AROW Form 10-Q June 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 June 30, 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 July 31, 2015
Common Stock, par value $1.00 per share
 
12,629,444
 







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)
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
ASSETS
 
 
 
 
 
Cash and Due From Banks
$
31,438

 
$
35,081

 
$
35,351

Interest-Bearing Deposits at Banks
13,699

 
11,214

 
16,459

Investment Securities:
 
 
 
 
 
Available-for-Sale
391,817

 
366,139

 
366,848

Held-to-Maturity (Approximate Fair Value of $328,361 at June 30, 2015; $308,566 at December 31, 2014; and $304,259 at June 30, 2014)
324,116

 
302,024

 
297,437

Federal Home Loan Bank and Federal Reserve Bank Stock
6,470

 
4,851

 
4,583

Loans
1,479,670

 
1,413,268

 
1,344,124

Allowance for Loan Losses
(15,574
)
 
(15,570
)
 
(15,036
)
Net Loans
1,464,096

 
1,397,698

 
1,329,088

Premises and Equipment, Net
28,570

 
28,488

 
28,465

Goodwill
22,003

 
22,003

 
22,003

Other Intangible Assets, Net
3,369

 
3,625

 
3,865

Other Assets
47,793

 
46,297

 
48,952

Total Assets
$
2,333,371

 
$
2,217,420

 
$
2,153,051

LIABILITIES
 
 
 
 
 
Noninterest-Bearing Deposits
$
325,046

 
$
300,786

 
$
286,735

NOW Accounts
904,893

 
871,671

 
820,589

Savings Deposits
547,706

 
524,648

 
523,626

Time Deposits of $100,000 or More
58,284

 
61,797

 
70,600

Other Time Deposits
136,555

 
144,046

 
159,116

Total Deposits
1,972,484

 
1,902,948

 
1,860,666

Federal Funds Purchased and
  Securities Sold Under Agreements to Repurchase
24,273

 
19,421

 
16,896

Federal Home Loan Bank Overnight Advances
29,500

 
41,000

 
24,000

Federal Home Loan Bank Term Advances
55,000

 
10,000

 
10,000

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts
20,000

 
20,000

 
20,000

Other Liabilities
25,167

 
23,125

 
23,873

Total Liabilities
2,126,424

 
2,016,494

 
1,955,435

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 June 30, 2015 and December 31, 2014 and 16,744,486 Shares Issued June 30, 2014)
17,079

 
17,079

 
16,744

Additional Paid-in Capital
240,243

 
239,721

 
230,131

Retained Earnings
35,303

 
29,458

 
32,132

Unallocated ESOP Shares (58,606 Shares at June 30, 2015; 71,748 Shares at December 31, 2014; and 74,845 Shares at June 30, 2014)
(1,200
)
 
(1,450
)
 
(1,550
)
Accumulated Other Comprehensive Loss
(7,171
)
 
(7,166
)
 
(3,489
)
Treasury Stock, at Cost (4,397,740 Shares at June 30, 2015; 4,386,001 Shares at December 31, 2014; and 4,319,587 Shares at June 30, 2014)
(77,307
)
 
(76,716
)
 
(76,352
)
Total Stockholders’ Equity
206,947

 
200,926

 
197,616

Total Liabilities and Stockholders’ Equity
$
2,333,371

 
$
2,217,420

 
$
2,153,051

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME
 
 
 
 
 
 
 
Interest and Fees on Loans
$
13,939

 
$
13,202

 
$
27,589

 
$
25,976

Interest on Deposits at Banks
26

 
16

 
47

 
29

Interest and Dividends on Investment Securities:
 
 
 
 
 
 
 
Fully Taxable
2,013

 
2,041

 
3,957

 
4,049

Exempt from Federal Taxes
1,429

 
1,436

 
2,804

 
2,907

Total Interest and Dividend Income
17,407

 
16,695

 
34,397

 
32,961

INTEREST EXPENSE
 
 
 
 
 
 
 
NOW Accounts
338

 
495

 
668

 
959

Savings Deposits
182

 
226

 
349

 
445

Time Deposits of $100,000 or More
88

 
201

 
178

 
431

Other Time Deposits
185

 
359

 
387

 
750

Federal Funds Purchased and
  Securities Sold Under Agreements to Repurchase
5

 
5

 
10

 
9

Federal Home Loan Bank Advances
301

 
127

 
451

 
272

Junior Subordinated Obligations Issued to
  Unconsolidated Subsidiary Trusts
144

 
142

 
286

 
283

Total Interest Expense
1,243

 
1,555

 
2,329

 
3,149

NET INTEREST INCOME
16,164

 
15,140

 
32,068

 
29,812

Provision for Loan Losses
70

 
505

 
345

 
963

NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES
16,094

 
14,635

 
31,723

 
28,849

NONINTEREST INCOME
 
 
 
 
 
 
 
Income From Fiduciary Activities
2,051

 
1,906

 
3,984

 
3,779

Fees for Other Services to Customers
2,334

 
2,377

 
4,573

 
4,571

Insurance Commissions
2,367

 
2,293

 
4,506

 
4,737

Net Gain (loss) on Securities Transactions
16

 
(27
)
 
106

 
(27
)
Net Gain on Sales of Loans
120

 
166

 
252

 
289

Other Operating Income
556

 
304

 
879

 
556

Total Noninterest Income
7,444

 
7,019

 
14,300

 
13,905

NONINTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and Employee Benefits
8,186

 
7,880

 
15,878

 
15,522

Occupancy Expenses, Net
2,344

 
2,316

 
4,831

 
4,657

FDIC Assessments
296

 
282

 
576

 
555

Other Operating Expense
3,557

 
3,259

 
7,053

 
6,469

Total Noninterest Expense
14,383

 
13,737

 
28,338

 
27,203

INCOME BEFORE PROVISION FOR INCOME TAXES
9,155

 
7,917

 
17,685

 
15,551

Provision for Income Taxes
2,850

 
2,393

 
5,525

 
4,707

NET INCOME
$
6,305


$
5,524


$
12,160


$
10,844

Average Shares Outstanding:
 
 
 
 
 
 
 
Basic
12,633

 
12,595

 
12,633

 
12,599

Diluted
12,669

 
12,616

 
12,670

 
12,621

Per Common Share:
 
 
 
 
 
 
 
Basic Earnings
$
0.50

 
$
0.44

 
$
0.96

 
$
0.86

Diluted Earnings
0.50

 
0.44

 
0.96

 
0.86


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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net Income
$
6,305

 
$
5,524

 
$
12,160

 
$
10,844

Other Comprehensive Income, Net of Tax:
 
 
 
 
 
 
 
  Net Unrealized Securities Holding (Losses) Gains
     Arising During the Period
(1,014
)
 
514

 
(159
)
 
755

Reclassification Adjustments for Securities (Gains) Losses Included in Net Income
          
(10
)
 
16

 
(65
)
 
16

  Amortization of Net Retirement Plan Actuarial Loss
118

 
69

 
235

 
139

  Accretion of Net Retirement Plan Prior
     Service Credit
(9
)
 
(13
)
 
(16
)
 
(26
)
Other Comprehensive Income (Loss) Gain
(915
)
 
586

 
(5
)
 
884

  Comprehensive Income
$
5,390

 
$
6,110

 
$
12,155

 
$
11,728

 
 
 
 
 
 
 
 

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

 

 
12,160

 

 

 

 
12,160

Other Comprehensive Income

 

 

 

 
(5
)
 

 
(5
)
Cash Dividends Paid, $.50 per Share

 

 
(6,315
)
 

 

 

 
(6,315
)
Stock Options Exercised, Net  (3,027 Shares)

 
40

 

 

 

 
30

 
70

Shares Issued Under the Directors’ Stock
  Plan  (4,579 Shares)

 
73

 

 

 

 
45

 
118

Shares Issued Under the Employee Stock
  Purchase Plan  (9,775 Shares)

 
153

 

 

 

 
96

 
249

Stock-Based Compensation Expense

 
157

 

 

 

 

 
157

Purchase of Treasury Stock
  (29,120 Shares)

 

 

 

 

 
(762
)
 
(762
)
Allocation of ESOP Stock  (13,142 Shares)

 
99

 

 
250

 

 

 
349

Balance at June 30, 2015
$
17,079

 
$
240,243

 
$
35,303

 
$
(1,200
)
 
$
(7,171
)
 
$
(77,307
)
 
$
206,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
16,744

 
$
229,290

 
$
27,457

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

Net Income

 

 
10,844

 

 

 

 
10,844

Other Comprehensive Income

 

 

 

 
884

 

 
884

Cash Dividends Paid, $.49 per Share 1

 

 
(6,169
)
 

 

 

 
(6,169
)
Stock Options Exercised, Net  (21,565 Shares)

 
308

 

 

 

 
212

 
520

Shares Issued Under the Directors’ Stock
  Plan  (3,872 Shares)

 
63

 

 

 

 
38

 
101

Shares Issued Under the Employee Stock
  Purchase Plan  (9,713 Shares)

 
146

 

 

 

 
95

 
241

Stock-Based Compensation Expense

 
180

 

 

 

 

 
180

Tax Benefit for Disposition of Stock Options

 
9

 

 

 

 

 
9

Purchase of Treasury Stock
 (61,609 Shares)

 

 

 

 

 
(1,568
)
 
(1,568
)
Acquisition of Subsidiaries  (3,595 Shares)

 
56

 

 

 

 
35

 
91

Allocation of ESOP Stock  (12,796 Shares)

 
79

 

 
250

 

 

 
329

Balance at June 30, 2014
$
16,744

 
$
230,131

 
$
32,132

 
$
(1,550
)
 
$
(3,489
)
 
$
(76,352
)
 
$
197,616


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)
 
Six Months Ended June 30,
Cash Flows from Operating Activities:
2015
 
2014
Net Income
$
12,160

 
$
10,844

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 
 
 
Provision for Loan Losses
345

 
963

Depreciation and Amortization
3,266

 
3,854

Allocation of ESOP Stock
349

 
329

Gains on the Sale of Securities Available-for-Sale
(106
)
 

Losses on the Sale of Securities Available-for-Sale

 
27

Loans Originated and Held-for-Sale
(10,626
)
 
(9,723
)
Proceeds from the Sale of Loans Held-for-Sale
7,620

 
8,993

Net Gains on the Sale of Loans
(252
)
 
(289
)
Net Losses on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets
112

 
46

Contributions to Retirement Benefit Plans
(416
)
 
(465
)
Deferred Income Tax Expense (Benefit)
297

 
(180
)
Shares Issued Under the Directors’ Stock Plan
118

 
101

Stock-Based Compensation Expense
157

 
180

Net Increase in Other Assets
(1,777
)
 
(714
)
Net Increase in Other Liabilities
2,458

 
67

Net Cash Provided By Operating Activities
13,705

 
14,033

Cash Flows from Investing Activities:
 
 
 
Proceeds from the Sale of Securities Available-for-Sale
21,426

 
40,725

Proceeds from the Maturities and Calls of Securities Available-for-Sale
55,976

 
107,292

Purchases of Securities Available-for-Sale
(104,488
)
 
(57,515
)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity
30,084

 
37,435

Purchases of Securities Held-to-Maturity
(52,815
)
 
(36,380
)
Net Increase in Loans
(64,241
)
 
(77,926
)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets
820

 
918

Purchase of Premises and Equipment
(1,136
)
 
(618
)
Cash Paid for Subsidiaries, Net

 
(75
)
Net (Increase) Decrease in Other Investments
(1,619
)
 
1,698

Purchase of Bank Owned Life Insurance

 
(5,245
)
Net Cash (Used In) Provided By Investing Activities
(115,993
)
 
10,309

Cash Flows from Financing Activities:
 
 
 
Net Increase in Deposits
69,536

 
18,336

Net Decrease in Short-Term Borrowings
(36,148
)
 
(23,881
)
Federal Home Loan Bank Advances
74,500

 

Repayments of Federal Home Loan Bank Term Advances

 
(10,000
)
Purchase of Treasury Stock
(762
)
 
(1,568
)
Stock Options Exercised, Net
70

 
520

Shares Issued Under the Employee Stock Purchase Plan
249

 
241

Tax Benefit from Exercise of Stock Options

 
9

Cash Dividends Paid
(6,315
)
 
(6,169
)
Net Cash Provided By (Used In) Financing Activities
101,130

 
(22,512
)
Net (Decrease) Increase in Cash and Cash Equivalents
(1,158
)
 
1,830

Cash and Cash Equivalents at Beginning of Period
46,295

 
49,980

Cash and Cash Equivalents at End of Period
$
45,137

 
$
51,810

 
 
 
 
Supplemental Disclosures to Statements of Cash Flow Information:
 
 
 
Interest on Deposits and Borrowings
$
2,297

 
$
3,222

Income Taxes
4,860

 
4,485

Non-cash Investing and Financing Activity:
 
 
 
Transfer of Loans to Other Real Estate Owned and Repossessed Assets
756

 
932

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 June 30, 2015, December 31, 2014 and June 30, 2014; the results of operations for the three-month and six-month periods ended June 30, 2015 and 2014; the consolidated statements of comprehensive income for the three-month and six-month periods ended June 30, 2015 and 2014; the changes in stockholders' equity for the six-month periods ended June 30, 2015 and 2014; and the cash flows for the six-month periods ended June 30, 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 ten accounting standards updates, The standards listed below did not have 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.
ASU 2015-06 "Earnings Per Share" contains guidance that addresses master limited partnerships. For Arrow, the standard is effective for the first quarter of 2016.
ASU 2015-07 "Fair Value Measurement" permits a reporting entity to measure the fair value of certain investments using the net asset value per share of the investment. For Arrow, the standard is effective for the first quarter of 2016.
ASU 2015-08 "Business Combinations" amended various SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 115.
ASU 2015-10 "Technical Corrections and Improvements"

Note 2.    INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at June 30, 2015, December 31, 2014 and June 30, 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
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Available-For-Sale Securities,
  at Amortized Cost
 
$
156,248

 
$
59,230

 
$
154,501

 
$
16,910

 
$
1,120

 
$
388,009

Available-For-Sale Securities,
  at Fair Value
 
156,937

 
59,303

 
157,641

 
16,691

 
1,245

 
391,817

Gross Unrealized Gains
 
788

 
117

 
3,350

 
5

 
125

 
4,385

Gross Unrealized Losses
 
99

 
43

 
210

 
224

 

 
576

Available-For-Sale Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
 
 
 
 
289,418

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

 
9,179

 
11,037

 
4,926

 
 
 
25,142

From 1 - 5 Years
 
156,248

 
48,283

 
115,431

 
10,984

 
 
 
330,946

From 5 - 10 Years
 

 
1,168

 
27,948

 

 
 
 
29,116

Over 10 Years
 

 
600

 
84

 
1,000

 
 
 
1,684

 
 
 
 
 
 
 
 
 
 
 
 
 

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

 
9,194

 
11,357

 
4,930

 
 
 
25,481

From 1 - 5 Years
 
156,937

 
48,341

 
117,681

 
10,961

 
 
 
333,920

From 5 - 10 Years
 

 
1,168

 
28,513

 

 
 
 
29,681

Over 10 Years
 

 
600

 
90

 
800

 
 
 
1,490

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

 
$

 
$

 
$

 
$

 
$

12 Months or Longer
 
35,149

 
16,401

 
47,859

 
10,232

 

 
109,641

Total
 
$
35,149

 
$
16,401

 
$
47,859

 
$
10,232

 
$

 
$
109,641

Number of Securities in a
  Continuous Loss Position
 
10

 
71

 
1

 
14

 

 
96

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

 
$

 
$

 
$

 
$

 
$

12 Months or Longer
 
99

 
43

 
210

 
224

 

 
576

Total
 
$
99

 
$
43

 
$
210

 
$
224

 
$

 
$
576

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Available-For-Sale Securities,
  at Amortized Cost
 
$
92,328

 
$
102,456

 
$
148,672

 
$
17,065

 
$
1,120

 
$
361,641

Available-For-Sale Securities,
  at Fair Value
 
92,186

 
102,862

 
153,770

 
16,829

 
1,201

 
366,848

Gross Unrealized Gains
 
4

 
413

 
5,143

 
15

 
81

 
5,656

Gross Unrealized Losses
 
146

 
7

 
45

 
251

 

 
449

Available-For-Sale Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
 
 
 
 
228,990

 
 
 
 
 
 
 
 
 
 
 
 
 

# 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
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
42,888

 
$
2,860

 
$
8,740

 
$

 
$

 
$
54,488

12 Months or Longer
 
33,031

 
4,223

 
1,935

 
8,537

 

 
47,726

Total
 
$
75,919

 
$
7,083

 
$
10,675

 
$
8,537

 
$

 
$
102,214

Number of Securities in a
  Continuous Loss Position
 
24

 
24

 
8

 
12

 

 
68

 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
30

 
$

 
$
34

 
$

 
$

 
$
64

12 Months or Longer
 
116

 
7

 
11

 
251

 

 
385

Total
 
$
146

 
$
7

 
$
45

 
$
251

 
$

 
$
449



The following table is the schedule of Held-To-Maturity Securities at June 30, 2015, December 31, 2014 and June 30, 2014:
Held-To-Maturity Securities
 
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Total
Held-To
Maturity
Securities
June 30, 2015
 
 
 
 
 
 
 
 
Held-To-Maturity Securities,
  at Amortized Cost
 
$
219,878

 
$
103,238

 
$
1,000

 
$
324,116

Held-To-Maturity Securities,
  at Fair Value
 
223,031

 
104,330

 
1,000

 
328,361

Gross Unrealized Gains
 
3,737

 
1,201

 

 
4,938

Gross Unrealized Losses
 
583

 
109

 

 
692

Held-To-Maturity Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
300,040

 
 
 
 
 
 
 
 
 
Maturities of Debt Securities,
  at Amortized Cost:
 
 
 
 
 
 
 
 
Within One Year
 
19,962

 

 

 
19,962

From 1 - 5 Years
 
93,785

 
69,333

 

 
163,118

From 5 - 10 Years
 
91,364

 
33,905

 

 
125,269

Over 10 Years
 
14,767

 

 
1,000

 
15,767

 
 
 
 
 
 
 
 
 
Maturities of Debt Securities,
  at Fair Value:
 
 
 
 
 
 
 
 
Within One Year
 
19,972

 

 

 
19,972

From 1 - 5 Years
 
95,510

 
70,023

 

 
165,533

From 5 - 10 Years
 
92,802

 
34,308

 

 
127,110

Over 10 Years
 
14,747

 

 
1,000

 
15,747

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

 
$

 
$

 
$

12 Months or Longer
 
44,748

 
3,967

 

 
48,715

Total
 
$
44,748

 
$
3,967

 
$

 
$
48,715

Number of Securities in a
  Continuous Loss Position
 
157

 
1

 

 
158

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

 
$

 
$

 
$


# 10



Held-To-Maturity Securities
 
 
State and
Municipal
Obligations
 
Mortgage-
Backed
Securities -
Residential
 
Corporate
and Other
Debt
Securities
 
Total
Held-To
Maturity
Securities
12 Months or Longer
 
583

 
109

 

 
692

Total
 
$
583

 
$
109

 
$

 
$
692

 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 

June 30, 2014
 
 
 
 
 
 
 
 
Held-To-Maturity Securities,
  at Amortized Cost
 
$
174,888

 
$
121,549

 
$
1,000

 
$
297,437

Held-To-Maturity Securities,
  at Fair Value
 
180,211

 
123,048

 
1,000

 
304,259

Gross Unrealized Gains
 
5,473

 
1,533

 

 
7,006

Gross Unrealized Losses
 
150

 
34

 

 
184

Held-To-Maturity Securities,
  Pledged as Collateral
 
 
 
 
 
 
 
296,437

 
 
 
 
 
 
 
 
 
Securities in a Continuous
  Loss Position, at Fair Value:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
2,697

 
$
9,561

 
$

 
$
12,258

12 Months or Longer
 
13,839

 
1,194

 

 
15,033

Total
 
$
16,536

 
$
10,755

 
$

 
$
27,291

Number of Securities in a
  Continuous Loss Position
 
63

 
4

 

 
67

 
 
 
 
 
 
 
 
 
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
 
 
 
 
 
 
 
 
Less than 12 Months
 
$
29

 
$
27

 
$

 
$
56

12 Months or Longer
 
121

 
7

 

 
128

Total
 
$
150

 
$
34

 
$

 
$
184

 
 
 
 
 
 
 
 



# 11



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.
In the available-for-sale category at June 30, 2015, U.S. agency obligations consisted solely of U.S. Government Agency securities with an amortized cost of $156.2 million and a fair value of $156.9 million. Mortgage-backed securities - residential consisted of U.S. Government Agency securities with an amortized cost of $30.8 million and a fair value of $31.7 million and government sponsored entity (GSE) securities with an amortized cost of $123.7 million and a fair value of $126.0 million. In the held-to-maturity category at June 30, 2015, mortgage-backed securities-residential consisted of U.S Government Agency securities with an amortized cost of $28.8 million and a fair value of $29.0 million and GSE securities with an amortized cost of $74.5 million and a fair value of $75.4 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 June 30, 2014, U.S. agency obligations consisted solely of U.S. Government Agency securities with an amortized cost of $92.3 million and a fair value of $92.2 million. Mortgage-backed securities-residential consisted of US Government Agency securities with an amortized cost of $29.4 million and a fair value of $30.1 million and GSE securities with an amortized cost of $119.3 million and a fair value of $123.7 million. In the held-to-maturity category at June 30, 2014, mortgage-backed securities-residential consisted of U.S. Government Agency securities with an amortized cost of $4.6 million and a fair value of $4.7 million and GSE securities with an amortized cost of $116.9 million and a fair value of $118.3 million.
Securities in a continuous loss position, in the tables above for June 30, 2015, December 31, 2014 and June 30, 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 June 30, 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 June 30, 2015, December 31, 2014 and June 30, 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 $3,656, $398 and $1,084 a as of June 30, 2015, December 31, 2014 and June 30, 2014, respectively, are included in the residential real estate balances for current loans.
 
 
 
 
Commercial
 
 
 
 
 
 
 
Commercial
 
Real Estate
 
Consumer
 
Residential
 
Total
June 30, 2015
 
 
 
 
 
 
 
 
 
Loans Past Due 30-59 Days
$
109

 
$

 
$
3,355

 
$
265

 
$
3,729

Loans Past Due 60-89 Days
86

 

 
1,116

 
1,062

 
2,264

Loans Past Due 90 or more Days
382

 
2,600

 
195

 
2,846

 
6,023

Total Loans Past Due
577

 
2,600

 
4,666

 
4,173

 
12,016

Current Loans
94,756

 
351,195

 
450,213

 
571,490

 
1,467,654

Total Loans
$
95,333

 
$
353,795

 
$
454,879

 
$
575,663

 
$
1,479,670

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

 
$
883

 
$
21

 
$
666

 
$
1,570

Nonaccrual Loans
$
513

 
$
1,777

 
$
417

 
$
4,224

 
$
6,931

 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
 
Loans Past Due 30-59 Days
$
212

 
$

 
$
2,726

 
$
439

 
$
3,377

Loans Past Due 60-89 Days
575

 
443

 
817

 
1,441

 
3,276

Loans Past Due 90 or more Days
108

 
1,887

 
272

 
2,955

 
5,222

Total Loans Past Due
895

 
2,330

 
3,815

 
4,835

 
11,875

Current Loans
92,995

 
337,018

 
413,349

 
488,887

 
1,332,249

Total Loans
$
93,890

 
$
339,348

 
$
417,164

 
$
493,722

 
$
1,344,124

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

 
$
51

 
$
5

 
$
1,269

 
$
1,325

Nonaccrual Loans
$
164

 
$
2,079

 
$
473

 
$
3,469

 
$
6,185

    

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.


# 13



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 by 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 Quarterly Periods:
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
$
2,163

 
$
3,833

 
$
5,267