Regulatory Matters

12 Months Ended

Dec. 31, 2018

Banking and Thrift [Abstract]

Regulatory Matters

REGULATORY MATTERS (Dollars in Thousands)

In the normal course of business, Arrow and its subsidiaries operate under certain regulatory restrictions, such as the extent and structure of covered inter-company borrowings and maintenance of reserve requirement balances.

The principal source of the funds for the payment of stockholder dividends by Arrow has been from dividends declared and paid to Arrow by its bank subsidiaries.  As of December 31, 2018, the maximum amount that could have been paid by subsidiary banks to Arrow, without prior regulatory approval, was approximately $56.1 million.

Under current Federal Reserve regulations, Arrow is prohibited from borrowing from the subsidiary banks unless such borrowings are secured by specific obligations.  Additionally, the maximum of any such borrowings from any one subsidiary bank(aggregated with all other "covered transactions between the bank and Arrow) is limited to 10% of that bank’s capital and surplus. Loans and other covered transactions between any one subsidiary bank and all of its affiliates cannot exceed 20% of that bank's capital and surplus.

Arrow and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on an institution’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Arrow and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Current quantitative measures established by regulation to ensure capital adequacy require Arrow and its subsidiary banks to maintain minimum capital amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2018 and 2017, that Arrow and both subsidiary banks meet all capital adequacy requirements to which they are subject. The regulatory capital requirements incorporate a capital concept, the so-called "capital conservation buffer" (set at 2.5%, after full phase-in), which must be added to each of the minimum required risk-based capital ratios (i.e., the minimum CET1 ratio, the minimum Tier 1 risk-based capital ratio and the minimum total risk-based capital ratio). As of January 1, 2019, the capital conservation buffer increased to 2.50% of risk weighted assets from 1.875% at January 1, 2018.

The Economic Growth Act was signed into law May 24, 2018, and includes a provision requiring the federal bank regulatory agencies to establish a "community bank leverage ratio" (CBLR) of between 8% and 10%, calculated by dividing tangible equity capital by average total consolidated assets of "qualifying community banks" that meet certain requirements to be set by those regulatory agencies.  A qualifying community bank is a depository institution or bank holding company with less than $10 billion in total assets that meets the other requirements to be established by the regulators.  If a qualifying community bank exceeds the community bank leverage ratio, it will be deemed to have met all applicable capital and leverage requirements, including the generally applicable leverage capital requirements and risk-based capital requirements and (if the community bank is a depository institution), the "well capitalized" requirement under the federal "prompt corrective action" capital standards.  This new community bank leverage ratio is intended to reduce the burden of compliance with regard to regulatory capital adequacy for qualifying community banks. However, this alternative capital standard will not be effective until the federal bank regulatory authorities adopt rules for its implementation.

On November 21, 2018, federal banking regulators issued a notice of proposed rulemaking that would set the threshold for the CBLR at greater than 9%, calculated as the ratio of “CBLR tangible equity” divided by “average total consolidated assets.” Based on the parameters of this proposed rulemaking, the CBLR for Arrow and both subsidiary banks is estimated to exceed the 9% threshold. However, these proposed rules are not yet final, and the terms of the rules may change before becoming final. Upon effectiveness, the final rules may impact Arrow’s capital options and requirements, although the potential impact of the final rules on Arrow will remain uncertain until those final rules are issued.  Until those rules become final, the enhanced bank capital standards promulgated under Dodd-Frank will remain applicable to Arrow.

As of December 31, 2018, Arrow and both subsidiary banks qualified as well-capitalized under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized,” Arrow and its subsidiary banks must maintain minimum total risk-based, Tier I risk-based, Tier I leverage, and CET1 risk-based ratios as set forth in the table below.  There are no conditions or events that management believes have changed Arrow’s or its subsidiary banks’ categories. The actual capital amounts and ratios for Arrow and its subsidiary banks, Glens Falls National Bank and Trust Company (“Glens Falls National”) and Saratoga National Bank and Trust Company (“Saratoga National”), are presented in the table below as of December 31, 2018 and 2017:

	Actual				Minimum Amounts For Capital Adequacy Purposes (including "capital conservation buffer")				Minimum Amounts To Be Well-Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2018
Total Capital  (to Risk Weighted Assets):
Arrow	$	304,109	14.9	%	$	202,059	9.9	%	$	204,100	10.0	%
Glens Falls National	237,238		14.4	%	163,101		9.9	%	164,749		10.0	%
Saratoga National	56,483		14.2	%	39,379		9.9	%	39,777		10.0	%
Tier I Capital  (to Risk Weighted Assets):
Arrow	283,913		13.9	%	161,361		7.9	%	163,403		8.0	%
Glens Falls National	220,844		13.4	%	130,199		7.9	%	131,847		8.0	%
Saratoga National	52,681		13.2	%	31,529		7.9	%	31,928		8.0	%
Tier I Capital  (to Average Assets):
Arrow	283,913		9.6	%	118,297		4.0	%	147,871		5.0	%
Glens Falls National	220,844		9.1	%	97,074		4.0	%	121,343		5.0	%
Saratoga National	52,681		9.6	%	21,950		4.0	%	27,438		5.0	%
Common Equity Tier 1 Capital  (to Risk Weighted Assets):
Arrow	263,863		12.9	%	130,909		6.4	%	132,954		6.5	%
Glens Falls National	220,794		13.4	%	105,454		6.4	%	107,102		6.5	%
Saratoga National	52,681		13.2	%	25,542		6.4	%	25,941		6.5	%
As of December 31, 2017
Total Capital  (to Risk Weighted Assets):
Arrow	278,163		15.0	%	172,461		9.3	%	185,442		10.0	%
Glens Falls National	220,275		14.6	%	140,312		9.3	%	150,873		10.0	%
Saratoga National	48,822		14.0	%	32,432		9.3	%	34,873		10.0	%
Tier I Capital  (to Risk Weighted Assets):
Arrow	259,378		14.0	%	135,247		7.3	%	148,216		8.0	%
Glens Falls National	205,200		13.6	%	110,144		7.3	%	120,706		8.0	%
Saratoga National	45,311		13.0	%	25,444		7.3	%	27,884		8.0	%
Tier I Capital  (to Average Assets):
Arrow	259,378		9.5	%	109,212		4.0	%	136,515		5.0	%
Glens Falls National	205,200		9.1	%	90,198		4.0	%	112,747		5.0	%
Saratoga National	45,311		9.4	%	19,281		4.0	%	24,102		5.0	%
Common Equity Tier 1 Capital  (to Risk Weighted Assets):
Arrow	239,326		12.9	%	107,604		5.8	%	120,591		6.5	%
Glens Falls National	205,148		13.6	%	87,490		5.8	%	98,049		6.5	%
Saratoga National	45,311		13.0	%	20,216		5.8	%	22,656		6.5	%