RETIREMENT BENEFIT PLANS (Dollars in Thousands)

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

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

As of December 31, 2016, Arrow updated its mortality assumption to the RP-2014 Mortality Table for annuitants and non-annuitants with projected generational mortality improvements using Scale MP-2016. The revised assumption resulted in a decrease in postretirement liabilities.

The following tables set forth changes in the plans’ benefit obligations (projected benefit obligation for pension benefits and accumulated benefit obligation for postretirement benefits) and changes in the plans’ assets and the funded status of the pension plans and other postretirement benefit plan at December 31:

Schedule of Defined Benefit Plan Disclosures

	Employees' Pension Plan			Select Executive Retirement Plan			Postretirement Benefit Plans
Defined Benefit Plan Funded Status
December 31, 2017
Fair Value of Plan Assets	$	53,571		$	—		$	—
Benefit Obligation	38,921			4,586			7,727
Funded Status of Plan	$	14,650		$	(4,586	)	$	(7,727	)

December 31, 2016
Fair Value of Plan Assets	$	50,220		$	—		$	—
Benefit Obligation	36,154			4,547			7,623
Funded Status of Plan	$	14,066		$	(4,547	)	$	(7,623	)

Change in Benefit Obligation
Benefit Obligation, at January 1, 2017	$	36,154		$	4,547		$	7,623
Service Cost	1,392			45			130
Interest Cost	1,682			209			339
Plan Participants' Contributions	—			—			492
Amendments	—			—			—
Actuarial (Gain) Loss	2,440			245			(14		)
Benefits Paid	(2,747		)	(460		)	(843		)
Benefit Obligation, at December 31, 2017	$	38,921		$	4,586		$	7,727

Schedule of Defined Benefit Plan Disclosures

	Employees' Pension Plan			Select Executive Retirement Plan			Postretirement Benefit Plans
Benefit Obligation, at January 1, 2016	$	35,982		$	4,784		$	7,701
Service Cost	1,400			40			147
Interest Cost	1,641			206			340
Plan Participants' Contributions	—			—			402
Amendments	—			—			—
Actuarial Gain	(738		)	(31		)	(327		)
Benefits Paid	(2,131		)	(452		)	(640		)
Benefit Obligation, at December 31, 2016	$	36,154		$	4,547		$	7,623

Change in Fair Value of Plan Assets
Fair Value of Plan Assets, at January 1, 2017	$	50,220		$	—		$	—
Actual Return on Plan Assets	6,098			—			—
Employer Contributions	—			460			351
Plan Participants' Contributions	—			—			492
Benefits Paid	(2,747		)	(460		)	(843		)
Fair Value of Plan Assets, at December 31, 2017	$	53,571		$	—		$	—

Fair Value of Plan Assets, at January 1, 2016	$	47,234		$	—		$	—
Actual Return on Plan Assets	5,117			—			—
Employer Contributions	—			452			238
Plan Participants' Contributions	—			—			402
Benefits Paid	(2,131		)	(452		)	(640		)
Fair Value of Plan Assets, at December 31, 2016	$	50,220		$	—		$	—

Accumulated Benefit Obligation at December 31, 2017	$	38,557		$	4,586		$	7,727

Amounts Recognized in the Consolidated Balance Sheets
December 31, 2017
Prepaid Pension Asset	$	14,650		$	—		—
Accrued Benefit Liability	—			(4,586		)	(7,727		)
Net Benefit Recognized	$	14,650		$	(4,586	)	$	(7,727	)

December 31, 2016
Prepaid Pension Asset	$	14,066		$	—		—
Accrued Benefit Liability	—			(4,547		)	(7,623		)
Net Benefit Recognized	$	14,066		$	(4,547	)	$	(7,623	)

Amounts Recognized in Other Comprehensive Income (Loss)
For the Year Ended December 31, 2017
Net Unamortized Gain Arising During the Period	$	(517	)	$	244		$	(14	)
Net Prior Service Cost Arising During the Period	—			—			—
Amortization of Net Loss	(306		)	(129		)	24
Amortization of Prior Service Credit (Cost)	57			(57		)	11
Total Other Comprehensive (Loss) for Pension and Other Postretirement Benefit Plans	$	(766	)	$	58		$	21

For the Year Ended December 31, 2016
Net Unamortized Loss Arising During the Period	$	(2,657	)	$	(32	)	$	(328	)
Net Prior Service Cost Arising During the Period	—			—			—
Amortization of Net Loss	(591		)	(125		)	—
Amortization of Prior Service Credit (Cost)	57			(57		)	12
Total Other Comprehensive Income (Loss) for Pension and Other Postretirement Benefit Plans	$	(3,191	)	$	(214	)	$	(316	)

Schedule of Defined Benefit Plan Disclosures

	Employees' Pension Plan			Select Executive Retirement Plan			Postretirement Benefit Plans
For the Year Ended December 31, 2015
Net Unamortized Loss Arising During the Period	$	472		$	(152	)	$	(1,715	)
Net Prior Service Cost Arising During the Period	277			91			—
Amortization of Net Loss	(601		)	(131		)	(114		)
Amortization of Prior Service (Cost) Credit	83			(58		)	31
Total Other Comprehensive (Loss) Income for Pension and Other Postretirement Benefit Plans	$	231		$	(250	)	$	(1,798	)

Accumulated Other Comprehensive Income
December 31, 2017
Net Actuarial Loss	$	6,656		$	2,127		$	(228	)
Prior Service (Credit) Cost	264			489			433
Total Accumulated Other Comprehensive Income, Before Tax	$	6,920		$	2,616		$	205

December 31, 2016
Net Actuarial Loss	$	7,479		$	2,012		$	(238	)
Prior Service (Credit) Cost	207			546			422
Total Accumulated Other Comprehensive Income, Before Tax	$	7,686		$	2,558		$	184
Amounts that will be Amortized from Accumulated Other Comprehensive Income the Next Year
Net Actuarial Loss	$	131		$	133		$	(2	)
Prior Service (Credit) Cost	$	(49	)	$	57		$	48

Net Periodic Benefit Cost
For the Year Ended December 31, 2017
Service Cost	$	1,392		$	45		$	130
Interest Cost	1,682			209			339
Expected Return on Plan Assets	(3,141		)	—			—
Amortization of Prior Service (Credit) Cost	(57		)	57			(11		)
Amortization of Net Loss	306			129			(24		)
Net Periodic Benefit Cost	$	182		$	440		$	434

For the Year Ended December 31, 2016
Service Cost	$	1,400		$	40		$	147
Interest Cost	1,641			206			340
Expected Return on Plan Assets	(3,198		)	—			—
Amortization of Prior Service (Credit) Cost	(57		)	57			(12		)
Amortization of Net Loss	591			125			—
Net Periodic Benefit Cost	$	377		$	428		$	475

For the Year Ended December 31, 2015
Service Cost	$	1,503		$	32		$	250
Interest Cost	1,545			211			394
Expected Return on Plan Assets	(3,311		)	—			—
Amortization of Prior Service (Credit) Cost	(83		)	58			(31		)
Amortization of Net Loss	601			131			114
Net Periodic Benefit Cost	$	255		$	432		$	727

Schedule of Defined Benefit Plan Disclosures

	Employees' Pension Plan		Select Executive Retirement Plan		Postretirement Benefit Plans
Weighted-Average Assumptions Used in Calculating Benefit Obligation
December 31, 2017
Discount Rate	4.24	%	4.18	%	4.22	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%
Interest Rate Credit for Determining Projected Cash Balance Account	3.00	%	3.00	%
Interest Rate to Annuitize Cash Balance Account	4.25	%	4.25	%
Interest Rate to Convert Annuities to Actuarially Equivalent Lump Sum Amounts	4.25	%	4.25	%

December 31, 2016
Discount Rate	4.83	%	4.73	%	4.80	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%
Interest Rate Credit for Determining Projected Cash Balance Account	3.00	%	3.00	%
Interest Rate to Annuitize Cash Balance Account	4.50	%	4.50	%
Interest Rate to Convert Annuities to Actuarially Equivalent Lump Sum Amounts	4.50	%	4.50	%

Weighted-Average Assumptions Used in Calculating Net Periodic Benefit Cost
December 31, 2017
Discount Rate	4.83	%	4.73	%	4.80	%
Expected Long-Term Return on Plan Assets	6.50	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%
Interest Rate Credit for Determining Projected Cash Balance Account	3.00	%	3.00	%
Interest Rate to Annuitize Cash Balance Account	4.50	%	4.50	%
Interest Rate to Convert Annuities to Actuarially Equivalent Lump Sum Amounts	4.50	%	4.50	%

December 31, 2016
Discount Rate	4.73	%	4.61	%	4.69	%
Expected Long-Term Return on Plan Assets	7.00	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%
Interest Rate Credit for Determining Projected Cash Balance Account	3.03	%	3.03	%
Interest Rate to Annuitize Cash Balance Account	5.00	%	5.00	%
Interest Rate to Convert Annuities to Actuarially Equivalent Lump Sum Amounts	5.00	%	5.00	%

December 31, 2015
Discount Rate	4.31	%	4.26	%	4.31	%
Expected Long-Term Return on Plan Assets	7.50	%
Rate of Compensation Increase	3.50	%	3.50	%	3.50	%
Interest Rate Credit for Determining Projected Cash Balance Account	3.04	%
Interest Rate to Annuitize Cash Balance Account	4.75	%
Interest Rate to Convert Annuities to Actuarially Equivalent Lump Sum Amounts	4.75	%	4.75	%

Schedule of Defined Benefit Plan Disclosures Information about Defined Benefit Plan Assets - Employees' Pension Plan

Fair Value Measurements Using:
Asset Category	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Percent of Total		Target Allocation Minimum		Target Allocation Maximum
December 31, 2017
Cash	$	22	$	—	$	—	$	22	—	%	—	%	15.0	%
Interest-Bearing Money Market Fund	2,682		—		—		2,682		5.0	%	—	%	15.0	%
Arrow Common Stock¹	5,657		—		—		5,657		10.6	%	—	%	10.0	%
North Country Funds - Equity ²	19,680		—		—		19,680		36.7	%
Other Mutual Funds - Equity	15,168		—		—		15,168		28.3	%
Total Equity Funds	34,848		—		—		34,848		65.0	%	55.0	%	85.0	%
North Country Funds - Fixed income ²	8,388		—		—		8,388		15.7	%
Other Mutual Funds - Fixed Income	1,974		—		—		1,974		3.7	%
Total Fixed Income Funds	10,362		—		—		10,362		19.4	%	10.0	%	30.0	%
Total	$	53,571	$	—	$	—	$	53,571	100.0	%

December 31, 2016
Cash	$	40	$	—	$	—	$	40	0.1	%	—	%	15.0	%
Interest-Bearing Money Market Fund	3,080		—		—		3,080		6.1	%	—	%	15.0	%
Arrow Common Stock¹	6,592		—		—		6,592		13.1	%	—	%	10.0	%
North Country Funds - Equity ²	18,640		—		—		18,640		37.2	%
Other Mutual Funds - Equity	13,560		—		—		13,560		27.0	%
Total Equity Funds	32,200		—		—		32,200		64.2	%	55.0	%	85.0	%
North Country Funds - Fixed income ²	7,332		—		—		7,332		14.6	%
Other Mutual Funds - Fixed Income	976		—		—		976		1.9	%
Total Fixed Income Funds	8,308		—		—		8,308		16.5	%	10.0	%	30.0	%
Total	$	50,220	$	—	$	—	$	50,220	100.0	%

¹Acquisition of Arrow Financial Corporation common stock was under 10% of the total fair value of the employee's pension plan assets at the time of acquisition.

² The North Country Funds - Equity and the North Country Funds - Fixed Income are publicly traded mutual funds advised by Arrow's subsidiary, North Country Investment Advisers, Inc.

Schedule of Defined Benefit Plan Disclosures

	Employees' Pension Plan		Select Executive Retirement Plan		Postretirement Benefit Plans
Expected Future Benefit Payments
2018	$	3,434	$	439	$	524
2019	2,345		426		543
2020	2,885		411		540
2021	2,456		396		581
2022	2,589		380		574
2022 - 2026	14,107		1,752		2,917

Estimated Contributions During 2018	$	—	$	439	$	524

Assumed Health Care Cost Trend Rates
December 31, 2017
Health Care Cost Trend Rate Assumed for Next Year					7.25		%
Rate to which the Cost Trend Rate is Assumed to Decline (the Ultimate Trend Rate)					3.89		%
Year that the Rate Reaches the Ultimate Trend Rate					2075

December 31, 2016
Health Care Cost Trend Rate Assumed for Next Year					7.50		%
Rate to which the Cost Trend Rate is Assumed to Decline (the Ultimate Trend Rate)					3.89		%
Year that the Rate Reaches the Ultimate Trend Rate					2075

Effect of a One-Percentage Point Change in Assumed Health Care Cost Trend Rates
Effect of a One Percentage Point Increase on Service and Interest Cost Components					$	44
Effect of a One Percentage Point Decrease on Service and Interest Cost Components					(37		)
Effect of a One Percentage Point Increase on Accumulated Postretirement Benefit Obligation					516
Effect of a One Percentage Point Decrease on Accumulated Postretirement Benefit Obligation					(445		)

Fair Value of Plan Assets (Defined Benefit Plan):

For information on fair value measurements, including descriptions of level 1, 2 and 3 of the fair value hierarchy and the valuation methods employed by Arrow, see Note 2, Summary of Significant Accounting Policies, and Note 17, Fair Values.

The fair value of level 1 financial instruments in the table above are based on unadjusted, quoted market prices from exchanges in active markets.

In accordance with ERISA guidelines, the Board authorized the purchase of Arrow common stock up to 10% of the fair market value of the plan's assets at the time of acquisition.

Pension Plan Investment Policies and Strategies:

The Company maintains a non-contributory pension benefit plan covering substantially all employees for the purpose of rewarding long and loyal service to the Company. The pension assets are held in trust and are invested in a prudent manner for the exclusive purpose of providing benefits to participants. The investment objective is to achieve an inflation-protected rate of return that meets the actuarial assumption which is used for funding purposes. The investment strategy attempts to maximize the investment return on assets at a level of risk deemed appropriate by the Company while complying with ERISA and any applicable regulations and laws. The investment strategy utilizes asset allocation as a principal determinant for establishing the risk/reward profile of the assets. Asset allocation ranges are established, periodically reviewed, and adjusted as funding levels, and participant benefit characteristics change. Active and passive investment management is employed to help enhance the risk/return profile of the assets.

The plan’s assets are invested in a diversified portfolio of equity securities comprised of companies with small, mid, and large capitalizations. Both domestic and international equities are allowed to provide further diversification and opportunity for return in potentially higher growth economies with lower correlation of returns. Growth and value styles of investment are employed to increase the diversification and offer varying opportunities for appreciation. The fixed income portion of the plan may be invested in U.S. dollar denominated debt securities that shall be rated within the top four ratings categories by nationally recognized ratings agencies. The fixed income portion will be invested without regard to industry or sector based on analysis of each target security’s structural and repayment features, current pricing and trading opportunities as well as credit quality of the issuer. Individual bonds with ratings that fall below the Plan’s rating requirements will be sold only when it is in the best interests of the Plan. Hybrid investments, such as convertible bonds, may be used to provide growth characteristics while offering some protection to declining equity markets by having a fixed income component. Alternative investments such as Treasury Inflation Protected Securities, commodities, and REITs may be used to further enhance diversification while offering opportunities for return. In accordance with ERISA guidelines, common stock of the Company may be purchased up to 10% of the fair market value of the Plan’s assets at the time of acquisition. Derivative investments are prohibited in the plan.

The return on assets assumption was developed through review of historical market returns, historical asset class volatility and correlations, current market conditions, the Plan’s past experience, and expectations on potential future market returns. The assumption represents a long-term average view of the performance of the assets in the Plan, a return that may or may not be achieved during any one calendar year. The assumption is based on the return of the Plan using the historical 15 year return adjusted for the potential for lower than historical returns due to low interest rates.

Cash Flows - We were not required to and we did not make any contribution to our qualified pension plan in 2017. Arrow makes contributions for its postretirement benefits in an amount equal to actual expenses for the year.