Voting Item 34 – Approval of 20202023 Directors' Stock Plan
Summary and Board Recommendation:
Item 34 is a proposal to approve the Arrow Financial Corporation 2023 Directors’ Stock Plan (the “2023 Directors’ Stock Plan”), which, if approved by our shareholders, will authorize 75,000 shares of Common Stock for issuance thereunder and succeed and replace the Arrow Financial Corporation 2020 Directors’ Stock Plan (the “2020 Directors’ Stock Plan”), which, if approved by our shareholders, will authorize 50,000 shares for issuance thereunder and succeed and replace the 2013 Directors’ Stock Plan.. The principal reason for the recommended adoption of the 20202023 Directors’ Stock Plan is that the Arrow Financial Corporation 20132020 Directors’ Stock Plan, (the “2013 Directors’ Stock Plan”), previously approved by our shareholders, has only a small number of remaining available and unissued shares (approximately 10,00021,742 shares as of DecemberJuly 31, 2019)2023). Because the remaining number of available shares ismay be insufficient for the continued operation of the plan and the Board continues to believe that granting stock awards to Directors is in the best interests of the Company, the Board approved the 20202023 Directors’ Stock Plan on January 29, 2020,February 1, 2023, as the successor plan to the 20132020 Directors’ Stock Plan.Plan, conditional upon the approval of the Company's shareholders. If the 20202023 Directors’ Stock Plan is not approved by the Company’s shareholders at the Annual Meeting, the Company will be able to continue to issue shares under the 20132020 Directors’ Stock Plan as currently in effect until the shares remaining for future grants are exhausted.
The terms of the 20202023 Directors’ Stock Plan are generally consistent with the terms of the 20132020 Directors’ Stock Plan. Plan with certain changes, including the following:
a.expanded coverage for Directors of the Company and all of its subsidiaries, as opposed to solely the Company’s bank subsidiaries;
b.each Director will now have the ability to make an annual election by December 15 of each year, beginning in 2023 for Directors’ fees payable in 2024, to increase the level of Directors’ fees that would otherwise be payable to such Director in the upcoming year in shares of Company common stock above the level approved by the Board;
c.75,000 shares of Company common stock shall be reserved and available for issuance under the 2023 Directors’ Stock Plan, as opposed to 50,000 shares reserved and available for issuance under the 2020 Directors’ Stock Plan;
d.the fair market value of a share of Company common stock to be issued under the 2023 Directors’ Stock Plan shall be valued at the reported closing price per share of Company common stock on the trading day of determination, as opposed to being determined in a manner set by the Board; and
e.provisions have been added providing for indemnification of Directors, officers and employees with regard to good faith determinations made under the plan, clarifying that taxes due on the payment of Directors’ fees (including stock issued under the plan) are the responsibility of the applicable Director, and noting that issuances under the plan are intended to qualify with Rule 16b-3 of the Securities Exchange Act of 1934, as amended.
The description below addresses key elements of the proposed 20202023 Directors’ Stock Plan. The complete text of the 20202023 Directors’ Stock Plan is set forth in AnnexAppendix A to this Proxy Statement. The following summary of the 20202023 Directors’ Stock Plan does not purport to be complete and is subject in all respects to the provisions contained in the complete text.
Plan Description
The 2020 Directors’ Stock Plan, like the 20132023 Directors’ Stock Plan provides for the issuance to Directors of the Company and its subsidiary bankssubsidiaries of shares of the Company’s common stock, in lieu of cash, as payment of some or all of the fees payable to them as Directors, including their annual retainer and meeting fees. Directors who are also officers (i.e., Management Directors) do not receive Directors’ fees. There are currently 119 non-Management Directors who receive Directors' fees. The specific portion and type of Directors’ fees payable in shares of stock is fixed, from time to time, by the Company’s Board in its sole discretion. Individual Directors have no rightdiscretion, subject to opt outthe ability of the plan oreach Director to increase or decrease the portionmake an annual election by December 15 of theireach year, beginning in 2023 with respect to Directors’ fees payable in 2024, to increase the formlevel of Directors’ fees that would otherwise be payable to such Director in shares fromof Company common stock above the levels fixedlevel otherwise approved by the Board.Board for the upcoming year. Historically, the Board, in making its annual determination on fees payable in stock, has designated a portion of Directors’ basic annual retainers as opposed to meeting fees, as payable in such formshares of Company common stock and has decided to pay such shares semi-annually, in May and November. The Board has also determined to pay a fixed dollar amount of all Directors’ annual retainers in shares of the Company’s common stock, even though different Directors receive differing dollar amounts as their total annual retainer, depending on whether or not they have additional duties. The benefits and amounts that will be received by individual non-Management Directors of the Company or its subsidiary banks under the 2020 Directors’ Stock Plan are not presently determinable. All grants are discretionary. For information on the amounts of Directors’ fees paid in 2019 in the form of stock under the 2013 Directors’ Stock Plan, see “Director Compensation” in the Voting Item 1 – Election of Directors section.
Shares distributed to Directors under the 2020 Directors’ Stock Plan, as under the predecessor 20132023 Directors’ Stock Plan will be valued at the market value of the shares on the date of distribution, determined as provided under such plan, and are fully vested and freely transferable by Directors upon their receipt thereof.
thereof, subject to Company policy and applicable law. The fair market value of a share of Company common stock to be issued under the 2023 Directors’ Stock Plan shall be valued at the reported closing price per share of Company common stock on the trading day of determination. The fair market value of distributed shares is taxable as ordinary income to the Directors upon their receipt, with such taxes being the responsibility of the individual Directors, and constitutes ordinary expense that is deductible by the Company for income tax purposes. The Board may change its determinations under the 20202023 Directors’ Stock Plan at any time.
The table below sets forth our historic use of equity with respect to both employees and non-employee Directors in 2017, 2018 and 2019. All grants and weighted average basic common shares outstanding have been restated for stock dividends.
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Fiscal Year Ended December 31, | 2017 |
| 2018 |
| 2019 |
|
Stock options granted | 59,009 |
| 55,070 |
| 53,560 |
|
Time-based RSUs granted | — |
| 3,478 |
| 4,018 |
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Basic average shares outstanding | 14,739,000 |
| 14,840,000 |
| 14,940,000 |
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As of the December 31, 2019, we had 241,242 stock options outstanding and 7,496 RSUs outstanding. Further, there are 225,485 shares remaining available for awards under our 2013 LTIP. In aggregate, these outstanding equity awards and remaining available shares, when combined with the 50,000 new shares under the 2020 Directors’ Stock Plan, if approved by our shareholders, result in a dilution level of approximately 3.50%.
A table setting forth certain information regarding Arrow's equity compensation plans as of December 31, 2019 can be found in Part II, Item 5 of our Annual Report on Form 10-K for the year ended December 31, 2019, under the caption “Equity Compensation Plan Information.”
The number of shares authorized for issuance under the 20202023 Directors’ Stock Plan will be subject to adjustment to reflect future stock dividends or stock splits, corporate mergers or reorganizations, or similar changes in shares of the Company’s common stock generally. The Compensation Committee, which makes recommendations to the full Board regarding compensation of Directors, believes the adoption of the 20202023 Directors’ Stock Plan and the continuation of its historical practice of issuing Company common stock to its Directors as a part of Director compensation is in the best interests of the Company’s shareholders because it enhances share ownership by Directors and further aligns Directors’ financial interests with those of other Company shareholders.
Accordingly, The shares of Common Stock issuable under the Compensation Committee recommended to the Board that the 20202023 Directors’ Stock Plan will be approved byregistered under the Board to succeed and replaceSecurities Act of 1933, as amended, following approval of the 2013 Directors’ Stock Plan. On January 29, 2020, the Board determined that the 20202023 Directors’ Stock Plan was in the best interests of the Company and its shareholders, approved it, and directed that it be submitted toby the Company’s shareholders for approval. shareholders.
The Board is vested with sole discretion to amend the 2023 Directors’ Stock Plan, but if any amendment must be approved by the shareholders of the Company under applicable laws and regulations (including the listing requirements of any applicable securities exchange), such an amendment would not be effective unless and until it is approved by our shareholders.
Dilution
The table below sets forth our historic use of equity with respect to both employees and non-employee Directors in 2020, 2021 and 2022. All grants and weighted average basic common shares outstanding have been restated for stock dividends.
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Fiscal Year Ended December 31, | 2020 | 2021 | 2022 | |
Stock options granted | 55,511 | | 58,880 | | 58,710 | | |
Time-based RSUs granted | 4,182 | | 5,026 | | 4,312 | | |
Basic average shares outstanding | 16,406,000 | | 16,499,000 | | 16,513,000 | | |
As of June 30, 2023, excluding vesting of awards related to Mr. Murphy's Departure, if any, we had outstanding awards as follows: 324,698 stock options and 14,352 non-vested RSUs. Further, as of June 30, 2023 there were 402,486 shares remaining available for awards under our 2022 LTIP. In aggregate, these outstanding equity awards and remaining available shares, when combined with the 75,000 new shares under the 2023 Directors’ Stock Plan, if approved by our shareholders, result in a dilution level of approximately 3.72%.
A table setting forth certain information regarding Arrow's equity compensation plans as of December 31, 2022 can be found in Part II, Item 5 of our Annual Report on Form 10-K for the year ended December 31, 2022, under the caption “Equity Compensation Plan Information.”
New Plan Benefits
The benefits and amounts that will be received by individual non-Management Directors of the Company or its subsidiaries under the 2023 Directors’ Stock Plan are not presently determinable. All grants are discretionary by the Board. Individual Directors have the ability annually to increase the amount of shares received as Directors’ fees payable in Company common stock for the upcoming year above the level that would have otherwise been payable to a Director in Company common stock as determined by the Board. For information on the amounts of Directors’ fees paid in 2022 in the form of stock under the 2020 Directors’ Stock Plan, but shareholder approval is required for any material amendments, including any increasessee “Director Compensation” in the numberVoting Item 1 – Election of shares authorizedDirectors section.
Vote Required for issuance thereunder.Approval
Approval of the 20202023 Directors’ Stock Plan will require the affirmative vote of the holders of a majority of the shares of Company common stock present in person or represented by proxy at the Annual Meeting and voting on this proposal. Abstentions and broker “non-votes” will not be counted in determining the number of votes cast and, therefore, will have no effect on the outcome of this vote.
• Vote Recommendation:Recommendation: Your Board recommends you vote “For”For” the new 20202023 Directors’ Stock Plan.
Voting Item 45 – Ratification of the Selection of KPMG LLP as Our Independent Auditor for 20202023
Summary and Board Recommendation:
The Audit Committee of the Board has selected the independent registered public accounting firm, KPMG LLP ("KPMG"), as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2020.2023. The selection process included a thorough review of KPMG’s performance in prior years, the quality and expertise of the KPMG management team, its understanding and expertise in the industries in which the Company operates, the appropriateness of the fees charged, and its familiarity with the Company’s internal controls and accounting policies and practices.
Although Companythe Company's Bylaws do not require the selection of the independent registered public accounting firm be submitted to shareholders for approval, the Board believes it is appropriate to give shareholders the opportunity to ratify the decision of the Audit Committee. Neither the Audit Committee nor the Board will be bound by the shareholders’ vote, but they may take it into account in future determinations regarding the retention of the Company’s independent
registered public accounting firm.
Representatives of KPMG are expected to be present atattend the virtual Annual Meeting. They will have an opportunity to make a statement, if they so desire, and are expected to be available to respond to appropriate questions from shareholders.submitted by shareholders prior to the meeting.
Ratification of the selection of KPMG will require the affirmative vote of the holders of a majority of the shares of common stock present in person or represented by proxy at the Annual Meeting and voting on this proposal.
•Vote Recommendation: Your Board recommends you vote “For” the ratification of the independent registered public accounting firm, KPMG LLP, as the independent auditor of the Company for the fiscal year ending December 31, 2020.
2023.
Independent Registered Public Accounting Firm Fees:
The following table sets forth the aggregate fees billed to the Company and its subsidiaries for the fiscal years ended December 31, 20192022 and 2018,2021, by the Company’s independent registered public accounting firm, KPMG. The tax fees in this table represent fees paid to KPMG for the specified year for tax preparation and consulting services.
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Categories of Service | 2022 | 2021 |
Audit Fees | $1,700,573 | $ | 545,500 | |
Audit-Related Fees | 8,500 | | — | |
Tax Fees | 105,600 | | 96,700 | |
All Other Fees | — | — | |
Total Fees | $ | 1,814,673 | | $ | 642,200 | |
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| | | | | | |
Categories of Service | 2019 | 2018 |
Audit Fees | $ | 585,620 |
| $ | 446,500 |
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Audit-Related Fees | — | — |
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Tax Fees | 81,600 |
| 95,040 |
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All Other Fees | — | — |
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Total Fees | 667,220 |
| 541,540 |
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Audit Committee Report
Each member of the Audit Committee qualifies as independent under both the NASDAQ® standards for independent directors and the more rigorous Securities and Exchange Commission (“SEC”) standards for independent Audit Committee members. For more detail, see the Corporate Governance section. The Audit Committee assists the Board in fulfilling its oversight role relating to the Company’s financial statements and the financial reporting process, including the system of disclosure controls and the Company’s internal controls and procedures. Its duties include reviewing the independent registered public accounting firm’s qualifications and independence, the performance of the independent registered public accounting firm, and the Company’s internal audit function. The duties of the Audit Committee are set forth in the Audit Committee Charter, which has been adopted by the Board and is reviewed annually by the Committee. A copy of the current charter of the Audit Committee is available on our website at www.arrowfinancial.com/corporate/governance.
Management has the responsibility for preparing the Company’s consolidated financial statements and for assessing the effectiveness of its internal controls over financial reporting. The Company’s independent registered public accounting firm, KPMG, has the responsibility for auditing these consolidated financial statements. KPMG reports directly to the Audit Committee, and they meet on a regular basis. The Audit Committee has reviewed and discussed with Management and KPMG the Company’s audited consolidated financial statements as of and for the year ended December 31, 2019.2022. The Audit Committee has also discussed with Management its assertion on the design and effectiveness of the Company’s internal control over financial reporting as of December 31, 2019,2022, and has discussed with KPMG the matters required to be discussed by professional standards. Based on this review and discussion, the Audit Committee recommended to the Board that the audited consolidated financial statements of the Company and its subsidiaries, and Management’s assertion on the design and effectiveness of internal control over financial reporting of the Company and its subsidiaries, be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2022, as filed with the SEC.
The Audit Committee has approved the engagement of KPMG as the Company’s independent registered public accounting firm for 20202023 and the scope of its work. The Audit Committee has also discussed with KPMG the firm’s assessment of the Company’s internal controls and the matters required to be discussed by Public Company Accounting Oversight Board Auditing Standards No. 1301, “Communications“Communications with Audit Committees.Committees.” The Audit Committee has received and discussed the written disclosures and the letter from KPMG required by Public Company Accounting Oversight Board Rule 3526, “Communication“Communication with Audit Committees Concerning Independence.” The Audit Committee has discussed with KPMG the firm’s independence and determined that the non-audit services provided to the Company by KPMG are compatible with its independence.
Colin L. Read, Chair
Michael B. Clarke, ChairGregory J. Champion
David G. Kruczlnicki Colin L. Read
Elizabeth A. Miller Richard J. Reisman
Corporate Governance
The Board’s Corporate Governance Guidelines provide the framework within which the Company’s Directors and Executive Officers manage the business and affairs of the Company. The Company is managed under the direction and oversight of the Board. The Board appoints the CEO, who is responsible for the day-to-day operation of the Company. The Board’s primary responsibilities, thereafter, are to oversee management and to exercise its business judgment to act in what it reasonably believes to be the best interests of the Company and its shareholders.
At least once each year, the Board will review the Company’s long-term strategic plans and future key issues. The Board may elect a Lead Director from the independent Directors of the Company to serve as a liaison between the Board Chair and the independent or non-Management Directors and to have such other duties and responsibilities as shall be determined by the Board, including chairing the Executive Sessions of the independent Directors.
The Governance Committee of the Board is responsible for reviewing with the full Board, on an annual basis, the requisite skills and characteristics of all Board members, as well as nominees for Director and the composition of the Board as a whole. This assessment will include whether individual Directors or nominees qualify as independent under applicable law and guidelines, as well as consideration of diversity, age, skills and experience of the Directors as a group in the context of the needs of the Board. The Company believes that a diverse Board advances the Company's interests by providing a variety of perspectives on important matters and improving our service to our communities. The Company has had a longstanding commitment to board diversity and currently exceeds NASDAQ diversity requirements. Please see our "Board Diversity Matrix" included in Voting Item 1 of this Proxy Statement for more detail on our current Board profile. A majority of Directors must meet the criteria for general Board independence as required and defined by NASDAQ®.NASDAQ. Directors generally must satisfy certain other applicable laws, rules and regulations.
The Board’s membership is divided into three classes, as equal in number. Onenumber as possible given the number of Directors. Generally, one class is elected each year by the Company’s shareholders to a term of three years. The Governance Committee identifies and recommends to the full Board suitable candidates for nomination for Director, including, when appropriate, incumbent Directors. In making its recommendations, the Governance Committee will consider any proposals it properly receives from shareholders for Director nominees. Shareholders may propose a Director candidate for consideration by the Governance Committee by following the rules described below under the heading “Shareholder“Shareholder Submissions of Director Nominees for the 20212024 Annual Meeting”Meeting” in the Additional Shareholder Information section. The Governance Committee’s recommendations of candidates for nomination will be based on its determination as to the suitability of the particular individuals, and the slate as a whole, to serve as Directors of the Company, taking into account the criteria discussed above. When evaluating incumbent Directors who are nominated for reelection, the Governance Committee considers, in addition to past performance, each such Director’s attendance record for meetings of the Company’s Board, its subsidiary banks’ boards and committees on which the Director serves, as applicable. See “Director“Director Nomination Process”Process” in the Voting Item 1 – Election of Directors section for a discussion of additional criteria considered in the selection of Directors for nomination.
The Board does not believe that Directors should be subject to term limits. While term limits may in some cases enhance the flow of fresh ideas and viewpoints in the boardroom, they may also result in the loss of knowledgeable and experienced Directors, whose insights into the Company and its operations typically expand and deepen over time. When evaluating whether incumbent Directors should be renominated, the Governance Committee will consider, in addition to the incumbent’s prior performance on the Board, the same general qualities and attributes, such as suitability, character, general experience and background that it applies to new candidates for Director. Additionally, the
Company’s Bylaws provide that Directors will retire from the Board at the first Annual Meeting of Shareholders held on or after they attain the age of 75.
Board Leadership Structure:
Currently, the Board leadership structure separates the roles of Chairman and CEO. CEO, therefore not requiring the appointment of a lead independent Director to serve as a liaison between the Chair and the independent Directors. The Board believes that the separation of the offices of the Chairman and CEO is appropriate at this time as it maximizes the effectiveness of Board leadership and allows our CEO to focus primarily on his management responsibilities. Further, the Company has a Board comprised largely of Directors who qualify as “independent” under the NASDAQ general independence guidelines.
Mr. Hoy, the Company's former CEO who retired CEO, servesin 2012, served as Chairman until May 2023 due to his longstanding experience with the Company, along with his strong leadership capability and banking expertise. When Mr. Hoy stepped down, the Board appointed Mr. Owens as Chairman. Mr. Owens previously served as Lead Director from 2017 until his appointment as Chairman. Mr. Hoy passed away on June 11, 2023. Mr. Murphy, the Company's President and CEO isuntil May 12, 2023, was the only member of the Board who iswas also an employee of the Company. Upon Mr. Murphy's Departure, the Board of Directors appointed Chief Banking Officer and Senior Executive Vice President David S. DeMarco as President and Chief Executive Officer of Arrow and its lead subsidiary, Glens Falls National Bank and Trust Company. The Board continues to believe this structure is in the best interest of the Company.
The Company has a Board comprised largely of Directors who qualify as “independent” under the NASDAQ® general independence guidelines. Under the Corporate Governance Guidelines, independent Directors, actingappointed Mr. DeMarco as a group, periodically appoint one of their own to serve as Lead Director. The Lead Director chairs the Board’s Executive Sessions, discussed further in “Board Committees” later in this section. The Lead Director also serves as a liaison between the Chair and the independent Directors. Director Owens began serving as Lead Director at the 2017 Annual Meeting. We believe that oversight by the Lead Director, combined with the Company’s overall corporate governance structure, policies and practices as outlined earlier, maximizes the effectiveness of Board leadership. on July 26, 2023.
The Governance Committee and the independent Directors will continue to evaluate the Board’s leadership structure as part of its regular review of corporate governance and succession planning to ensure that it remains best suited for the Company and shareholders.
Board Committees:
The Board has three standing committees whose membership and responsibilities must meet certain NASDAQ® and SEC requirements. These standing committees are the Audit, Compensation and Governance Committees (collectively, the “Committees”“Committees”). The Board may from time to time establish or maintain additional committees, as it deems necessary or appropriate, the membership of which may include one or more Directors, as well as non-Directors. One such additional committee that the Board has established is the Executive Committee, which is described later in this section.
Committee Membership
The Governance Committee regularly reviews committee membership and makes recommendations for changes on an annual basis, with consideration given to the qualifications and preferences of individual Directors and the specific requirements, if any, of NASDAQ® and the SEC for service on such Committees.committees. The Board gives consideration to rotating committee members periodically, to the extent feasible under applicable laws and regulations governing the membership requirements of the Committees, but the Board does not believe rotation should be mandated as policy, nor that service by a Director on a committee should be subject to term limits. All members of the three standing Committees are independent Directors, as defined (and generally required) under applicable law, rules and regulations (see “Director Independence”“Director Independence” later in this section for more detail). A table showing the current members of each of the standing Committees follows:
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Director | Audit Committee | Compensation Committee | Governance Committee |
Mark L. Behan | | X | |
| | | |
DirectorGregory J. Champion | Audit
Committee X | Compensation
Committee
| Governance
Committee X |
Mark L. Behan | | X | |
Tenée R. Casaccio | | | X |
Michael B. Clarke | Chair | X | |
Gary C. Dake | | X | Chair |
David G. Kruczlnicki | X | Chair | |
Elizabeth A. Miller | X | | X |
William L. Owens | | X | X |
Colin L. Read | XChair | | X |
Richard J. Reisman | X | | |
Each of the three standing Committees has its own charter that sets forth the purposes, goals and responsibilities of the committee,Committee, as well as the qualifications for membership, procedures for appointing members, structure and operations, and policies for Board oversight of the committee.Committee. Each has the power to hire, at the Company’s expense, independent accounting, compensation, financial, legal or other consultants, as the members may deem necessary and appropriate, consistent with the overall authority to retain such advisors as set forth in the committee’sCommittee’s charter, including budgeting or professional conditions and limitations. Management approval will not be required for engagement of consultants, although Management normally will be advised and consulted prior to any such engagement to avoid, among other things, conflicts of interest.
Committee Descriptions
A description of each of the three standing Committees, as well as the Executive Committee, follows:
•Audit Committee:Mr. Clarke Dr. Read is Chair of the Audit Committee; he has served in this role since 2008.2020. The Audit Committee’s primary duties and responsibilities are to select and appoint the independent auditors each year; monitor the independence and performance of the Company’s independent auditors and internal Audit Department; monitor the quality and integrity of the Company’s financial reporting process and systems of internal controls regarding accounting, financial and legal compliance; and provide a means of communication among the independent auditors, Management, the internal Audit Department and the Board. The Audit Committee also reviews business or financial transactions between the Company and Company insiders and their related parties, such as any transactions with an individual Director or business entity in which the Director has a controlling or material interest. In accordance with applicable rules, the Audit Committee must specifically approve in advance all services performed by the independent auditor. The Audit Committee met fivefour times in 2019, and2022, all but one then-serving membermembers attended each of these committee meetings; one director missed two Audit Committee meetings.For additional information, see the Audit Committee Report section.
•Compensation Committee: Mr. Kruczlnicki is Chair of the Compensation Committee; he has served in this role since 2013. The Compensation Committee’s principal responsibility is to review and approve, not less often than annually, all aspects of the compensation arrangements and benefit plans covering the Company's Executive Officers, including the CEO, subject to full Board approval, where appropriate. The Compensation Committee also periodically reviews the compensation of the Board and makes recommendations to the full Board with respect to the types and amounts of compensation payable to the Directors for service on the Company’s Board, the boards of its subsidiary banks, and committees thereof. The Compensation Committee also consults with Management and provides general oversight of the compensation and benefit programs and policies for employees. The Compensation Committee met twothree times in 2019,2022, all then-serving members attended these meetings. For additional detail regarding executive compensation and the role of the Compensation Committee, see the Compensation Discussion and Analysis section.
•Governance Committee: Mr. Dake is the Chair of the Governance Committee; he has served in this role since 2017. The Governance Committee is specifically charged with establishing procedures with respect to the Director nomination process; reviewing and considering Director nominees, including incumbent nominees, and making recommendations to the Board regarding nominees; reviewing and recommending practices and policies concerningrelated to the Company's environmental, social, and corporate governance;governance strategy; reviewing annually and reporting to the Board regarding the independence of Company Directors and satisfaction by the Board and committee members of applicable requirements or qualifications; reviewing annually and reporting to the Board regarding the performance of the Board; reviewing periodically and making recommendations regarding Company codes of conduct and ethics policies for Directors, Executive Officers and employees and with respect to Board policy, including the Company's committee charters; and reviewing Director training initiatives. The Governance Committee met twothree times in 2019,2022, and all then-serving members attended each of these meetings.
•Executive Committee: The main purpose of the Executive Committee is to act on matters that may require immediate attention at a time when it is impractical or inconvenient to convene the entire Board. The Executive Committee has the full authority of the Board, subject to certain restrictions established by law or the Company’s governing documents. For example, the committeeCommittee is not authorized pursuant to the Bylaws to make submissions to shareholders requiring shareholder approval, fill vacancies on the Board or any of its committees, fix compensation of the Board, make changes to the Bylaws, or repeal any prior resolution of the Board. Because the Board believes proper governance involves the entire Board in the Company’s decision-making process, the Board strives to keep meetings of the Executive Committee to a minimum. The Executive
Committee is currently comprised of the Board Chair and the Chairs of the three Board Committees, and the Chair of the GFNB/SNB Joint Wealth Management Committee, who is also a Director of the Company.Committees. In 2019,2022, the Executive Committee did not hold any meetings sincemet one time, and all matters were able to be addressed during meetings ofthen-serving members attended the full Board and/or its standing committees.meeting.
Executive Session
In addition to regular Board and committee meetings, Directors meeting the general independence test under NASDAQ® meet on occasion in Executive Session to discuss any matters deemed relevant to the Company’s operation and condition. No current or former members of Management are in attendance during these sessions, which are chaired by the Lead Director.Board Chair. Generally, the Lead Director, prior to May 2023, and the Board Chair, thereafter, will
poll independent Directors prior to or in connection with each Company Board meeting and, if there is a consensus to do so, an Executive Session will be held. Due to the informality and expectation of confidentiality that characterize Executive Sessions, typically noofficial records are not maintained during the Executive Sessions unless a binding corporate decisionsdecision or actions are taken nor official records maintained for them.action is taken. The independent Directors held four Executive Sessions in 2019.2022.
Attendance
In 2019,2022, the Board had four regularly scheduled meetings, onetwo special Board meetingmeetings and 11ten separate committee meetings which included two special audit committee meetings. There was 100% attendance at all Board meetings, and all then-current Board members met the requirements of Item 402(b) of the SEC’s Regulation S-K by attending more than 75% of the meetings to which they were invited. 11Six of the 12eleven then-current Directors attended the 20192022 Annual Meeting of Shareholders.
Code of Ethics
The Governance Committee has adopted a Business Code of Ethics which applies to all Directors, officers and employees of both the Company and its subsidiary banks. The Business Code of Ethics addresses a wide range of issues and is intended to satisfy the requirements for a code of conduct set forth in the listing standards issued by NASDAQ®.NASDAQ. Additionally, the Governance Committee has adopted a Financial Code of Ethics which applies to the Company’s CEO, Chief Financial Officer ("CFO"), principal accounting officer,CFO, PAO, controller and any other officers who perform similar functions. The Financial Code of Ethics complies with the SEC’s requirements for a code of conduct established under Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated by the SEC thereunder.
Complete copies of each of the current charters of the Audit Committee, the Compensation Committee and the Governance Committee, as well as copies of the Corporate Governance Guidelines, the Business Code of Ethics and the Financial Code of Ethics are available on our website at www.arrowfinancial.com on the “Corporate Governance” page. The Company intends to post on that page any substantive amendment to, or waiver granted from, the Financial Code of Ethics or Business Code of Ethics that relates to any element of such code enumerated in Item 406(b) of Regulation S-K within four business days of such amendment or waiver.
Director Independence:
Under applicable law and regulation, it is the responsibility of the Board to review and make a determination regarding the independence and qualifications of each member, as well as additional review and determination for members of certain committees.
Under the NASDAQ® listing standards, a majority of the members of the full Board must meet a general independence requirement. The Board has determined that the following Company Directors currently meetmet this requirement: Behan, Casaccio, Clarke,Champion, Dake, Hoy, Kruczlnicki, Miller, O'Conor, Owens Read and Reisman.Read. Prior to Mr. Murphy's Departure, Director Murphy iswas not independent due to his position as the Company President and CEO. Director Casaccio is not independent for the reasons noted below.
In making its independence determinations for individual Directors, the Board considers transactions and relationships between (i) the Company and its subsidiaries, and (ii) the DirectorDirectors and/or his or hertheir immediate family or any businesses he or she controls.they control. The Board considers the objective tests for Director independence set forth in the NASDAQ® listing standards and other regulatory guidelines for such transactions and relationships, as well as a variety of subjective factors, including particular or unique relationships between the Company and the Director, even if such relationships do not exceed the specific dollar threshold that would disqualify themsuch Director under applicable regulatory guidelines. In its review of Director independence at year-end 2019,2022, the Board considered the following 20192022 transactions between the Company and the following individual Directors:
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• | Ms. Casaccio •Ms. Casaccio is President and part-owner of JMZ Architects and Planners, PC ("JMZ"), an architectural firm located in Glens Falls, New York. In 2016, GFNB engaged JMZ to provide architectural, design and space utilization services for the four buildings located in downtown Glens Falls that represent GFNB’s main campus. The project is ongoing, and in 2019 payments to JMZ totaled approximately $130,200. The Board has determined these minimal payments were sufficiently below the objective limits for general Director independence set forth in the NASDAQ® listing standards and that the Company’s relationship with JMZ and Ms. Casaccio did not compromise her independence. See “Related Party Transactions” later in this section for further information on these business transactions.
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• | Mr. Dake is President of Stewart’s Shops Corporation ("Stewart's"), a large, private company that owns and operates a regional chain of convenience stores. During 2019, Arrow Financial Corporation's subsidiary banks made approximately $226,000 in payments to Stewart’s for rent and incidentals for leased space at market rates and other immaterial purchases. This amount is less than 0.01% of the annual gross revenue of Stewart’s, which exceeds $1.7 billion. The Board has determined that the Company’s payments were below the objective limits for general Director independence set forth in the NASDAQ® listing standards and that the Company’s relationship with Stewart’s and Mr. Dake did not compromise his independence. See “Related Party Transactions” later in this section for further information on these business transactions.
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• | Mr. Owens is Managing Partner at the law firm of Stafford, Owens, Piller, Murnane, Kelleher & Trombley, PLLC (“Stafford Owens”). During 2019, the Company’s subsidiary bank GFNB made $2,106 in payments to Stafford Owens for legal services rendered by the firm to or on behalf of GFNB. Additionally, Stafford Owens received approximately $9,100 in total payments from certain GFNB loan customers in connection with its representation of GFNB at loan closings. The Board determined that the total payments received by Stafford Owens from all sources in connection with the firm's representation of GFNB in 2019 were well below the objective limits for general Director independence set forth in the NASDAQ® listing standards and the relationship did not compromise Mr. Owen's independence.
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Mr. Read was elected Mayorcompleted in 2023, and in 2022 payments to JMZ totaled approximately $175,000. Given the level of payments to JMZ, Ms. Casaccio will not be deemed to be an independent director and will not serve on any of the City of Plattsburgh ("City") effective January 1, 2017. GFNB purchased three municipal bonds from the City in 2009 and four in 2017 as part of its regular portfolio transactions. As of December 31, 2019, there was $3,575,000 in outstanding principal under these bonds, which was equal to the maximum principal outstanding balance during 2019. Considering that GFNB was operating consistent with its historical practice in managing its investment portfolio and that the bonds were issued on market terms and are not in default, the Board has determined these bond holdings by GFNB did not compromise Mr. Read’s independence under the rules set forth in the NASDAQ® listing standards.Board’s committees. See “Related“Related Party Transactions”Transactions” later in this section for further information on these business transactions.
•Mr. Dake is President of Stewart’s Shops Corporation ("Stewart's"), a large, private company that owns and operates a regional chain of convenience stores. During 2022, the Company's subsidiary banks paid approximately $101,000 to Stewart’s for rent and incidentals for leased space at market rates and other immaterial purchases. This amount is less than 0.01% of the annual gross revenue of Stewart’s, which approximates $2.7 billion. The Board has determined that the Company’s payments were below the objective limits for general Director independence set forth in the NASDAQ listing standards and that the Company’s relationship with Stewart’s and Mr. Dake did not compromise his independence.
•Ms. Miller is the grantor of The Elizabeth A. Miller Family Irrevocable Insurance Trust which leased an administrative office to Arrow Financial during 2022. Total 2022 payments on this lease were $24,000. The Board has determined that the Company’s payments were below the objective limits for general Director independence set forth in the NASDAQ listing standards and that the Company’s relationship with Ms. Miller did not compromise her independence.
•Mr. Owens is Managing Partner at the law firm of Stafford, Owens, Piller, Murnane, Kelleher & Trombley, PLLC (“Stafford Owens”). During 2022, Stafford Owens received approximately $36,700 of total payments from certain GFNB loan customers in connection with its representation of GFNB at loan closings. The Board determined that the total payments received by Stafford Owens from all sources in connection with the firm's representation of GFNB in 2022 were well below the objective limits for general Director independence set forth in the NASDAQ listing standards and the relationship did not compromise Mr. Owens' independence.
There were no “Compensation Committee interlocks,” as defined under the SEC rules, in existence during fiscal year 2019.2022. No member of the Compensation Committee is a current or former employee of the Company or any of its subsidiaries. No member of the Compensation Committee is party to any related party transactions with the Company requiring disclosure by us hereunder except Director DakeCasaccio (see “Related“Related Party Transactions”Transactions” later in this section).
In addition to meeting NASDAQ® general independence standards applicable to Directors, the Directors who serve on the Audit and/or Compensation Committees must meet certain additional independence or regulatory requirements, some of which may be more rigorous than the general standards. The Board has determined that Directors Clarke,Champion, Kruczlnicki, Miller Read and Reisman,Read, who constitute the Audit Committee, all meet the SEC’s more stringent independence requirements for Audit Committee members. The Board has also determined that Directors Clarke, Kruczlnicki and Read each qualify as an “Audit Committee Financial Expert,” as defined by the SEC rules (not all Audit Committee members need to be financial experts). Further, the Board has determined that Directors Behan, Clarke, Dake, Kruczlnicki and Owens, who constitute the Compensation Committee, all meet the independence requirements of NASDAQ® and the SEC for Compensation Committee members.
Related Party Transactions:
Under the Company’s Statement of Policy with respect to Related Party Transactions, the Audit Committee or the Board itself must approve certain transactions or relationships between the Company and its “related parties,” including Directors and Executive Officers, as well as their immediate family members and controlled companies, if such transactions or relationships in any year will involve an aggregate dollar amount of goods, services or payments in excess of $120,000. Loans from the Company's subsidiary banks to Directors and Executive Officers, their families and
controlled businesses, and other related parties, are generally exempt from the above described preapproval policy, as most such loans are subject to Board preapproval under a separate federal banking law, Regulation O.
20192022 Transactions with Related Parties
During 2019,2022, several Directors and Executive Officers and/or their related parties had outstanding loans from one or both of the Company's subsidiary banks in amounts of $120,000 or more. All such loans were made in the ordinary course of business of the bank, on the bank’s standard terms and conditions, and did not involve more than normal risk of collectability or present any other preferential features. As of December 31, 2019,June 30, 2023, none of these loans were classified by the Company as a non-accrual, past due, restructured or potential problem loan.
A summary of the transactions in 20192022 between the Company and athe related partyparties that involved an aggregate dollar amount in excess of $120,000 follows.follows:
Under multi-year lease agreements between the Company’s subsidiary banks and Stewart’s, a private company that owns and operates a regional chain of convenience stores, the banks operate five bank offices (three GFNB and two SNB) in premises owned by Stewart’s in which Stewart’s convenience stores are also located. Director Dake is the President of Stewart’s. The Company paid rent and incidental expenses to Stewart’s under these leases in the total amount of approximately $226,000 during 2019. This amount is less than 0.01% of the annual gross revenue of Stewart's, which exceeds $1.7 billion. One GFNB lease currently has a ten-year term, with one renewal option for an additional ten-year term. A second GFNB lease has an original duration of 10 years, expiring in 2020, with a renewal option for three additional five-year terms. The third GFNB lease has an original duration of ten years, expiring in 2023, with a renewal option for three additional five-year terms. One of the SNB leases has a current term of three years, expiring in 2022, with one renewal option for an additional three-year term. The other SNB lease has a duration of six months, expiring in June 2020, with a renewal option for two additional one-year terms. These five bank offices are in high-traffic locations. In connection with its approval of the leases, the Board determined that the terms of the leases were, in its opinion, no less favorable from the Company’s perspective than could be obtained by it from a non-related party for comparable premises in an arms-length transaction.20
Director Read was elected Mayor of the City of Plattsburgh ("City") effective January 1, 2017. GFNB purchased three municipal bonds from the City in 2009 and four in 2017 as part of its regular portfolio transactions. As of December 31, 2019, there was $3,575,000 in outstanding principal, which was equal to the maximum principal outstanding during 2019. During 2019, under these bonds and consistent with the bond terms, the City paid aggregate interest to both GFNB and SNB in the aggregate amount of $37,500. Interest rates for the bonds are 2.250%, 2.375%, and two at 3.000%. The City paid a principal amount of $925,000 on two outstanding bond issues during 2019.
Director•Ms. Casaccio is President and part-owner of JMZ, an architectural firm located in Glens Falls, New York. In 2016, GFNB engaged JMZ to provide architectural, design and space utilization services for the four buildings located in downtown Glens Falls that represent GFNB’s main campus. The project has continued,was completed in 2023, and in 20192022 payments to JMZ totaled approximately $130,200. The amount paid to JMZ by GFNB was less than 5% of JMZ’s annual gross revenue for the year.$175,000. The terms of the engagement from GFNB’s perspective were no less favorable than terms the Company could have obtained from a non-related party for comparable services in an arms-length transaction.
Board Risk Oversight:
The Board has responsibility for the oversight of risk management within the Company. The Board and its Committeescommittees regularly discuss and review with Management the areas of material risk exposure, the potential impact of such risks on the Company, the steps taken to monitor Company exposure to these risks and the controls adopted to mitigate such risk exposure.
The Board Committees assist the Board in fulfilling its oversight responsibilities throughout the year, as follows:
a.Audit Committee: Reviews financial risk exposures by monitoring the independence and performance of the Company’s internal and external auditors, and the quality and integrity of the Company’s financial reporting process and systems of internal controls.
b.Compensation Committee: Reviews all aspects of the compensation paid to Executive Officers, Directors and employees in general. The committeeCommittee assesses the ways, if any, in which any aspect of its executive compensation program may, as an unintended consequence, incentivize action or activities that expose the Company to inappropriate risks.
c.Governance Committee: Focuses on the management of risks associated with Board organization, membership, structure, and structure,performance through its nomination process and Director independence assessment, its review of the organizational and governance structure of the Company, and its periodic review of Board practices and policies concerning environmental, social and corporate governance and the Board’s performance.
governance.
In addition to these Board Committees, the Company has an Enterprise Risk Management (“ERM”) Committee at the Management level to assist the Board by providing reasonable assurance regarding the achievement of the Company’s strategic objectives and to enhance the long-term value of the Company. The ERM Committee uses a Board-approved program that is applied both strategically and tactically, and is designed to identify, and manage on a holistic basis, potential and actual risks that may affect the Company. It is based on principles in the "Enterprise Risk Management – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and other regulatory guidance. The Board receives periodic reports from the ERM Committee, which is chaired by the ChiefDirector of Compliance and Risk Officer ("CRO"DoCR") and includes senior and other designated managers as appropriate. The CRO'sDoCR's primary function is to oversee risk management as well as regulatory and compliance requirements. The CRODoCR reports directly to the Company President and CEO. Arrow employs an indepth,in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. The Company employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Arrow has implemented and regularly reviews and updates extensive systems of internal controls and procedures as well as corporate governance policies and procedures intended to protect its business operations, including the security and privacy of all confidential customer information.
Environmental, Social and Governance Practices:
Corporate responsibility and sustainability play an important role in our business, operating strategies and long-termlong- term value creation for our stockholders,shareholders, customers and team members. We believe that environmental, social and governance (ESG) practices are critical to attracting and retaining the best talent, meeting the evolving needs of our customers and being good stewards of our communities. We are committed to conducting operations and activities in a manner that provides and maintains safe and healthfulhealthy working conditions, protects the environment and conserves natural resources. We maintain practices so that our operations are managed and operatedoperate in compliance with applicable laws and regulations. We recognize the importance of ESG considerationsregulations and are firmly committed to conducting business in a responsible manner.
Environmentally, Arrow is dedicated to conserving natural resources and complying with environmental regulations.
Steps taken in this area include:
•Expanded our philanthropic support of environmental sustainability in our community, including organizations that impact soil and water conservation, land conservation, sustainable farming, mountain and lake protection and stewardship, and parks and recreation
•Incorporated energy-saving features into the renovation of our branches, such as interior and exterior LED lighting and energy-efficient plumbing in 40% of our branch network
•Incorporated the above environmentally friendly attributes into our Glens Falls, New York, headquarters renovation, which includes approximately 76,000 square feet of office space; motion-activated lighting; significant improvements to exterior wall and roof insulation; new HVAC systems with higher efficiency, which meet modern fresh-air and ventilation requirements; energy-efficient windows and entry doors; low-VOC materials; a separate tie-in to the city stormwater and sewer system to bypass the municipal treatment of rainwater collected off the building; and green plantings on a portion of the roof
•Installed solar panels at 20 South Street, part of our corporate headquarters, to support the main campus with approximately 3,000 square feet of green energy
•Installed electric vehicle charging stations at our SNB Main Office
•Reduced emissions via remote work and video conferencing for large segments of employees
•Provided and encouraged digital banking options and paperless statements
Socially, Arrow is proud of its many contributions to its employees, customers and communities, including meeting financial needs of the low- to moderate-income population, providing professional development and holistic support of its team, and giving back to its communities in dollars and volunteer hours. Arrow is also working on many ways to demonstrate the value of differences, particularly around diversity, equity, inclusion and belonging (“DEIB”).
Steps taken in this area include:
•More than $675,000 and 9,395 hours donated to our communities in 2022 in support of arts and culture, child care, economic and workforce development, emergency assistance, food security, financial literacy, mental and physical health, safe and affordable housing, transportation and more
•71% of donated dollars and 40% of hours are Community Reinvestment Act-eligible
•Prioritization of donations to organizations that make it their mission to provide affordable homeownership, environmental or sustainable activities and programming, economic empowerment, health and human services and social progress
•Lending program to facilitate first-time home ownership
•Extensive pandemic-related support to customers in need, including loan deferrals and over $234.2 million of 2,400 Paycheck Protection Program (PPP) loans through 2022
•Bank On-certified checking product for the unbanked or underbanked population with no overdraft fees
•Partnership with numerous organizations to meet the financial needs of the low- to moderate-income population
•Annual engagement with a third party to assess diversity within our employee base and support for setting and tracking goals to encourage the advancement of minorities, women, veterans and persons with disabilities
•Professional development, wellness and mental health services to our employees through the HR Department and through outside Employee Assistance Program (EAP) contracted services
•Ongoing outreach to measure employee engagement
•Three consecutive years of special bonuses for all employees in recognition of exceptional commitment and performance
•Incorporation of inclusion and belonging into our human resources policies, practices and programs
•Upcoming DEIB educational series for the Arrow Team as well as the development of a group of stakeholders to guide further initiatives
•Encouraged and facilitated employee giving including payroll deduction, dress-down days, and a fundraising campaign that totaled more than $103,000, a true reflection of our culture of giving
•Developed ESG Investment Models for our socially conscious clients
•Longstanding dedication to diversity on Arrow’s Board of Directors, exceeding NASDAQ requirements
Finally, Arrow believes that strong corporate governance is the foundation to delivering on its commitments to stakeholders. Arrow adheres to a comprehensive governance program, including:
•Strong cybersecurity protections and training
•Majority “independent” Directors
•Diverse Board of Directors with strong risk oversight
•Strong compensation policies
•Benchmarking and third-party review of compensation decisions
Shareholder Communications with the Board of Directors:
Any shareholder communication that is sent generally to the Company or the Board is directed to the Corporate Secretary, who will review it and advise the Board of the communication. Any such shareholder communication that is directed to an individual Director, Directors or a committee of the Board will be forwarded by the Corporate Secretary to such Director(s) or committee. The Corporate Secretary will retain and make available all such communications for review by the appropriate parties and will periodically summarize and report all such shareholder communications to the Board. Shareholders may communicate to the Board, to an individual Director or Directors, or to a particular committee of the Board by directing such communication either by email to corporatesecretary@arrowbank.com or in writing to: Board of Directors – Shareholder Communications, c/o Corporate Secretary, Arrow Financial Corporation, 250 Glen Street, Glens Falls, New York 12801. If a shareholder intends such communication to be delivered to an individual Director, specific Directors, or particular committee of the Board, we request that this information be prominently displayed at the beginning of the communication.
Named Executive Officers
The Company's Named Executive Officers for 20192022 were Thomas J. Murphy, our then President and CEO;Edward J. Campanella, Senior Vice President,CEO and, from September 30, 2022, until February 2023, our then Interim Treasurer, CFO and CFO;PAO; David S. DeMarco, Senior Executive Vice President and Chief Banking Officer ("CBO"); David D. Kaiser, Senior Executive Vice President and Chief Credit Officer ("CCO"); and Andrew J. Wise, Senior Executive Vice President and Chief Operating Officer ("COO"). and Edward J. Campanella, our then Senior Executive Vice President, Treasurer and CFO until September 30, 2022.
As previously disclosed in certain of the Company’s filings with the SEC, the Company became aware that on June 23, 2023, Robert C. Ashe filed a putative class action complaint against the Company in the United States District Court for the Northern District of New York. In addition to the Company, the complaint names as defendants (i) Mr. Murphy, the Company’s former CEO and from September 30, 2022 to February 20, 2023; (ii) its former interim CFO, Edward J. Campanella, the Company’s former CFO; (iii) and Mr. Ivanov, the Company’s current CFO (“Individual Defendants” and, together with the Company, the "Defendants"). The complaint alleges that the Defendants made materially false and misleading statements regarding the Company’s business, operations and compliance policies in the Company’s public filings between March 12, 2022 and May 12, 2023. The complaint further alleges that the Individual Defendants are liable for these materially false and misleading statements as "controlling persons" of the Company. Based on these allegations, the complaint brings two claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and of Section 20(a) of the Exchange Act. Mr. Ashe, on behalf of a putative class of shareholders, seeks compensatory damages as well as recovery of the costs and fees associated with the litigation. The Company believes the lawsuit to be without merit and expressly denies any wrongdoing in connection with the matters claimed in the complaint and intends to vigorously defend the lawsuit. As of the date of filing of this Report, the Company has not been served with the complaint.
Stock Ownership Information
Directors and Executive Officers:
The following table sets forth the beneficial ownership of the Company’s common stock, as defined under SEC rules, as of March 12, 2020,August 29, 2023, the record date for the 20202023 Annual Meeting, for each Director, Director nominee and NEO of the Company, as well as for all Directors and Executive Officers as a group.
Beneficial ownership includes all shares of common stock for which the individual has sole or shared voting power or investment power and all shares that the individual has the right to acquire within 60 days of the record date through the exercise of any option, RSU, warrant or right. There were 14,980,52316,553,058 shares of the Company's common stock outstanding as of that date.
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Name | Number of Shares Owned (a) | Options Exercisable Within 60 Days | Total Beneficial Ownership of Company Common Stock | Percent of Shares Outstanding (b) |
Mark L. Behan | 6,058 | | | 3,892 | | | 9,950 | | * |
Edward J. Campanella (c) | — | | | — | | | — | | * |
Tenée R. Casaccio | 18,493 | | | 7,572 | | | 26,065 | | * |
Gregory J. Champion | 4,908 | | | 522 | | | 5,430 | | * |
Gary C. Dake | 46,721 | | | 3,927 | | | 50,648 | | * |
David S. DeMarco | 33,949 | | | 25,429 | | | 59,378 | | * |
David D. Kaiser | 23,863 | | (d) | 25,432 | | | 49,295 | | * |
David G. Kruczlnicki | 52,855 | | | 2,188 | | | 55,043 | | * |
Elizabeth A. Miller | 32,254 | | (e) | 3,728 | | | 35,982 | | * |
Thomas J. Murphy | 67,189 | | (f) | 21,869 | | | 89,058 | | * |
Raymond F. O’Conor | 47,794 | | | 3,892 | | | 51,686 | | * |
William L. Owens | 12,990 | | | 3,630 | | | 16,620 | | * |
Colin L. Read | 9,443 | | | 4,227 | | | 13,670 | | * |
Andrew J. Wise | 6,548 | | | 12,489 | | | 19,037 | | * |
Total Shares of Directors and Executive Officers as a Group (14 people) | 363,065 | | | 118,797 | | | 481,862 | | 2.91% |
(a)The Company has rounded partial share holdings for purposes of the table data.
(b)The use of an asterisk (“*”) denotes a percentage ownership of less than 1%.
(c)Mr. Campanella resigned as our CFO effective September 30, 2022. The reported figure reflects Mr. Campanella's holdings to the knowledge of the Company.
(d)Includes 4,765 shares held in the Kaiser Family Trust.
(e)Includes 5,677 shares held in the Miller Family Partnership, L.P.
(f)Does not reflect any vesting of awards related to Mr. Murphy's Departure. Mr Murphy holds a total of 26,275 RSUs, vested and unvested.
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Name | Number of Shares Owned (a) | Options Exercisable Within 60 Days | Total Beneficial Ownership of Company Common Stock | Percent of Shares Outstanding (b) |
Mark L. Behan | 2,855 |
| | 787 |
| 3,642 |
| * |
Edward J. Campanella | 199 |
| | 2,348 |
| 2,547 |
| * |
Tenée R. Casaccio | 11,865 |
| | 3,880 |
| 15,745 |
| * |
Michael B. Clarke | 13,250 |
| (c) | 4,479 |
| 17,729 |
| * |
Gary C. Dake | 31,544 |
| | 1,888 |
| 33,432 |
| * |
David S. DeMarco | 28,359 |
| | 19,404 |
| 47,763 |
| * |
Thomas L. Hoy | 199,616 |
| (d) | 5,050 |
| 204,666 |
| 1.37% |
David D. Kaiser | 14,071 |
| (e) | 25,649 |
| 39,720 |
| * |
David G. Kruczlnicki | 40,399 |
| | 2,184 |
| 42,583 |
| * |
Elizabeth A. Miller | 25,472 |
| (f) | 787 |
| 26,259 |
| * |
Thomas J. Murphy | 50,033 |
| | 18,887 |
| 68,920 |
| * |
Raymond F. O’Conor | 44,049 |
| | 787 |
| 44,836 |
| * |
William L. Owens | 7,320 |
| | 1,840 |
| 9,160 |
| * |
Colin L. Read | 12,892 |
| | 819 |
| 13,711 |
| * |
Richard J. Reisman | 15,536 |
|
| 8,647 |
| 24,183 |
| * |
Andrew J. Wise | 825 |
| | 3,022 |
| 3,847 |
| * |
Total Shares of Directors and Executive Officers as a Group (16 people) | 498,285 |
| | 100,458 |
| 598,743 |
| 4.00% |
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(a) | The Company has rounded partial share holdings for purposes of the table data. |
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(b) | The use of an asterisk (“*”) denotes a percentage ownership of less than 1%. |
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(c) | Includes 12,600 shares held directly by Director Clarke’s wife in a revocable trust. |
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(d) | Includes 5,846 shares held directly by Director Hoy’s wife and 2,936 shares held by Director Hoy’s wife in an individual retirement account. |
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(e) | Includes 3,475 shares held in the Kaiser Family Trust. |
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(f) | Includes 5,721 shares held in the Miller Family Partnership, L.P. |
5% Shareholders:
The following table sets forth the beneficial ownership of the Company’s common stock as of March 12, 2020,August 29, 2023, the record date for the 20202023 Annual Meeting, by the one holder known by us to be thea beneficial owner of more than 5% of the outstanding shares of the Company's common stock on such date. Beneficial ownership includes all shares of common stock for which the person or entity has sole or shared voting power or investment power.
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Name | Shares Owned | Percent |
BlackRock, Inc. 55 East 52nd Street New York, NY 10055 | 1,195,975 | | (a) | 7.23 | % | (b) |
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Name | Shares Owned | Percent |
BlackRock, Inc. 55 East 52nd Street New York, NY 10055 | 1,104,280 |
| (a) | 7.37 | % | (b) |
(a)The listed number of shares of the Company’s common stock by BlackRock, Inc. ("BlackRock") is based solely upon a Schedule 13G, Amendment No. 13 filed by BlackRock on January 31, 2023 with the SEC. In that schedule, BlackRock reported that as of December 31, 2022, it had sole dispositive power over all such shares and the sole voting power with respect to 1,168,654 shares. BlackRock is an asset management company that provides asset management services to numerous mutual funds.
(b)Percentage based on 16,553,058 shares of the Company's common stock outstanding on August 29, 2023.
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(a) | The listed number of shares of the Company’s common stock by BlackRock, Inc. ("BlackRock") is based solely upon a Schedule 13G, Amendment No. 10 filed by BlackRock on February 5, 2020 with the SEC. In that schedule, BlackRock reported that as of December 31, 2019, it had sole dispositive power over all such shares and the sole voting power with respect to 1,073,863 shares. BlackRock is an asset management company that provides asset management services to numerous mutual funds. |
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(b) | Percentage based on 14,980,523 shares of the Company's common stock outstanding on March 12, 2020. |
The Company's subsidiary banks, GFNB and SNB, in their capacities as fiduciary of numerous accounts in their respective Wealth Management departments, including, in the case of GFNB, as trustee of the Company's Employee Stock Ownership Plan (“ESOP”), held between them 1,740,62616,553,058 shares of the Company's common stock, or 11.6%11.7% of the total shares outstanding and entitled to vote on the record date. However, GFNB and SNB were the beneficial owners of only a relatively small number of these shares. Other persons, such as the individual ESOP participants, had the sole power to vote and/or direct the disposition of most of these shares. As a result, neither GFNB nor SNB were the beneficial owners of more than 5% of the shares of the Company's common stock outstanding and entitled to vote on the record date.
Compensation Discussion and Analysis
The Compensation Discussion and Analysis section of our Proxy Statement provides our shareholders with an explanation of our Named Executive Officer compensation philosophies, programs, process, decisions, and other relevant information. It is organized as follows:
•Overview
•Philosophy and Program
•Process
•Decisions
•Other
Overview:
The following section provides an overview of our business, 20192022 performance and organizational changes, and our key compensation actions.
Business Environment and Performance
Like mostArrow Financial Corporation delivered another year of strong financial institutions,results in 2022 with record loan growth, excellent earnings and sustained profitability.
In 2022, we navigatedmade key investments in our technology and our team, with the upgrade to our core banking system and the payment of a challenging interest rate environment and other economic pressures in 2019. Yet I am proudspecial employee bonus for outstanding performance. We made meaningful contributions to share that we once again delivered record earnings, steady growth, sustained profitability, and excellent credit quality. We remain committed to living our mission for our customers, employees, shareholders and the communities we serve. Our measured and thoughtful approach keeps us focused on long-term opportunities that will help us continue to grow in the future.
The Company’sorganic growth, expense management and deepening and growing relationships. Arrow’s conservative business model emphasizes a strong capital position, high loan quality, knowledge of our market and responsiveness to our customers. OurWe outperformed comparable community bank benchmarks for shareholder return performance has been above our comparable benchmarks over the most recent one-, three-,one-year, three-year, and five-year periods.periods of time. Summary results for the fiscal year ended December 31, 2019,2022 include:
In addition to our total shareholder return performance, we also highlight several important financial achievements in 2022.
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20192022 Returns | 20192022 Growth | 20192022 Asset Quality |
A 3% stock dividend was distributed to shareholders during 2019.2022.
Cash dividends paid effectively increased 5%3%.
Return on average equity (ROE) of 13.17%was 13.55%, as compared to 13.96%14.09% for 20182021.
Return on average assets (ROA) of 1.24%was 1.21%, compared to 1.27%1.28% for 2018.2021.
| Total assets increased to a record high of $3.184 billion.
The loan portfolio increased 8.6% toreached a record high, of $2.4increasing 11.8% to $2.98 billion.
Total deposit balances grew 11.5% to $2.6were $3.5 billion. | ImprovedAsset quality remained strong, nonperforming asset performance to 0.18% (as a percentassets represented 0.32% of total assets as of December 31, 2019) from 0.23% at December 31, 2018.2022.
Allowance for net loan losses represented 0.89%1.00% of period-end loans as ofat December 31, 2019.2022. |
Compensation Program Overview
Our compensation program includes several integrated elements designed to retain and appropriately award our NEOs, enhance the long-term profitability of the business within acceptable risk parameters, align the financial interests of our NEOs with the interests of our shareholders and support a total rewards approach to executive compensation. Below is a short listing of the elements of pay and their relative magnitude for our CEO and other NEOs.
Key Compensation Decisions and Actions
The business environment and our performance as well as our organizational changes, impacted various compensation decisions. The following is a summary of key decisions and actions regarding executive compensation in 20192022 and early 2020.2023.
•Base Salary Adjustments: The Compensation Committee approved merit and market-based salary increases for each NEO in January of 2019.
2022. Recognizing the uncertainty of current macro-economic forecasts, at the request of Management, the Compensation Committee approved no salary increases for the NEOs for 2023, excluding Mr. DeMarco's salary increase related to his appointment as our President and CEO.•Short-Term Incentive Plan (“STIP”) Awards: In JanuaryFebruary of 2020,2023, awards were made to our NEOs based on the achievement of specified Company and individual performance results.results for fiscal year 2022. Actual bonus payouts as a percentage of target were 78%112% on average in 20192022 for our NEOs.
These awards reflected increased target STIP opportunities for our NEOs other than our CEO, moving from a 30% of base salary target to 40% of base salary. The increases were intended to better align the NEOs' target bonus opportunity with competitive market practice. Additionally, last year in 2022 the Compensation Committee approved the mix of corporate and individual goals for 2022 bonus calculations. Further details are available under the "STIP Award Decisions" section of the Compensation Discussion and Analysis.•Long-Term Incentive Plan Awards: In January of 2019,2022, grants of stock options were made to the NEOs under the 2013 LTIP. These awards were made to better align our NEOsNEOs' interests with thatthose of our shareholders and to foster a long-term performance orientation. The awards vest ratably in four equal annual installments which helps promote retention.
•Restricted Stock Unit Award: In January of 2019,2022, the CEO was awarded RSUs that vest after three years and will be distributed ratably over 10 years post-retirement.
•New Employment Agreements: In January 2020, On February 1, 2023, the Company entered into new employment agreements with each of Messrs. Murphy, Campanella, DeMarco, Kaiser and Wise.
Wise that were substantially similar to their existing employment agreements. The employment agreements are described in more detail in the Agreements with Named Executive Officers section, below.
•CEO Transition: Effective May 12, 2023, Mr. Murphy terminated his employment as President and CEO and as a director of the Company and all other positions he held with the Company and its affiliates. Effective May 13, 2023, the Company appointed Mr. DeMarco to serve as President and CEO of the Company and GFNB, in addition to continuing to serve as President and CEO of SNB. Mr. DeMarco's employment agreement was amended and restated effective May 13, 2023 as described in more detail in the Agreements with Named Executive Officers section below.
•CFO Transition: Our former Senior Executive Vice President, Treasurer and CFO, Edward J. Campanella, resigned effective September 30, 2022. Effective October 1, 2022, the Company and Mr. Campanella signed a six-month Professional Services Agreement, under which Mr. Campanella agreed to hold himself available to render advice and assistance to Arrow and oversee certain projects for the Company at the request of the CEO of Arrow. In exchange for these services, Mr. Campanella received $5,000 per week, plus approved out-of-pocket expenses. The agreement terminated March 31, 2023.
•New CFO: Penko Ivanov was appointed Chief Financial Officer, Executive Vice President, Treasurer and Chief Accounting Officer effective February 21, 2023. He received a compensation package that is customary with our compensation packages for our other NEOs. Mr. Ivanov's employment agreement is similar to the employment agreements with Messrs. DeMarco, Kaiser, and Wise, and is described in more detail in the Agreements with Named Executive Officers section below.
Philosophy and Program:
The following section describes our overall compensation philosophy and program elements. Our executive compensation program is designed to attract and retain key executives and to motivate our executives to improve the Company’s long-term profitability within acceptable risk parameters. We accomplish this through a number of compensation elements, each with its own purpose, operation, and timing.
Base Salary
•Purpose: Provide a fixed form of compensation for performance of the requirements of the position.
•Operation: In setting or adjusting base salary levels for our NEOs, the Company may consider the following factors: the executive’s position, recent promotions, Company and individual performance,
market compensation information, experience, professional standing in the field of banking and financial services and commitment to the community.
•Timing: Base salaries for new hires are set as part of the negotiation process when individuals are being recruited. Base salaries for our NEOs are subsequently reviewed and approved annually by the Compensation Committee, typically in January, so the Compensation Committee can take into account performance results from the complete prior fiscal year, as well as any proposed organizational changes.
STIP
•Purpose: Reward Company and individual performance relative to our annual performance goals.
•Operation: Our STIP is based on a comprehensive quantitative and qualitative assessment of both Company and individual performance. In setting goals under the STIP, the Compensation Committee considers multiple inputs, including but not limited to: specific financial goals, trend analysis regarding our financial performance, general business and economic outlook, and individual goals and objectives. The Compensation Committee, in its sole discretion, will determine, on a case-by-case basis, whether an NEO will receive a bonus award for the year and, if so, the amount of this bonus.
•Timing: The Compensation Committee meets at the beginning of each year to determine the STIP awards for the previous year when the Company’s final year-end performance is generally known and can be accurately measured. At the same meeting, the Compensation Committee also typically sets the STIP goals for the current year.
2022 LTIP
•Purpose: Align the interests of our NEOs with those of our shareholders and foster a long-term performance orientation.
•Operation: Long-term incentive compensation is provided through the Company’s 20132022 LTIP. The 20132022 LTIP allows for grants of various types of equity awards, such as restricted stock, RSUs and stock options. Historically, the Company has provided long-term incentive compensation in the form of stock options, which only provide value to our NEOs if the Company’s stock price increases. Stock options vest 25% per year over a four-year period which promotes participant retention. The stock options have a term of 10 years, which we believe effectively focuses management on long-term performance. In 2018, we expanded the use of long-term incentives to include RSUs for Mr. Murphy. The RSUs granted in 20192022 vest 100% after three years but are not settled until after Mr. MurphyMurphy's employment has retired.terminated. The Compensation Committee believed that this was an effective method of providing Mr. Murphy with retirement-related benefits that are commensurate with his role in a shareholder-friendly manner.
•Timing: The Company’s annual stock option awards and RSUs are generally granted in January each year, shortly after the close of the Company’s fiscal year.
Executive Benefits
•Purpose: The executive benefit program is intended to provide appropriate security and benefits for our NEOs, allowing them to focus on managing the business.
•Operation: Generally, NEOs are eligible for the benefits package we offer to our full-time employees, which includes medical, dental, life/long-term disability insurance and qualified retirement plans. In addition, our executive compensation program includes a Supplemental Executive Retirement Plan ("SERP"), Deferred Compensation Plan, limited executive perquisites (the personal use of a company automobile, and
reimbursement of country club dues orand a golf course membership)membership, as applicable), and Employment Agreements. See the following sections for additional information on these programs:
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◦ | Pension Benefits and Table - contained in the Executive Compensation section |
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◦ | Nonqualified Deferred Compensation - contained in the Executive Compensation section |
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◦ | Agreements With Named Executive Officers section |
◦"Pension Benefits and Table" - contained in the Executive Compensation section
◦"Nonqualified Deferred Compensation" - contained in the Executive Compensation section
◦Agreements With Named Executive Officers section
•Timing: All forms of executive benefits are reviewed and approved by the Compensation Committee on an annual basis.
The Compensation Committee believes these four components – base salary, short-term incentives, long-term incentives, and executive benefits – comprise a total compensation program that retains and appropriately rewards NEOs, aligns the financial interests of our NEOs with the interests of our shareholders, and supports a total rewards approach to executive compensation. While we have no stated policy on the allocation of compensation and benefits, our executive compensation program is reviewed at least annually by the Compensation Committee to ensure that various considerations, such as fixed versus variable, short-term versus long-term, cash versus equity-based compensation, and benefits provided are and remain appropriate considering market trendscompetitive pressure and the Company’s primary business objectives.
Compensation Policies&and Features
In addition to our compensation elements, the executive compensation program also incorporates the following policies and features, which the Compensation Committee feel are important aspects of a well-constructed, balanced compensation program.
•Hedging and Pledging Policies: The Company has hedging and pledging policies for its ExecutiveDirectors and Officers who are subject to the SEC’s Section 16 reporting requirements. The policy prohibits Directors and Section 16 Officers from entering into financial transactions designed to hedge or offset any decrease in market value of Company common stock. In addition, the Company requires Board approval prior to the pledging of any Company stock by an NEO. The Company does not have a hedging policy for non-Executive Officer employees or Directors.
employees.•Clawback Policy: The Company may seek to recover any incentives paid or payable to an NEO on the achievement of financial or operational goals that subsequently are deemed by the Company to be inaccurate, misstated or misleading.
The Company will revisit its policy in light of Section 10D of the Securities Exchange Act of 1934, as amended, and NASDAQ requirements relevant thereto.•Stock Ownership Policy: The Company has a stock ownership policy for NEOs. TheyNEOs are required to own shares of the Company’s common stock equal in value to three times base salary for the CEO and equal in value to one times base salary for other NEOs. Until the required ownership is attained, this policy restricts the NEO’s ability to sell shares of the Company’s common stock obtained through the 20132022 LTIP (or predecessor plans). These stock ownership requirements are measured each year by the Compensation Committee, each year, using holdings valued as of December 31 of the previousCompany's annual meeting record date for that year. Common shares owned outright or vested shares held through benefit plans are currently counted toward the stock ownership requirement. Individuals have five years from appointment or promotion to a Company executive officer to meet these requirements. The independent members of the Board have the discretion to address and approve exceptions on a case-by-case basis.
•No Tax Gross-Ups: The Company does not pay any taxes that are owed by its NEOs.
•Double-Trigger Mechanism: Employment agreements for all NEOs include a “double-trigger” mechanism for change-of-control payments.
•No Stock Option Repricing: The Company has never repriced stock options. The 20132022 LTIP prohibits repricing without shareholder approval.
Process:
The following section describes the process and key inputs that are considered in making decisions regarding NEO compensation.
Role of the Compensation Committee, Independent Consultants, and Management
Each year the Compensation Committee discusses, reviews, recommends, and approves certain actions related to NEO compensation and our overall compensation program. The Committee utilizes outside advisors in certain cases to assist them in the review and decision-making process. Additionally, certain members of the management team assist in developing materials and proposals that support our compensation philosophy and objectives for the Compensation Committee to consider during the year.
•The Compensation Committee: Oversees our executive compensation policies and process. The Committee is responsible for the final decisions on components of executive compensation for the CEO and the other NEOs and makes recommendations to the full Board as needed. The Compensation Committee is also responsible for reviewing and approving all aspects of compensation of our CEO and other NEOs, and it receives input from the CEO and the full Board on key compensation policy issues.
•The Committee’s Independent Consultant: During 2019, theThe Compensation Committee retained the services of Pearl Meyer & Partners, LLC (“Pearl Meyer”) to provide assistance regarding executive compensation and support with compensation policies and proxy disclosure. Pearl Meyer performed a comprehensive review of the executive compensation program in 2019 to provide context for 2020 pay decisions. Pearl Meyer provided no other consulting services for the Company in 20192022 and has certified its independence for the Committee.
•Company Management: Our CEO provides the Compensation Committee with an annual review of his own goals for the Company, including broad performance and individual goals, as well as a performance assessment for each of the other NEOs. Management also provides information and data on Company and individual performance and executive compensation to the Compensation Committee. Although our
CEO provides insight and recommendations regarding NEO compensation, the Compensation Committee votes on decisions regarding NEO compensation. Where appropriate, the Board will also make recommendations or determinations or give its approval regarding NEO compensation. Although the Compensation Committee meets with our CEO to obtain his views, goals and assessments regarding compensation matters, as discussed above, the decisions regarding his compensation package are made solely by the Compensation Committee without the CEO or other NEOs present.
Benchmarking
In setting program targets and making compensation decisions, the Compensation Committee uses a variety of data sources and information related to market practices for bank holding companies like ours.
The Compensation Committee considers a select number of key inputs, summarized below, to provide market-competitive information for base salary, short-short and long-term incentive targets, and estimated total direct compensation, with ranges for performance. This information allows the Compensation Committee to see potential pay and range of pay for executive roles, and it provides context for the Committee in setting targeted pay levels going forward.
TheOn an annual basis, the Compensation Committee conducts a peer review of benchmarking data through the Company's participation in the annual NYBA Pearl Meyer Report. Additionally, the group periodically commissions an independent outside consulting firm to conduct a comprehensive review of the Company’s executive compensation program. In 2015,program, most recently in 2019. This review conducted by Pearl Meyer conducted("Pearl Meyer Report”) provides an independent and objective analysis of all elements of compensation, individually and in aggregate, relative to market and peer group practices (“Pearl Meyer Report”). Pay mix and an assessment of the pay-for-performance relationship were also presented to the Compensation Committee.practices.
A primary data source used in the Pearl Meyer Report for determining the competitive market for NEO compensation was the information publicly disclosed by a peer group of other publicly traded banks. This peer group was developed by Pearl Meyer using objective parameters that reflect bank holding companies of similar asset size located in our general geographic region.
The Pearl Meyer Report 2015Report's 2019 peer group, which is listed below, consisted of 18 bank holding20 companies in Connecticut, Maine, Massachusetts, New Jersey, Ohio, Pennsylvania, Virginia and Vermontthe Northeast that ranged from approximately $1$1.7 billion to $3$5.2 billion in assets, positioning the Company at approximately the median for size at the time of the Pearl Meyer Report:
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Blue Hills Bancorp, Inc. ACNB Corporation
Bar Harbor Bankshares WSFS Bank Camden National Corp. Corporation Citizens & Northern Corp.Chemung Financial Corporation
CNB Financial Corp. Corporation Codorus Valley Bancorp, Inc.
| Enterprise Bancorp, Inc. Financial Institutions, Inc. First Community Bancshares,Bankshares, Inc. | First ConnecticutPremier Financial Corp.
HarborOne Bancorp, Inc. First Defiance Financial Corp.
Hampton Roads Bankshares, Inc.
Merchants Bancshares, Inc.
OceanFirst Financial Corp.
Orrstown Financial Services, Inc. | Peapack-Gladstone Financial Corp. Corporation
| Peoples Bancorp Inc. Peoples Financial Services Corp. SunThe First Bancorp, Inc.
Univest Financial Corporation of Pennsylvania Westfield Financial,Washington Trust Bancorp, Inc.
Western New England Bancorp, Inc.
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In addition to the regional peer group data, the Pearl Meyer Report used data from other banking industry surveys that reviewedrepresenting bank holding companies of similar asset size and regions to that of the Company.
In 2017, Pearl Meyer conducted an independent and objective analysis of all elements of compensation for the CEO position, relative to market and peer group practices (the “Pearl Meyer CEO Report”). Like the 2015 Pearl Meyer Report, the primary data source used in the Pearl Meyer CEO Report for determining the competitive market for CEO compensation was the information publicly disclosed by a peer group of other publicly traded banks. This peer group was developed by Pearl Meyer using objective parameters that reflect banks of similar asset size located in our general geographic region.
The 2017 peer group contained in the Pearl Meyer CEO Report, which is listed below, consisted of 20 companies in the mid-Atlantic and Northeast that ranged from approximately one-half to two times the asset size of Arrow Financial Corporation, positioning the Company at approximately the median for size at the time of the Pearl Meyer CEO Report:
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Bar Harbor Bankshares
Blue Hills Bancorp, Inc.
Bryn Mawr Bank Corp.
Camden National Corp.
CNB Financial Corp.
Enterprise Bancorp, Inc.
Financial Institutions, Inc.
| First Bancorp, Inc.
First Community Bancshares, Inc.
First Connecticut Bancorp, Inc.
First Defiance Financial Corp.
HarborOne Bancorp, Inc.
OceanFirst Financial Corp.
Peapack-Gladstone Financial Corp.
| Peoples Bancorp, Inc.
Peoples Financial Services Corp.
Sun Bancorp, Inc.
Univest Corporation of Pennsylvania
Washington Trust Bancorp, Inc.
Western New England Bancorp, Inc.
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Previous Say on PaySay-on-Pay Vote Results
We strive to continually deliver a compensation program that is aligned with our business strategy and needs, compensation philosophy and objectives, and market best practices. In both 2018 and 2019, approximately 95%2022, 94% of our votes cast were in favor of our “say on pay”“say-on-pay” vote.
Decisions:
The following section describes the decisions made regarding NEO compensation.
January 20192022 Base Salary Decisions
The Compensation Committee met in January 20192022 to review the current base salaries for our NEOs. The Committee reflected on corporate and individual executive performance for 20182021 in determining any merit-based increases. In addition, the Committee reviewed the competitiveness of current salary levels to comparable
companies. The Compensation Committee approved the base salaries below for the Named Executive Officers effective January 1, 2019.2022. The nature of each increase is also described in the table below.
| | Named Executive Officer | 2018 Salary | January 2019 Raise | 2019 Salary | Nature of Increase | Named Executive Officer | 2021 Salary | January 2022 Raise | 2022 Salary | Nature of Increase |
% of Base Salary | Amount | % of Base Salary | Amount |
Thomas J. Murphy | $ | 490,000 |
| 10.20% | $ | 50,000 |
| $ | 540,000 |
| Merit and Market-Based | Thomas J. Murphy | $ | 600,000 | | 8.33 | $ | 50,000 | | $ | 650,000 | | Merit and Market-Based |
Edward J. Campanella | 235,000 |
| 10.64% | 25,000 |
| 260,000 |
| Merit and Market-Based
| Edward J. Campanella | 300,000 | | 8.33 | 25,000 | | 325,000 | | Merit and Market-Based |
David S. DeMarco | 290,000 |
| 12.07% | 35,000 |
| 325,000 |
| Merit and Additional Responsibilities
| David S. DeMarco | 365,000 | | 8.22 | 30,000 | | 395,000 | | Merit and Additional Responsibilities |
David D. Kaiser | 235,000 |
| 8.51% | 20,000 |
| 255,000 |
| Merit and Market-Based | David D. Kaiser | 300,000 | | 8.33 | 25,000 | | 325,000 | | Merit and Additional Responsibilities |
Andrew J. Wise | 195,000 |
| 12.82% | 25,000 |
| 220,000 |
| Merit and Additional Responsibilities
| Andrew J. Wise | 300,000 | | 8.33 | 25,000 | | 325,000 | | Merit and Market-Based |
STIP Award Decisions
Each year, the Compensation Committee sets goals that will result in bonus awards only in years of successful financial performance by the Company. The STIP has a master governor feature that limits the total pool for all participants to 10% of Net Operating Earnings (defined below) after subtracting 7% of fiscal year end shareholders equity, thereafter.equity. Determining the amount of the annual STIP awards for an NEO consists of the following four-part process:process. For 2022, each NEO other than Mr. Campanella was eligible to receive an award under the STIP. Mr. Campanella did not receive an award due to his separation from the Company prior to the end of the year.
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1. | Determining the Individual NEO STIP Funding Maximums: To determine individual NEO STIP maximum bonus payouts for the year, the Compensation Committee uses Internal Net Operating Earnings (“Internal NOE”), which is different from U.S. Generally Accepted Accounting Principles (“GAAP”) in that it represents the net income of the Company before considering significant nonrecurring items, net of tax. The significant nonrecurring items are reviewed by the Compensation Committee on a case-by-case basis to determine their appropriateness for inclusion or exclusion from the calculation. Items are included to the extent that they are relevant, regularly recurring and deemed to be in the normal course of business operations.
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1.Determining the Individual NEO STIP Funding Maximums: To determine individual NEO STIP maximum bonus payouts for the year, the Compensation Committee uses Internal Net Operating Earnings (“Internal NOE”), which is different from U.S. Generally Accepted Accounting Principles (“GAAP”) in that it represents the net income of the Company before considering significant nonrecurring items, net of tax. The significant nonrecurring items are reviewed by the Compensation Committee on a case-by-case basis to determine their appropriateness for inclusion or exclusion from the calculation. Items are included to the extent that they are relevant, regularly recurring and deemed to be in the normal course of business operations.
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Individual NEO STIP maximums are funded based on Internal NOE performance relative to the stated goals. The interpolations between threshold and target, and target and maximum are to increase the funding by 5 percentage points for every one percentage point increase in Internal NOE.
| | Company Performance Measure | Threshold Goal | Target Goal | Maximum Goal | Results | Company Performance Measure | Threshold Goal | Target Goal | Maximum Goal | Results |
Internal NOE ($M) | $35.1 | $39.0 | $42.9 | $37.6 | Internal NOE ($M) | 42.48 | 47.20 | 51.92 | 48.31 |
Resulting Maximum STIP Funding (% of Target) | 50% | 100% | 150% | 82.02% | Resulting Maximum STIP Funding (% of Target) | 50 | 100 | 150 | 111.74 |
Based on our Internal NOE performance, the Committee approved the resulting 82.02%111.74% maximum funding level. The potential maximum funding range can be from 50% to 150% of the target bonus. The individual NEO maximum STIP payout amounts for fiscal year 20192022 were as follows:
| | Named Executive Officer | Base Salary | Target STIP % | Target STIP Amount | Maximum STIP Payouts | Named Executive Officer | Base Salary | Target STIP % | Target STIP Amount | Maximum STIP Payout Opportunity |
Thomas J. Murphy | $ | 540,000 |
| 50% | $ | 270,000 |
| $ | 221,445 |
| Thomas J. Murphy | $ | 650,000 | | 50 | $ | 325,000 | | 363,170 | |
Edward J. Campanella | 260,000 |
| 30% | 78,000 |
| 63,973 |
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David S. DeMarco | 325,000 |
| 30% | 97,500 |
| 79,966 |
| David S. DeMarco | 395,000 | | 40 | 158,000 | | 176,557 | |
David D. Kaiser | 255,000 |
| 30% | 76,500 |
| 62,743 |
| David D. Kaiser | 325,000 | | 40 | 130,000 | | 145,268 | |
Andrew J. Wise | 220,000 |
| 30% | 66,000 |
| 54,131 |
| Andrew J. Wise | 325,000 | | 40 | 130,000 | | 145,268 | |
The formula for determining preliminary STIP awards once all information is available and assessments have been performed is as follows. Although there is a formula for determining STIP awards, the Compensation Committee retains full discretion for making theseapproving awards to all our NEOs.