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, 2019, the maximum amount that could have been paid by subsidiary banks to Arrow, without prior regulatory approval, was approximately $64.6 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, 2019 and 2018, 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 satisfied the risk-based and leverage capital requirements, and 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.

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 tier 1 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. The CBLR is calculated as the ratio of “tier 1 capital” divided by “average total consolidated assets.” Based on preliminary estimates, the Company’s CBLR computed in compliance with this new standard is expected to exceed the 9% threshold. This final rule became effective January 1, 2020, and qualifying community banking organizations 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). Until the final rules become effective and Arrow opts into the CBLR framework, the Capital Rules promulgated under Dodd-Frank will remain applicable to Arrow.

As of December 31, 2019, 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, 2019 and 2018:



	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, 2019
Total Capital (to Risk Weighted Assets):
Arrow	$	330,657	14.8	%	$	234,588	10.5	%	$	223,417	10.0	%
Glens Falls National	254,438		14.5	%	184,248		10.5	%	175,474		10.0	%
Saratoga National	65,295		13.6	%	50,412		10.5	%	48,011		10.0	%
Tier I Capital (to Risk Weighted Assets):
Arrow	309,469		13.8	%	190,615		8.5	%	179,402		8.0	%
Glens Falls National	237,546		13.5	%	149,566		8.5	%	140,768		8.0	%
Saratoga National	60,999		12.7	%	40,826		8.5	%	38,425		8.0	%
Tier I Capital (to Average Assets):
Arrow	309,469		10.0	%	123,788		4.0	%	154,735		5.0	%
Glens Falls National	237,546		9.5	%	100,019		4.0	%	125,024		5.0	%
Saratoga National	60,999		9.6	%	25,416		4.0	%	31,770		5.0	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Arrow	289,409		12.9	%	157,044		7.0	%	145,826		6.5	%
Glens Falls National	237,486		13.5	%	123,141		7.0	%	114,345		6.5	%
Saratoga National	60,999		12.7	%	33,621		7.0	%	31,220		6.5	%

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	%