10-Q 1 arowform10-qmarch2020.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class |  | Outstanding as of April 30, 2020
Common Stock, par value $1.00 per share |  | 14,983,674

ARROW FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS

| Page
PART I - FINANCIAL INFORMATION |
Item 1. Financial Statements | 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 62
Item 4. Controls and Procedures | 62
PART II - OTHER INFORMATION |
Item 1. Legal Proceedings | 63
Item 1.A. Risk Factors | 63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 63
Item 3. Defaults Upon Senior Securities | 63
Item 4. Mine Safety Disclosures | 63
Item 5. Other Information | 64
Item 6. Exhibits | 64
SIGNATURES | 65

# 2

PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) (Unaudited)
| March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
ASSETS |  |  |  |  |
Cash and Due From Banks | $ | 32,525 |  |  | $ | 47,035 |  |  | $ | 36,198 |
Interest-Bearing Deposits at Banks | 106,004 |  |  | 23,186 |  |  | 25,031 |
Investment Securities: |  |  |  |  |
Available-for-Sale at Fair Value | 378,186 |  |  | 357,334 |  |  | 298,812 |
Held-to-Maturity (Approximate Fair Value of $242,804 at March 31, 2020; $249,618 at December 31, 2019; and $280,414 at March 31, 2019) | 238,520 |  |  | 245,065 |  |  | 279,400 |
Equity Securities | 1,689 |  |  | 2,063 |  |  | 1,850 |
FHLB and Federal Reserve Bank Stock | 5,379 |  |  | 10,317 |  |  | 7,878 |
Loans | 2,414,193 |  |  | 2,386,120 |  |  | 2,235,208 |
Allowance for Loan Losses | (23,637 | ) |  | (21,187 | ) |  | (20,373 | )
Net Loans | 2,390,556 |  |  | 2,364,933 |  |  | 2,214,835 |
Premises and Equipment, Net | 40,987 |  |  | 40,629 |  |  | 34,949 |
Goodwill | 21,873 |  |  | 21,873 |  |  | 21,873 |
Other Intangible Assets, Net | 1,640 |  |  | 1,661 |  |  | 1,777 |
Other Assets | 73,973 |  |  | 70,179 |  |  | 62,280 |
Total Assets | $ | 3,291,332 |  |  | $ | 3,184,275 |  |  | $ | 2,984,883 |
LIABILITIES |  |  |  |  |
Noninterest-Bearing Deposits | $ | 489,151 |  |  | $ | 484,944 |  |  | $ | 453,089 |
Interest-Bearing Checking Accounts | 793,425 |  |  | 689,221 |  |  | 823,301 |
Savings Deposits | 1,146,683 |  |  | 1,046,568 |  |  | 866,861 |
Time Deposits over $250,000 | 135,854 |  |  | 123,968 |  |  | 83,834 |
Other Time Deposits | 245,892 |  |  | 271,353 |  |  | 263,012 |
Total Deposits | 2,811,005 |  |  | 2,616,054 |  |  | 2,490,097 |
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase | 57,909 |  |  | 51,099 |  |  | 58,407 |
Federal Home Loan Bank Overnight Advances | — |  |  | 130,000 |  |  | 74,500 |
Federal Home Loan Bank Term Advances | 50,000 |  |  | 30,000 |  |  | 35,000 |
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 |  |  | 20,000 |  |  | 20,000 |
Finance Leases | 5,249 |  |  | 5,254 |  |  | 2,946 |
Other Liabilities | 37,771 |  |  | 30,140 |  |  | 27,324 |
Total Liabilities | 2,981,934 |  |  | 2,882,547 |  |  | 2,708,274 |
STOCKHOLDERS’ EQUITY |  |  |  |  |
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at March 31, 2020 and December 31, 2019; $5 Par Value and 1,000,000 Shares Authorized at March 31, 2019 | — |  |  | — |  |  | — |
Common Stock, $1 Par Value; 30,000,000 Shares Authorized at March 31, 2020 and December 31, 2019 and 20,000,000 Shares Authorized at March 31, 2019 (19,606,449 Shares Issued at March 31, 2020 and December 31, 2019 and 19,035,565 at March 31, 2019) | 19,606 |  |  | 19,606 |  |  | 19,035 |
Additional Paid-in Capital | 336,021 |  |  | 335,355 |  |  | 315,262 |
Retained Earnings | 37,441 |  |  | 33,218 |  |  | 34,231 |
Unallocated ESOP Shares (None at March 31, 2020 and December 31, 2019 and 5,501 Shares at March 31, 2019) | — |  |  | — |  |  | (100 | )
Accumulated Other Comprehensive Loss | (2,412 | ) |  | (6,357 | ) |  | (11,567 | )
Treasury Stock, at Cost (4,624,348 Shares at March 31, 2020; 4,608,258 Shares at December 31, 2019 and 4,556,083 Shares at March 31, 2019) | (81,258 | ) |  | (80,094 | ) |  | (80,252 | )
Total Stockholders’ Equity | 309,398 |  |  | 301,728 |  |  | 276,609 |
Total Liabilities and Stockholders’ Equity | $ | 3,291,332 |  |  | $ | 3,184,275 |  |  | $ | 2,984,883 |

See Notes to Unaudited Interim Consolidated Financial Statements.
# 3

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

1 2019 Share and Per Share Amounts have been restated for the September 27, 2019 3% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.
# 4

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)
|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Net Income |  | $ | 8,127 |  |  | $ | 8,734 |
Other Comprehensive Income, Net of Tax: |  |  |  |
Net Unrealized Securities Holding Gains Arising During the Period |  | 4,098 |  |  | 2,080 |
Net Unrealized Loss on Cash Flow Hedge Agreements |  | (219 | ) |  | — |
Amortization of Net Retirement Plan Actuarial Loss |  | 27 |  |  | 121 |
Amortization of Net Retirement Plan Prior Service Cost |  | 39 |  |  | 42 |
Other Comprehensive Income |  | 3,945 |  |  | 2,243 |
Comprehensive Income |  | $ | 12,072 |  |  | $ | 10,977 |

See Notes to Unaudited Interim Consolidated Financial Statements.
# 5

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

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

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

1 Cash dividends paid per share have been adjusted for the September 27, 2019 3% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.
# 6

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

| Three Months Ended March 31,
Cash Flows from Operating Activities: | 2020 |  | 2019
Net Income | $ | 8,127 |  |  | $ | 8,734 |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |  |  |
Provision for Loan Losses | 2,772 |  |  | 472 |
Depreciation and Amortization | 1,597 |  |  | 1,309 |
Net Loss (Gain) on Securities Transactions | 374 |  |  | (76 | )
Loans Originated and Held-for-Sale | (9,322 | ) |  | (4,223 | )
Proceeds from the Sale of Loans Held-for-Sale | 7,975 |  |  | 3,718 |
Net Gain on the Sale of Loans | (213 | ) |  | (104 | )
Net (Gain) Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets | (91 | ) |  | 130 |
Contributions to Retirement Benefit Plans | (195 | ) |  | (153 | )
Deferred Income Tax Benefit | (873 | ) |  | (297 | )
Stock-Based Compensation Expense | 103 |  |  | 95 |
Tax Benefit from Exercise of Stock Options | 28 |  |  | 78 |
Net Increase in Other Assets | (5,719 | ) |  | (1,565 | )
Net Increase in Other Liabilities | 8,563 |  |  | 2,613 |
Net Cash Provided By Operating Activities | 13,126 |  |  | 10,731 |
Cash Flows from Investing Activities: |  |  |
Proceeds from the Maturities and Calls of Securities Available-for-Sale | 17,444 |  |  | 21,261 |
Purchases of Securities Available-for-Sale | (33,201 | ) |  | — |
Proceeds from the Maturities and Calls of Securities Held-to-Maturity | 7,075 |  |  | 5,319 |
Purchases of Securities Held-to-Maturity | (717 | ) |  | (1,457 | )
Net Increase in Loans | (27,317 | ) |  | (39,545 | )
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets | 781 |  |  | 442 |
Purchase of Premises and Equipment | (1,072 | ) |  | (2,099 | )
Net Decrease in Other Investments | 4,938 |  |  | 7,628 |
Net Cash Used By Investing Activities | (32,069 | ) |  | (8,451 | )
Cash Flows from Financing Activities: |  |  |
Net Increase in Deposits | 194,951 |  |  | 144,513 |
Net Decrease in Short-Term Federal Home Loan Bank Borrowings | (130,000 | ) |  | (159,500 | )
Net Increase in Short-Term Borrowings | 6,810 |  |  | 3,748 |
Finance Lease Payments | (5 | ) |  | (4 | )
Federal Home Loan Bank Advances | 40,000 |  |  | — |
Repayments of Federal Home Loan Bank Term Advances | (20,000 | ) |  | (10,000 | )
Purchase of Treasury Stock | (1,507 | ) |  | (1,392 | )
Stock Options Exercised, Net | 343 |  |  | 535 |
Shares Issued Under the Employee Stock Purchase Plan | 121 |  |  | 117 |
Shares Issued for Dividend Reinvestment Plans | 442 |  |  | 453 |
Cash Dividends Paid | (3,904 | ) |  | (3,760 | )
Net Cash Provided (Used) By Financing Activities | 87,251 |  |  | (25,290 | )
Net Increase (Decrease) in Cash and Cash Equivalents | 68,308 |  |  | (23,010 | )
Cash and Cash Equivalents at Beginning of Period | 70,221 |  |  | 84,239 |
Cash and Cash Equivalents at End of Period | $ | 138,529 |  |  | $ | 61,229 |
Supplemental Disclosures to Statements of Cash Flow Information: |  |  |
Interest on Deposits and Borrowings | $ | 5,264 |  |  | $ | 4,924 |
Income Taxes | 344 |  |  | 311 |
Non-cash Investing and Financing Activity: |  |  |
Transfer of Loans to Other Real Estate Owned and Repossessed Assets | 371 |  |  | 728 |

See Notes to Unaudited Interim Consolidated Financial Statements.
# 7

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. ACCOUNTING POLICIES
In the opinion of the management of Arrow Financial Corporation (Arrow, the Company, we, or us), the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of March 31, 2020, December 31, 2019 and March 31, 2019; the results of operations for the three-month periods ended March 31, 2020 and 2019; the consolidated statements of comprehensive income for the three-month periods ended March 31, 2020 and 2019; the changes in stockholders' equity for the three-month periods ended March 31, 2020 and 2019; and the cash flows for the three-month periods ended March 31, 2020 and 2019. All such adjustments are of a normal recurring nature.
Management’s Use of Estimates -The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Due to the uncertainty regarding the impact of the COVID-19 pandemic, management utilized estimates and assumptions in its evaluation of potential impairment of the Company's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for loan losses. Other estimates include the evaluation of other-than-temporary impairment of investment securities, pension and other post-retirement liabilities and an analysis of a need for a valuation allowance for deferred tax assets. Actual results could differ from those estimates.
A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains appraisals for properties. The allowance for loan losses is management’s best estimate of probable loan losses incurred as of the balance sheet date. While management uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions.
The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, 2019 included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2019.
The following accounting standards have been adopted in the first three months of 2020:
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-13 "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" as part of its disclosure framework, and pursuant to which FASB has eliminated, amended and added disclosure requirements for fair value measurements. For Arrow, the standard became effective, on a prospective basis, on January 1, 2020. The adoption of this change in fair value disclosure did not have a material impact on its financial position or the results of operations in the period subsequent to its adoption.
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-15 "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" which will require companies to defer potentially significant, specified implementation costs incurred in a cloud computing arrangement that are currently often expensed under US GAAP. For Arrow, the standard was adopted, on a prospective basis, on January 1, 2020. The adoption of this standard did not have a material impact on its financial position or the results of operations in the period subsequent to its adoption.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). ASU 2018-17 provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For Arrow, the standard was effective on January 1, 2020 and the adoption of this standard did not have a material impact on its financial position or the results of operations in the period subsequent to its adoption.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022), and provides optional relief for contract modifications, hedge accounting and Held-to-maturity debt securities. For Arrow, this standard was effective January 1, 2020 and can be applied prospectively beginning January 1, 2020 for contract modifications and hedging relationships. The one-time election to sell and/or transfer securities classified as Held-to-maturity may be made at any point after March 12, 2020. Arrow is evaluating the impact of this standard as it will provide relief for contracts currently tied to LIBOR and hedge accounting relationships.
# 8

Note 2. INVESTMENT SECURITIES (In Thousands)
The following table is the schedule of Available-For-Sale Securities at March 31, 2020, December 31, 2019 and March 31, 2019:

Available-For-Sale Securities
|  | U.S. Government & Agency Obligations |  | State and Municipal Obligations |  | Mortgage- Backed Securities |  | Corporate and Other Debt Securities |  | Total Available- For-Sale Securities
March 31, 2020 |  |  |  |  |  |  |  |  |  |
Available-For-Sale Securities, at Amortized Cost |  | $ | 5,002 |  |  | $ | 723 |  |  | $ | 365,333 |  |  | $ | 1,000 |  |  | $ | 372,058 |
Gross Unrealized Gains |  | 179 |  |  | — |  |  | 7,484 |  |  | — |  |  | 7,663 |
Gross Unrealized Losses |  | — |  |  | — |  |  | (1,335 | ) |  | (200 | ) |  | (1,535 | )
Available-For-Sale Securities, at Fair Value |  | 5,181 |  |  | 723 |  |  | 371,482 |  |  | 800 |  |  | 378,186 |
Available-For-Sale Securities, Pledged as Collateral, at Fair Value |  |  |  |  |  |  |  |  |  | 273,124 |
Maturities of Debt Securities, at Amortized Cost: |  |  |  |  |  |  |  |  |  |
Within One Year |  | $ | — |  |  | $ | 26 |  |  | $ | 14,201 |  |  | $ | — |  |  | $ | 14,227 |
From 1 - 5 Years |  | 5,002 |  |  | 257 |  |  | 325,234 |  |  | — |  |  | 330,493 |
From 5 - 10 Years |  | — |  |  | — |  |  | 25,898 |  |  | 1,000 |  |  | 26,898 |
Over 10 Years |  | — |  |  | 440 |  |  | — |  |  | — |  |  | 440 |
Maturities of Debt Securities, at Fair Value: |  |  |  |  |  |  |  |  |  |
Within One Year |  | $ | — |  |  | $ | 26 |  |  | $ | 14,616 |  |  | $ | — |  |  | $ | 14,642 |
From 1 - 5 Years |  | 5,181 |  |  | 257 |  |  | 331,422 |  |  | — |  |  | 336,860 |
From 5 - 10 Years |  | — |  |  | — |  |  | 25,444 |  |  | 800 |  |  | 26,244 |
Over 10 Years |  | — |  |  | 440 |  |  | — |  |  | — |  |  | 440 |
Securities in a Continuous Loss Position, at Fair Value: |  |  |  |  |  |  |  |  |  |
Less than 12 Months |  | $ | — |  |  | $ | — |  |  | $ | 18,846 |  |  | $ | — |  |  | $ | 18,846 |
12 Months or Longer |  | — |  |  | — |  |  | 59,262 |  |  | 800 |  |  | 60,062 |
Total |  | $ | — |  |  | $ | — |  |  | $ | 78,108 |  |  | $ | 800 |  |  | $ | 78,908 |
Number of Securities in a Continuous Loss Position |  | — |  |  | — |  |  | 27 |  |  | 1 |  |  | 28 |
Unrealized Losses on Securities in a Continuous Loss Position: |  |  |  |  |  |  |  |  |  |
Less than 12 Months |  | $ | — |  |  | $ | — |  |  | $ | 316 |  |  | $ | — |  |  | $ | 316 |
12 Months or Longer |  | — |  |  | — |  |  | 1,019 |  |  | 200 |  |  | 1,219 |
Total |  | $ | — |  |  | $ | — |  |  | $ | 1,335 |  |  | $ | 200 |  |  | $ | 1,535 |
Disaggregated Details: |  |  |  |  |  |  |  |  |  |
US Agency Obligations, at Amortized Cost |  | 5,002 |  |  |  |  |  |  |  |  |
US Agency Obligations, at Fair Value |  | 5,181 |  |  |  |  |  |  |  |  |
US Government Agency Securities, at Amortized Cost |  |  |  |  |  | $ | 58,089 |  |  |  |  |
US Government Agency Securities, at Fair Value |  |  |  |  |  | 57,091 |  |  |  |  |
Government Sponsored Entity Securities, at Amortized Cost |  |  |  |  |  | 307,244 |  |  |  |  |
Government Sponsored Entity Securities, at Fair Value |  |  |  |  |  | 314,391 |  |  |  |  |

# 9

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

# 10

Available-For-Sale Securities
|  | U.S. Government & Agency Obligations |  | State and Municipal Obligations |  | Mortgage- Backed Securities |  | Corporate and Other Debt Securities |  | Total Available- For-Sale Securities
March 31, 2019 |  |  |  |  |  |  |  |  |  |
Available-For-Sale Securities, at Amortized Cost |  | $ | 35,519 |  |  | $ | 1,114 |  |  | $ | 263,347 |  |  | $ | 1,000 |  |  | $ | 300,980 |
Gross Unrealized Gains |  | — |  |  | 2 |  |  | 657 |  |  | — |  |  | 659 |
Gross Unrealized Losses |  | (136 | ) |  | — |  |  | (2,491 | ) |  | (200 | ) |  | (2,827 | )
Available-For-Sale Securities, at Fair Value |  | 35,383 |  |  | 1,116 |  |  | 261,513 |  |  | 800 |  |  | 298,812 |
Available-For-Sale Securities, Pledged as Collateral, at Fair Value |  |  |  |  |  |  |  |  |  | 255,028 |
Securities in a Continuous Loss Position, at Fair Value: |  |  |  |  |  |  |  |  |  |
Less than 12 Months |  | $ | — |  |  | $ | — |  |  | $ | 53,131 |  |  | $ | — |  |  | $ | 53,131 |
12 Months or Longer |  | 35,383 |  |  | — |  |  | 155,108 |  |  | 800 |  |  | 191,291 |
Total |  | $ | 35,383 |  |  | $ | — |  |  | $ | 208,239 |  |  | $ | 800 |  |  | $ | 244,422 |
Number of Securities in a Continuous Loss Position |  | 7 |  |  | — |  |  | 80 |  |  | 1 |  |  | 88 |
Unrealized Losses on Securities in a Continuous Loss Position: |  |  |  |  |  |  |  |  |  |
Less than 12 Months |  | $ | — |  |  | $ | — |  |  | $ | 258 |  |  | $ | — |  |  | $ | 258 |
12 Months or Longer |  | 136 |  |  | — |  |  | 2,233 |  |  | 200 |  |  | 2,569 |
Total |  | $ | 136 |  |  | $ | — |  |  | $ | 2,491 |  |  | $ | 200 |  |  | $ | 2,827 |
Disaggregated Details: |  |  |  |  |  |  |  |  |  |
US Agency Obligations, at Amortized Cost |  | 35,519 |  |  |  |  |  |  |  |  |
US Agency Obligations, at Fair Value |  | 35,383 |  |  |  |  |  |  |  |  |
US Government Agency Securities, at Amortized Cost |  |  |  |  |  | $ | 70,358 |  |  |  |  |
US Government Agency Securities, at Fair Value |  |  |  |  |  | 70,034 |  |  |  |  |
Government Sponsored Entity Securities, at Amortized Cost |  |  |  |  |  | 192,989 |  |  |  |  |
Government Sponsored Entity Securities, at Fair Value |  |  |  |  |  | 191,479 |  |  |  |  |

# 11

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

Held-To-Maturity Securities
|  | State and Municipal Obligations |  | Mortgage- Backed Securities |  | Total Held-To Maturity Securities
March 31, 2020 |  |  |  |  |  |
Held-To-Maturity Securities, at Amortized Cost |  | $ | 204,148 |  |  | $ | 34,372 |  |  | $ | 238,520 |
Gross Unrealized Gains |  | 3,104 |  |  | 1,329 |  |  | 4,433 |
Gross Unrealized Losses |  | (149 | ) |  | — |  |  | (149 | )
Held-To-Maturity Securities, at Fair Value |  | 207,103 |  |  | 35,701 |  |  | 242,804 |
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value |  |  |  |  |  | 231,539 |
Maturities of Debt Securities, at Amortized Cost: |  |  |  |  |  |
Within One Year |  | $ | 16,308 |  |  | $ | 2,857 |  |  | $ | 19,165 |
From 1 - 5 Years |  | 115,665 |  |  | 31,515 |  |  | 147,180 |
From 5 - 10 Years |  | 70,585 |  |  | — |  |  | 70,585 |
Over 10 Years |  | 1,590 |  |  | — |  |  | 1,590 |
Maturities of Debt Securities, at Fair Value: |  |  |  |  |  |
Within One Year |  | $ | 16,329 |  |  | $ | 2,964 |  |  | $ | 19,293 |
From 1 - 5 Years |  | 117,119 |  |  | 32,737 |  |  | 149,856 |
From 5 - 10 Years |  | 72,031 |  |  | — |  |  | 72,031 |
Over 10 Years |  | 1,624 |  |  | — |  |  | 1,624 |
Securities in a Continuous Loss Position, at Fair Value: |  |  |  |  |  |
Less than 12 Months |  | $ | 5,625 |  |  | $ | — |  |  | $ | 5,625 |
12 Months or Longer |  | 1,867 |  |  | — |  |  | 1,867 |
Total |  | $ | 7,492 |  |  | $ | — |  |  | $ | 7,492 |
Number of Securities in a Continuous Loss Position |  | 16 |  |  | — |  |  | 16 |
Unrealized Losses on Securities in a Continuous Loss Position: |  |  |  |  |  |
Less than 12 Months |  | $ | 16 |  |  | $ | — |  |  | $ | 16 |
12 Months or Longer |  | 133 |  |  | — |  |  | 133 |
Total |  | $ | 149 |  |  | $ | — |  |  | $ | 149 |
Disaggregated Details: |  |  |  |  |  |
US Government Agency Securities, at Amortized Cost |  |  |  | $ | 1,594 |  |  |
US Government Agency Securities, at Fair Value |  |  |  | 1,655 |  |  |
Government Sponsored Entity Securities, at Amortized Cost |  |  |  | 32,778 |  |  |
Government Sponsored Entity Securities, at Fair Value |  |  |  | 34,046 |  |  |

# 12

Held-To-Maturity Securities
|  | State and Municipal Obligations |  | Mortgage- Backed Securities |  | Total Held-To Maturity Securities
December 31, 2019 |  |  |  |  |  |
Held-To-Maturity Securities, at Amortized Cost |  | $ | 208,243 |  |  | $ | 36,822 |  |  | $ | 245,065 |
Gross Unrealized Gains |  | 4,170 |  |  | 477 |  |  | 4,647 |
Gross Unrealized Losses |  | (94 | ) |  | — |  |  | (94 | )
Held-To-Maturity Securities, at Fair Value |  | 212,319 |  |  | 37,299 |  |  | 249,618 |
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value |  |  |  |  |  | 237,969 |
Securities in a Continuous Loss Position, at Fair Value: |  |  |  |  |  |
Less than 12 Months |  | $ | 1,438 |  |  | $ | — |  |  | $ | 1,438 |
12 Months or Longer |  | 1,994 |  |  | — |  |  | 1,994 |
Total |  | $ | 3,432 |  |  | $ | — |  |  | $ | 3,432 |
Number of Securities in a Continuous Loss Position |  | 10 |  |  | — |  |  | 10 |
Unrealized Losses on Securities in a Continuous Loss Position: |  |  |  |  |  |
Less than 12 Months |  | $ | 85 |  |  | $ | — |  |  | $ | 85 |
12 Months or Longer |  | 9 |  |  | — |  |  | 9 |
Total |  | $ | 94 |  |  | $ | — |  |  | $ | 94 |
Disaggregated Details: |  |  |  |  |  |
US Government Agency Securities, at Amortized Cost |  |  |  | $ | 1,703 |  |  |
US Government Agency Securities, at Fair Value |  |  |  | 1,720 |  |  |
Government Sponsored Entity Securities, at Amortized Cost |  |  |  | 35,119 |  |  |
Government Sponsored Entity Securities, at Fair Value |  |  |  | 35,579 |  |  |
March 31, 2019 |  |  |  |  |  |
Held-To-Maturity Securities, at Amortized Cost |  | $ | 234,454 |  |  | $ | 44,946 |  |  | $ | 279,400 |
Gross Unrealized Gains |  | 1,695 |  |  | 97 |  |  | 1,792 |
Gross Unrealized Losses |  | (573 | ) |  | (205 | ) |  | (778 | )
Held-To-Maturity Securities, at Fair Value |  | 235,576 |  |  | 44,838 |  |  | 280,414 |
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value |  |  |  |  |  | 265,465 |
Securities in a Continuous Loss Position, at Fair Value: |  |  |  |  |  |
Less than 12 Months |  | $ | — |  |  | $ | — |  |  | $ | — |
12 Months or Longer |  | 71,450 |  |  | 26,021 |  |  | 97,471 |
Total |  | $ | 71,450 |  |  | $ | 26,021 |  |  | $ | 97,471 |
Number of Securities in a Continuous Loss Position |  | 193 |  |  | 29 |  |  | 222 |

# 13

Held-To-Maturity Securities
|  | State and Municipal Obligations |  | Mortgage- Backed Securities |  | Total Held-To Maturity Securities
Unrealized Losses on Securities in a Continuous Loss Position: |  |  |  |  |  |
Less than 12 Months |  | $ | — |  |  | $ | — |  |  | $ | — |
12 Months or Longer |  | 573 |  |  | 205 |  |  | 778 |
Total |  | $ | 573 |  |  | $ | 205 |  |  | $ | 778 |
March 31, 2019 |  |  |  |  |  |
Disaggregated Details: |  |  |  |  |  |
US Government Agency Securities, at Amortized Cost |  |  |  | $ | 2,069 |  |  |
US Government Agency Securities, at Fair Value |  |  |  | 2,012 |  |  |
Government Sponsored Entity Securities, at Amortized Cost |  |  |  | 42,877 |  |  |
Government Sponsored Entity Securities, at Fair Value |  |  |  | 42,826 |  |  |

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

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

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

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

# 14

Note 3. LOANS (In Thousands)
Loan Categories and Past Due Loans
The following table presents loan balances outstanding as of March 31, 2020, December 31, 2019 and March 31, 2019 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers a loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of $1,905, $215 and $201 as of March 31, 2020, December 31, 2019 and March 31, 2019, respectively, are included in the residential real estate balances for current loans.

Schedule of Past Due Loans by Loan Category
|  |  | Commercial |  |  |  |  |  |
| Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
March 31, 2020 |  |  |  |  |  |  |  |  |
Loans Past Due 30-59 Days | $ | 173 |  |  | $ | 461 |  |  | $ | 5,636 |  |  | $ | 1,630 |  |  | $ | 7,900 |
Loans Past Due 60-89 Days | 70 |  |  | 110 |  |  | 1,451 |  |  | 212 |  |  | 1,843 |
Loans Past Due 90 or more Days | 8 |  |  | 911 |  |  | 549 |  |  | 1,525 |  |  | 2,993 |
Total Loans Past Due | 251 |  |  | 1,482 |  |  | 7,636 |  |  | 3,367 |  |  | 12,736 |
Current Loans | 146,849 |  |  | 524,648 |  |  | 817,073 |  |  | 912,887 |  |  | 2,401,457 |
Total Loans | $ | 147,100 |  |  | $ | 526,130 |  |  | $ | 824,709 |  |  | $ | 916,254 |  |  | $ | 2,414,193 |
Loans 90 or More Days Past Due and Still Accruing Interest | $ | 5 |  |  | $ | 238 |  |  | $ | 93 |  |  | $ | 101 |  |  | $ | 437 |
Nonaccrual Loans | 63 |  |  | 1,445 |  |  | 715 |  |  | 2,720 |  |  | 4,943 |
December 31, 2019 |  |  |  |  |  |  |  |  |
Loans Past Due 30-59 Days | $ | 150 |  |  | $ | — |  |  | $ | 5,670 |  |  | $ | 152 |  |  | $ | 5,972 |
Loans Past Due 60-89 Days | 42 |  |  | 266 |  |  | 2,700 |  |  | 2,027 |  |  | 5,035 |
Loans Past Due 90 or more Days | 21 |  |  | 326 |  |  | 445 |  |  | 1,807 |  |  | 2,599 |
Total Loans Past Due | 213 |  |  | 592 |  |  | 8,815 |  |  | 3,986 |  |  | 13,606 |
Current Loans | 150,447 |  |  | 509,949 |  |  | 802,383 |  |  | 909,735 |  |  | 2,372,514 |
Total Loans | $ | 150,660 |  |  | $ | 510,541 |  |  | $ | 811,198 |  |  | $ | 913,721 |  |  | $ | 2,386,120 |
Loans 90 or More Days Past Due and Still Accruing Interest | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 253 |  |  | $ | 253 |
Nonaccrual Loans | 81 |  |  | 326 |  |  | 663 |  |  | 2,935 |  |  | 4,005 |
March 31, 2019 |  |  |  |  |  |  |  |  |
Loans Past Due 30-59 Days | $ | 168 |  |  | $ | 208 |  |  | $ | 4,758 |  |  | $ | 1,345 |  |  | $ | 6,479 |
Loans Past Due 60-89 Days | — |  |  | — |  |  | 1,387 |  |  | 207 |  |  | 1,594 |
Loans Past Due 90 or more Days | 17 |  |  | 108 |  |  | 369 |  |  | 1,610 |  |  | 2,104 |
Total Loans Past Due | 185 |  |  | 316 |  |  | 6,514 |  |  | 3,162 |  |  | 10,177 |
Current Loans | 133,091 |  |  | 493,071 |  |  | 740,285 |  |  | 858,584 |  |  | 2,225,031 |
Total Loans | $ | 133,276 |  |  | $ | 493,387 |  |  | $ | 746,799 |  |  | $ | 861,746 |  |  | $ | 2,235,208 |
Loans 90 or More Days Past Due and Still Accruing Interest | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 64 |  |  | $ | 64 |
Nonaccrual Loans | 415 |  |  | 248 |  |  | 588 |  |  | 3,892 |  |  | 5,143 |

The Company disaggregates its loan portfolio into the following four categories:
Commercial - The Company offers a variety of loan options to meet the specific needs of commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. Generally, these loans carry a higher risk than commercial real estate loans, due primarily to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, the Company may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees to support the borrowing, as permitted by applicable law.
# 15

Commercial Real Estate - The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are often made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner- and non-owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, the Company also offers commercial construction and land development loans to finance projects. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.
Consumer Loans - Included in this category are automobile loans. The Company primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most of these indirect consumer loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed. The Company also offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. Several loans are unsecured, which carry a higher risk of loss.
Residential - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. The Company originates fixed-rate and adjustable-rate one-to-four-family residential real estate loans for construction, the purchase of real estate or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in the Company’s market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 80% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. The Company’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is the Company's general practice to underwrite residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, the Company offers fixed home equity loans, as well as variable rate home equity lines of credit, to consumers to finance home improvements, debt consolidation, education and other uses. The Company's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.
Allowance for Loan Losses
The following table presents a roll-forward of the allowance for loan losses and other information pertaining to the allowance for loan losses:

Allowance for Loan Losses
|  |  | Commercial |  |  |  |  |  |
| Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods: |  |  |  |  |  |  |  |  |
December 31, 2019 | $ | 1,386 |  |  | $ | 5,830 |  |  | $ | 9,408 |  |  | $ | 4,563 |  |  | $ | 21,187 |
Charge-offs | (14 | ) |  | — |  |  | (467 | ) |  | — |  |  | (481 | )
Recoveries | — |  |  | — |  |  | 159 |  |  | — |  |  | 159 |
Provision | 267 |  |  | 1,235 |  |  | 904 |  |  | 366 |  |  | 2,772 |
March 31, 2020 | $ | 1,639 |  |  | $ | 7,065 |  |  | $ | 10,004 |  |  | $ | 4,929 |  |  | $ | 23,637 |
December 31, 2018 | $ | 1,218 |  |  | $ | 5,644 |  |  | $ | 8,882 |  |  | $ | 4,452 |  |  | $ | 20,196 |
Charge-offs | (1 | ) |  | (29 | ) |  | (418 | ) |  | (14 | ) |  | (462 | )
Recoveries | — |  |  | — |  |  | 167 |  |  | — |  |  | 167 |
Provision | 33 |  |  | (26 | ) |  | 778 |  |  | (313 | ) |  | 472 |
March 31, 2019 | $ | 1,250 |  |  | $ | 5,589 |  |  | $ | 9,409 |  |  | $ | 4,125 |  |  | $ | 20,373 |

# 16

Allowance for Loan Losses
|  |  | Commercial |  |  |  |  |  |
| Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
March 31, 2020 |  |  |  |  |  |  |  |  |
Allowance for loan losses - Loans Individually Evaluated for Impairment | $ | 4 |  |  | $ | — |  |  | $ | — |  |  | $ | 37 |  |  | $ | 41 |
Allowance for loan losses - Loans Collectively Evaluated for Impairment | 1,635 |  |  | 7,065 |  |  | 10,004 |  |  | 4,892 |  |  | 23,596 |
Ending Loan Balance - Individually Evaluated for Impairment | 34 |  |  | 1,137 |  |  | 111 |  |  | 953 |  |  | 2,235 |
Ending Loan Balance - Collectively Evaluated for Impairment | $ | 147,066 |  |  | $ | 524,993 |  |  | $ | 824,598 |  |  | $ | 915,301 |  |  | $ | 2,411,958 |
December 31, 2019 |  |  |  |  |  |  |  |  |
Allowance for loan losses - Loans Individually Evaluated for Impairment | $ | 5 |  |  | $ | — |  |  | $ | — |  |  | $ | 42 |  |  | $ | 47 |
Allowance for creditlosses - Loans Collectively Evaluated for Impairment | 1,381 |  |  | 5,830 |  |  | 9,408 |  |  | 4,521 |  |  | 21,140 |
Ending Loan Balance - Individually Evaluated for Impairment | 35 |  |  | — |  |  | 107 |  |  | 959 |  |  | 1,101 |
Ending Loan Balance - Collectively Evaluated for Impairment | $ | 150,625 |  |  | $ | 510,541 |  |  | $ | 811,091 |  |  | $ | 912,762 |  |  | $ | 2,385,019 |
March 31, 2019 |  |  |  |  |  |  |  |  |
Allowance for loan losses - Loans Individually Evaluated for Impairment | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Allowance for credit losses - Loans Collectively Evaluated for Impairment | 1,250 |  |  | 5,589 |  |  | 9,409 |  |  | 4,125 |  |  | 20,373 |
Ending Loan Balance - Individually Evaluated for Impairment | 40 |  |  | 387 |  |  | 101 |  |  | 2,417 |  |  | 2,945 |
Ending Loan Balance - Collectively Evaluated for Impairment | $ | 133,236 |  |  | $ | 493,000 |  |  | $ | 746,698 |  |  | $ | 859,329 |  |  | $ | 2,232,263 |

Through the provision for loan losses, an allowance for loan losses is maintained that reflects the best estimate of the incurred risk of loss in the Company’s loan portfolio as of the balance sheet date. Additions are made to the allowance for loan losses through a periodic provision for loan losses. Actual loan losses are charged against the allowance for loan losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for loan losses.
Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, our independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.
The Company uses a two-step process to determine the provision for loan losses and the amount of the allowance for loan losses. An evaluation of impaired loans is performed on a quarterly basis. Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. In general, Arrow's impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.
# 17

The remainder of the portfolio is evaluated on a pooled basis, as described below. For each homogeneous loan pool, a total loss factor is estimated based on the historical net loss rates adjusted for applicable qualitative factors. The total loss factors assigned to each loan category are updated on a quarterly basis. For the commercial, commercial construction and commercial real estate categories, the loan categories are further segregated by credit risk profile (pools of loans graded pass, special mention and accruing substandard). Additional description of the credit risk classifications is detailed in the Credit Quality Indicators section of this note.
The historical net loss rate is determined for each loan category using a trailing three-year net charge-off average. While historical net loss experience provides a reasonable starting point for analysis, historical net losses, or even recent trends in net losses, do not by themselves form a sufficient basis to determine the appropriate level of the allowance for loan losses. Therefore, historical net loss factors are considered and adjusted for qualitative factors that impact the incurred risk of loss associated with the loan categories within the total loan portfolio. These include:

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

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

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

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

• | Changes in the quality of the loan review system

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

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

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

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

# 18

Loan Credit Quality Indicators
The following table presents the credit quality indicators by loan category at March 31, 2020, December 31, 2019 and March 31, 2019:

Loan Credit Quality Indicators
|  |  | Commercial |  |  |  |  |  |
| Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
March 31, 2020 |  |  |  |  |  |  |  |  |
Credit Risk Profile by Creditworthiness Category: |  |  |  |  |  |  |  |  |
Satisfactory | $ | 140,218 |  |  | $ | 497,243 |  |  |  |  |  |  | $ | 637,461 |
Special Mention | 28 |  |  | 255 |  |  |  |  |  |  | 283 |
Substandard | 6,854 |  |  | 28,632 |  |  |  |  |  |  | 35,486 |
Doubtful | — |  |  | — |  |  |  |  |  |  | — |
Credit Risk Profile Based on Payment Activity: |  |  |  |  |  |  |  |  |
Performing |  |  |  |  | $ | 823,901 |  |  | $ | 913,433 |  |  | $ | 1,737,334 |
Nonperforming |  |  |  |  | 808 |  |  | 2,821 |  |  | 3,629 |
December 31, 2019 |  |  |  |  |  |  |  |  |
Credit Risk Profile by Creditworthiness Category: |  |  |  |  |  |  |  |  |
Satisfactory | $ | 144,283 |  |  | $ | 484,267 |  |  |  |  |  |  | $ | 628,550 |
Special Mention | 32 |  |  | 263 |  |  |  |  |  |  | 295 |
Substandard | 6,345 |  |  | 26,011 |  |  |  |  |  |  | 32,356 |
Doubtful | — |  |  | — |  |  |  |  |  |  | — |
Credit Risk Profile Based on Payment Activity: |  |  |  |  |  |  |  |  |
Performing |  |  |  |  | $ | 810,535 |  |  | $ | 910,533 |  |  | $ | 1,721,068 |
Nonperforming |  |  |  |  | 663 |  |  | 3,188 |  |  | 3,851 |
March 31, 2019 |  |  |  |  |  |  |  |  |
Credit Risk Profile by Creditworthiness Category: |  |  |  |  |  |  |  |  |
Satisfactory | $ | 125,918 |  |  | $ | 465,216 |  |  |  |  |  |  | $ | 591,134 |
Special Mention | 133 |  |  | 2,268 |  |  |  |  |  |  | 2,401 |
Substandard | 7,225 |  |  | 25,903 |  |  |  |  |  |  | 33,128 |
Doubtful | — |  |  | — |  |  |  |  |  |  | — |
Credit Risk Profile Based on Payment Activity: |  |  |  |  |  |  |  |  |
Performing |  |  |  |  | $ | 746,211 |  |  | $ | 857,790 |  |  | $ | 1,604,001 |
Nonperforming |  |  |  |  | 588 |  |  | 3,956 |  |  | 4,544 |

For the purposes of the table above, nonperforming consumer and residential loans are those loans on nonaccrual status or are 90 days or more past due and still accruing interest.
For the allowance calculation, an internally developed system of five credit quality indicators is used to rate the credit worthiness of each commercial loan defined as follows:
1) Satisfactory - "Satisfactory" borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified;
2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. "Special mention" assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this credit quality indicator include loans to borrowers with deteriorating financial strength and/or earnings record and loans with potential for problems due to weakening economic or market conditions;
3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. “Substandard”
# 19

loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard;
4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen the value (e.g. possibility of additional collateral, injection of capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and
5) Loss - Loans classified as “loss” are considered uncollectible with collateral of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses.
Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of incurred risk of loss in our commercial related loan portfolios.
# 20

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

Impaired Loans
|  |  | Commercial |  |  |  |  |  |
| Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
March 31, 2020 |  |  |  |  |  |  |  |  |
Recorded Investment: |  |  |  |  |  |  |  |  |
With No Related Allowance | $ | — |  |  | $ | 1,137 |  |  | $ | 112 |  |  | $ | 697 |  |  | $ | 1,946 |
With a Related Allowance | 33 |  |  | — |  |  | — |  |  | 256 |  |  | 289 |
Unpaid Principal Balance: |  |  |  |  |  |  |  |  |
With No Related Allowance | — |  |  | 1,137 |  |  | 111 |  |  | 697 |  |  | 1,945 |
With a Related Allowance | 34 |  |  | — |  |  | — |  |  | 256 |  |  | 290 |
December 31, 2019 |  |  |  |  |  |  |  |  |
Recorded Investment: |  |  |  |  |  |  |  |  |
With No Related Allowance | $ | — |  |  | $ | — |  |  | $ | 108 |  |  | $ | 699 |  |  | $ | 807 |
With a Related Allowance | 34 |  |  | — |  |  | — |  |  | 260 |  |  | 294 |
Unpaid Principal Balance: |  |  |  |  |  |  |  |  |
With No Related Allowance | — |  |  | — |  |  | 107 |  |  | 699 |  |  | 806 |
With a Related Allowance | 35 |  |  | — |  |  | — |  |  | 260 |  |  | 295 |
March 31, 2019 |  |  |  |  |  |  |  |  |
Recorded Investment: |  |  |  |  |  |  |  |  |
With No Related Allowance | $ | 38 |  |  | $ | 389 |  |  | $ | 101 |  |  | $ | 2,417 |  |  | $ | 2,945 |
With a Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
Unpaid Principal Balance: |  |  |  |  |  |  |  |  |
With No Related Allowance | 424 |  |  | 2 |  |  | 101 |  |  | 2,416 |  |  | $ | 2,943 |
With a Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
For the Quarter Ended: |  |  |  |  |  |  |  |  |
March 31, 2020 |  |  |  |  |  |  |  |  |
Average Recorded Balance: |  |  |  |  |  |  |  |  |
With No Related Allowance | $ | — |  |  | $ | 569 |  |  | $ | 110 |  |  | $ | 698 |  |  | $ | 1,377 |
With a Related Allowance | 34 |  |  | — |  |  | — |  |  | 258 |  |  | 292 |
Interest Income Recognized: |  |  |  |  |  |  |  |  |
With No Related Allowance | — |  |  | 10 |  |  | — |  |  | — |  |  | 10 |
With a Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
Cash Basis Income: |  |  |  |  |  |  |  |  |
With No Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
With a Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
March 31, 2019 |  |  |  |  |  |  |  |  |
Average Recorded Balance: |  |  |  |  |  |  |  |  |
With No Related Allowance | $ | 234 |  |  | $ | 591 |  |  | $ | 101 |  |  | $ | 2,011 |  |  | $ | 2,937 |
With a Related Allowance | — |  |  | — |  |  | — |  |  | 147 |  |  | 147 |
Interest Income Recognized: |  |  |  |  |  |  |  |  |
With No Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
With a Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
Cash Basis Income: |  |  |  |  |  |  |  |  |
With No Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |
With a Related Allowance | — |  |  | — |  |  | — |  |  | — |  |  | — |

At March 31, 2020, December 31, 2019 and March 31, 2019, all impaired loans were considered to be collateral dependent and were therefore evaluated for impairment based on the fair value of collateral less estimated cost to sell. Interest income recognized in the table above represents income earned after the loans became impaired and includes restructured loans in compliance with their modified terms and nonaccrual loans where interest income was recognized on a cash basis.
# 21

Loans Modified in Trouble Debt Restructurings
The following table presents information on loans modified in trouble debt restructurings during the periods indicated.

Loans Modified in Trouble Debt Restructurings During the Period
|  |  | Commercial |  |  |  |  |  |
| Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
For the Quarter Ended: |  |  |  |  |  |  |  |  |
March 31, 2020 |  |  |  |  |  |  |  |  |
Number of Loans | — |  |  | — |  |  | 1 |  |  | — |  |  | 1 |
Pre-Modification Outstanding Recorded Investment | $ | — |  |  | $ | — |  |  | $ | 16 |  |  | $ | — |  |  | $ | 16 |
Post-Modification Outstanding Recorded Investment | — |  |  | — |  |  | 16 |  |  | — |  |  | 16 |
Subsequent Default, Number of Contracts | — |  |  | — |  |  | — |  |  | — |  |  | — |
Subsequent Default, Recorded Investment | — |  |  | — |  |  | — |  |  | — |  |  | — |
March 31, 2019 |  |  |  |  |  |  |  |  |
Number of Loans | — |  |  | — |  |  | 1 |  |  | — |  |  | 1 |
Pre-Modification Outstanding Recorded Investment | $ | — |  |  | $ | — |  |  | $ | 13 |  |  | $ | — |  |  | $ | 13 |
Post-Modification Outstanding Recorded Investment | — |  |  | — |  |  | 13 |  |  | — |  |  | 13 |
Subsequent Default, Number of Contracts | — |  |  | — |  |  | — |  |  | — |  |  | — |
Subsequent Default, Recorded Investment | — |  |  | — |  |  | — |  |  | — |  |  | — |

In general, prior to the COVID-19 pandemic, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. Such modifications may involve a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of March 31, 2020. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, if a short-term loan modification (e.g. six months) is made for a borrower as the result of the COVID-19 pandemic, and who was current on contractual payments as of December 31, 2019, this modification is not considered a troubled debt restructuring (TDR).
Note 4. COMMITMENTS AND CONTINGENCIES (In Thousands)
The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of March 31, 2020, December 31, 2019 and March 31, 2019:

Commitments to Extend Credit and Letters of Credit
| March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
Notional Amount: |  |  |  |  |
Commitments to Extend Credit | $ | 376,519 |  |  | $ | 349,718 |  |  | $ | 310,749 |
Standby Letters of Credit | 3,301 |  |  | 3,129 |  |  | 4,431 |
Fair Value: |  |  |  |  |
Commitments to Extend Credit | $ | — |  |  | $ | — |  |  | $ | — |
Standby Letters of Credit | 29 |  |  | 31 |  |  | 20 |

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.
Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
# 22

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are not expected to be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.
Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.
Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with commercial lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at March 31, 2020, December 31, 2019 and March 31, 2019 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from 1% to 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at March 31, 2020, December 31, 2019 and March 31, 2019, were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.
The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.
In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal proceedings. At present, there are no legal proceedings pending or threatened, which in the opinion of management and counsel, would result in a material loss to Arrow.
# 23

Note 5. COMPREHENSIVE INCOME (In Thousands)
The following table presents the components of other comprehensive income for the three-month periods ended March 31, 2020 and 2019:

Schedule of Comprehensive Income
|  | Three Months Ended March 31,
|  |  |  | Tax |  |
|  | Before-Tax |  | (Expense) |  | Net-of-Tax
|  | Amount |  | Benefit |  | Amount
2020 |  |  |  |  |  |
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period |  | 5,504 |  |  | $ | (1,406 | ) |  | 4,098 |
Net Unrealized Losses on Cash Flow Swap |  | (294 | ) |  | 75 |  |  | (219 | )
Amortization of Net Retirement Plan Actuarial Loss |  | 36 |  |  | (9 | ) |  | 27 |
Amortization of Net Retirement Plan Prior Service Cost |  | 54 |  |  | (15 | ) |  | 39 |
Other Comprehensive Income |  | $ | 5,300 |  |  | $ | (1,355 | ) |  | $ | 3,945 |
2019 |  |  |  |  |  |
Net Unrealized Securities Holding Gains on Securities Available-for-Sale Arising During the Period |  | 2,788 |  |  | $ | (708 | ) |  | 2,080 |
Amortization of Net Retirement Plan Actuarial Loss |  | 163 |  |  | (42 | ) |  | 121 |
Amortization of Net Retirement Plan Prior Service Cost |  | 56 |  |  | (14 | ) |  | 42 |
Other Comprehensive Income |  | $ | 3,007 |  |  | $ | (764 | ) |  | $ | 2,243 |

# 24

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

Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)
| Unrealized Gains and Losses on Available-for-Sale Securities |  | Unrealized Loss on Cash Flow Swap |  | Defined Benefit Plan Items |  | Total
|  |  | Net Actuarial Gain (Loss) |  | Net Prior Service (Cost) Credit |
For the Quarter-To-Date periods ended: |  |  |  |  |  |  |  |  |
December 31, 2019 | $ | 465 |  |  | $ | — |  |  | $ | (5,847 | ) |  | $ | (975 | ) |  | $ | (6,357 | )
Other comprehensive income or loss before reclassifications | 4,098 |  |  | (219 | ) |  | — |  |  | — |  |  | 3,879 |
Amounts reclassified from accumulated other comprehensive income | — |  |  | — |  |  | 27 |  |  | 39 |  |  | 66 |
Net current-period other comprehensive income | 4,098 |  |  | (219 | ) |  | 27 |  |  | 39 |  |  | 3,945 |
March 31, 2020 | $ | 4,563 |  |  | $ | (219 | ) |  | $ | (5,820 | ) |  | $ | (936 | ) |  | $ | (2,412 | )
December 31, 2018 | $ | (3,697 | ) |  |  |  | $ | (8,971 | ) |  | $ | (1,142 | ) |  | $ | (13,810 | )
Other comprehensive income or loss before reclassifications | 2,080 |  |  |  |  | — |  |  | — |  |  | 2,080 |
Amounts reclassified from accumulated other comprehensive income | — |  |  |  |  | 121 |  |  | 42 |  |  | 163 |
Net current-period other comprehensive income | 2,080 |  |  |  |  | 121 |  |  | 42 |  |  | 2,243 |
March 31, 2019 | $ | (1,617 | ) |  |  |  | $ | (8,850 | ) |  | $ | (1,100 | ) |  | $ | (11,567 | )

(1) All amounts are net of tax.
# 25

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

Reclassifications Out of Accumulated Other Comprehensive Income
|  | Amounts Reclassified |  |
Details about Accumulated Other |  | from Accumulated Other |  | Affected Line Item in the Statement
Comprehensive Income (Loss) Components |  | Comprehensive Income |  | Where Net Income Is Presented
For the Quarter-to-date periods ended: |  |  |  |
March 31, 2020 |  |  |  |
Amortization of defined benefit pension items: |  |  |  |
Prior-service costs |  | $ | (54 | ) | (1) | Salaries and Employee Benefits
Actuarial loss |  | (36 | ) | (1) | Salaries and Employee Benefits
|  | (90 | ) |  | Total before Tax
|  | 24 |  |  | Provision for Income Taxes
|  | $ | (66 | ) |  | Net of Tax
Total reclassifications for the period |  | $ | (66 | ) |  | Net of Tax
March 31, 2019 |  |  |  |
Amortization of defined benefit pension items: |  |  |  |
Prior-service costs |  | $ | (56 | ) | (1) | Salaries and Employee Benefits
Actuarial loss |  | (163 | ) | (1) | Salaries and Employee Benefits
|  | (219 | ) |  | Total before Tax
|  | 56 |  |  | Provision for Income Taxes
|  | $ | (163 | ) |  | Net of Tax
Total reclassifications for the period |  | $ | (163 | ) |  | Net of Tax

(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.
# 26

Note 6. STOCK-BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)
Arrow has established three stock-based compensation plans: a Long Term Incentive Plan, an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September 27, 2019 3% stock dividend.
Long Term Incentive Plan
The Long Term Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance units and performance shares. The Compensation Committee of the Board of Directors administers the Long Term Incentive Plan.
Stock Options - Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. The options usually vest over a four-year period.
The following table summarizes information about stock option activity for the year to date period ended March 31, 2020.

| Shares | Weighted Average Exercise Price
Outstanding at January 1, 2020 | 241,242 |  | $ | 27.58 |
Granted | 50,800 |  | 35.28 |
Exercised | (14,282 | ) | 24.05 |
Forfeited | (2,752 | ) | 29.65 |
Outstanding at March 31, 2020 | 275,008 |  | 29.17 |
Vested at Period-End | 155,195 |  | 26.23 |
Expected to Vest | 119,813 |  | 32.97 |
Stock Options Granted |  |
Weighted Average Grant Date Information: |  |
Fair Value of Options Granted | $ | 4.99 |  |
Fair Value Assumptions: |  |
Dividend Yield | 2.90 | % |
Expected Volatility | 20.25 | % |
Risk Free Interest Rate | 1.53 | % |
Expected Lives (in years) | 6.68 |  |

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

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

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant date. Once vested, the restricted stock units become vested units and are no longer forfeitable. Vested units settle upon retirement of the recipient. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.
# 27

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

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

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

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

Employee Stock Purchase Plan
Arrow sponsors an ESPP under which employees may purchase Arrow's common stock at a 5% discount below market price. Under current accounting guidance, a stock purchase plan with a discount of 5% or less is not considered a compensatory plan.
Employee Stock Ownership Plan
Arrow maintains an ESOP, pursuant to which substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The ESOP borrowed funds from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock. The notes, which were fully repaid as of December 31, 2019, required annual payments of principal and interest through 2019. As the debt was repaid, shares were released from collateral based on the proportion of debt paid to total debt outstanding for the year and allocated to active employees. In addition, the Company makes additional cash contributions to the Plan each year.
Shares pledged as collateral were reported as unallocated ESOP shares in stockholders' equity. As shares were released from collateral, Arrow reported compensation expense equal to the current average market price of the shares, and the shares became outstanding for earnings per share computations.
# 28

Note 7. RETIREMENT BENEFIT PLANS (Dollars in Thousands)
Arrow sponsors qualified and non-qualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate in effect for November of the prior year with a minimum interest credit of 3%. The service credits under the cash balance plan are equal to 6.0% of eligible salaries for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from 6.0% to 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under The Employee Retirement Income Security Act (ERISA). Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.
Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. Arrow’s policy is to fund the cost of postretirement benefits based on the current cost of the underlying policies. However, the health care plan provision for automatic increases of Company contributions each year is based on the increase in inflation and is limited to a maximum of 5%.
As of December 31, 2019, Arrow updated its mortality assumption to the Pri-2012 mortality tables for employees, healthy annuitants and contingent survivors, adjusted for mortality improvements with the Scale MP-2019 mortality improvement scale on a generational basis to reflect newly published mortality tables. The Pension Plan uses the sex-distinct amount-weighted tables, the Select Executive Retirement Plan uses the sex-distinct white collar amount-weighted tables, and the Postretirement Benefit Plan uses the sex-distinct headcount-weighted tables. The change in mortality tables resulted in a decrease in liabilities for the Employee's Pension Plan, the Select Executive Retirement Plan and the Postretirement Benefit Plan.
The mortality table used in determining the present value of a lump sum payment/annuitizing cash balance accounts was changed to the applicable mortality table for the determination of present values under Internal Revenue Code (IRC) Section 417(e)(3)(B). This table is currently a 50/50 blend of male and female rates from the 2020 sex distinct optional combined mortality tables, as prescribed under IRC Section 430. The change in mortality table was made to reflect the continued improvement in mortality rates and resulted in an increase in liabilities for the Employee's Pension Plan and the Select Executive Retirement Plan.
T he interest rates used in determining the present value of a lump sum payment/annuitizing cash balance accounts were changed to the segment rates in effect for the January 1, 2020 plan year (2.04%, 3.09%, 3.68%) as of December 31, 2019. This change resulted in a decrease in liability for the Employees' Pension Plan and the Select Executive Retirement Plan.
The following tables provide the components of net periodic benefit costs for the three-month periods ended March 31, 2020 and 2019.

|  | Employees' |  | Select Executive |  | Postretirement
|  | Pension |  | Retirement |  | Benefit
|  | Plan |  | Plan |  | Plans
Net Periodic Benefit Cost |  |  |  |  |  |
For the Three Months Ended March 31, 2020 |  |  |  |  |  |
Service Cost 1 |  | $ | 430 |  |  | $ | 103 |  |  | $ | 33 |
Interest Cost 2 |  | 417 |  |  | 54 |  |  | 78 |
Expected Return on Plan Assets 2 |  | (904 | ) |  | — |  |  | — |
Amortization of Prior Service Cost 2 |  | 16 |  |  | 11 |  |  | 27 |
Amortization of Net Loss 2 |  | 1 |  |  | 33 |  |  | 2 |
Net Periodic Cost |  | $ | (40 | ) |  | $ | 201 |  |  | $ | 140 |
Plan Contributions During the Period |  | $ | — |  |  | $ | 117 |  |  | $ | 78 |
For the Three Months Ended March 31, 2019: |  |  |  |  |  |
Service Cost 1 |  | $ | 399 |  |  | $ | 97 |  |  | $ | 30 |
Interest Cost 2 |  | 397 |  |  | 52 |  |  | 89 |
Expected Return on Plan Assets 2 |  | (770 | ) |  | — |  |  | — |
Amortization of Prior Service Cost 2 |  | 17 |  |  | 14 |  |  | 25 |
Amortization of Net Loss 2 |  | 153 |  |  | 27 |  |  | (17 | )
Net Periodic (Benefit) Cost |  | $ | 196 |  |  | $ | 190 |  |  | $ | 127 |
Plan Contributions During the Period |  | $ | — |  |  | $ | 116 |  |  | $ | 37 |

Footnotes:
1. Included in Salaries and Employee Benefits on the Consolidated Statements of Income
2. Included in Other Operating Expense on the Consolidated Statements of Income
A contribution to the qualified pension plan in 2020 was not required, and currently, additional contributions in 2020 are not expected. Arrow makes contributions to its other post-retirement benefit plans in an amount equal to benefit payments for the year.
# 29

Note 8. EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts)
The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (“EPS”) for periods ended March 31, 2020 and 2019. All share and per share amounts have been adjusted for the September 27, 2019, 3% stock dividend.

Earnings Per Share
| Three Months Ended
| March 31, 2020 |  | March 31, 2019
Earnings Per Share - Basic: |  |  |
Net Income | $ | 8,127 |  |  | $ | 8,734 |
Weighted Average Shares - Basic | 14,996 |  |  | 14,903 |
Earnings Per Share - Basic | $ | 0.54 |  |  | $ | 0.59 |
Earnings Per Share - Diluted: |  |  |
Net Income | $ | 8,127 |  |  | $ | 8,734 |
Weighted Average Shares - Basic | 14,996 |  |  | 14,903 |
Dilutive Average Shares Attributable to Stock Options | 30 |  |  | 53 |
Weighted Average Shares - Diluted | 15,026 |  |  | 14,956 |
Earnings Per Share - Diluted | $ | 0.54 |  |  | $ | 0.58 |

# 30

Note 9. FAIR VALUES (Dollars In Thousands)
FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. There are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at March 31, 2020, December 31, 2019 and March 31, 2019 were securities available-for-sale, equity securities and derivatives. Arrow held no securities or liabilities for trading on such dates.
The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
|  |  | Fair Value Measurements at Reporting Date Using:
| Fair Value |  | Quoted Prices In Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Fair Value of Assets and Liabilities Measured on a Recurring Basis: |  |  |  |  |  |  |
March 31, 2020 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Securities Available-for Sale: |  |  |  |  |  |  |
U.S. Government & Agency Obligations | $ | 5,181 |  |  | $ | — |  |  | $ | 5,181 |  |  | $ | — |
State and Municipal Obligations | 723 |  |  | — |  |  | 723 |  |  | — |
Mortgage-Backed Securities | 371,482 |  |  | — |  |  | 371,482 |  |  | — |
Corporate and Other Debt Securities | 800 |  |  | — |  |  | 800 |  |  | — |
Total Securities Available-for-Sale | 378,186 |  |  | — |  |  | 378,186 |  |  | — |
Equity Securities | 1,689 |  |  | — |  |  | 1,689 |  |  | — |
Total Securities Measured on a Recurring Basis | 379,875 |  |  | — |  |  | 379,875 |  |  | — |
Derivatives, included in other assets | 5,191 |  |  | — |  |  | 5,191 |  |  | — |
Total Measured on a Recurring Basis | $ | 385,066 |  |  | $ | — |  |  | $ | 385,066 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Derivatives, included in other liabilities | 5,191 |  |  | — |  |  | 5,191 |  |  | — |
Total Measured on a Recurring Basis | $ | 5,191 |  |  | $ | — |  |  | $ | 5,191 |  |  | $ | — |
December 31, 2019 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Securities Available-for Sale: |  |  |  |  |  |  |
U.S. Government & Agency Obligations | $ | 5,054 |  |  | $ | — |  |  | $ | 5,054 |  |  | $ | — |
State and Municipal Obligations | 764 |  |  | — |  |  | 764 |  |  | — |
Mortgage-Backed Securities | 350,716 |  |  | — |  |  | 350,716 |  |  | — |
Corporate and Other Debt Securities | 800 |  |  | — |  |  | 800 |  |  | — |
Total Securities Available-for-Sale | 357,334 |  |  |  |  | 357,334 |  |  |
Equity Securities | 2,063 |  |  | — |  |  | 2,063 |  |  | — |
Total Securities Measured on a Recurring Basis | 359,397 |  |  | — |  |  | 359,397 |  |  | — |

# 31

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

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

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

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

# 32

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

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

Fair Value Methodology for Assets and Liabilities Measured on a Recurring Basis
The fair value of Level 1 securities available-for-sale are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of Level 2 securities available-for-sale are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. The fair value of Level 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.
Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis
The fair value of collateral dependent impaired loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment at least annually, with no impairment recognized for these assets at March 31, 2020, December 31, 2019 and March 31, 2019.
Fair Value Methodology for Financial Instruments Not Measured on a Recurring or Nonrecurring Basis
The fair value for securities held-to-maturity is determined utilizing an independent bond pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.
ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories. The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for loan and lease loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the Swap Curve.
The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rates are estimated using the Federal Home Loan Bank of New York ("FHLBNY") yield curve, which is considered representative of Arrow’s time deposit rates. The fair value of all other deposits is equal to the carrying value.
The fair value of FHLBNY advances is calculated by the FHLBNY.
The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of the stock.
The book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable (indexed to LIBOR) and Arrow is well-capitalized.
# 33

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

Schedule of Fair Values by Balance Sheet Grouping
|  |  |  |  | Fair Value Hierarchy
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
March 31, 2020 |  |  |  |  |  |  |  |  |
Cash and Cash Equivalents | $ | 138,529 |  |  | $ | 138,529 |  |  | $ | 138,529 |  |  | $ | — |  |  | $ | — |
Securities Available-for-Sale | 378,186 |  |  | 378,186 |  |  | — |  |  | 378,186 |  |  | — |
Securities Held-to-Maturity | 238,520 |  |  | 242,804 |  |  | — |  |  | 242,804 |  |  | — |
Equity Securities | 1,689 |  |  | 1,689 |  |  | — |  |  | 1,689 |  |  | — |
Federal Home Loan Bank and Federal Reserve Bank Stock | 5,379 |  |  | 5,379 |  |  | — |  |  | 5,379 |  |  | — |
Net Loans | 2,390,556 |  |  | 2,368,033 |  |  | — |  |  | — |  |  | 2,368,033 |
Accrued Interest Receivable | 7,856 |  |  | 7,856 |  |  | — |  |  | 7,856 |  |  | — |
Derivatives, included in other assets | 5,191 |  |  | 5,191 |  |  |  |  | 5,191 |  |  |
Deposits | 2,811,005 |  |  | 2,811,668 |  |  | — |  |  | 2,811,668 |  |  | — |
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase | 57,909 |  |  | 57,909 |  |  | — |  |  | 57,909 |  |  | — |
Federal Home Loan Bank Term Advances | 50,000 |  |  | 51,194 |  |  | — |  |  | 51,194 |  |  | — |
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 |  |  | 20,000 |  |  | — |  |  | 20,000 |  |  | — |
Accrued Interest Payable | 1,392 |  |  | 1,392 |  |  | — |  |  | 1,392 |  |  | — |
Derivatives, included in other liabilities | 5,191 |  |  | 5,191 |  |  | — |  |  | 5,191 |  |  | — |

# 34

Schedule of Fair Values by Balance Sheet Grouping
|  |  |  |  | Fair Value Hierarchy
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
December 31, 2019 |  |  |  |  |  |  |  |  |
Cash and Cash Equivalents | $ | 70,221 |  |  | $ | 70,221 |  |  | $ | 70,221 |  |  | $ | — |  |  | $ | — |
Securities Available-for-Sale | 357,334 |  |  | 357,334 |  |  | — |  |  | 357,334 |  |  | — |
Securities Held-to-Maturity | 245,065 |  |  | 249,618 |  |  | — |  |  | 249,618 |  |  | — |
Equity Securities | 2,063 |  |  | 2,063 |  |  | — |  |  | 2,063 |  |  |
Federal Home Loan Bank and Federal Reserve Bank Stock | 10,317 |  |  | 10,317 |  |  | — |  |  | 10,317 |  |  | — |
Net Loans | 2,364,933 |  |  | 2,332,797 |  |  | — |  |  | — |  |  | 2,332,797 |
Accrued Interest Receivable | 7,377 |  |  | 7,377 |  |  | — |  |  | 7,377 |  |  | — |
Derivatives, included in other assets | 69 |  |  | 69 |  |  | — |  |  | 69 |  |  | — |
Deposits | 2,616,054 |  |  | 2,614,170 |  |  | — |  |  | 2,614,170 |  |  | — |
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase | 51,099 |  |  | 51,099 |  |  | — |  |  | 51,099 |  |  | — |
Federal Home Loan Bank Overnight Advances | 130,000 |  |  | 130,000 |  |  | — |  |  | 130,000 |  |  | — |
Federal Home Loan Bank Term Advances | 30,000 |  |  | 29,993 |  |  | — |  |  | 29,993 |  |  | — |
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 |  |  | 20,000 |  |  | — |  |  | 20,000 |  |  | — |
Accrued Interest Payable | 1,436 |  |  | 1,436 |  |  | — |  |  | 1,436 |  |  | — |
Derivatives, included in other liabilities | 69 |  |  | 69 |  |  | — |  |  | 69 |  |  | — |
March 31, 2019 |  |  |  |  |  |  |  |  |
Cash and Cash Equivalents | $ | 61,229 |  |  | $ | 61,229 |  |  | $ | 61,229 |  |  | $ | — |  |  | $ | — |
Securities Available-for-Sale | 298,812 |  |  | 298,812 |  |  | — |  |  | 298,812 |  |  | — |
Securities Held-to-Maturity | 279,400 |  |  | 280,414 |  |  | — |  |  | 280,414 |  |  | — |
Equity Securities | 1,850 |  |  | 1,850 |  |  | — |  |  | 1,850 |  |  |
Federal Home Loan Bank and Federal Reserve Bank Stock | 7,878 |  |  | 7,878 |  |  | — |  |  | 7,878 |  |  | — |
Net Loans | 2,214,835 |  |  | 2,164,298 |  |  | — |  |  | — |  |  | 2,164,298 |
Accrued Interest Receivable | 8,180 |  |  | 8,180 |  |  | — |  |  | 8,180 |  |  | — |
Deposits | 2,490,097 |  |  | 2,484,479 |  |  | — |  |  | 2,484,479 |  |  | — |
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase | 58,407 |  |  | 58,407 |  |  | — |  |  | 58,407 |  |  | — |
Federal Home Loan Bank Overnight Advances | 74,500 |  |  | 74,500 |  |  | — |  |  | 74,500 |  |  | — |
Federal Home Loan Bank Term Advances | 35,000 |  |  | 34,805 |  |  | — |  |  | 34,805 |  |  | — |
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 |  |  | 20,000 |  |  | — |  |  | 20,000 |  |  | — |
Accrued Interest Payable | 737 |  |  | 737 |  |  | — |  |  | 737 |  |  | — |

# 35

Note 10. LEASES (Dollars In Thousands)
The Company is a lessee in its leases, which are mainly for financial services locations in addition to leases for corporate vehicles. These leases generally require the Company to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, the Company pays the variable payments to the lessor, and in other leases, the Company pays the variable payments directly to the applicable third party. None of the Company's current leases include any residual value guarantees or any subleases, and there are no significant rights and obligations of the Company for leases that have not commenced as of the reporting date.
Arrow leases five of its branch offices, at market rates, from Stewart’s Shops Corp. Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a director on the board of directors of each of Arrow and Saratoga National Bank and Trust Company.
The following includes quantitative data related to the Company's leases as of and for the three months ended March 31, 2020 and March 31, 2019:

|  | Three Months Ended
Finance Lease Amounts: | Classification | March 31, 2020 |  | March 31, 2019
Right-of-use Assets | Premises and Equipment, Net | $ | 5,124 |  |  | $ | 2,922 |
Lease Liabilities | Finance Leases | 5,249 |  |  | 2,946 |
Operating Lease Amounts: |  |  |  |
Right-of-use Assets | Other Assets | $ | 5,529 |  |  | $ | 5,587 |
Lease Liabilities | Other Liabilities | 5,602 |  |  | 5,639 |
Other Information: |  |  |  |
Cash Paid For Amounts Included In The Measurement Of Lease Liabilities: |  |  |  |
Operating Outgoing Cash Flows From Finance Leases |  | $ | 50 |  |  | $ | 15 |
Operating Outgoing Cash Flows From Operating Leases |  | 158 |  |  | 173 |
Financing Outgoing Cash Flows From Finance Leases |  | 5 |  |  | 4 |
Right-of-use Assets Obtained In Exchange For New Finance Lease Liabilities |  | — |  |  | 2,939 |
Right-of-use Assets Obtained In Exchange For New Operating Lease Liabilities |  | — |  |  | 5,725 |
Weighted-average Remaining Lease Term—Finance Leases (Yrs.) |  | 29.90 |  |  | 26.91 |
Weighted-average Remaining Lease Term—Operating Leases (Yrs.) |  | 13.70 |  |  | 14.63 |
Weighted-average Discount Rate—Finance Leases % |  | 3.75 | % |  | 3.82 | %
Weighted-average Discount Rate—Operating Leases % |  | 3.36 | % |  | 3.50 | %

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

# 36

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

# 37

Note 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (In Thousands)
Arrow is exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of the Bank’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Derivatives Not Designated as Hedging Instruments
Arrow enters into interest rate swap agreements with its commercial customers to provide them with a long-term fixed rate, while simultaneously Arrow entered into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure.
These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present any material exposure to the Arrow's consolidated statements of income. The Bank records its interest rate swap agreements at fair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income.
The following table depicts the fair value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of the interest rate swap agreements.

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

Derivatives Designated as Hedging Instruments
Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings.
The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income.

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

Note 12. COVID-19 PANDEMIC
The outbreak of the novel coronavirus (COVID-19) pandemic has impacted the global economy, including the banking sector and many industries in which our customers operate, in a variety of significant ways. For further discussion of the impact COVID-19 has had and may in the future have on Arrow and its financial results and operations, please refer to the risk factor included in Item 8.01 of Arrow's Current Report on Form 8-K filed April 24, 2020.
# 38

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Arrow Financial Corporation:
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Arrow Financial Corporation and subsidiaries (the Company) as of March 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
Albany, New York
May 7, 2020
# 39

Item 2.
ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2020
NOTE ON TERMINOLOGY
In this Quarterly Report on Form 10-Q (this Report), the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this Form 10-Q, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this Form 10-Q is comprised of the group of 146 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the Federal Reserve Board’s "Bank Holding Company Performance Report" for December 31, 2019 (the most recent such report currently available), and peer group data contained herein has been derived from such report.
THE COMPANY AND ITS SUBSIDIARIES
Arrow is a two-bank holding company headquartered in Glens Falls, New York. The banking subsidiaries are Glens Falls National Bank and Trust Company (Glens Falls National) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National) whose main office is located in Saratoga Springs, New York. Active subsidiaries of Glens Falls National include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to Arrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, which issued trust preferred securities (TRUPs), which are still outstanding.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains statements that are not historical in nature but rather are based on the Company's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "continue," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include statements regarding the Company's asset quality, the level of allowance for credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and the Company's tax plans and strategies. Some of these statements, such as those included in the interest rate sensitivity analysis in Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on Arrow's general perceptions of market conditions and trends in business activity, both the Company's and in the banking industry generally, as well as current management strategies for future operations and development.
These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, our actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to the following, which are or may be amplified by the novel coronavirus (COVID-19) pandemic:

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

• | other rapid and dramatic changes in economic and market conditions;

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

• | sudden changes in the market for products provided, such as real estate loans;

• | significant changes in banking or other laws and regulations, including both enactment of new legal or regulatory measures or the modification or elimination of pre-existing measures;

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

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

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

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

The Company is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents incorporated by reference and that are attributable to the Company are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or any persons acting on our behalf may issue. This Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Annual Report) and our other filings with the SEC.
# 40

USE OF NON-GAAP FINANCIAL MEASURES
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of "non-GAAP financial measures" certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although the Company is unable to state with certainty that the SEC would so regard them.
Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and from the fact that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. The Company follows these practices.
The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest income. Net interest income as utilized in calculating the efficiency ratio is typically the same as the net interest income presented in Selected Financial Information table discussed in the preceding paragraph, i.e., it is expressed on a tax-equivalent basis. Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (which is included in noninterest expense under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of noninterest income under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio). The Company makes these adjustments.
Tangible Book Value per Share: Tangible equity is total stockholders’ equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding. Intangible assets includes many items, but in our case, essentially represents goodwill.
Adjustments for Certain Items of Income or Expense: In addition to our regular utilization in our public filings and disclosures of the various non-GAAP measures commonly utilized by financial institutions discussed above, the Company also may elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, earnings per share (i.e. EPS), return on average assets (i.e. ROA), and return on average equity (i.e. ROE), to provide as well certain comparative disclosures that adjust these GAAP financial measures, typically by removing them from the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. The Company will do so only if it believes that provision of the resulting non-GAAP financial measures may improve the average investor's understanding of our results of operations by separating out items that have a disproportional positive or negative impact on the particular period in question or by otherwise permitting a better comparison from period-to-period in our results of operations with respect to our fundamental lines of business, including the commercial banking business.
The Company believes that the non-GAAP financial measures disclosed from time-to-time are useful in evaluating our performance and that such information should be considered as supplemental in nature, and not as a substitute for or superior to, the related financial information prepared in accordance with GAAP. Non-GAAP financial measures may differ from similar measures presented by other companies.
# 41

Arrow Financial Corporation Selected Quarterly Information (Dollars In Thousands, Except Per Share Amounts - Unaudited)
Quarter Ended | 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
Net Income | $ | 8,127 |  |  | $ | 9,740 |  |  | $ | 10,067 |  |  | $ | 8,934 |  |  | $ | 8,734 |
Transactions in Net Income (Net of Tax): |  |  |  |  |  |  |  |  |
Net Changes in Fair Value of Equity Investments | (279 | ) |  | 50 |  |  | 109 |  |  | — |  |  | 57 |
Share and Per Share Data:1 |  |  |  |  |  |  |  |  |
Period End Shares Outstanding | 14,982 |  |  | 14,998 |  |  | 14,969 |  |  | 14,949 |  |  | 14,909 |
Basic Average Shares Outstanding | 14,996 |  |  | 14,978 |  |  | 14,955 |  |  | 14,922 |  |  | 14,903 |
Diluted Average Shares Outstanding | 15,026 |  |  | 15,026 |  |  | 14,991 |  |  | 14,963 |  |  | 14,956 |
Basic Earnings Per Share | $ | 0.54 |  |  | $ | 0.65 |  |  | $ | 0.67 |  |  | $ | 0.60 |  |  | $ | 0.59 |
Diluted Earnings Per Share | 0.54 |  |  | 0.65 |  |  | 0.67 |  |  | 0.60 |  |  | 0.58 |
Cash Dividend Per Share | 0.260 |  |  | 0.260 |  |  | 0.252 |  |  | 0.252 |  |  | 0.252 |
Selected Quarterly Average Balances: |  |  |  |  |  |  |  |  |
Interest-Bearing Deposits at Banks | $ | 32,787 |  |  | $ | 28,880 |  |  | $ | 27,083 |  |  | $ | 25,107 |  |  | $ | 26,163 |
Investment Securities | 603,748 |  |  | 582,982 |  |  | 545,073 |  |  | 584,679 |  |  | 611,161 |
Loans | 2,394,346 |  |  | 2,358,110 |  |  | 2,308,879 |  |  | 2,255,299 |  |  | 2,210,642 |
Deposits | 2,670,009 |  |  | 2,607,421 |  |  | 2,472,528 |  |  | 2,436,290 |  |  | 2,347,985 |
Other Borrowed Funds | 170,987 |  |  | 177,877 |  |  | 231,291 |  |  | 250,283 |  |  | 327,138 |
Stockholders’ Equity | 306,527 |  |  | 296,124 |  |  | 289,016 |  |  | 280,247 |  |  | 272,864 |
Total Assets | 3,180,857 |  |  | 3,113,114 |  |  | 3,023,043 |  |  | 2,997,458 |  |  | 2,977,056 |
Return on Average Assets, annualized | 1.03 | % |  | 1.24 | % |  | 1.32 | % |  | 1.20 | % |  | 1.19 | %
Return on Average Equity, annualized | 10.66 | % |  | 13.05 | % |  | 13.82 | % |  | 12.79 | % |  | 12.98 | %
Return on Average Tangible Equity, annualized 2 | 11.55 | % |  | 14.18 | % |  | 15.05 | % |  | 13.96 | % |  | 14.22 | %
Average Earning Assets | $ | 3,030,881 |  |  | $ | 2,969,972 |  |  | $ | 2,881,035 |  |  | $ | 2,865,085 |  |  | $ | 2,847,966 |
Average Paying Liabilities | 2,362,515 |  |  | 2,293,804 |  |  | 2,213,642 |  |  | 2,235,462 |  |  | 2,224,403 |
Interest Income | 28,226 |  |  | 28,367 |  |  | 27,952 |  |  | 27,227 |  |  | 26,213 |
Tax-Equivalent Adjustment 3 | 288 |  |  | 321 |  |  | 344 |  |  | 376 |  |  | 373 |
Interest Income, Tax-Equivalent 3 | 28,514 |  |  | 28,688 |  |  | 28,296 |  |  | 27,603 |  |  | 26,586 |
Interest Expense | 5,220 |  |  | 5,449 |  |  | 5,649 |  |  | 5,520 |  |  | 5,092 |
Net Interest Income | 23,006 |  |  | 22,918 |  |  | 22,303 |  |  | 21,707 |  |  | 21,121 |
Net Interest Income, Tax-Equivalent 3 | 23,294 |  |  | 23,239 |  |  | 22,647 |  |  | 22,083 |  |  | 21,494 |
Net Interest Margin, annualized | 3.05 | % |  | 3.06 | % |  | 3.07 | % |  | 3.04 | % |  | 3.01 | %
Net Interest Margin, Tax Equivalent, annualized 3 | 3.09 | % |  | 3.10 | % |  | 3.12 | % |  | 3.09 | % |  | 3.06 | %
Efficiency Ratio Calculation: 4 |  |  |  |  |  |  |  |  |
Noninterest Expense | $ | 17,754 |  |  | $ | 17,099 |  |  | $ | 16,791 |  |  | $ | 16,908 |  |  | $ | 16,652 |
Less: Intangible Asset Amortization | 58 |  |  | 60 |  |  | 61 |  |  | 44 |  |  | 79 |
Net Noninterest Expense | $ | 17,696 |  |  | $ | 17,039 |  |  | $ | 16,730 |  |  | $ | 16,864 |  |  | $ | 16,573 |
Net Interest Income, Tax-Equivalent 3 | $ | 23,294 |  |  | $ | 23,238 |  |  | $ | 22,647 |  |  | $ | 22,083 |  |  | $ | 21,494 |
Noninterest Income | 7,694 |  |  | 7,081 |  |  | 7,691 |  |  | 6,896 |  |  | 6,887 |
Less: Net Changes in Fair Value of Equity Invest. | (374 | ) |  | 67 |  |  | 146 |  |  | — |  |  | 76 |
Net Gross Income | $ | 31,362 |  |  | $ | 30,252 |  |  | $ | 30,192 |  |  | $ | 28,979 |  |  | $ | 28,305 |
Efficiency Ratio 4 | 56.42 | % |  | 56.32 | % |  | 55.41 | % |  | 58.19 | % |  | 58.55 | %
Period-End Capital Information: |  |  |  |  |  |  |  |  |
Total Stockholders’ Equity (i.e. Book Value) | $ | 309,398 |  |  | $ | 301,728 |  |  | $ | 292,228 |  |  | $ | 284,649 |  |  | $ | 276,609 |
Book Value per Share 1 | 20.65 |  |  | 20.12 |  |  | 19.52 |  |  | 19.04 |  |  | 18.55 |
Goodwill and Other Intangible Assets, net | 23,513 |  |  | 23,534 |  |  | 23,586 |  |  | 23,603 |  |  | 23,650 |
Tangible Book Value per Share 1,2 | 19.08 |  |  | 18.55 |  |  | 17.95 |  |  | 17.46 |  |  | 16.97 |
Capital Ratios:5 |  |  |  |  |  |  |  |  |
Community Bank Leverage Ratio | 9.87 | % |  |  |  |  |  |  |  |
Tier 1 Leverage Ratio |  |  | 9.98 | % |  | 10.04 | % |  | 9.88 | % |  | 9.73 | %
Common Equity Tier 1 Capital Ratio |  |  | 12.94 | % |  | 12.93 | % |  | 12.99 | % |  | 12.98 | %
Tier 1 Risk-Based Capital Ratio |  |  | 13.83 | % |  | 13.85 | % |  | 13.93 | % |  | 13.95 | %
Total Risk-Based Capital Ratio |  |  | 14.78 | % |  | 14.81 | % |  | 14.91 | % |  | 14.93 | %
Assets Under Trust Admin. & Investment Mgmt. | $ | 1,342,531 |  |  | $ | 1,543,653 |  |  | $ | 1,485,116 |  |  | $ | 1,496,966 |  |  | $ | 1,483,259 |

# 42

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

Footnotes: |  |  |  |  |  |  |  |
1. | Share and Per Share Data have been restated for the September 27, 2019, 3% stock dividend.
2. | Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which the Company believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
|  | 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
| Total Stockholders' Equity (GAAP) | $ | 309,398 |  |  | $ | 301,728 |  |  | $ | 292,228 |  |  | $ | 284,649 |  |  | $ | 276,609 |
| Less: Goodwill and Other Intangible assets, net | 23,513 |  |  | 23,534 |  |  | 23,586 |  |  | 23,603 |  |  | 23,650 |
| Tangible Equity (Non-GAAP) | $ | 285,885 |  |  | $ | 278,194 |  |  | $ | 268,642 |  |  | $ | 261,046 |  |  | $ | 252,959 |
| Period End Shares Outstanding | 14,982 |  |  | 14,998 |  |  | 14,969 |  |  | 14,949 |  |  | 14,909 |
| Tangible Book Value per Share (Non-GAAP) | $ | 19.08 |  |  | $ | 18.55 |  |  | $ | 17.95 |  |  | $ | 17.46 |  |  | $ | 16.97 |
| Net Income | 8,127 |  |  | 9,740 |  |  | 10,067 |  |  | 8,934 |  |  | 8,734 |
| Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized) | 11.55 | % |  | 14.18 | % |  | 15.05 | % |  | 13.96 | % |  | 14.22 | %
3. | Non-GAAP Financial Measures Reconciliation: Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which the Company believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 43.
|  | 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
| Interest Income (GAAP) | $ | 28,226 |  |  | $ | 28,367 |  |  | $ | 27,952 |  |  | $ | 27,227 |  |  | $ | 26,213 |
| Add: Tax-Equivalent adjustment (Non-GAAP) | 288 |  |  | 321 |  |  | 344 |  |  | 376 |  |  | 373 |
| Interest Income - Tax Equivalent (Non-GAAP) | $ | 28,514 |  |  | $ | 28,688 |  |  | $ | 28,296 |  |  | $ | 27,603 |  |  | $ | 26,586 |
| Net Interest Income (GAAP) | $ | 23,006 |  |  | $ | 22,918 |  |  | $ | 22,303 |  |  | $ | 21,707 |  |  | $ | 21,121 |
| Add: Tax-Equivalent adjustment (Non-GAAP) | 288 |  |  | 321 |  |  | 344 |  |  | 376 |  |  | 373 |
| Net Interest Income - Tax Equivalent (Non-GAAP) | $ | 23,294 |  |  | $ | 23,239 |  |  | $ | 22,647 |  |  | $ | 22,083 |  |  | $ | 21,494 |
| Average Earning Assets | $ | 3,030,881 |  |  | $ | 2,969,972 |  |  | $ | 2,881,035 |  |  | $ | 2,865,085 |  |  | $ | 2,847,966 |
| Net Interest Margin (Non-GAAP)* | 3.09 | % |  | 3.10 | % |  | 3.12 | % |  | 3.09 | % |  | 3.06 | %
4. | Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. The Company believes the efficiency ratio provides investors with information that is useful in understanding our financial performance. The Company defines efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 43.
5. | For the current quarter, the Community Bank Leverage Ratio (CBLR) in the table above is an estimation. The previous Total Risk-Weighted Assets and Common Equity Tier 1 Capital amounts listed in the table below reflect actual results. The CBLR at March 31, 2020 listed below (i.e., 9.87%) exceeds the required minimum CBLR (i.e., 9.00%).
|  | 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
| Community Bank Leverage Ratio | 9.87 | % |  |  |  |  |  |  |  |
| Total Risk Weighted Assets |  |  | $ | 2,237,127 |  |  | $ | 2,184,214 |  |  | $ | 2,121,541 |  |  | $ | 2,075,115 |
| Common Equity Tier 1 Capital |  |  | 289,409 |  |  | 282,485 |  |  | 275,528 |  |  | 269,363 |
| Common Equity Tier 1 Capital Ratio |  |  | 12.94 | % |  | 12.93 | % |  | 12.99 | % |  | 12.98 | %

* Quarterly ratios have been annualized.
# 43

Average Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP Basis)
(Dollars In Thousands)
Quarter Ended March 31: | 2020 |  | 2019
|  |  | Interest |  | Rate |  |  |  | Interest |  | Rate
| Average |  | Income/ |  | Earned/ |  | Average |  | Income/ |  | Earned/
| Balance |  | Expense |  | Paid |  | Balance |  | Expense |  | Paid
Interest-Bearing Deposits at Banks | $ | 32,787 |  |  | $ | 124 |  |  | 1.52 | % |  | $ | 26,163 |  |  | $ | 195 |  |  | 3.02 | %
Investment Securities: |  |  |  |  |  |  |  |  |  |  |
Fully Taxable | 399,307 |  |  | 2,193 |  |  | 2.21 |  |  | 378,120 |  |  | 2,369 |  |  | 2.54 |
Exempt from Federal Taxes | 204,441 |  |  | 1,035 |  |  | 2.04 |  |  | 233,041 |  |  | 1,246 |  |  | 2.17 |
Loans | 2,394,346 |  |  | 24,874 |  |  | 4.18 |  |  | 2,210,642 |  |  | 22,403 |  |  | 4.11 |
Total Earning Assets | 3,030,881 |  |  | 28,226 |  |  | 3.75 |  |  | 2,847,966 |  |  | 26,213 |  |  | 3.73 |
Allowance for Credit Losses | (22,186 | ) |  |  |  |  |  | (20,108 | ) |  |  |  |
Cash and Due From Banks | 34,211 |  |  |  |  |  |  | 35,125 |  |  |  |  |
Other Assets | 137,951 |  |  |  |  |  |  | 114,073 |  |  |  |  |
Total Assets | $ | 3,180,857 |  |  |  |  |  |  | $ | 2,977,056 |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |
Interest-Bearing Checking Accounts | $ | 707,747 |  |  | 487 |  |  | 0.28 |  |  | $ | 768,354 |  |  | 482 |  |  | 0.25 |
Savings Deposits | 1,092,980 |  |  | 2,471 |  |  | 0.91 |  |  | 833,832 |  |  | 1,601 |  |  | 0.78 |
Time Deposits of $250,000 or More | 126,046 |  |  | 533 |  |  | 1.70 |  |  | 79,346 |  |  | 396 |  |  | 2.02 |
Other Time Deposits | 264,755 |  |  | 1,000 |  |  | 1.52 |  |  | 212,785 |  |  | 713 |  |  | 1.36 |
Total Interest-Bearing Deposits | 2,191,528 |  |  | 4,491 |  |  | 0.82 |  |  | 1,894,317 |  |  | 3,192 |  |  | 0.68 |
Short-Term Borrowings | 92,444 |  |  | 208 |  |  | 0.90 |  |  | 264,471 |  |  | 1,421 |  |  | 2.18 |
FHLBNY Term Advances & Other Long-Term Debt | 73,297 |  |  | 471 |  |  | 2.58 |  |  | 62,667 |  |  | 464 |  |  | 3.00 |
Finance Leases | 5,246 |  |  | 50 |  |  | 3.83 |  |  | 2,948 |  |  | 15 |  |  | 2.06 |
Total Interest-Bearing Liabilities | 2,362,515 |  |  | 5,220 |  |  | 0.89 |  |  | 2,224,403 |  |  | 5,092 |  |  | 0.93 |
Noninterest-bearing deposits | 478,481 |  |  |  |  |  |  | 453,668 |  |  |  |  |
Other Liabilities | 33,334 |  |  |  |  |  |  | 26,121 |  |  |  |  |
Total Liabilities | 2,874,330 |  |  |  |  |  |  | 2,704,192 |  |  |  |  |
Stockholders’ Equity | 306,527 |  |  |  |  |  |  | 272,864 |  |  |  |  |
Total Liabilities and Stockholders’ Equity | $ | 3,180,857 |  |  |  |  |  |  | $ | 2,977,056 |  |  |  |  |
Net Interest Income |  |  | $ | 23,006 |  |  |  |  |  |  | $ | 21,121 |  |  |
Net Interest Spread |  |  |  |  | 2.86 | % |  |  |  |  |  | 2.80 | %
Net Interest Margin |  |  |  |  | 3.05 | % |  |  |  |  |  | 3.01 | %

# 44

OVERVIEW
The following discussion and analysis focuses on and reviews the results of operations for the three-month period ended March 31, 2020 and the financial condition as of March 31, 2020 and 2019. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.
COVID-19 Pandemic:
In March 2020, the World Health Organization recognized COVID-19 as a pandemic. In response, the United States federal government and various state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. Like many businesses, we expect the operations and financial results of Arrow to be adversely impacted by the COVID-19 pandemic. The severity, magnitude and duration of the current pandemic are still uncertain, rapidly changing and hard to predict.
Arrow has been proactive and continually assessing the potential impact of the pandemic. It formed a Business Continuity Task Force in advance of the impending arrival of the pandemic to Upstate New York. The task force, representing leadership from across the organization, has overseen a robust and expansive effort to protect employees and customers while continuing to deliver essential banking services during the pandemic. In that regard, Arrow has been limiting access at all facilities to appointment-only and encouraging customers to use no-contact alternatives such as digital banking, drive-ins and ATMs. Additionally, Arrow expanded remote work arrangements for a large portion of its employee base, discontinued employee travel, minimized in-person meetings, and implemented social distancing for essential employees who remained on-site. Arrow believes that between remote working arrangements and cross training initiatives, current human capital resources should be able to continue operations during the current COVID-19 pandemic, absent unforeseen facts.
Demand for the Small Business Administration’s Paycheck Protection Program has been significant. Both of Arrow’s subsidiary banks are proudly participating in the program as a way to deliver relief for small businesses in Upstate New York. In order to process the large volume of Paycheck Protection Program applications, Arrow reinforced its lending team with resources and support from across the Company. Arrow believes it will be able to effectively manage its liquidity position while being able to satisfy the significant demand for the Small Business Administration’s Paycheck Protection Program.
The COVID-19 pandemic has significantly impacted economic activity and markets around the world, and we expect it will negatively impact Arrow's business in numerous ways. In particular, the rapid rise in unemployment and the mandated closure of non-essential businesses in New York, will most likely reduce loan production as well as impact borrowers' ability to satisfy their obligations. Investments are analyzed to determine if any impairment not considered temporary exists. Municipal investments may be impacted if tax revenue deceases significantly. Management will continue to evaluate investment securities for impairment. Arrow has increased its allowance for loan losses as a result of the uncertainty surrounding the ability of its borrowers to satisfy loan obligations to Arrow. Arrow will continue to assess potential loan losses. Arrow does not anticipate any impairment of its right-of-use lease assets, goodwill or other intangible assets as a result of COVID-19, however, the Company will continue to assess impairment throughout the pandemic.
We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets or its impact on our business, we are not able to reasonably estimate the overall impact on the Company. For further discussion of the impact COVID-19 has had and may in the future have on Arrow and its financial results and operations, please refer to the risk factor included in Item 8.01 of Arrow's Current Report on Form 8-K filed April 24, 2020.
Summary of Q1 2020 Financial Results: Net income for the first quarter of 2020 was $8.1 million, compared to $8.7 million in the first quarter of 2019. Although loan growth slowed in March, primarily as a result of the COVID-19 pandemic, total loans grew in the first quarter by $28.1 million from December 31, 2019 to $2.4 billion. Net interest income increased to $23.0 million in the first quarter of 2020, compared to $21.1 million for the comparable quarter of 2019.
Diluted earnings per share (EPS) for the quarter was $0.54, a decrease of 6.9% from the EPS of $0.58 reported for the first quarter of 2019. Return on average equity (ROE) for the first quarter of 2020 decreased to 10.66%, as compared to a ROE of 12.98% for the quarter ended March 31, 2019. Return on average assets (ROA) for the 2020 first quarter was 1.03%, a decrease from an ROA of 1.19% for the quarter ended March 31, 2019.
Total loans reached $2.4 billion as of March 31, 2020, which represents an increase of $179.0 million, or 8.0% as compared to March 31, 2019. The consumer loan portfolio grew by $77.9 million, or 10.4%, as compared to March 31, 2019, primarily within the indirect automobile lending program. Total outstanding residential real estate loans increased $54.5 million, or 6.3%, as compared to March 31, 2019. Total outstanding commercial loans increased $46.6 million, or 7.4%, as compared to March 31, 2019.
At March 31, 2020, deposit balances reached $2.8 billion, up $320.9 million, or 12.9%, from the prior-year level. Noninterest-bearing deposits represented 17.4% of total deposits at March 31, 2020, compared to 18.2% of total deposits on March 31, 2019. At March 31, 2020, other time deposits were $245.9 million, a decrease of $17.1 million compared to the prior year. Municipal deposits increased $174.7 million, or 28.1% from March 31, 2019. Total combined Federal Home Loan Bank Overnight and Term Advances declined $110.0 million from December 31, 2019.
First quarter 2020 net interest income increased to $23.0 million, up 8.9% from $21.1 million in the comparable quarter of 2019. The net interest margin was 3.05% for the quarter, compared to 3.01% for the first quarter of 2019. The increase in net interest margin from the prior year was primarily the result of both the increase in the deposit balances as described above combined with the decrease in market rates. The yield on earning assets has been consistent between years with increased loan yields offset by declining yields on investments.
# 45

Noninterest income for the three months ended March 31, 2020 was $7.7 million, compared to $6.9 million in the comparable 2019 quarter. For the first quarter of 2020, the fair value of equity securities at March 31, 2020 decreased $374 thousand primarily as a result of the equity market disruption related to the COVID-19 pandemic. In addition, $866 thousand of interest rate swap income was recorded in the first quarter of 2020.
Noninterest expense for the first quarter of 2020 increased 6.6% to $17.8 million, from $16.7 million for the first quarter of 2019. Salaries and benefits increased $1.1 million, primarily the result of increased cost of health insurance benefits.
Asset quality remained strong at March 31, 2020, with continued low levels of nonperforming loans and net charge-offs. Nonperforming loans at March 31, 2020, were $5.5 million, up $168 thousand from the level at March 31, 2019. Net charge-offs, expressed as an annualized percentage of average loans outstanding, were 0.05% for the three-month period ended March 31, 2020, consistent with March 31, 2019. The allowance for loan losses was $23.6 million at March 31, 2020, which represented 0.98% of loans outstanding, as compared to 0.91% at March 31, 2019. The loss provision expense for the first quarter of 2020 was $2.8 million, up $2.3 million from the provision expense for the comparable 2019 quarter. Although credit quality remains very strong, the increase in loss provision reflects the uncertainty resulting from the COVID-19 pandemic.
The changes in net income, net interest income and net interest margin between the three-month periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page 59.
Regulatory Capital and Increase in Stockholders' Equity: The federal bank regulators have issued a final rule to implement the “community bank leverage ratio”, introducing an optional simplified measure of capital adequacy for qualifying community banking organizations (the CBLR framework). To qualify for the CBLR framework, a community banking organization must satisfy certain requirements, including having a leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios. Subsequently, Section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act required the federal banking agencies to temporarily lower the threshold for election of the CBLR framework, issuing two interim final rules to set the CLBR at 8% as of the second quarter of 2020 and then gradually re-establish the CBLR at 9%.
Under the interim final rules, the CBLR will be set at 8% beginning in the second quarter of 2020 through the end of the year. Thus, community banks that have a leverage ratio of 8% or greater and meet certain other criteria may elect to use the CBLR framework. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the leverage ratio requirement to use the CBLR framework will return to 9%.
The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks utilized the CBLR framework for purposes of filing their Form FR Y-9C and call reports for the first quarter of 2020. At March 31, 2020, the CBLR ratio for the Company and both subsidiary banks exceeded the 9% minimum threshold and therefore continued to qualify as "well-capitalized" under the regulatory capital classification guidelines.
Stockholders’ equity was $309.4 million at March 31, 2020, an increase of $7.7 million, or 2.5%, from the December 31, 2019 level of $301.7 million, and an increase of $32.8 million, or 11.9%, from the prior-year level. The increase in stockholders' equity over the first three months of 2020 principally reflected the following factors: (i) $8.13 million of net income for the period, plus (ii) other comprehensive income of $3.95 million, plus (iii) issuance of $1.01 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $3.90 million; and (v) repurchases of common stock of $1.51 million. The components of the change in stockholders’ equity since year-end 2019 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.
At March 31, 2020, book value per share was $20.65, up by 11.3% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was $19.08, an increase of $2.11, or 12.4%, over the level as of March 31, 2019. See the disclosure on page 41 related to the use of non-GAAP financial measures including tangible book value.
On March 31, 2020, the Company's closing stock price was $27.87, representing a trading multiple of 1.46 to tangible book value. In the first quarter of 2020, the Company paid a quarterly cash dividend of $0.26. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page 56.
Loan Quality: Net charge-offs for the first quarter of 2020 were $322 thousand as compared to $295 thousand for the comparable 2019 quarter. The ratio of net charge-offs to average loans (annualized) was 0.05% for the first quarter of 2020 consistent with the first quarter of 2019. At March 31, 2020, the allowance for credit losses was $23.6 million representing 0.98% of total loans, which is an increase from the March 31, 2019 ratio of 0.91%. Although credit quality remains very strong, the increase in loan loss provision expense reflects the uncertainty resulting from the COVID-19 pandemic. As permitted by the CARES Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses.
Nonperforming loans were $5.5 million at March 31, 2020, representing 0.23% of period-end loans, a decrease from the March 31, 2019 ratio of 0.24%. The ratio continues to compare favorably with the weighted average ratio of the peer group of 0.53% at December 31, 2019.
# 46

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

• | Commercial and Commercial Real Estate Loans: Combined, these loans comprise 27.9% of the total loan portfolio at period-end. Commercial property values in the Company's region have remained stable in recent periods leading to the pandemic. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal. The mandatory closure of nonessential business in New York will impact the Bank's customer base. Government intervention, with programs such as the Small Business Administration’s Paycheck Protection Program, may mitigate the economic risk to both Arrow and its customers, however the full impact cannot be determined at this time.

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

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

Liquidity and Access to Credit Markets: The Company has not experienced any liquidity problems or special concerns thus far in 2020, or at any time in recent history. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration’s Paycheck Protection Program. Interest-bearing cash balances at March 31, 2020 were $106.0 million compared to $25.0 million at March 31, 2019. Contingent collateralized lines of credit are established and available through the FHLBNY and FRB, totaling $1.2 billion. The terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page 57). Historically, the Company has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises including the current COVID-19 pandemic.
Visa Class B Common Stock: Arrow's subsidiary bank, Glens Falls National, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in its litigation escrow account. On September 18, 2018, Visa issued a press release announcing that it and other defendants entered into a settlement agreement with class plaintiffs in the related litigation case. But certain merchants opted out of the class settlement and filed separate litigation cases. Once the class action and other merchant litigation cases are settled and the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. On September 27, 2019, Visa deposited $300 million into the litigation escrow account that was established pursuant to Visa’s U.S. retrospective responsibility plan, which reduces the conversion rate of Class B shares to Class A shares. This did not have a significant effect on the number of Class B shares currently convertible to Class A shares by Glens Falls National. At March 31, 2020, Glens Falls National held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to 45,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, the Company does not recognize any economic value for these shares.
# 47

CHANGE IN FINANCIAL CONDITION
Summary of Selected Consolidated Balance Sheet Data
(Dollars in Thousands)

| March 31, 2020 |  | At Period-End December 31, 2019 |  | March 31, 2019 |  | $ Change From December |  | $ Change From March |  | % Change From December (not annualized) |  | % Change From March
Interest-Bearing Bank Balances | $ | 106,004 |  |  | $ | 23,186 |  |  | $ | 25,031 |  |  | $ | 82,818 |  |  | $ | 80,973 |  |  | 357.2 | % |  | 323.5 | %
Securities Available-for-Sale | 378,186 |  |  | 357,334 |  |  | 298,812 |  |  | 20,852 |  |  | 79,374 |  |  | 5.8 | % |  | 26.6 | %
Securities Held-to-Maturity | 238,520 |  |  | 245,065 |  |  | 279,400 |  |  | (6,545 | ) |  | (40,880 | ) |  | (2.7 | )% |  | (14.6 | )%
Equity Securities | 1,689 |  |  | 2,063 |  |  | 1,850 |  |  | (374 | ) |  | (161 | ) |  | (18.1 | )% |  | (8.7 | )%
Loans (1) | 2,414,193 |  |  | 2,386,120 |  |  | 2,235,208 |  |  | 28,073 |  |  | 178,985 |  |  | 1.2 | % |  | 8.0 | %
Allowance for loan losses | 23,637 |  |  | 21,187 |  |  | 20,373 |  |  | 2,450 |  |  | 3,264 |  |  | 11.6 | % |  | 16.0 | %
Earning Assets (1) | 3,143,971 |  |  | 3,024,085 |  |  | 2,848,179 |  |  | 119,886 |  |  | 295,792 |  |  | 4.0 | % |  | 10.4 | %
Total Assets | $ | 3,291,332 |  |  | $ | 3,184,275 |  |  | $ | 2,984,883 |  |  | $ | 107,057 |  |  | $ | 306,449 |  |  | 3.4 | % |  | 10.3 | %
Noninterest-Bearing Deposits | $ | 489,151 |  |  | $ | 484,944 |  |  | $ | 453,089 |  |  | $ | 4,207 |  |  | $ | 36,062 |  |  | 0.9 | % |  | 8.0 | %
Interest-Bearing Checking Accounts | 793,425 |  |  | 689,221 |  |  | 823,301 |  |  | 104,204 |  |  | (29,876 | ) |  | 15.1 | % |  | (3.6 | )%
Savings Deposits | 1,146,683 |  |  | 1,046,568 |  |  | 866,861 |  |  | 100,115 |  |  | 279,822 |  |  | 9.6 | % |  | 32.3 | %
Time Deposits over $250,000 | 135,854 |  |  | 123,968 |  |  | 83,834 |  |  | 11,886 |  |  | 52,020 |  |  | 9.6 | % |  | 62.1 | %
Other Time Deposits | 245,892 |  |  | 271,353 |  |  | 263,012 |  |  | (25,461 | ) |  | (17,120 | ) |  | (9.4 | )% |  | (6.5 | )%
Total Deposits | $ | 2,811,005 |  |  | $ | 2,616,054 |  |  | $ | 2,490,097 |  |  | $ | 194,951 |  |  | $ | 320,908 |  |  | 7.5 | % |  | 12.9 | %
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase | $ | 57,909 |  |  | $ | 51,099 |  |  | $ | 58,407 |  |  | $ | 6,810 |  |  | $ | (498 | ) |  | 13.3 | % |  | (0.9 | )%
FHLBNY Advances - Overnight | — |  |  | 130,000 |  |  | 74,500 |  |  | (130,000 | ) |  | (74,500 | ) |  | (100.0 | )% |  | (100.0 | )%
FHLBNY Advances - Term | 50,000 |  |  | 30,000 |  |  | 35,000 |  |  | 20,000 |  |  | 15,000 |  |  | 66.7 | % |  | 42.9 | %
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts | 20,000 |  |  | 20,000 |  |  | 20,000 |  |  | — |  |  | — |  |  | — | % |  | — | %
Stockholders' Equity | 309,398 |  |  | 301,728 |  |  | 276,609 |  |  | 7,670 |  |  | 32,789 |  |  | 2.5 | % |  | 11.9 | %

(1) Includes Nonaccrual Loans.
Changes in Earning Assets: The loan portfolio at March 31, 2020, was $2.4 billion, an increase of $28.1 million, or 1.2%, from the December 31, 2019 level and up by $179.0 million, or 8.0%, from the March 31, 2019 level. The following trends were experienced in our largest segments:

• | Commercial and commercial real estate loans: This segment of the loan portfolio increased by $12.0 million, or 1.8%, during the first three months of 2020.

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

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

Changes in Sources of Funds: Deposit balances reached $2.8 billion, up $320.9 million, or 12.9%, from the prior-year level. Noninterest-bearing deposits represented 17.4% of total deposits at March 31, 2020, compared to 18.2% of total deposits on March 31, 2019. At March 31, 2020, other time deposits were $245.9 million, a decrease of $17.1 million compared to the prior year. Municipal deposits increased $174.7 million, or 28.1% from March 31, 2019. Total combined Federal Home Loan Bank Overnight and Term Advances declined $110.0 million from December 31, 2019.
# 48

Municipal Deposits: Fluctuations in balances of interest-bearing checking accounts are largely the result of timing and behavior of municipal deposits. Municipal deposits on average represent 20% to 25% of total deposits. Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts.
In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS Aid payments to school districts. In addition to seasonal behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities.
FINANCIAL CONDITION
Investment Portfolio Trends
The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, 2019 to March 31, 2020 (in thousands).

| (Dollars in Thousands)
| Fair Value at Period-End |  | Net Unrealized Gains (Losses) For Period Ended
| 3/31/2020 |  | 12/31/2019 |  | Change |  | 3/31/2020 |  | 12/31/2019 |  | Change
Securities Available-for-Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Agency Securities | $ | 5,181 |  |  | $ | 5,054 |  |  | $ | 127 |  |  | $ | 179 |  |  | $ | 52 |  |  | $ | 127 |
State and Municipal Obligations | 723 |  |  | 764 |  |  | (41 | ) |  | — |  |  | — |  |  | — |
Mortgage-Backed Securities | 371,482 |  |  | 350,716 |  |  | 20,766 |  |  | 6,149 |  |  | 772 |  |  | 5,377 |
Corporate and Other Debt Securities | 800 |  |  | 800 |  |  | — |  |  | (200 | ) |  | (200 | ) |  | — |
Total | $ | 378,186 |  |  | $ | 357,334 |  |  | $ | 20,852 |  |  | $ | 6,128 |  |  | $ | 624 |  |  | $ | 5,504 |
Securities Held-to-Maturity: |  |  |  |  |  |  |  |  |  |  |
State and Municipal Obligations | $ | 207,103 |  |  | $ | 212,319 |  |  | $ | (5,216 | ) |  | $ | 2,955 |  |  | $ | 4,076 |  |  | $ | (1,121 | )
Mortgage-Backed Securities | 35,701 |  |  | 37,299 |  |  | (1,598 | ) |  | 1,329 |  |  | 477 |  |  | 852 |
Total | $ | 242,804 |  |  | $ | 249,618 |  |  | $ | (6,814 | ) |  | $ | 4,284 |  |  | $ | 4,553 |  |  | $ | (269 | )
Equity Securities | $ | 1,689 |  |  | $ | 2,063 |  |  | $ | (374 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |

At March 31, 2020, the Company held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.
In the periods referenced above, Mortgage-Backed Securities consisted solely of mortgage pass-through securities and Collateralized Mortgage Obligations ("CMOs") issued or guaranteed by U.S. federal agencies. Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. The Company's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. As a result of payment deferrals on underlying loan collateral that make up mortgage-backed securities, some cashflows may be temporarily impacted.
Other-Than-Temporary Impairment
Each quarter all investment securities with a fair value less than amortized cost are evaluated in the available-for-sale portfolio, the held-to-maturity portfolio and the equity securities portfolio, to determine if there exists other-than-temporary impairment for any such security as defined under generally accepted accounting principles. The evaluation also examined the potential impact of the COVID-19 pandemic on other-than-temporary impairment. There were no other-than-temporary impairment losses in the first three months of 2020.
Change in Net Unrealized Securities Gains (Losses): Nearly all of the change in net unrealized gains or losses during recent periods has been attributable to changes in the market rates during the periods in question, with no change in the credit-worthiness of the issuers. Fixed income valuations increased sharply, while equities dropped, in the period primarily as the result of market disruptions associated with the COVID-19 pandemic.
# 49

Investment Sales, Purchases and Maturities
There were no sales of investment securities within the three-month periods ended March 31, 2020 or 2019.
The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the three-month periods ended March 31, 2020 and 2019, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:

(In Thousands) | Three Months Ended
Purchases: | 3/31/2020 |  | 3/31/2019
Available-for-Sale Portfolio |  |  |
Mortgage-Backed Securities | $ | 33,201 |  |  | $ | — |
Maturities & Calls | $ | 17,444 |  |  | $ | 21,261 |

| Three Months Ended
Purchases: | 3/31/2020 |  | 3/31/2019
Held-to-Maturity Portfolio |  |  |
State and Municipal Obligations | $ | 717 |  |  | $ | 1,457 |
Maturities & Calls | $ | 7,075 |  |  | $ | 5,319 |

Loan Trends
The following three tables present, for each of the last five quarters, the quarterly average balances by loan type, the percentage of total loans represented by each loan type and the annualized yield of each loan category. Over the last five quarters, the average balances for Commercial, Commercial Real Estate, Consumer and Residential Real Estate have steadily increased, although at different rates. As result of the economic impact of the COVID-19 pandemic, it is uncertain if this consistent growth will continue in the remaining quarters of 2020.
Quarterly Average Loan Balances
(Dollars in Thousands)

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

Percentage of Total Quarterly Average Loans

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

# 50

Quarterly Yield on Loans

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

The average yield of the overall total loan portfolio increased throughout 2019 and remained steady for the large portion of the 1st quarter of 2020. The COVID-19 pandemic and the rapid decline to historic low in market rates will lower loan yields for the remainder of 2020.
Maintenance of High Quality in the Loan Portfolio: In the first three months of 2020, prior to the COVID-19 pandemic, there were no significant fluctuations in the quality of the loan portfolio or any segment thereof. In general, residential real estate loans have historically been underwritten to secondary market standards for prime loans and the Company has not engaged in subprime mortgage lending as a business line. Similarly, high underwriting standards have generally been applied to commercial and commercial real estate lending operations and generally in the indirect lending program as well. The economic events related to the COVID-19 pandemic, specifically high unemployment and the mandated closure of nonessential business, may impact the ability of our borrowers to satisfy their obligations.
Commercial Loans and Commercial Real Estate Loans: Combined commercial and commercial real estate loan originations continued to grow in the period leading up to the COVID-19 pandemic.
Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in the Company's regional markets. A portion of the loans in the commercial portfolio have variable rates tied to Prime, LIBOR or FHLBNY rates.
Many of the commercial and commercial real estate loans are in industries heavily impacted by the COVID-19 pandemic. Arrow is working closely with customers who wish to obtain Small Business Administration Paycheck Protection Program funding. Also, additional government intervention, if any, may mitigate the economic risk to both Arrow and its customers, however, the extent of such intervention and its impact cannot be determined at this time.
Consumer Loans: At March 31, 2020, consumer loans (primarily automobile loans originated through dealerships located primarily in upstate New York and Vermont) continues to be a significant component of business, comprising more than a third of this total loan portfolio. The physical sale of vehicles through dealerships has been curtailed and not deemed essential as part of the New York State and Vermont response to the COVID-19 pandemic. Accordingly, we believe, the volume of originations of consumer loans will be adverselyimpacted. However, the magnitude of the impact cannot yet be determined.
New consumer loan volume for the first three months of 2020 was $95.9 million, down from the $100.4 million originated in the first three months of 2019.
For credit quality purposes, the Company assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. The Company's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. The Company believes that this disciplined approach to evaluating risk has contributed to maintaining the strong credit quality in this portfolio. The COVID-19 pandemic has created significant unemployment, which may impact borrowers' ability to satisfy their obligations to the Company. Government intervention may mitigate a significant portion of the credit risk, however, the extent of such intervention and its impact cannot be determined at this time.
Residential Real Estate Loans: In recent years, residential real estate loans, including home equity loans, have represented the largest category of the total loan portfolio. Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first three months of 2020 were $32.4 million. The Company has also sold portions of these originations in the secondary market. In the first three months of 2020, the Company sold $8.2 million, or 25.5%, of originations. In the first three months of 2019, $3.6 million, or 15.5%, of originations were sold. The Company expects to continue to sell a portion of mortgage loan originations in upcoming periods if market conditions warrant. It is not currently possible to determine the long term economic impact of the COVID-19 pandemic, which has resulted in the mandated closure of non-essential business and potential unemployment.
# 51

Deposit Trends
The following tables provide information on trends in the balance and mix of the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. Savings deposits and total time deposits, both over and under $250,000, have increased each of the last five quarters as a result of the migration to higher yielding deposit accounts due to the previous rise in short-term market rates, which occurred for the majority of 2019. Market rates, beginning to decline prior to the COVID-19 pandemic, reached historic lows at March 31, 2020.
Quarterly Average Deposit Balances
(Dollars in Thousands)

| Quarter Ended
| 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
Noninterest-bearing deposits | $ | 478,481 |  |  | $ | 491,494 |  |  | $ | 490,177 |  |  | $ | 454,130 |  |  | $ | 453,668 |
Interest-Bearing Checking Accounts | 707,747 |  |  | 724,668 |  |  | 686,017 |  |  | 733,327 |  |  | 768,354 |
Savings Deposits | 1,092,980 |  |  | 1,003,612 |  |  | 924,868 |  |  | 879,026 |  |  | 833,832 |
Time Deposits over $250,000 | 126,046 |  |  | 120,321 |  |  | 86,018 |  |  | 97,703 |  |  | 79,346 |
Other Time Deposits | 264,755 |  |  | 267,326 |  |  | 285,448 |  |  | 272,104 |  |  | 212,785 |
Total Deposits | $ | 2,670,009 |  |  | $ | 2,607,421 |  |  | $ | 2,472,528 |  |  | $ | 2,436,290 |  |  | $ | 2,347,985 |

Percentage of Total Quarterly Average Deposits

| Quarter Ended
| 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
Noninterest-bearing deposits | 17.9 | % |  | 18.8 | % |  | 19.8 | % |  | 18.6 | % |  | 19.3 | %
Interest-Bearing Checking Accounts | 26.5 |  |  | 27.8 |  |  | 27.7 |  |  | 30.1 |  |  | 32.7 |
Savings Deposits | 41.0 |  |  | 38.5 |  |  | 37.5 |  |  | 36.0 |  |  | 35.5 |
Time Deposits over $250,000 | 4.7 |  |  | 4.6 |  |  | 3.5 |  |  | 4.0 |  |  | 3.4 |
Other Time Deposits | 9.9 |  |  | 10.3 |  |  | 11.5 |  |  | 11.2 |  |  | 9.1 |
Total Deposits | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %

Quarterly Cost of Deposits

| Quarter Ended
| 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
Demand Deposits | — | % |  | — | % |  | — | % |  | — | % |  | — | %
Interest-Bearing Checking Accounts | 0.28 | % |  | 0.30 | % |  | 0.29 | % |  | 0.25 | % |  | 0.25 | %
Savings Deposits | 0.91 | % |  | 0.98 | % |  | 0.99 | % |  | 0.92 | % |  | 0.78 | %
Time Deposits over $250,000 | 1.70 | % |  | 1.88 | % |  | 2.08 | % |  | 2.11 | % |  | 2.02 | %
Other Time Deposits | 1.52 | % |  | 1.67 | % |  | 1.74 | % |  | 1.67 | % |  | 1.36 | %
Total Deposits | 0.68 | % |  | 0.72 | % |  | 0.73 | % |  | 0.68 | % |  | 0.55 | %

During the quarter ended March 31, 2020, the total cost of deposits decreased. The Federal Reserve cut the targeted short-term rates on two occasions, one cut was 50 basis points and the other was 100 basis points in response to the economic uncertainty related to the COVID-19 pandemic. The balance sheet of the Company is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," for further discussion.
Non-Deposit Sources of Funds
The Company's other sources of funds include securities sold under agreements to repurchase, overnight advances and term advances from the FHLBNY. The securities sold under agreements to repurchase are short-term in nature and are collateralized by investment securities. The term advances from the FHLBNY are fixed rate non-callable advances with original maturities of three to five years.
Arrow no longer relies on TRUPs as a source of new funds. As a result of the passage of Dodd-Frank in 2010 and its removal of Tier 1 regulatory capital treatment for TRUPs issued after Dodd-Frank's grandfathering date, the Company, like other banking organizations of Arrow's size or larger, have not issued any TRUPs since that date and are not likely to issue any TRUPs in the future. However, consistent with the grandfathering provision in Dodd-Frank, the $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of March 31, 2020 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 55 of this Report. These trust preferred securities are subject to early redemption by the Company if the proceeds cease to qualify as Tier 1 capital of Arrow for any reason, or if certain other unanticipated but negative events should occur. An example of such an event would be an adverse change in tax laws that might deny the Company the ability to deduct interest paid on these obligations for federal income tax purposes.
In the first quarter of 2020, Arrow entered into an interest rate swap agreement to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities.
# 52

ASSET QUALITY
The following table presents information related to the allowance and provision for loan losses for the past five quarters.
Summary of the Allowance and Provision for Loan Losses
(Dollars in Thousands, Loans Stated Net of Unearned Income)

| 3/31/2020 |  | 12/31/2019 |  | 9/30/2019 |  | 6/30/2019 |  | 3/31/2019
Loan Balances: |  |  |  |  |  |  |  |  |
Period-End Loans | $ | 2,414,193 |  |  | $ | 2,386,120 |  |  | $ | 2,335,591 |  |  | $ | 2,280,308 |  |  | $ | 2,235,208 |
Average Loans, Year-to-Date | 2,394,346 |  |  | 2,283,707 |  |  | 2,258,633 |  |  | 2,233,094 |  |  | 2,210,642 |
Average Loans, Quarter-to-Date | 2,394,346 |  |  | 2,358,110 |  |  | 2,308,879 |  |  | 2,255,299 |  |  | 2,210,642 |
Period-End Assets | 3,291,332 |  |  | 3,184,275 |  |  | 3,112,822 |  |  | 3,005,750 |  |  | 2,984,883 |
Allowance for loan losses, Year-to-Date: |  |  |  |  |  |  |  |  |
Allowance for loan losses, Beginning of Period | $ | 21,187 |  |  | $ | 20,196 |  |  | $ | 20,196 |  |  | $ | 20,196 |  |  | 20,196 |
Provision for Loan Losses, YTD | 2,772 |  |  | 2,079 |  |  | 1,445 |  |  | 927 |  |  | 472 |
Loans Charged-off, YTD | (481 | ) |  | (1,735 | ) |  | (1,232 | ) |  | (830 | ) |  | (462 | )
Recoveries of Loans Previously Charged-off | 159 |  |  | 647 |  |  | 522 |  |  | 402 |  |  | 167 |
Net Charge-offs, YTD | (322 | ) |  | (1,088 | ) |  | (710 | ) |  | (428 | ) |  | $ | (295 | )
Allowance for loan losses, End of Period | $ | 23,637 |  |  | $ | 21,187 |  |  | $ | 20,931 |  |  | $ | 20,695 |  |  | $ | 20,373 |
Allowance for loan losses, Quarter-to-Date: |  |  |  |  |  |  |  |  |
Allowance for loan losses, Beginning of Period | $ | 21,187 |  |  | $ | 20,931 |  |  | $ | 20,695 |  |  | $ | 20,373 |  |  | $ | 20,196 |
Provision for Loan Losses, QTD | 2,772 |  |  | 634 |  |  | 518 |  |  | 455 |  |  | 472 |
Loans Charged-off, QTD | (481 | ) |  | (503 | ) |  | (402 | ) |  | (368 | ) |  | (462 | )
Recoveries of Loans Previously Charged-off | 159 |  |  | 125 |  |  | 120 |  |  | 235 |  |  | 167 |
Net Charge-offs, QTD | (322 | ) |  | (378 | ) |  | (282 | ) |  | (133 | ) |  | (295 | )
Allowance for loan losses, End of Period | $ | 23,637 |  |  | $ | 21,187 |  |  | $ | 20,931 |  |  | $ | 20,695 |  |  | $ | 20,373 |
Nonperforming Assets, at Period-End: |  |  |  |  |  |  |  |  |
Nonaccrual Loans | $ | 4,943 |  |  | $ | 4,005 |  |  | $ | 3,465 |  |  | $ | 4,949 |  |  | $ | 5,143 |
Loans Past Due 90 or More Days and Still Accruing Interest | 437 |  |  | 253 |  |  | 1,066 |  |  | 457 |  |  | 64 |
Restructured and in Compliance with Modified Terms | 136 |  |  | 143 |  |  | 150 |  |  | 142 |  |  | 141 |
Total Nonperforming Loans | 5,516 |  |  | 4,401 |  |  | 4,681 |  |  | 5,548 |  |  | 5,348 |
Repossessed Assets | 160 |  |  | 139 |  |  | 76 |  |  | 115 |  |  | 123 |
Other Real Estate Owned | 782 |  |  | 1,122 |  |  | 1,198 |  |  | 1,258 |  |  | 1,322 |
Total Nonperforming Assets | $ | 6,458 |  |  | $ | 5,662 |  |  | $ | 5,955 |  |  | $ | 6,921 |  |  | $ | 6,793 |
Asset Quality Ratios: |  |  |  |  |  |  |  |  |
Allowance to Nonperforming Loans | 428.52 | % |  | 481.41 | % |  | 447.15 | % |  | 373.02 | % |  | 380.95 | %
Allowance to Period-End Loans | 0.98 | % |  | 0.89 | % |  | 0.90 | % |  | 0.91 | % |  | 0.91 | %
Provision to Average Loans (Quarter) (1) | 0.47 | % |  | 0.11 | % |  | 0.09 | % |  | 0.08 | % |  | 0.09 | %
Provision to Average Loans (YTD) (1) | 0.47 | % |  | 0.09 | % |  | 0.09 | % |  | 0.08 | % |  | 0.09 | %
Net Charge-offs to Average Loans (Quarter) (1) | 0.05 | % |  | 0.06 | % |  | 0.05 | % |  | 0.02 | % |  | 0.05 | %
Net Charge-offs to Average Loans (YTD) (1) | 0.05 | % |  | 0.05 | % |  | 0.04 | % |  | 0.04 | % |  | 0.05 | %
Nonperforming Loans to Total Loans | 0.23 | % |  | 0.18 | % |  | 0.20 | % |  | 0.24 | % |  | 0.24 | %
Nonperforming Assets to Total Assets | 0.20 | % |  | 0.18 | % |  | 0.19 | % |  | 0.23 | % |  | 0.23 | %
(1) Annualized |  |  |  |  |  |  |  |  |

Provision for Loan Losses
Through the provision for loan losses, an allowance is maintained that reflects the Company's best estimate of probable incurred loan losses related to specifically identified impaired loans as well as the inherent risk of loss related to the remaining portfolio. Loan charge-offs are recorded to this allowance when loans are deemed uncollectible, in whole or in part. As loans become past due, consideration is given to the status of those loans and whether or not to classify them as nonaccrual loans. Any loans listed as "past due 90 or more days and still accruing interest" have been evaluated and determined to be secured and is the process of collection.
As permitted by the CARES Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses.
In the first quarter of 2020, the Company made a $2.77 million provision for loan losses, compared to a provision of $472 thousand for the first quarter of 2019 and a provision of $634 thousand for the fourth quarter of 2019. The significant increase in loss provision for
# 53

loan losses reflects the uncertainty resulting from the COVID-19 pandemic despite the continued strong asset quality of Arrow. See Note 3 to the unaudited interim consolidated financial statements for a discussion on how the Company classifies credit quality indicators as well as the balance in each category.
The ratio of the allowance for credit losses to total loans was 0.98% at March 31, 2020, an increase from 0.89% at December 31, 2019 and an increase of 7 basis points from 0.91% at March 31, 2019.
The accounting policy relating to the allowance for credit losses is considered to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments may have on the results of operations. The process for determining the provision for loan losses is described in Note 3 to the unaudited interim consolidated financial statements.
Risk Elements
Nonperforming assets at March 31, 2020 amounted to $6.5 million, up from the $5.7 million total at December 31, 2019 and a decrease of $0.3 million, from March 31, 2019. For the three-month periods ended March 31, 2020 and 2019, ratios of nonperforming assets to total assets have remained below the average ratios for the peer group. (See page 40 for a discussion of the peer group.) At December 31, 2019, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was 0.18%, well below the 0.44% ratio of the peer group at such date (the latest date for which peer group information is available). At March 31, 2020 the ratio was 0.20%, which is below the most recent ratio for the peer group.
The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e. loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk.

Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)
| 3/31/2020 |  | 12/31/2019 |  | 3/31/2019
Commercial Loans | $ | 244 |  |  | $ | 192 |  |  | $ | 157 |
Commercial Real Estate Loans | — |  |  | 266 |  |  | 208 |
Residential Real Estate Loans | 1,632 |  |  | 1,960 |  |  | 1,552 |
Consumer Loans - Primarily Indirect Automobile | 7,015 |  |  | 8,305 |  |  | 6,113 |
Total Loans Past Due 30-89 Days and Accruing Interest | $ | 8,891 |  |  | $ | 10,723 |  |  | $ | 8,030 |

At March 31, 2020, the loans in the above-referenced category totaled $8.9 million, a decrease of $1.8 million, or 17.1%, from the $10.7 million of such loans at December 31, 2019. The March 31, 2020 total of non-current loans equaled 0.37% of loans then outstanding, compared to 0.49% at December 31, 2019 and 0.36% at March 31, 2019. The decrease from December 31, 2019 is primarily attributable to a decrease in delinquent automobile loans as well as residential real estate loans.
The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 3 to the unaudited interim consolidated financial statements. The Company considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 3) to be potential problem loans. The dollar amount of such loans at March 31, 2020 was $35.5 million, up from the dollar amount of such loans at December 31, 2019, when the amount was $32.4 million. These loans will continue to be closely monitored and the Company expects to collect all payments of contractual principal and interest in full on these classified loans. Total nonperforming assets at period-end decreased by $0.3 million, or 4.9% from March 31, 2019.
The economic impact of the COVID-19 pandemic, specifically unemployment levels and the mandated closure of nonessential businesses, may impact the borrowers' ability to satisfy their obligations, and may therefore result in delinquencies. Government intervention, on both the federal and state level, have been deployed to mitigate a significant portion of the credit risk. Arrow cannot make a determination of the overall impact on its business of the COVID-19 pandemic at this time.
As of March 31, 2020, the Company held for sale one commercial property and one residential property in other real estate owned. The Company does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.
# 54

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

COVID-19 Deferrals by Loan Category at March 31, 2020 ($ in 000's)
| Balances by Sector |  | Deferrals
|  | Total |  | % of Total Loans |  | Balance |  | % of Loan Segment |  | % of Total Loans
Commercial and Commercial Real Estate Loans: |  |  |  |  |  |  |  |  |  |
Lessors of Non-Residential Real Estate |  | $ | 129,880 |  |  | 5.4 | % |  | $ | 1,064 |  |  | 0.2 | % |  | — | %
Health Care and Social Assistance |  | 104,177 |  |  | 4.3 | % |  | 1,341 |  |  | 0.2 | % |  | 0.1 | %
Lessors of Residential Real Estate |  | 99,569 |  |  | 4.1 | % |  | 527 |  |  | 0.1 | % |  | — | %
Hotels & Motels |  | 97,914 |  |  | 4.1 | % |  | 3,787 |  |  | 0.6 | % |  | 0.2 | %
Arts/Recreation/Restaurants/Vacation Camps |  | 39,385 |  |  | 1.6 | % |  | 3,102 |  |  | 0.5 | % |  | 0.1 | %
Retail |  | 30,226 |  |  | 1.3 | % |  | 6,326 |  |  | 0.9 | % |  | 0.3 | %
Construction & Related |  | 17,551 |  |  | 0.7 | % |  | 216 |  |  | — | % |  | — | %
Other |  | 154,528 |  |  | 6.4 | % |  | 22,312 |  |  | 3.2 | % |  | 0.9 | %
Total Commercial and Commercial Real Estate Loans |  | 673,230 |  |  | 27.9 | % |  | 38,675 |  |  | 5.7 | % |  | 1.6 | %
Consumer Loans |  | 824,709 |  |  | 34.2 | % |  | 2,643 |  |  | 0.3 | % |  | 0.1 | %
Residential Real Estate Loans |  | 916,254 |  |  | 37.9 | % |  | 126 |  |  | — | % |  | — | %
Total Loans |  | 2,414,193 |  |  |  |  | 41,444 |  |  |  |  | 1.7 | %

CAPITAL RESOURCES
Regulatory Capital Standards
Capital Adequacy Requirements. An important area of banking regulation is the federal banking system's promulgation and enforcement of minimum capitalization standards for banks and bank holding companies.
As reported in the Regulatory Reform section above, the federal bank regulators have issued a final rule to implement the CBLR, introducing an optional simplified measure of capital adequacy for qualifying community banks that satisfy certain requirements, including having a leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community bank that opts into the CBLR framework and meets all requirements under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios. The CBLR is calculated as the ratio of “tier 1 capital” divided by “average total consolidated assets.” This final rule was effective as of January 1, 2020, and qualifying community banks can utilize the CBLR framework for purposes of filing their call reports or Form FR Y-9C, as applicable, for the first quarter of 2020 (i.e., as of March 31, 2020). Arrow elected to utilize the CBLR framework beginning with the first quarter of 2020.
Subsequently, Section 4012 of the CARES Act required the federal banking agencies to temporarily lower the threshold for election of the CBLR framework, issuing two interim final rules to set the CLBR at 8% as of the second quarter of 2020 and then gradually re-establish the CBLR at 9%. Under the interim final rules, the CBLR will be set at 8% beginning in the second quarter of 2020 through the end of the year. Thus, community banks that have a leverage ratio of 8% or greater and meet certain other criteria may elect to use the CBLR framework. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the leverage ratio requirement to use the CBLR framework will return to 9%.
Prompt Corrective Action Capital Classifications. Under the current capital classifications, a banking institution is considered "well-capitalized" if it meets the minimum CBLR levels. If a banking entity fails to qualify for the CBLR framework or if the banking entity's CBLR ratio falls below the minimum threshold, the banking entity will be subject to the regulatory capital guidelines established under the Dodd Frank legislation. Under the Dodd Frank capital guidelines, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet certain minimum capital requirements. For these purposes, the regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized".
Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow's holding company and two subsidiary banks, Glens Falls National and Saratoga National, under the current CBLR Rules, as of March 31, 2020:
# 55

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

At March 31, 2020, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the CBLR framework and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies, as described above.
Capital Components; Stock Repurchases; Dividends
Stockholders' Equity: Stockholders’ equity was $309.4 million at March 31, 2020, an increase of $7.7 million, or 2.5%, from the December 31, 2019 level of $301.7 million, and an increase of $32.8 million, or 11.9%, from the prior-year level. The increase in stockholders' equity over the first three months of 2020 principally reflected the following factors: (i) $8.13 million of net income for the period, plus (ii) other comprehensive income of $3.95 million, plus (iii) issuance of $1.01 million of common stock through employee benefit and dividend reinvestment plans; reduced by (iv) cash dividends of $3.90 million; and (v) repurchases of common stock of $1.51 million under the Board-approved stock repurchase program described below.
Trust Preferred Securities: In each of 2003 and 2004, the Company issued $10 million of trust preferred securities (TRUPs) in a private placement. Under the Federal Reserve Board's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the Dodd-Frank Act, any trust preferred securities that Arrow might issue on or after the grandfathering date set forth in Dodd-Frank (May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.
In the first quarter of 2020, Arrow entered into an interest rate swap agreement to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is 3.43% until maturity. These agreements are designated as cash flow hedges.
Stock Repurchase Program: In October 2019, the Board of Directors approved a $5.0 million stock repurchase program, effective January 1, 2020 (the 2020 Repurchase Program), under which management is authorized, in its discretion, to permit the Company to repurchase up to $5 million of shares of Arrow's common stock during 2020, in the open market or in privately negotiated transactions, to the extent management believes the Company's stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders. This 2020 Repurchase Program replaced a similar repurchase program which was in effect during 2019 (the 2019 program), which also authorized the repurchase of up to $5.0 million of shares of Arrow's common stock. As of March 31, 2020 approximately $1.5 million had been used under the 2020 Repurchase Program to repurchase Arrow shares. This total does not include repurchases of Arrow's Common Stock other than through its 2020 Repurchase Program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to the Company in connection with employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock.
Dividends: The Company's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past five quarters listed below represent actual sales transactions, as reported by NASDAQ. On April 29, 2020, the Board of Directors declared a 2020 second quarter cash dividend of $0.26 payable on June 15, 2020. Per share amounts and share counts in the following tables have been restated for the September 27, 2019 3% stock dividend.

|  |  |  |  | Cash
| Market Price |  | Dividends
| Low |  | High |  | Declared
2019 |  |  |  |  |
First Quarter | $ | 29.57 |  |  | $ | 35.19 |  |  | $ | 0.252 |
Second Quarter | 30.96 |  |  | 33.93 |  |  | 0.252 |
Third Quarter | 30.26 |  |  | 35.31 |  |  | 0.252 |
Fourth Quarter | 32.03 |  |  | 38.31 |  |  | 0.260 |
2020 |  |  |  |  |
First Quarter | $ | 20.79 |  |  | $ | 38.04 |  |  | $ | 0.260 |
Second Quarter (dividend payable June 15, 2020) | TBD |  |  | TBD |  |  | 0.260 |

# 56

| Quarter Ended March 31
| 2020 |  | 2019
Cash Dividends Per Share | $ | 0.260 |  |  | $ | 0.252 |
Diluted Earnings Per Share | 0.54 |  |  | 0.58 |
Dividend Payout Ratio | 48.15 | % |  | 43.45 | %
Total Equity (in thousands) | 309,398 |  |  | $ | 276,609 |
Shares Issued and Outstanding (in thousands) | 14,982 |  |  | 14,909 |
Book Value Per Share | $ | 20.65 |  |  | $ | 18.55 |
Intangible Assets (in thousands) | 23,513 |  |  | 23,650 |
Tangible Book Value Per Share | $ | 19.08 |  |  | $ | 16.97 |

LIQUIDITY
The objective of effective liquidity management is to ensure that the Company has the ability to raise cash when needed at a reasonable cost. This includes the capability of meeting expected and unexpected obligations to the Company's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, the Company must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in time of need. With the COVID-19 pandemic, liquidity management is critical for Arrow. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term disruptions that may develop as a result of the COVID-19 pandemic such as: reduced cash-flows from the investment and loan portfolios and aggressive funding of programs associated with response efforts, including the Small Business Administration’s Paycheck Protection Program.
The primary sources of available liquidity are overnight investments in federal funds sold, interest bearing bank balances at the Federal Reserve Bank of New York, and cash flow from investment securities and loans. Certain investment securities are selected at purchase as available-for-sale based on their marketability and collateral value, as well as their yield and maturity. The securities available-for-sale portfolio was $378.2 million at March 31, 2020, an increase of $20.9 million, from the year-end 2019 level. Due to the potential for volatility in market values, the Company may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at March 31, 2020 of $106.0 million compared to $25.0 million at March 31, 2019.
In addition to liquidity from cash, short-term investments, investment securities and loans, the Company has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with two correspondent banks totaling $52 million which were not drawn on during the three months ended March 31, 2020.
To support the borrowing relationship with the FHLBNY, the Company has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At March 31, 2020, the Company had outstanding collateral obligations with the FHLBNY of $115 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately $620 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At March 31, 2020, the balance of outstanding brokered deposits totaled $108.1 million. Also, the Company's two bank subsidiaries have each established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At March 31, 2020, the amount available under this facility was approximately $593 million, and there were no advances then outstanding.
Arrow performs regular liquidity stress tests and tests of the contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises including the current COVID-19 pandemic.
The Company measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight funds investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, the Company believes that the available liquidity is sufficient to meet all funding needs that may arise in connection with the COVID-19 pandemic or any other reasonably likely events or occurrences, although there can be no assurance that it will be sufficient. At March 31, 2020, the basic liquidity ratio, including the FHLBNY collateralized borrowing capacity, was 20.9% of total assets, or $558 million in excess of the internally-set minimum target ratio of 4%.
The Company did not experience any significant liquidity constraints in the three-month period ended March 31, 2020 and did not experience any such constraints in recent prior years. The Company has not at any time during such period been forced to pay above-market rates to obtain retail deposits or other funds from any source.
# 57

RECENTLY ISSUED ACCOUNTING STANDARDS
The following accounting standards have been issued and become effective for the Company at a future date:
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" ("CECL") which will change the way financial entities measure expected credit losses for financial assets, primarily loans. Under this ASU, the "incurred loss" model will be replaced with an "expected loss" model which will recognize losses over the life of the instrument and requires consideration of a broader range of reasonable and supportable information. Currently, credit losses on available-for-sale securities reduce the carrying value of the instrument and cannot be reversed. Under CECL, the amount of the credit loss is carried as a valuation allowance and can be reversed. The standard also requires expanded credit quality disclosures. In April 2019, the FASB issued ASU 2019-04 "Codification Improvements to Topic 326, Financial Instruments-Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments," which clarifies that the estimate of expected credit losses should include expected recoveries of financial assets, and that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Company's loan terms for contractual extensions and renewal options are unconditionally cancellable by the Company (that is, the Company has no obligation to extend or renew existing loans), and therefore are not considered in measuring expected credit losses. In May 2019, the FASB issued ASU 2019-05 "Targeted Transition Relief," which allows entities to irrevocably elect the fair value option for certain financial assets measured at amortized cost, not including held-to-maturity investment securities which will continue to be measured at amortized cost. This will apply to those institutions that elect the fair value option on newly originated or purchased financial assets, to avoid the possibility of dual measurement methodologies for identical or similar financial assets.
As permitted by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, Arrow has elected to defer the adoption of the Current Expected Credit Losses ("CECL") methodology in determining credit losses. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle and the adoption will require additional disclosures in future periods. The Company has held CECL working group meetings that included individuals from various functional areas relevant to the implementation of CECL. The Company's CECL working group has developed accounting policies for credit losses including, among other things, management’s decisions regarding portfolio segmentation, life of loan considerations, and a reasonable and supportable forecasting methodology. The CECL pronouncement describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans. The Company has identified the discounted cash flow method for determining losses for the commercial loan portfolios and the residential real estate portfolios, and the vintage method for the consumer indirect loan portfolio. As a result of analyses performed, including the availability of future economic data, the Company will utilize an 18-month reasonable and supportable forecast period, and revert to an historic loss rate using the straight-line method over a two year reversion period. The Company has identified the economic data that it believes best correlate with expected loan losses through the use of various regression analyses of historical economic information and loan losses. The adoption of this standard will change the way qualitative factors are determined as compared to the current incurred loss allowance for loan losses model.
The Company has performed a parallel run as of December 31, 2019 and is in process of reviewing the most recent model run, reviewing the results of model back-testing, finalizing certain assumptions including qualitative adjustments, and incorporating the feedback from the third-party model validation process into the model. The Company has also developed a control framework and is in process of finalizing controls. The Company continues to monitor the effect of this guidance, as well as regulatory guidance, and evaluate the effect it will have on the consolidated financial statements, disclosures and processes and internal controls.
Based on the December 31, 2019 parallel run, review of the portfolio, including the composition, characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, the Company believes that the adjustment to retained earnings related to the initial adoption of CECL will result in an immaterial impact. The Company will remain a well-capitalized financial institution under the CBLR framework. Regulators have developed two deferral options related to the adoption of CECL and the resulting computation of regulatory capital ratios. The initial deferral method, the 2019 CECL Rule, allows a financial institution to elect a three-year deferral of the initial CECL adoption amount for the computation of regulatory capital. An additional deferral method, the Interim Final Rule, allows a financial institution that implements CECL before the end of 2020, the option to delay for two years an estimate of CECL's effect on regulatory capital, followed by a three-year transition period. Arrow is in the process of evaluating these deferral methods.
In August 2018, the FASB issued ASU 2018-14 "Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans" which applies to all companies that provide defined benefit pension or other postretirement benefit plans for their employees. Certain disclosure requirements have been eliminated such as reporting the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next year, and reporting the effects of a one-percentage-point change in the assumed healthcare cost trend rate on the aggregate of the service cost and interest cost components of net periodic benefit cost and on the benefit obligation for postretirement healthcare benefits. New required disclosures for reporting the weighted-average interest rate used to credit cash balance and similar plans that have a promised interest credit, the reasons for significant gains and losses affecting benefit obligations and other requirements for reporting aggregate information related to pension plans. For Arrow, the standard becomes effective at December 31, 2020. The Company does not expect that the adoption of this change affecting defined benefit plan disclosures will have a material impact on its financial position or the results of operations.
In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes" (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. Arrow will adopt this standard effective on January 1, 2021. The Company does not expect that the adoption of this standard will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.
# 58

RESULTS OF OPERATIONS
Three Months Ended March 31, 2020 Compared With
Three Months Ended March 31, 2019
Summary of Earnings Performance
(Dollars in Thousands, Except Per Share Amounts)

| Three Months Ended |  |  |  |
| March 31, 2020 |  | March 31, 2019 |  | Change |  | % Change
Net Income | $ | 8,127 |  |  | $ | 8,734 |  |  | $ | (607 | ) |  | (6.9 | )%
Diluted Earnings Per Share | 0.54 |  |  | 0.58 |  |  | (0.04 | ) |  | (6.9 | )%
Return on Average Assets | 1.03 | % |  | 1.19 | % |  | (0.16 | )% |  | (13.4 | )%
Return on Average Equity | 10.66 | % |  | 12.98 | % |  | (2.32 | )% |  | (17.9 | )%

Net income was $8.1 million and diluted earnings per share (EPS) of $.54 for the first quarter of 2020, compared to net income of $8.7 million and diluted EPS of $.58 for the first quarter of 2019. Return on average assets (ROA) for the first quarter of 2020 was 1.03%, up from 1.19% in the first quarter of 2019. In addition, return on average equity (ROE) decreased to 10.66% for the first quarter of 2020, down from 12.98% in the first quarter of 2019.
The following narrative discusses the quarter-to-quarter changes in net interest income, noninterest income, noninterest expense and income taxes.
Net Interest Income
Summary of Net Interest Income
(Dollars in Thousands)

| Three Months Ended |  |  |  |
| March 31, 2020 |  | March 31, 2019 |  | Change |  | % Change
Interest and Dividend Income | $ | 28,226 |  |  | $ | 26,213 |  |  | $ | 2,013 |  |  | 7.7 | %
Interest Expense | 5,220 |  |  | 5,092 |  |  | 128 |  |  | 2.5 | %
Net Interest Income | 23,006 |  |  | 21,121 |  |  | 1,885 |  |  | 8.9 | %
Average Earning Assets(1) | 3,030,881 |  |  | 2,847,966 |  |  | 182,915 |  |  | 6.4 | %
Average Interest-Bearing Liabilities | 2,362,515 |  |  | 2,224,403 |  |  | 138,112 |  |  | 6.2 | %
Yield on Earning Assets(1) | 3.75 | % |  | 3.73 | % |  | 0.02 |  |  | 0.5 | %
Cost of Interest-Bearing Liabilities | 0.89 |  |  | 0.93 |  |  | (0.04 | ) |  | (4.3 | )
Net Interest Spread | 2.86 |  |  | 2.80 |  |  | 0.06 |  |  | 2.1 |
Net Interest Margin | 3.05 |  |  | 3.01 |  |  | 0.04 |  |  | 1.3 |

(1) Includes Nonaccrual Loans.
Net interest income for the recently completed quarter increased by $1.9 million, or 8.9%, from the first quarter of 2019, due primarily to loan growth and balance sheet mix. Total loans increased $28.1 million in the first quarter of 2020. In addition, average earning assets increased 6.4% from March 31, 2019. In order to fund the consistent loan growth, total average-interest-bearing liabilities increased 6.2% from the first quarter of 2019. Net interest margin increased 4 basis points in the first quarter of 2020 to 3.05%, from 3.01% during the first quarter of 2019. Average earning asset yields were 2 basis points higher as compared to the first quarter of 2019 due primarily to the increase of loans as a percentage of earning assets. The cost of interest-bearing liabilities decreased 4 basis points from the quarter ended March 31, 2019. The Company defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" and "Loan Trends."
As discussed previously under the heading "Asset Quality" beginning on page 53, the provision for loan losses for the first quarter of 2020 was $2.77 million, compared to a provision of $472 thousand for the first quarter of 2019.
# 59

Noninterest Income
Summary of Noninterest Income
(Dollars in Thousands)

| Three Months Ended |  |  |  |
| March 31, 2020 |  | March 31, 2019 |  | Change |  | % Change
Income From Fiduciary Activities | $ | 2,213 |  |  | $ | 2,107 |  |  | $ | 106 |  |  | 5.0 | %
Fees for Other Services to Customers | 2,451 |  |  | 2,402 |  |  | 49 |  |  | 2.0 | %
Insurance Commissions | 1,632 |  |  | 1,719 |  |  | (87 | ) |  | (5.1 | )%
Net (Loss) Gain on Securities Transactions | (374 | ) |  | 76 |  |  | (450 | ) |  | (592.1 | )%
Net Gain on the Sale of Loans | 213 |  |  | 104 |  |  | 109 |  |  | 104.8 | %
Other Operating Income | 1,559 |  |  | 479 |  |  | 1,080 |  |  | 225.5 | %
Total Noninterest Income | $ | 7,694 |  |  | $ | 6,887 |  |  | $ | 807 |  |  | 11.7 | %

Total noninterest income in the current quarter was $7.7 million, an increase of $807 thousand from the comparable quarter of 2019. Income from fiduciary activities for the first quarter of 2020 increased by $106 thousand, or 5.0% from the first quarter of 2019.
Fees for other services to customers were $2.5 million for the first quarter of 2020. Fees were consistent with the first quarter of 2019.
Insurance commissions decreased to $1.6 million for the first quarter of 2020 compared to $1.7 million for the first quarter of 2019, due primarily to a decline in the employee benefits sector of the business.
Net loss on security transactions of $374 thousand for the first quarter of 2020 was the result in the decrease in the fair value of equity securities.
Net gain on the sale of loans in the first quarter of 2020 increased by $109 thousand from the first quarter of 2019. The change was a result of favorable market conditions leading to an increase in loan sale volume. See page 51 for the discussion of loan sales.
Other operating income increased $1.1 million from the comparable quarter in 2019, primarily the result of fees received as part of interest rate swap agreements.
Noninterest Expense
Summary of Noninterest Expense
(Dollars in Thousands)

| Three Months Ended |  |  |  |
| March 31, 2020 |  | March 31, 2019 |  | Change |  | % Change
Salaries and Employee Benefits | $ | 10,383 |  |  | 9,319 |  |  | $ | 1,064 |  |  | 11.4 | %
Occupancy Expense of Premises, Net | 1,449 |  |  | 1,420 |  |  | 29 |  |  | 2.0 | %
Technology and Equipment Expense | 3,352 |  |  | 3,141 |  |  | 211 |  |  | 6.7 | %
FDIC and FICO Assessments | 219 |  |  | 212 |  |  | 7 |  |  | 3.3 | %
Amortization | 58 |  |  | 79 |  |  | (21 | ) |  | (26.6 | )%
Other Operating Expense | 2,293 |  |  | 2,481 |  |  | (188 | ) |  | (7.6 | )%
Total Noninterest Expense | $ | 17,754 |  |  | $ | 16,652 |  |  | $ | 1,102 |  |  | 6.6 | %
Efficiency Ratio | 56.42 | % |  | 58.55 | % |  | (2.13 | ) |  | (3.6 | )%

Noninterest expense for the first quarter of 2020 was $17.8 million, an increase of $1.1 million, or 6.6%, from the first quarter of 2019. Salaries and benefit expenses increased $1.1 million, or 11.4%, from the comparable quarter in 2019. The increase in salaries and benefits was primarily due to the increase in the cost of health insurance benefits. Technology and equipment expenses have increased from the previous year as a result of the continued efforts with ongoing projects to enhance operational efficiencies.
The efficiency ratio continues to be solid at 56.42% for the first quarter of 2020 and 58.55% for the comparable 2019 quarter. The efficiency ratio (a ratio where lower is better), is a commonly used non-GAAP financial measure in the banking industry that purports to reflect an institution's operating efficiency. The Company calculates the efficiency ratio as the ratio of noninterest expense (excluding, under the Company's definition, intangible asset amortization) to (i) net interest income (on a tax-equivalent basis) plus (ii) noninterest income (excluding net securities gains or losses). See the discussion on this non-GAAP measure on page 41 of this Report under the heading "Use of Non-GAAP Financial Measures" and the related tabular information and notes on pages 42 and 43 of this Report. The efficiency ratio included by the Federal Reserve Board in its "Bank Holding Company Performance Reports" excludes net securities gains or losses from the denominator (as does the Company's calculation), but unlike the Company's ratio does not exclude intangible asset amortization from the numerator. The Company's efficiency ratios in recent periods have generally compared favorably to the ratios of the peer group as disclosed in the Federal Reserve Performance Reports (see page 40 for a discussion of the peer group). For the three-month period ended December 31, 2019 (the most recent reporting period for which peer group information is available), the peer group's efficiency ratio was 60.47% compared to the Company's ratio of 56.32% (not adjusted for the definitional difference).
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Income Taxes
Summary of Income Taxes
(Dollars in Thousands)

| Three Months Ended |  |  |  |
| March 31, 2020 |  | March 31, 2019 |  | Change |  | % Change
Provision for Income Taxes | $ | 2,047 |  |  | $ | 2,150 |  |  | $ | (103 | ) |  | (4.8 | )%
Effective Tax Rate | 20.1 | % |  | 19.8 | % |  | 0.3 |  |  | 1.5 | %

The increase in the effective tax rate in the first three months ended March 31, 2020 over the three months ended March 31, 2019 was primary due to the reduction in tax exempt income combined with the reduced tax benefit related to stock based compensation.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to credit risk in the loan portfolio and liquidity risk, discussed earlier, the Company's business activities also generate market risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make the Company's position (i.e., assets and operations) less valuable. The Company's primary market risk is interest rate volatility. The ongoing monitoring and management of interest rate risk is an important component of the asset/liability management process, which is governed by policies that are reviewed and approved annually by the Board of Directors. The Board of Directors delegates responsibility for carrying out asset/liability oversight and control to management's Asset/Liability Committee ("ALCO"). In this capacity ALCO develops guidelines and strategies impacting the asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.
Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk). This may individually or in combination affect net interest income, net interest margin, and ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify this interest rate risk by projecting net interest income in various interest rate scenarios.
The Company's standard simulation model applies a parallel shift in interest rates, ramped over a 12-month period, to capture the impact of changing interest rates on net interest income. The results are compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth and a 200 basis point upward and a 100 basis point downward shift in interest rates. Additional tools to monitor potential longer-term interest rate risk, including periodic stress testing involving hypothetical sudden and significant interest rate spikes, are also evaluated.
The following table summarizes the percentage change in net interest income as compared to the base scenario, which assumes no change in market interest rates as generated from the standard simulation model. The results are presented for each of the first two years of the simulation period for the 200 basis point increase in interest rate scenario and the 100 basis point decrease in interest rate scenario.
As of March 31, 2020:

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

Historically, there has existed an inverse relationship between changes in prevailing rates and the Company's net interest income, suggesting that liabilities and sources of funds generally reprice more quickly than earning assets (near-term liability sensitivity). However, when net interest income is simulated over a longer time frame, this exposure is limited, and actually reverses, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors (long-term asset sensitivity).
The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions, including: the nature and timing of changes in interest rates including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. The COVID-19 pandemic may impact markets, rates, behavior and other estimates used in the above scenarios.
Item 4.
CONTROLS AND PROCEDURES
Senior management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Arrow's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2020. Based upon that evaluation, senior management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective. Further, there were no changes made in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that had materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
The Company, including its subsidiary banks, is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, the Company is often the subject of, or a party to, various legal claims by other parties against the Company, by the Company against other parties, or involving the Company, which arise in the normal course of business. The various pending legal claims against the Company will not, in the opinion of management based upon consultation with counsel, result in any material liability.
Item 1.A.
Risk Factors
The Risk Factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, continue to represent the most significant risks to the Company's future results of operations and financial conditions, without modification or amendment. Please refer to such Risk Factors as listed in Part I, Item 1A, of the Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by the risk factor included in Item 8.01 of the Company's Current Report on Form 8-K filed April 24, 2020.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table presents information about purchases by Arrow during the three months ended March 31, 2020 of common stock (our only class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934):

First Quarter 2020 Calendar Month | (A) Total Number of Shares Purchased 1 |  | (B) Average Price Paid Per Share 1 |  | (C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2 |  | (D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs 2
January | 1,091 |  |  | $ | 37.17 |  |  | — |  |  | $ | 5,000,000 |
February | 12,056 |  |  | 33.06 |  |  | 9,448 |  |  | 4,692,520 |
March | 60,000 |  |  | 28.96 |  |  | 40,573 |  |  | 3,493,345 |
Total | 73,147 |  |  | 29.76 |  |  | 50,021 |  |  |

1 The total number of shares purchased by the Company and the average price paid per share listed in columns (A) and (B) consist of (i) any shares purchased in such periods in open market or private transactions under the Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the "DRIP") by the administrator of the DRIP, (ii) shares surrendered or deemed surrendered to Arrow in such periods by holders of options to acquire Arrow common stock received by them under Arrow's long-term incentive plans in connection with their stock-for-stock exercise of such options and (iii) shares purchased under the publicly-announced 2020 Repurchase Program. In the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through such methods: January - DRIP purchases (1,091 shares); February - DRIP purchases (2,608 shares) and repurchased under the 2020 Repurchase Program (9,448 shares); and March - DRIP purchases (19,427 shares) and repurchased under the 2020 Repurchase Program (40,573 shares)
2 Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs. Our only publicly-announced stock repurchase program in effect for the first quarter of 2020 was the 2020 Repurchase Program approved by the Board of Directors and announced in October 2019, under which the Board authorized management, in its discretion, to repurchase from time to time during calendar year 2020, in the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions.
Item 3.
Defaults Upon Senior Securities - None
Item 4.
Mine Safety Disclosures - None
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Item 5.
Other Information - None
Item 6.
Exhibits

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

* Management contracts or compensation plans required to be filed as an exhibit.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
ARROW FINANCIAL CORPORATION
Registrant

May 7, 2020 | /s/Thomas J. Murphy
Date | Thomas J. Murphy, President and
| Chief Executive Officer
May 7, 2020 | /s/Edward J. Campanella
Date | Edward J. Campanella, Senior Vice President,
| Treasurer and Chief Financial Officer
| (Principal Financial Officer and
| Principal Accounting Officer)

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