AROW Form 10-Q Mar 2015


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 March 31, 2015

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

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.  Yes          No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   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     

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 April 30, 2015
Common Stock, par value $1.00 per share
 
12,636,663
 







ARROW FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 







# 2



PART I - Financial Information



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
ASSETS
 
 
 
 
 
Cash and Due From Banks
$
37,941

 
$
35,081

 
$
40,056

Interest-Bearing Deposits at Banks
73,654

 
11,214

 
35,994

Investment Securities:
 
 
 
 
 
Available-for-Sale
393,133

 
366,139

 
429,230

Held-to-Maturity (Approximate Fair Value of $312,500 at March 31, 2015; $308,566 at December 31, 2014; and $322,335 at March 31, 2014)
305,175

 
302,024

 
317,632

Federal Home Loan Bank and Federal Reserve Bank Stock
4,806

 
4,851

 
3,896

Loans
1,434,794

 
1,413,268

 
1,310,423

Allowance for Loan Losses
(15,625
)
 
(15,570
)
 
(14,636
)
Net Loans
1,419,169

 
1,397,698

 
1,295,787

Premises and Equipment, Net
28,381

 
28,488

 
28,717

Goodwill
22,003

 
22,003

 
22,003

Other Intangible Assets, Net
3,489

 
3,625

 
3,996

Other Assets
47,777

 
46,297

 
44,270

Total Assets
$
2,335,528

 
$
2,217,420

 
$
2,221,581

LIABILITIES
 
 
 
 
 
Noninterest-Bearing Deposits
$
310,878

 
$
300,786

 
$
277,086

NOW Accounts
967,537

 
871,671

 
908,028

Savings Deposits
541,750

 
524,648

 
524,670

Time Deposits of $100,000 or More
59,886

 
61,797

 
74,127

Other Time Deposits
138,653

 
144,046

 
164,108

Total Deposits
2,018,704

 
1,902,948

 
1,948,019

Federal Funds Purchased and
  Securities Sold Under Agreements to Repurchase
15,895

 
19,421

 
13,787

Federal Home Loan Bank Overnight Advances

 
41,000

 

Federal Home Loan Bank Term Advances
50,000

 
10,000

 
20,000

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts
20,000

 
20,000

 
20,000

Other Liabilities
25,964

 
23,125

 
25,284

Total Liabilities
2,130,563

 
2,016,494

 
2,027,090

STOCKHOLDERS’ EQUITY
 
 
 
 
 
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized


 


 


Common Stock, $1 Par Value; 20,000,000 Shares Authorized (17,079,376 Shares Issued at March 31, 2015 and December 31, 2014 and 16,744,486 Shares Issued March 31, 2014)
17,079

 
17,079

 
16,744

Additional Paid-in Capital
239,981

 
239,721

 
229,842

Retained Earnings
32,157

 
29,458

 
29,692

Unallocated ESOP Shares (63,723 Shares at March 31, 2015; 71,748 Shares at December 31, 2014; and 79,763 Shares at March 31, 2014)
(1,300
)
 
(1,450
)
 
(1,650
)
Accumulated Other Comprehensive Loss
(6,256
)
 
(7,166
)
 
(4,075
)
Treasury Stock, at Cost (4,380,293 Shares at March 31, 2015; 4,386,001 Shares at December 31, 2014; and 4,315,156 Shares at March 31, 2014)
(76,696
)
 
(76,716
)
 
(76,062
)
Total Stockholders’ Equity
204,965

 
200,926

 
194,491

Total Liabilities and Stockholders’ Equity
$
2,335,528

 
$
2,217,420

 
$
2,221,581

See Notes to Unaudited Interim Consolidated Financial Statements.

# 3



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended March 31,
 
 
2015
 
2014
 
INTEREST AND DIVIDEND INCOME
 
 
 
 
Interest and Fees on Loans
$
13,650

 
$
12,774

 
Interest on Deposits at Banks
21

 
13

 
Interest and Dividends on Investment Securities:
 
 
 
 
Fully Taxable
1,944

 
2,008

 
Exempt from Federal Taxes
1,375

 
1,471

 
Total Interest and Dividend Income
16,990

 
16,266

 
INTEREST EXPENSE
 
 
 
 
NOW Accounts
330

 
464

 
Savings Deposits
167

 
219

 
Time Deposits of $100,000 or More
90

 
230

 
Other Time Deposits
202

 
391

 
Federal Funds Purchased and
  Securities Sold Under Agreements to Repurchase
5

 
4

 
Federal Home Loan Bank Advances
150

 
145

 
Junior Subordinated Obligations Issued to
  Unconsolidated Subsidiary Trusts
142

 
141

 
Total Interest Expense
1,086

 
1,594

 
NET INTEREST INCOME
15,904

 
14,672

 
Provision for Loan Losses
275

 
458

 
NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES
15,629

 
14,214

 
NONINTEREST INCOME
 
 
 
 
Income From Fiduciary Activities
1,933

 
1,873

 
Fees for Other Services to Customers
2,239

 
2,194

 
Insurance Commissions
2,139

 
2,444

 
Net Gain on Securities Transactions
90

 

 
Net Gain on Sales of Loans
132

 
123

 
Other Operating Income
323

 
252

 
Total Noninterest Income
6,856

 
6,886

 
NONINTEREST EXPENSE
 
 
 
 
Salaries and Employee Benefits
7,692

 
7,642

 
Occupancy Expenses, Net
2,487

 
2,341

 
FDIC Assessments
280

 
273

 
Other Operating Expense
3,496

 
3,210

 
Total Noninterest Expense
13,955

 
13,466

 
INCOME BEFORE PROVISION FOR INCOME TAXES
8,530

 
7,634

 
Provision for Income Taxes
2,675

 
2,314

 
NET INCOME
$
5,855


$
5,320


Average Shares Outstanding:
 
 
 
 
Basic
12,633

 
12,601

 
Diluted
12,671

 
12,625

 
Per Common Share:
 
 
 
 
Basic Earnings
$
0.46

 
$
0.42

 
Diluted Earnings
0.46

 
0.42

 

Share and Per Share Amounts have been restated for the September 2014 2% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.

# 4



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 
Three Months Ended March 31,
 
 
2015
 
2014
 
Net Income
$
5,855

 
$
5,320

 
Other Comprehensive Income, Net of Tax:
 
 
 
 
  Net Unrealized Securities Holding Gains
     Arising During the Period
745

 
241

 
  Reclassification Adjustments for Securities Gains
Included in Net Income
55

 

 
  Amortization of Net Retirement Plan Actuarial Loss
117

 
70

 
  Accretion of Net Retirement Plan Prior
     Service Credit
(7
)
 
(13
)
 
Other Comprehensive Income
910

 
298

 
  Comprehensive Income
$
6,765

 
$
5,618

 
 
 
 
 
 

See Notes to Unaudited Interim Consolidated Financial Statements.


# 5



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)

 
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, 2014
$
17,079

 
$
239,721

 
$
29,458

 
$
(1,450
)
 
$
(7,166
)
 
$
(76,716
)
 
$
200,926

Net Income

 

 
5,855

 

 

 

 
5,855

Other Comprehensive Income

 

 

 

 
910

 

 
910

Cash Dividends Paid, $.25 per Share

 

 
(3,156
)
 

 

 

 
(3,156
)
Stock Options Exercised, Net  (3,027 Shares)

 
40

 

 

 

 
30

 
70

Shares Issued Under the Directors’ Stock
  Plan  (431 Shares)

 
7

 

 

 

 
4

 
11

Shares Issued Under the Employee Stock
  Purchase Plan  (4,370 Shares)

 
68

 

 

 

 
43

 
111

Stock-Based Compensation Expense

 
82

 

 

 

 

 
82

Purchase of Treasury Stock
  (2,120 Shares)

 

 

 

 

 
(57
)
 
(57
)
Allocation of ESOP Stock  (8,025 Shares)

 
63

 

 
150

 

 

 
213

Balance at March 31, 2015
$
17,079

 
$
239,981

 
$
32,157

 
$
(1,300
)
 
$
(6,256
)
 
$
(76,696
)
 
$
204,965

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
16,744

 
$
229,290

 
$
27,457

 
$
(1,800
)
 
$
(4,373
)
 
$
(75,164
)
 
$
192,154

Net Income

 

 
5,320

 

 

 

 
5,320

Other Comprehensive Income

 

 

 

 
298

 

 
298

Cash Dividends Paid, $.245 per Share 1

 

 
(3,085
)
 

 

 

 
(3,085
)
Stock Options Exercised, Net  (19,308 Shares)

 
284

 

 

 

 
190

 
474

Shares Issued Under the Employee Stock
  Purchase Plan  (4,272 Shares)

 
63

 

 

 

 
42

 
105

Stock-Based Compensation Expense

 
90

 

 

 

 

 
90

Tax Benefit for Disposition of Stock Options

 
5

 

 

 

 

 
5

Purchase of Treasury Stock
 (45,608 Shares)

 

 

 

 

 
(1,165
)
 
(1,165
)
Acquisition of Subsidiaries  (3,595 Shares)

 
56

 

 

 

 
35

 
91

Allocation of ESOP Stock  (7,878 Shares)

 
54

 

 
150

 

 

 
204

Balance at March 31, 2014
$
16,744

 
$
229,842

 
$
29,692

 
$
(1,650
)
 
$
(4,075
)
 
$
(76,062
)
 
$
194,491


1 Cash dividends paid per share have been adjusted for the September 2014 2% stock dividend.
See Notes to Unaudited Interim Consolidated Financial Statements.

# 6



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended March 31,
Cash Flows from Operating Activities:
2015
 
2014
Net Income
$
5,855

 
$
5,320

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
 
Provision for Loan Losses
275

 
458

Depreciation and Amortization
1,626

 
1,965

Allocation of ESOP Stock
213

 
204

Gains on the Sale of Securities Available-for-Sale
(90
)
 

Loans Originated and Held-for-Sale
(3,970
)
 
(4,592
)
Proceeds from the Sale of Loans Held-for-Sale
3,674

 
4,277

Net Gains on the Sale of Loans
(132
)
 
(123
)
Net Losses on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets

 
3

Contributions to Retirement Benefit Plans
(161
)
 
(261
)
Deferred Income Tax Expense (Benefit)
538

 
(45
)
Shares Issued Under the Directors’ Stock Plan
11

 

Stock-Based Compensation Expense
82

 
90

Net (Increase) Decrease in Other Assets
(2,420
)
 
(1,025
)
Net Increase (Decrease) in Other Liabilities
3,000

 
1,274

Net Cash Provided By Operating Activities
8,501

 
7,545

Cash Flows from Investing Activities:
 
 
 
Proceeds from the Sale of Securities Available-for-Sale
2,702

 

Proceeds from the Maturities and Calls of Securities Available-for-Sale
22,829

 
44,907

Purchases of Securities Available-for-Sale
(51,673
)
 
(16,905
)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity
7,180

 
16,561

Purchases of Securities Held-to-Maturity
(10,655
)
 
(35,328
)
Net Increase in Loans
(21,712
)
 
(44,253
)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets
258

 
289

Purchase of Premises and Equipment
(373
)
 
(89
)
Cash Paid for Subsidiaries, Net

 
(75
)
Net Decrease in Other Investments
45

 
2,385

Net Cash Used In Investing Activities
(51,399
)
 
(32,508
)
Cash Flows from Financing Activities:
 
 
 
Net Increase in Deposits
115,756

 
105,689

Net Decrease in Short-Term Borrowings
(44,526
)
 
(50,990
)
Federal Home Loan Bank Advances
40,000

 

Purchase of Treasury Stock
(57
)
 
(1,165
)
Stock Options Exercised, Net
70

 
474

Shares Issued Under the Employee Stock Purchase Plan
111

 
105

Tax Benefit from Exercise of Stock Options

 
5

Cash Dividends Paid
(3,156
)
 
(3,085
)
Net Cash Provided By Financing Activities
108,198

 
51,033

Net Increase in Cash and Cash Equivalents
65,300

 
26,070

Cash and Cash Equivalents at Beginning of Period
46,295

 
49,980

Cash and Cash Equivalents at End of Period
$
111,595

 
$
76,050

 
 
 
 
Supplemental Disclosures to Statements of Cash Flow Information:
 
 
 
Interest on Deposits and Borrowings
$
1,080

 
$
1,628

Income Taxes
635

 
335

Non-cash Investing and Financing Activity:
 
 
 
Transfer of Loans to Other Real Estate Owned and Repossessed Assets
394

 
484

Acquisition of Subsidiaries

 
91


See Notes to Unaudited Interim Consolidated Financial Statements.

# 7



NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.     ACCOUNTING POLICIES

In the opinion of the management of Arrow Financial Corporation (Arrow), the accompanying unaudited consolidated interim financial statements contain all of the adjustments necessary to present fairly the financial position as of March 31, 2015, December 31, 2014 and March 31, 2014; the results of operations for the three-month periods ended March 31, 2015 and 2014; the consolidated statements of comprehensive income for the three-month periods ended March 31, 2015 and 2014; the changes in stockholders' equity for the three-month periods ended March 31, 2015 and 2014; and the cash flows for the three-month periods ended March 31, 2015 and 2014. All such adjustments are of a normal recurring nature. Certain prior period amounts have been reclassified to conform to the current presentation. The preparation of financial statements requires the use of management estimates. The unaudited consolidated interim financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, 2014, included in Arrow's 2014 Form 10-K.

New Accounting Standards Updates (ASU): During 2015, through the date of this report, the FASB issued five accounting standards updates, none of which had an immediate impact on Arrow, but could in the future.
ASU 2015-01 "Income Statement - Extraordinary and Unusual Items" eliminated the concept of extraordinary items. For Arrow, the standard is effective for the first quarter of 2016.
ASU 2015-02 "Consolidation" changed the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. For Arrow, the standard is effective for the first quarter of 2016.
ASU 2015-03 "Interest - Imputation of Interest" required debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. There were no changes to the recognition and measurement of debt issuance costs. For Arrow, the standard is effective for the first quarter of 2016.
ASU 2015-04 "Compensation-Retirement Benefits" provides several practical expedients for the measurement or, in certain circumstances, the remeasurement of defined benefit plan assets and obligations. Most of the practical expedients will not apply to Arrow, however, if used, an entity must disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations. For Arrow, the standard is effective for the first quarter of 2016.
ASU 2015-05 "Intangibles - Goodwill and Other - Internal use Software" provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. For Arrow, the standard is effective for the first quarter of 2016.

Note 2.    INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at March 31, 2015, December 31, 2014 and March 31, 2014:
Available-For-Sale Securities
 
 
U.S. Agency
Obligations
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Mutual Funds
and Equity
Securities
 
Total
Available-
For-Sale
Securities
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Available-For-Sale Securities,
  at Amortized Cost
 
$
150,500

 
$
73,886

 
$
145,185

 
$
16,949

 
$
1,120

 
$
387,640

Available-For-Sale Securities,
  at Fair Value
 
151,527

 
74,095

 
149,510

 
16,756

 
1,245

 
393,133

Gross Unrealized Gains
 
1,049

 
217

 
4,325

 
19

 
125

 
5,735

Gross Unrealized Losses
 
22

 
9

 

 
212

 

 
243

Available-For-Sale Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
 
 
 
 
284,708

 
 
 
 
 
 
 
 
 
 
 
 
 
Maturities of Debt Securities,
  at Amortized Cost:
 
 
 
 
 
 
 
 
 
 
 
 
Within One Year
 
5,000

 
23,532

 
1,515

 
4,938

 
 
 
34,985

From 1 - 5 Years
 
145,500

 
48,471

 
122,340

 
11,010

 
 
 
327,321

From 5 - 10 Years
 

 
1,243

 
21,330

 

 
 
 
22,573

Over 10 Years
 

 
640

 

 
1,000

 
 
 
1,640

 
 
 
 
 
 
 
 
 
 
 
 
 
Maturities of Debt Securities,
  at Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
Within One Year
 
5,005

 
23,573

 
1,532

 
4,947

 
 
 
35,057

From 1 - 5 Years
 
146,522

 
48,638

 
125,850

 
11,009

 
 
 
332,019

From 5 - 10 Years
 

 
1,244

 
22,128

 

 
 
 
23,372

Over 10 Years
 

 
640

 

 
800

 
 
 
1,440


# 8



Available-For-Sale Securities
 
 
U.S. Agency
Obligations
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Mutual Funds
and Equity
Securities
 
Total
Available-
For-Sale
Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$

 
$

 
$

 
$

 
$

 
$

12 Months or Longer
 
13,937

 
6,581

 
22

 
5,702

 

 
26,242

Total
 
$
13,937

 
$
6,581

 
$
22

 
$
5,702

 
$

 
$
26,242

Number of Securities in a
  Continuous Loss Position
 
46

 
7

 
31

 
22

 

 
106

 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$

 
$

 
$

 
$

 
$

 
$

12 Months or Longer
 
22

 
9

 

 
212

 

 
243

Total
 
$
22

 
$
9

 
$

 
$
212

 
$

 
$
243

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Available-For-Sale Securities,
  at Amortized Cost
 
$
137,540

 
$
81,582

 
$
124,732

 
$
16,988

 
$
1,120

 
$
361,962

Available-For-Sale Securities,
  at Fair Value
 
137,603

 
81,730

 
128,827

 
16,725

 
1,254

 
366,139

Gross Unrealized Gains
 
208

 
187

 
4,100

 
7

 
134

 
4,636

Gross Unrealized Losses
 
145

 
39

 
5

 
270

 

 
459

Available-For-Sale Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
 
 
 
 
267,384

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
39,631

 
$
3,309

 
$
82

 
$

 
$

 
$
43,022

12 Months or Longer
 
28,020

 
14,035

 
1,546

 
10,738

 

 
54,339

Total
 
$
67,651

 
$
17,344

 
$
1,628

 
$
10,738

 
$

 
$
97,361

Number of Securities in a
  Continuous Loss Position
 
22

 
65

 
3

 
15

 

 
105

 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
48

 
$

 
$

 
$

 
$

 
$
48

12 Months or Longer
 
97

 
39

 
5

 
270

 

 
411

Total
 
$
145

 
$
39

 
$
5

 
$
270

 
$

 
$
459

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Available-For-Sale Securities,
  at Amortized Cost
 
$
121,477

 
$
125,165

 
$
160,023

 
$
17,115

 
$
1,120

 
$
424,900

Available-For-Sale Securities,
  at Fair Value
 
121,220

 
125,410

 
164,541

 
16,839

 
1,220

 
429,230

Gross Unrealized Gains
 
3

 
333

 
4,616

 
14

 
100

 
5,066

Gross Unrealized Losses
 
260

 
88

 
98

 
290

 

 
736

Available-For-Sale Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
 
 
 
 
329,039

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
50,778

 
$
17,937

 
$
10,613

 
$
5,868

 
$

 
$
85,196

12 Months or Longer
 
6,124

 
3,653

 
4,063

 
3,392

 

 
17,232

Total
 
$
56,902

 
$
21,590

 
$
14,676

 
$
9,260

 
$

 
$
102,428


# 9



Available-For-Sale Securities
 
 
U.S. Agency
Obligations
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Mutual Funds
and Equity
Securities
 
Total
Available-
For-Sale
Securities
Number of Securities in a
  Continuous Loss Position
 
16

 
87

 
9

 
13

 

 
125

 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
222

 
$
72

 
$
81

 
$
50

 
$

 
$
425

12 Months or Longer
 
38

 
16

 
17

 
240

 

 
311

Total
 
$
260

 
$
88

 
$
98

 
$
290

 
$

 
$
736



The following table is the schedule of Held-To-Maturity Securities at March 31, 2015, December 31, 2014 and March 31, 2014:
Held-To-Maturity Securities
 
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Total
Held-To
Maturity
Securities
March 31, 2015
 
 
 
 
 
 
 
 
Held-To-Maturity Securities,
  at Amortized Cost
 
$
195,951

 
$
108,224

 
$
1,000

 
$
305,175

Held-To-Maturity Securities,
  at Fair Value
 
200,578

 
110,922

 
1,000

 
312,500

Gross Unrealized Gains
 
4,753

 
2,698

 

 
7,451

Gross Unrealized Losses
 
126

 

 

 
126

Held-To-Maturity Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
285,132

 
 
 
 
 
 
 
 
 
Maturities of Debt Securities,
  at Amortized Cost:
 
 
 
 
 
 
 
 
Within One Year
 
35,926

 

 

 
35,926

From 1 - 5 Years
 
89,022

 
43,820

 

 
132,842

From 5 - 10 Years
 
67,708

 
64,404

 

 
132,112

Over 10 Years
 
3,295

 

 
1,000

 
4,295

 
 
 
 
 
 
 
 
 
Maturities of Debt Securities,
  at Fair Value:
 
 
 
 
 
 
 
 
Within One Year
 
35,968

 

 

 
35,968

From 1 - 5 Years
 
91,192

 
44,816

 

 
136,008

From 5 - 10 Years
 
70,047

 
66,106

 

 
136,153

Over 10 Years
 
3,371

 

 
1,000

 
4,371

 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$

 
$

 
$

 
$

12 Months or Longer
 
16,010

 

 

 
16,010

Total
 
$
16,010

 
$

 
$

 
$
16,010

Number of Securities in a
  Continuous Loss Position
 
585

 
7

 

 
592

 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$

 
$

 
$

 
$

12 Months or Longer
 
126

 

 

 
126

Total
 
$
126

 
$

 
$

 
$
126

 
 
 
 
 
 
 
 
 

# 10



Held-To-Maturity Securities
 
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Total
Held-To
Maturity
Securities
December 31, 2014
 
 
 
 
 
 
 
 
Held-To-Maturity Securities,
  at Amortized Cost
 
$
188,472

 
$
112,552

 
$
1,000

 
$
302,024

Held-To-Maturity Securities,
  at Fair Value
 
193,252

 
114,314

 
1,000

 
308,566

Gross Unrealized Gains
 
4,935

 
1,770

 

 
6,705

Gross Unrealized Losses
 
155

 
8

 

 
163

Held-To-Maturity Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
282,640

 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
2,143

 
$
4,581

 
$

 
$
6,724

12 Months or Longer
 
16,033

 

 

 
16,033

Total
 
$
18,176

 
$
4,581

 
$

 
$
22,757

Number of Securities in a
  Continuous Loss Position
 
74

 
1

 

 
75

 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
17

 
$
8

 
$

 
$
25

12 Months or Longer
 
138

 

 

 
138

Total
 
$
155

 
$
8

 
$

 
$
163

 
 
 
 
 
 
 
 

March 31, 2014
 
 
 
 
 
 
 
 
Held-To-Maturity Securities,
  at Amortized Cost
 
$
190,847

 
$
125,785

 
$
1,000

 
$
317,632

Held-To-Maturity Securities,
  at Fair Value
 
195,524

 
125,811

 
1,000

 
322,335

Gross Unrealized Gains
 
5,042

 
274

 

 
5,316

Gross Unrealized Losses
 
365

 
248

 

 
613

Held-To-Maturity Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
316,632

 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
19,696

 
$
43,049

 
$

 
$
62,745

12 Months or Longer
 
5,112

 

 

 
5,112

Total
 
$
24,808

 
$
43,049

 
$

 
$
67,857

Number of Securities in a
  Continuous Loss Position
 
86

 
17

 

 
103

 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
324

 
$
248

 
$

 
$
572

12 Months or Longer
 
41

 

 

 
41

Total
 
$
365

 
$
248

 
$

 
$
613

 
 
 
 
 
 
 
 


In the tables above, maturities of mortgage-backed-securities - residential are included based on their expected average lives.  Actual maturities will differ from the table below because issuers may have the right to call or prepay obligations with or without prepayment penalties.


# 11



In the available-for-sale category at March 31, 2015, U.S. agency obligations consisted solely of U.S. Government Agency securities with an amortized cost of $150.5 million and a fair value of $151.5 million. Mortgage-backed securities - residential consisted of U.S. Government Agency securities with an amortized cost of $34.1 million and a fair value of $35.0 million and government sponsored entity (GSE) securities with an amortized cost of $111.1 million and a fair value of $114.5 million. In the held-to-maturity category at March 31, 2015, mortgage-backed securities-residential consisted of U.S Government Agency securities with an amortized cost of $29.9 million and a fair value of $30.6 million and GSE securities with an amortized cost of $78.3 million and a fair value of $80.3 million.
In the available-for-sale category at December 31, 2014, U.S. agency obligations consisted solely of U.S. Government Agency securities with an amortized cost of $137.5 million and a fair value of $137.6 million. Mortgage-backed securities-residential consisted of U.S. Government Agency securities with an amortized cost of $23.0 million and a fair value of $23.6 million and GSE securities with an amortized cost of $101.7 million and a fair value of $105.2 million. In the held-to-maturity category at December 31, 2014, mortgage-backed securities-residential consisted of U.S. Government Agency securities with an amortized cost of $4.4 million and a fair value of $4.5 million and GSE securities with an amortized cost of $108.1 million and a fair value of $109.8 million.
In the available-for-sale category at March 31, 2014, U.S. agency obligations consisted solely of U.S. Government Agency securities with an amortized cost of $121.5 million and a fair value of $121.2 million. Mortgage-backed securities-residential consisted of US Government Agency securities with an amortized cost of $30.6 million and a fair value of $31.3 million and GSE securities with an amortized cost of $129.4 million and a fair value of $133.2 million. In the held-to-maturity category at March 31, 2014, mortgage-backed securities-residential consisted of U.S. Government Agency securities with an amortized cost of $4.8 million and a fair value of $4.8 million and GSE securities with an amortized cost of $121.0 million and a fair value of $121.0 million.
Securities in a continuous loss position, in the tables above for March 31, 2015, December 31, 2014 and March 31, 2014, do not reflect any deterioration of the credit worthiness of the issuing entities.  U.S. Agency issues, including agency-backed collateralized mortgage obligations and mortgage-backed securities, are all rated at least Aaa by Moody's or AA+ by Standard and Poor's.  The state and municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured. Obligations issued by school districts are supported by state aid.  For any non-rated municipal securities, credit analysis is performed in-house based upon data that has been submitted by the issuers to the NY State Comptroller. That analysis reflects satisfactory credit worthiness of the municipalities.  Corporate and other debt securities continue to be rated above investment grade according to Moody's and Standard and Poor's. Subsequent to March 31, 2015, and through the date of filing this report, there were no securities downgraded below investment grade.  
The unrealized losses on these temporarily impaired securities are primarily the result of changes in interest rates for fixed rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and/or changes in the level of prepayments for mortgage related securities.   Because we do not currently intend to sell any of our temporarily impaired securities, and because it is not more likely-than-not that we would be required to sell the securities prior to recovery, the impairment is considered temporary.



# 12



Note 3.    LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of March 31, 2015, December 31, 2014 and March 31, 2014 and an analysis of the recorded investment in loans that are past due at these dates.  Generally, Arrow considers a loan past due 30 or more days if the borrower is two or more payments past due.   Loans held-for-sale of $828, $398 and $502 as of March 31, 2015, December 31, 2014 and March 31, 2014, respectively, are included in the residential real estate balances for current loans.

 
 
 
 
Commercial
 
 
 
 
 
 
 
Commercial
 
Real Estate
 
Consumer
 
Residential
 
Total
March 31, 2015
 
 
 
 
 
 
 
 
 
Loans Past Due 30-59 Days
$
370

 
$
255

 
$
3,357

 
$
2,205

 
$
6,187

Loans Past Due 60-89 Days
48

 

 
428

 
519

 
995

Loans Past Due 90 or more Days
284

 
1,838

 
147

 
2,707

 
4,976

Total Loans Past Due
702

 
2,093

 
3,932

 
5,431

 
12,158

Current Loans
99,208

 
337,194

 
436,970

 
549,264

 
1,422,636

Total Loans
$
99,910

 
$
339,287

 
$
440,902

 
$
554,695

 
$
1,434,794

 
 
 
 
 
 
 
 
 
 
Loans 90 or More Days Past Due
  and Still Accruing Interest
$

 
$

 
$

 
$
580

 
$
580

Nonaccrual Loans
$
409

 
$
2,070

 
$
337

 
$
4,182

 
$
6,998

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Loans Past Due 30-59 Days
$
124

 
$
432

 
$
4,167

 
$
482

 
$
5,205

Loans Past Due 60-89 Days
154

 
7

 
1,225

 
1,495

 
2,881

Loans Past Due 90 or more Days
345

 
1,832

 
206

 
2,999

 
5,382

Total Loans Past Due
623

 
2,271

 
5,598

 
4,976

 
13,468

Current Loans
98,888

 
337,841

 
431,443

 
531,628

 
1,399,800

Total Loans
$
99,511

 
$
340,112

 
$
437,041

 
$
536,604

 
$
1,413,268

 
 
 
 
 
 
 
 
 
 
Loans 90 or More Days Past Due
  and Still Accruing Interest
$

 
$

 
$

 
$
537

 
$
537

Nonaccrual Loans
$
473

 
$
2,071

 
$
415

 
$
3,940

 
$
6,899

 
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
Loans Past Due 30-59 Days
$
597

 
$
1,381

 
$
2,714

 
$
2,026

 
$
6,718

Loans Past Due 60-89 Days
579

 
237

 
528

 
438

 
1,782

Loans Past Due 90 or more Days
29

 
1,785

 
150

 
2,244

 
4,208

Total Loans Past Due
1,205

 
3,403

 
3,392

 
4,708

 
12,708

Current Loans
88,671

 
333,464

 
405,012

 
470,568

 
1,297,715

Total Loans
$
89,876

 
$
336,867

 
$
408,404

 
$
475,276

 
$
1,310,423

 
 
 
 
 
 
 
 
 
 
Loans 90 or More Days Past Due
  and Still Accruing Interest
$

 
$

 
$

 
$
347

 
$
347

Nonaccrual Loans
$
182

 
$
2,042

 
$
372

 
$
3,687

 
$
6,283

    

The Company disaggregates its loan portfolio into the following four categories:

Commercial - The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. These loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, the Company may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees of the borrowers. In addition, the Company offers commercial construction and land development loans to finance projects, primarily within the communities that we serve. Many projects will ultimately be used by the borrowers’ businesses, while others are developed for resale. These real estate loans are secured by first liens on the real estate, which may include apartments,

# 13



commercial structures, housing businesses, healthcare facilities, and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.

Commercial Real Estate - The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner and non owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, the Company also offers commercial construction and land development loans to finance projects, primarily within the communities that we serve. Many projects will ultimately be used bye the borrowers' businesses, while others are developed for resale. These real estate loans are also secured by first liens on the real estate, which may include apartments, commercial structures, housing business, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.

Consumer Loans - The Company offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. Several loans are unsecured, which carry a higher risk of loss. Also included in this category are automobile loans. The Company primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed.

Residential Real Estate Mortgages - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. We originate adjustable-rate and fixed-rate one-to-four-family residential real estate loans for the construction, purchase or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in the Company’s market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. The Company’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is our general practice to underwrite our residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, the Company offers fixed home equity loans as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses.  Our policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed.  The Company originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate).  Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows.  A security interest, with title insurance when necessary, is taken in the underlying real estate.

Allowance for Loan Losses

The following table presents a roll-forward of the allowance for loan losses and other information pertaining to the allowance for loan losses:
Allowance for Loan Losses
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Commercial
 
Real Estate
 
Consumer
 
Residential
 
Unallocated
 
Total
Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
$
2,100

 
$
4,128

 
$
5,210

 
$
3,369

 
$
763

 
$
15,570

Charge-offs
(16
)
 

 
(185
)
 
(89
)
 

 
(290
)
Recoveries
7

 

 
63

 

 

 
70

Provision
72

 
(295
)
 
179

 
349

 
(30
)
 
275

March 31, 2015
$
2,163

 
$
3,833

 
$
5,267

 
$
3,629

 
$
733

 
$
15,625

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
$
1,886

 
$
3,962

 
$
4,478

 
$
3,026

 
$
1,082

 
$
14,434

Charge-offs
(123
)
 

 
(197
)
 
(16
)
 

 
(336
)
Recoveries
19

 

 
61

 

 

 
80

Provision
15

 
236

 
244

 
67

 
(104
)
 
458

March 31, 2014
$
1,797

 
$
4,198

 
$
4,586

 
$
3,077

 
$
978

 
$
14,636

 
 
 
 
 
 
 
 
 
 
 
 

# 14



Allowance for Loan Losses
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Commercial
 
Real Estate
 
Consumer
 
Residential
 
Unallocated
 
Total
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses - Loans Individually Evaluated for Impairment
$

 
$

 
$

 
$
149

 
$

 
$
149

Allowance for loan losses - Loans Collectively Evaluated for Impairment
$
2,163

 
$
3,833