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 June 30, 2019

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 July 31, 2019
Common Stock, par value $1.00 per share	14,519,270

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	43
Item 3. Quantitative and Qualitative Disclosures About Market Risk	69
Item 4. Controls and Procedures	69
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	70
Item 1.A. Risk Factors	70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3. Defaults Upon Senior Securities	70
Item 4. Mine Safety Disclosures	70
Item 5. Other Information	71
Item 6. Exhibits	71
SIGNATURES	72

# 2

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

# 3

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) (Unaudited)
	June 30, 2019			December 31, 2018			June 30, 2018
ASSETS
Cash and Due From Banks	$	34,650		$	56,529		$	38,552
Interest-Bearing Deposits at Banks	28,045			27,710			22,189
Investment Securities:
Available-for-Sale	285,878			317,535			325,387
Held-to-Maturity (Approximate Fair Value of $266,068 at June 30, 2019; $280,338 at December 31, 2018; and $292,605 at June 30, 2018)	262,541			283,476			297,885
Equity Securities	1,850			1,774			1,802
Other Investments	8,202			15,506			11,089
Loans	2,280,308			2,196,215			2,057,862
Allowance for Loan Losses	(20,695		)	(20,196		)	(19,640		)
Net Loans	2,259,613			2,176,019			2,038,222
Premises and Equipment, Net	38,836			30,446			28,104
Goodwill	21,873			21,873			21,873
Other Intangible Assets, Net	1,730			1,852			2,060
Other Assets	62,532			55,614			58,008
Total Assets	$	3,005,750		$	2,988,334		$	2,845,171
LIABILITIES
Noninterest-Bearing Deposits	$	467,179		$	472,768		$	467,048
Interest-Bearing Checking Accounts	741,395			790,781			861,959
Savings Deposits	908,642			818,048			735,217
Time Deposits over $250,000	97,220			73,583			70,950
Other Time Deposits	289,317			190,404			169,607
Total Deposits	2,503,753			2,345,584			2,304,781
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	51,149			54,659			60,248
Federal Home Loan Bank Overnight Advances	83,000			234,000			136,000
Federal Home Loan Bank Term Advances	30,000			45,000			45,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000			20,000			20,000
Finance Leases	5,270			—			—
Other Liabilities	27,929			19,507			19,654
Total Liabilities	2,721,101			2,718,750			2,585,683
STOCKHOLDERS’ EQUITY
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at June 30, 2019; $5 Par Value and 1,000,000 Shares Authorized at December 31, 2018 and June 30, 2018	—			—			—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized at June 30, 2019 and 20,000,000 Shares Authorized at December 31, 2018 and June 30, 2018 (19,035,565 Shares Issued at June 30, 2019 and December 31, 2018 and 18,481,301 at June 30, 2018)	19,035			19,035			18,481
Additional Paid-in Capital	316,229			314,533			292,020
Retained Earnings	39,397			29,257			40,326
Unallocated ESOP Shares (5,001 Shares at June 30, 2019; 5,001 Shares at December 31, 2018 and 9,643 Shares at June 30, 2018)	(100		)	(100		)	(200		)
Accumulated Other Comprehensive Loss	(9,647		)	(13,810		)	(11,804		)
Treasury Stock, at Cost (4,517,412 Shares at June 30, 2019; 4,558,207 Shares at December 31, 2018 and 4,467,909 Shares at June 30, 2018)	(80,265		)	(79,331		)	(79,335		)
Total Stockholders’ Equity	284,649			269,584			259,488
Total Liabilities and Stockholders’ Equity	$	3,005,750		$	2,988,334		$	2,845,171

See Notes to Unaudited Interim Consolidated Financial Statements.

# 4

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	23,520	$	19,909	$	45,923	$	38,767
Interest on Deposits at Banks	195		158		390		292
Interest and Dividends on Investment Securities:
Fully Taxable	2,284		2,048		4,653		3,941
Exempt from Federal Taxes	1,228		1,475		2,474		3,008
Total Interest and Dividend Income	27,227		23,590		53,440		46,008
INTEREST EXPENSE
Interest-Bearing Checking Accounts	453		388		935		775
Savings Deposits	2,008		711		3,609		1,233
Time Deposits over $250,000	515		328		911		532
Other Time Deposits	1,131		282		1,844		541
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	25		16		47		32
Federal Home Loan Bank Advances	1,099		656		2,693		1,070
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	261		247		530		461
Interest on Financing Leases	28		—		43		—
Total Interest Expense	5,520		2,628		10,612		4,644
NET INTEREST INCOME	21,707		20,962		42,828		41,364
Provision for Loan Losses	455		629		927		1,375
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	21,252		20,333		41,901		39,989
NONINTEREST INCOME
Income From Fiduciary Activities	2,252		2,647		4,359		4,844
Fees for Other Services to Customers	2,545		2,570		4,947		4,950
Insurance Commissions	1,935		2,192		3,654		4,095
Net Gain on Securities Transactions	—		223		76		241
Net Gain on Sales of Loans	140		23		244		61
Other Operating Income	24		256		503		609
Total Noninterest Income	6,896		7,911		13,783		14,800
NONINTEREST EXPENSE
Salaries and Employee Benefits	9,727		9,812		19,046		19,181
Occupancy Expenses, Net	1,279		1,270		2,699		2,610
Technology and Equipment Expense	3,243		2,849		6,384		5,547
FDIC Assessments	212		223		424		440
Other Operating Expense	2,447		2,038		5,007		4,370
Total Noninterest Expense	16,908		16,192		33,560		32,148
INCOME BEFORE PROVISION FOR INCOME TAXES	11,240		12,052		22,124		22,641
Provision for Income Taxes	2,306		2,322		4,456		4,380
NET INCOME	$	8,934	$	9,730	$	17,668	$	18,261
Average Shares Outstanding 1:
Basic	14,487		14,394		14,478		14,374
Diluted	14,527		14,480		14,523		14,459
Per Common Share:
Basic Earnings	$	0.62	$	0.68	$	1.22	$	1.27
Diluted Earnings	0.62		0.67		1.22		1.26

¹2018 Share and Per Share Amounts have been restated for the September 27, 20183% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

# 5

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)
	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Net Income	$	8,934	$	9,730		$	17,668	$	18,261
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Securities Holding Gains (Losses) Arising During the Period	1,744		(635		)	3,824		(3,120		)
Amortization of Net Retirement Plan Actuarial Loss	133		75			254		121
Amortization of Net Retirement Plan Prior Service Cost	43		41			85		40
Other Comprehensive Income (Loss)	1,920		(519		)	4,163		(2,959		)
Comprehensive Income	$	10,854	$	9,211		$	21,831	$	15,302

See Notes to Unaudited Interim Consolidated Financial Statements.

# 6

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

	Six-Month Period Ended June 30, 2019
	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, 2018	$	19,035	$	314,533	$	29,257		$	(100	)	$	(13,810	)	$	(79,331	)	$	269,584
Net Income	—		—		17,668			—			—			—			17,668
Other Comprehensive Income	—		—		—			—			4,163			—			4,163
Cash Dividends Paid, $.52 per Share	—		—		(7,528		)	—			—			—			(7,528		)
Stock Options Exercised, Net  (62,712 Shares)	—		638		—			—			—			687			1,325
Shares Issued Under the Directors’ Stock   Plan  (3,997 Shares)	—		86		—			—			—			44			130
Shares Issued Under the Employee Stock   Purchase Plan  (7,948 Shares)	—		163		—			—			—			87			250
Shares Issued for Dividend   Reinvestment Plans (26,698 Shares)	—		615		—			—			—			289			904
Stock-Based Compensation Expense	—		194		—			—			—			—			194
Purchase of Treasury Stock   (60,560 Shares)	—		—		—			—			—			(2,041		)	(2,041		)
Balance at June 30, 2019	$	19,035	$	316,229	$	39,397		$	(100	)	$	(9,647	)	$	(80,265	)	$	284,649
	Three-Month Period Ended June 30, 2019
	Common Stock		Additional Paid-In Capital		Retained Earnings			Unallo-cated ESOP Shares			Accumu-lated Other Com- prehensive Loss			Treasury Stock			Total
Balance at March 31, 2019	$	19,035	$	315,262	$	34,231		$	(100	)	$	(11,567	)	$	(80,252	)	$	276,609
Net Income	—		—		8,934			—			—			—			8,934
Other Comprehensive Income	—		—		—			—			1,920			—			1,920
Cash Dividends Paid, $.26 per Share	—		—		(3,768		)	—			—			—			(3,768		)
Stock Options Exercised, Net  (36,577 Shares)	—		389		—			—			—			401			790
Shares Issued Under the Directors’ Stock   Plan  (3,997 Shares)	—		86		—			—			—			44			130
Shares Issued Under the Employee Stock   Purchase Plan  (4,239 Shares)	—		87		—			—			—			46			133
Shares Issued for Dividend Reinvestment Plans (13,566 Shares)	—		306		—			—			—			145			451
Stock-Based Compensation Expense	—		99		—			—			—			—			99
Purchase of Treasury Stock   (19,708 Shares)	—		—		—			—			—			(649		)	(649		)
Balance at June 30, 2019	$	19,035	$	316,229	$	39,397		$	(100	)	$	(9,647	)	$	(80,265	)	$	284,649

See Notes to Unaudited Interim Consolidated Financial Statements.

# 7

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

	Six-Month Period Ended June 30, 2018
	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, 2017	$	18,481	$	290,219	$	28,818		$	(200	)	$	(8,514	)	$	(79,201	)	$	249,603
Net Income	—		—		18,261			—			—			—			18,261
Other Comprehensive Loss	—		—		—			—			(2,959		)	—			(2,959		)
Impact of the Adoption of ASU 2014-09	—		—		(102		)	—			—			—			(102		)
Impact of the Adoption of ASU 2016-01	—		—		331			—			(331		)	—			—
Cash Dividends Paid, $.485 per Share 1	—		—		(6,982		)	—			—			—			(6,982		)
Stock Options Exercised, Net (79,001 Shares)	—		804		—			—			—			888			1,692
Shares Issued Under the Directors’ Stock   Plan  (2,705 Shares)	—		72		—			—			—			31			103
Shares Issued Under the Employee Stock   Purchase Plan  (7,613 Shares)	—		167		—			—			—			85			252
Shares Issued for Dividend   Reinvestment Plans (24,305 Shares)	—		580		—			—			—			276			856
Stock-Based Compensation Expense	—		178		—			—			—			—			178
Purchase of Treasury Stock  (40,009 Shares)	—		—		—			—			—			(1,414		)	(1,414		)
Balance at June 30, 2018	$	18,481	$	292,020	$	40,326		$	(200	)	$	(11,804	)	$	(79,335	)	$	259,488
	Three-Month Period Ended June 30, 2018
	Common Stock		Additional Paid-In Capital		Retained Earnings			Unallo-cated ESOP Shares			Accumu-lated Other Com- prehensive Loss			Treasury Stock			Total
Balance March 31, 2018	$	18,481	$	290,980	$	34,093		$	(200	)	$	(11,285	)	$	(79,335	)	$	252,734
Net Income	—		—		9,730			—			—			—			9,730
Other Comprehensive Loss	—		—		—			—			(519		)	—			(519		)
Cash Dividends Paid, $.242 per Share 1	—		—		(3,497		)	—			—			—			(3,497		)
Stock Options Exercised, Net (51,339 Shares)	—		497		—			—			—			585			1,082
Shares Issued Under the Directors’ Stock   Plan  (2,705 Shares)	—		72		—			—			—			31			103
Shares Issued Under the Employee Stock   Purchase Plan  (3,939 Shares)	—		91		—			—			—			45			136
Shares Issued for Dividend Reinvestment Plans (11,846 Shares)	—		291		—			—			—			134			425
Stock-Based Compensation Expense	—		89		—			—			—			—			89
Purchase of Treasury Stock  (21,294 Shares)	—		—		—			—			—			(795		)	(795		)
Balance at June 30, 2018	$	18,481	$	292,020	$	40,326		$	(200	)	$	(11,804	)	$	(79,335	)	$	259,488

¹ Cash dividends paid per share have been adjusted for the September 27, 20183% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

# 8

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Six Months Ended June 30,
Cash Flows from Operating Activities:	2019			2018
Net Income	$	17,668		$	18,261
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses	927			1,375
Depreciation and Amortization	2,516			2,408
Net Gain on Securities Transactions	(76		)	(241		)
Loans Originated and Held-for-Sale	(10,310		)	(2,354		)
Proceeds from the Sale of Loans Held-for-Sale	9,336			2,198
Net Gain on the Sale of Loans	(244		)	(61		)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	432			117
Contributions to Retirement Benefit Plans	(324		)	(352		)
Deferred Income Tax Benefit	(569		)	(261		)
Shares Issued Under the Directors’ Stock Plan	130			103
Stock-Based Compensation Expense	194			178
Tax Benefit from Exercise of Stock Options	179			160
Net (Increase) Decrease in Other Assets	(2,062		)	186
Net Increase (Decrease) in Other Liabilities	3,294			(673		)
Net Cash Provided By Operating Activities	21,091			21,044
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale	51,686			25,035
Purchases of Securities Available-for-Sale	(15,390		)	(56,598		)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity	22,608			39,616
Purchases of Securities Held-to-Maturity	(2,095		)	(2,105		)
Net Increase in Loans	(84,695		)	(107,598		)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	779			644
Purchase of Premises and Equipment	(4,389		)	(1,395		)
Proceeds from the Sale of a Subsidiary, Net	—			49
Net Decrease (Increase) in Other Investments	7,304			(1,140		)
Net Cash Used By Investing Activities	(24,192		)	(103,492		)
Cash Flows from Financing Activities:
Net Increase in Deposits	158,169			59,665
Net (Decrease) Increase in Short-Term Federal Home Loan Bank Borrowings	(151,000		)	31,000
Net Decrease in Short-Term Borrowings	(3,510		)	(4,718		)
Finance Lease Payments	(12		)	—
Repayments of Federal Home Loan Bank Term Advances	(15,000		)	(10,000		)
Purchase of Treasury Stock	(2,041		)	(1,414		)
Stock Options Exercised, Net	1,325			1,692
Shares Issued Under the Employee Stock Purchase Plan	250			252
Shares Issued for Dividend Reinvestment Plans	904			856
Cash Dividends Paid	(7,528		)	(6,982		)
Net Cash (Used) Provided By Financing Activities	(18,443		)	70,351
Net Decrease in Cash and Cash Equivalents	(21,544		)	(12,097		)
Cash and Cash Equivalents at Beginning of Period	84,239			72,838
Cash and Cash Equivalents at End of Period	$	62,695		$	60,741
Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	$	9,990		$	4,530
Income Taxes	5,031			5,294
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,098			402

See Notes to Unaudited Interim Consolidated Financial Statements.

# 9

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 June 30, 2019, December 31, 2018 and June 30, 2018; the results of operations for the three-month periods endedJune 30, 2019 and 2018; the consolidated statements of comprehensive income for the three-month periods endedJune 30, 2019 and 2018; the changes in stockholders' equity for the three-month and six-month periods ended June 30, 2019 and 2018; and the cash flows for the six-month periods ended June 30, 2019 and 2018. 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 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.  Our most significant estimate is the allowance for loan losses. Other estimates include the evaluation of other-than-temporary impairment of investment securities, goodwill impairment, pension and other postretirement 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, 2018 included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2018.

Recently Adopted and Recently Issued Accounting Standards

The following accounting standards have been adopted in the first six months of 2019:

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08 "Receivables-Nonrefundable Fees and Other Costs" which amends the amortization period for certain purchased callable debt securities held at a premium. This shortens the amortization period for the premium to the earliest call date. Under United States generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For Arrow, the standard was effective in the first quarter of 2019 and did not have a material impact on its financial position or the results of operations in the current quarter or in future periods.

In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): "Land Easement Practical Expedient for Transition to Topic 842". In July 2018, the FASB issued ASU 2018-10 "Codification Improvements to Topic 842, Leases" which provided clarification on certain components of the original guidance, including that the rate implicit in the lease cannot be less than zero. Also in July 2018, the FASB issued ASU 2018-11 "Targeted Improvements" to Leases (Topic 842) which amends the original guidance to allow for the adoption of this standard to be applied retrospectively at the beginning of the period of adoption, which was January 1, 2019 for Arrow, without revising prior comparative periods.

The Company adopted this standard as of January 1, 2019 using the effective date method, also known as the modified retrospective method, with the cumulative-effect adjustment recorded at the beginning of the period of adoption. As a result of this adoption, the Company's assets increased $7.9 million and the Company's liabilities increased $8.0 million with no adjustment required to retained earnings and no material impact to the Consolidated Statements of Income.

Practical Expedients Elected At Adoption: The package of practical expedients were elected that did not require the Company to reassess whether an existing contract contains a lease, to reassess existing leases between operating leases and finance leases and to not reassess initial direct costs for any existing leases. These practical expedients were applied together. In addition, the Company also elected a practical expedient, which was required to be applied consistently to all of its leases, to use hindsight in determining the lease term when considering lessee options to extend or terminate the lease and in assessing impairment in the right-of-use asset.

Accounting Policy Elections: The Company also made two accounting policy elections related to the adoption of this standard. The first is a determination not to separate lease and non-lease components and account for the resulting combined component as a single lease component. The second election is to account for short-term leases, those leases with a "lease term" of twelve months or less, like an operating lease under current GAAP.

Determination of the Discount Rate to Calculate the Lease Liability: Since the Company was unable to determine the rate implicit in its leases, the secured borrowing rate from the Federal Home Loan Bank of New York as of the January 1, 2019 adoption date was utilized for existing leases for the effective lease term beginning with the effective date of each existing lease. The expected expiration date of each lease was determined on a lease-by-lease basis based on the availability of renewal options in the lease contracts, the amount of leasehold improvements at each location, total branch deposits at each location in addition to the feasibility of growth potential at each location. A similar process is followed to determine the expected lease expiration date for all leases executed subsequent to the January 1, 2019 adoption date.

# 10

The following accounting standards have been issued and will become effective for the Company at a future date:

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" (Topic 326) 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 this ASU, 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.

For Arrow, the standard is effective for the first quarter of 2020 and early adoption is allowed in 2019. The Company plans on adopting the standard in the first quarter of 2020, in order to maximize the accumulation of data needed to calculate the new current expected credit loss (CECL) methodologies. The ASU describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans and requires additional disclosures. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle. The Company has continued its implementation efforts with the development and testing of various methods within its core model, and has tentatively 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. Based on further testing, these methods may change prior to adoption. As a result of analyses performed, including the availability of future economic data, the Company plans to utilize an 18-month reasonable and supportable forecast period. The Company has identified the economic data that best correlates with expected loan losses through the use of various regression analyses of historical economic information and loan losses. The Company continues to monitor new regulatory guidance and is updating relevant internal controls and processes. The adoption of this standard will likely have the effect of increasing the allowance for loan and lease losses and reducing shareholders' equity, the extent of which will depend upon the nature and characteristics of the Company's loan portfolio and economic conditions and forecasts at the adoption date. The Company expects to remain a well-capitalized financial institution under current regulatory calculations.     

In August 2018, the FASB issued ASU 2018-13 "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" which as part of its disclosure framework, the FASB has eliminated, amended and added disclosure requirements for fair value measurements. The following disclosure requirements were eliminated: Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy of the timing of transfers between levels of the fair value hierarchy; the valuation processes for Level 3 fair value measurements. For public companies such as Arrow, the following new disclosures will be required: Changes in unrealized gains and losses for the period included in other comprehensive income (OCI); the range and weighted average of significant unobservable inputs used; alternatively, a company may choose to disclose other quantitative information if it determines that it is a more reasonable and rational method that reflects the distribution of unobservable inputs used. For Arrow, the standard becomes effective in the first quarter of 2020. The Company does not expect that the adoption of this change in fair value disclosure will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.

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 August 2018, the FASB issued 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 often expensed under current US GAAP. For Arrow, the standard becomes effective at January 1, 2020. The Company is in the process of assessing the impact of this new accounting standard on its financial position and the results of operations in periods subsequent to its adoption.

# 11

Note 2.    INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at June 30, 2019, December 31, 2018 and June 30, 2018:

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
June 30, 2019
Available-For-Sale Securities,   at Amortized Cost	$	17,506	$	965	$	266,235	$	1,000	$	285,706
Available-For-Sale Securities,   at Fair Value	17,524		967		266,587		800		285,878
Gross Unrealized Gains	31		2		1,293		—		1,326
Gross Unrealized Losses	13		—		941		200		1,154
Available-For-Sale Securities,   Pledged as Collateral									246,202
Maturities of Debt Securities,   at Amortized Cost:
Within One Year	$	12,503	$	226	$	267	$	—	$	12,996
From 1 - 5 Years	5,003		299		165,852		—		171,154
From 5 - 10 Years	—		—		75,603		—		75,603
Over 10 Years	—		440		24,513		1,000		25,953
Maturities of Debt Securities,   at Fair Value:
Within One Year	$	12,490	$	229	$	268	$	—	$	12,987
From 1 - 5 Years	5,034		298		166,178		—		171,510
From 5 - 10 Years	—		—		75,538		—		75,538
Over 10 Years	—		440		24,603		800		25,843
Securities in a Continuous   Loss Position, at Fair Value:
Less than 12 Months	$	35	$	—	$	24,948	$	—	$	24,983
12 Months or Longer	12,454		—		130,229		800		143,483
Total	$	12,489	$	—	$	155,177	$	800	$	168,466
Number of Securities in a   Continuous Loss Position	2		—		61		1		64
Unrealized Losses on   Securities in a Continuous   Loss Position:
Less than 12 Months	$	—	$	—	$	234	$	—	$	234
12 Months or Longer	13		—		707		200		920
Total	$	13	$	—	$	941	$	200	$	1,154
Disaggregated Details:
US Treasury Obligations,   at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	17,506
US Agency Obligations, at Fair Value	17,524
US Government Agency   Securities, at Amortized Cost					$	67,760
US Government Agency   Securities, at Fair Value					67,613
Government Sponsored Entity   Securities, at Amortized Cost					198,475
Government Sponsored Entity Securities, at Fair Value					198,974

# 12

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, 2018
Available-For-Sale Securities,   at Amortized Cost	$	47,071	$	1,193	$	273,227	$	1,000	$	322,491
Available-For-Sale Securities,   at Fair Value	46,765		1,195		268,775		800		317,535
Gross Unrealized Gains	—		2		288		—		290
Gross Unrealized Losses	306		—		4,740		200		5,246
Available-For-Sale Securities,   Pledged as Collateral,   at Fair Value									236,163
Securities in a Continuous   Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	107,550	$	—	$	107,550
12 Months or Longer	46,765		—		124,627		800		172,192
Total	$	46,765	$	—	$	232,177	$	800	$	279,742
Number of Securities in a   Continuous Loss Position	10		—		86		1		97
Unrealized Losses on   Securities in a Continuous   Loss Position:
Less than 12 Months	$	—	$	—	$	841	$	—	$	841
12 Months or Longer	306		—		3,899		200		4,405
Total	$	306	$	—	$	4,740	$	200	$	5,246
Disaggregated Details:
US Treasury Obligations,   at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	47,071
US Agency Obligations, at Fair Value	46,765
US Government Agency   Securities, at Amortized Cost					$	72,095
US Government Agency   Securities, at Fair Value					71,800
Government Sponsored Entity   Securities, at Amortized Cost					201,132
Government Sponsored Entity Securities, at Fair Value					196,975

# 13

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
June 30, 2018
Available-For-Sale Securities,   at Amortized Cost	$	60,199	$	3,377	$	267,113	$	1,000	$	331,689
Available-For-Sale Securities,   at Fair Value	59,615		3,383		261,589		800		325,387
Gross Unrealized Gains	—		6		332		—		338
Gross Unrealized Losses	584		—		5,856		200		6,640
Available-For-Sale Securities,   Pledged as Collateral									282,481
Securities in a Continuous   Loss Position, at Fair Value:
Less than 12 Months	$	17,218	$	1,797	$	144,265	$	—	$	163,280
12 Months or Longer	42,397		—		72,209		800		115,406
Total	$	59,615	$	1,797	$	216,474	$	800	$	278,686
Number of Securities in a   Continuous Loss Position	14		6		79		1		100
Unrealized Losses on Securities   in a Continuous Loss Position:
Less than 12 Months	$	297	$	—	$	2,409	$	—	$	2,706
12 Months or Longer	287		—		3,447		200		3,934
Total	$	584	$	—	$	5,856	$	200	$	6,640
Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	60,199
US Agency Obligations, at Fair Value	59,615
US Government Agency   Securities, at Amortized Cost					$	68,030
US Government Agency   Securities, at Fair Value					68,083
Government Sponsored Entity   Securities, at Amortized Cost					199,083
Government Sponsored Entity Securities, at Fair Value					193,506

# 14

The following table is the schedule of Held-To-Maturity Securities at June 30, 2019, December 31, 2018 and June 30, 2018:

Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities			Total Held-To Maturity Securities
June 30, 2019
Held-To-Maturity Securities,   at Amortized Cost	$	220,529	$	42,012		$	262,541
Held-To-Maturity Securities,   at Fair Value	223,654		42,414			266,068
Gross Unrealized Gains	3,206		415			3,621
Gross Unrealized Losses	81		13			94
Held-To-Maturity Securities,   Pledged as Collateral						251,639
Maturities of Debt Securities,   at Amortized Cost:
Within One Year	$	24,060	$	1,884		$	25,944
From 1 - 5 Years	114,782		40,128			154,910
From 5 - 10 Years	80,037		—			80,037
Over 10 Years	1,650		—			1,650
Maturities of Debt Securities,   at Fair Value:
Within One Year	$	24,109	$	1,907		$	26,016
From 1 - 5 Years	116,273		40,507			156,780
From 5 - 10 Years	81,593		—			81,593
Over 10 Years	1,679		—			1,679
Securities in a Continuous   Loss Position, at Fair Value:
Less than 12 Months	$	159	$	(67	)	$	92
12 Months or Longer	14,374		1,711			16,085
Total	$	14,533	$	1,644		$	16,177
Number of Securities in a   Continuous Loss Position	36		1			37
Unrealized Losses on Securities    in a Continuous Loss Position:
Less than 12 Months	$	—	$	—		$	—
12 Months or Longer	81		13			94
Total	$	81	$	13		$	94
Disaggregated Details:
US Government Agency   Securities, at Amortized Cost			$	1,942
US Government Agency   Securities, at Fair Value			1,948
Government Sponsored Entity   Securities, at Amortized Cost			40,070
Government Sponsored Entity Securities, at Fair Value			40,466

# 15

Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
December 31, 2018
Held-To-Maturity Securities,   at Amortized Cost	$	235,782	$	47,694	$	283,476
Held-To-Maturity Securities,   at Fair Value	233,359		46,979		280,338
Gross Unrealized Gains	486		—		486
Gross Unrealized Losses	2,909		715		3,624
Held-To-Maturity Securities,   Pledged as Collateral					266,341
Securities in a Continuous   Loss Position, at Fair Value:
Less than 12 Months	$	32,093	$	33,309	$	65,402
12 Months or Longer	110,947		13,670		124,617
Total	$	143,040	$	46,979	$	190,019
Number of Securities in a   Continuous Loss Position	411		47		458
Unrealized Losses on   Securities in a Continuous   Loss Position:
Less than 12 Months	$	162	$	456	$	618
12 Months or Longer	2,747		259		3,006
Total	$	2,909	$	715	$	3,624
Disaggregated Details:
US Government Agency   Securities, at Amortized Cost			$	2,180
US Government Agency   Securities, at Fair Value			2,143
Government Sponsored Entity   Securities, at Amortized Cost			45,514
Government Sponsored Entity Securities, at Fair Value			44,836
June 30, 2018
Held-To-Maturity Securities,   at Amortized Cost	$	244,016	$	53,869	$	297,885
Held-To-Maturity Securities,   at Fair Value	239,841		52,764		292,605
Gross Unrealized Gains	497		—		497
Gross Unrealized Losses	4,672		1,105		5,777
Held-To-Maturity Securities,   Pledged as Collateral					278,627