STOCK BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established three stock-based compensation plans: an Incentive and Non-qualified Stock Option Plan (Long Term Incentive Plan), an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September 27, 2018 3% stock dividend.

Long Term Incentive Plan

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



Shares Available for Grant at Period-End				261,614

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 ended December 31, 2018.



	Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2018	356,540		23.42
Granted	53,466		31.84
Exercised	(107,818	)	20.92
Forfeited	(17,666	)	27.06
Outstanding at December 31, 2018	284,522		25.67	5.44	1,807
Vested at Period-End	172,410		22.56	3.68	1,631
Expected to Vest	112,112		30.46	8.16	176

Schedule of Stock Options Granted Under the Long Term Incentive Plan by Exercise Price Range



	Exercise Price Ranges
	$17.48	$19.58 to $20.93	$21.50 to $21.99	$23.19 to $23.66	$31.84	$35.07	Total
Outstanding at December 31, 2018
Number of Stock Options Outstanding	5,763	61,569	52,683	69,175	50,376	44,956	284,522
Weighted-Average Remaining Contractual Life (in years)	0.06	1.65	3.75	6.34	9.09	7.86	5.44
Weighted-Average Exercise Price	17.48	20.32	21.81	23.45	31.84	35.07	25.67

Vested at December 31, 2018
Number of Stock Options Outstanding	5,763	61,569	52,683	38,243	1,030	13,122	172,410
Weighted-Average Remaining Contractual Life (in years)	0.06	1.65	3.75	6.00	9.09	7.36	3.68
Weighted-Average Exercise Price	17.48	20.32	21.81	23.40	31.84	35.07	22.55

Schedule of Other Information on Stock Options Granted



	2018			2017			2016
Stock Options Granted	53,466			57,290			60,101
Weighted Average Grant Date Information:
Fair Value of Options Granted	$	5.59		$	6.07		$	5.28
Fair Value Assumptions:
Dividend Yield	2.98		%	2.72		%	3.88		%
Expected Volatility	21.55		%	21.40		%	32.95		%
Risk Free Interest Rate	2.68		%	2.25		%	1.80		%
Expected Lives (in years)	6.98			6.88			7.56

Amount Expensed During the Year	$	322		$	351		$	287
Compensation Costs for Non-vested Awards Not Yet Recognized	504			528			521
Weighted Average Expected Vesting Period, In Years	2.74			2.59			2.71
Proceeds From Stock Options Exercised	2,255			$	1,190		$	2,404
Tax Benefits Related to Stock Options Exercised	240			168			188
Intrinsic Value of Stock Options Exercised	1,552			825			1,010

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

The following table summarizes information about restricted stock unit activity for the year ended December 31, 2018 which was the first year the company has granted restricted stock units.



	Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2018	—	$	—
Granted	3,377	$	32.57
Vested	—	$	—
Canceled	—	$	—
Non-vested at December 31, 2018	3,377	$	32.57

The following table presents information on the amounts expensed related to Restricted Stock Units awarded pursuant to the Long Term Incentive Plan for the year ended December 31, 2018.



		2018
Amount Expensed During the Year		34
Compensation Costs for Non-vested Awards Not Yet Recognized		76

Employee Stock Purchase Plan

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

Employee Stock Ownership Plan

Arrow maintains an employee stock ownership plan (“ESOP”). Substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The ESOP borrowed funds from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock. The notes require annual payments of principal and interest through 2019. As the debt is repaid, shares are released from collateral based on the proportion of debt paid to total debt outstanding for the year and allocated to active employees. In addition, the Company makes additional cash contributions to the Plan each year.

Schedule of ESOP Compensation Expense



	2018		2017		2016
ESOP Compensation Expense	$	1,400	$	1,400	$	1,200

Shares pledged as collateral are reported as unallocated ESOP shares in stockholders’ equity. As shares are released from collateral, Arrow reports compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings per share computations. The ESOP shares as of December 31, 2018 were as follows:

Schedule of Shares in ESOP Plan



ESOP Plan Shares:	2018
Allocated Shares	758,101
Shares Released for Allocation During 2018	4,931
Unallocated Shares	5,001
Total ESOP Shares	768,033

Market Value of Unallocated Shares	$	160