Arrow Financial Earnings 2019-09-30

AROW 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Comparables ($MM TTM)
Ticker	M Cap	Assets	Liab	Rev	G Profit	Net Inc	EBITDA	EV	G Margin	EV/EBITDA	ROA
FLIC	527	4,202	3,811	2	0	42	92	818	0%	8.9	1%
FCBC	516	2,212	1,878	0	0	38	54	359		6.6	2%
IBCP	509	3,438	3,107	27	0	42	73	454	0%	6.2	1%
MOFG	495	4,662	4,174	0	0	32	79	748		9.4	1%
THFF	492	3,064	2,586	0	0	45	67	431		6.4	1%
MBIN	485	5,287	4,772	0	0	59	153	86		0.6	1%
AROW	479	3,006	2,721	0	0	36	68	416		6.1	1%
FISI	448	4,314	3,892	0	0	41	95	487		5.1	1%
OLBK	448	3,076	2,686	0	0	36	81	427		5.3	1%
CCBG	446	3,018	2,703	0	0	28	43	446		10.3	1%

10-Q 1 arowform10-qseptember2019.htm 10-Q Document

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 September 30, 2019

[ ] 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 October 31, 2019
Common Stock, par value $1.00 per share		14,976,493

ARROW FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

# 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)

	September 30, 2019			December 31, 2018			September 30, 2018
ASSETS
Cash and Due From Banks	$	65,882		$	56,529		$	57,385
Interest-Bearing Deposits at Banks	26,416			27,710			34,910
Investment Securities:
Available-for-Sale	314,182			317,535			340,411
Held-to-Maturity (Approximate Fair Value of $259,128 at September 30, 2019; $280,338 at December 31, 2018; and $282,719 at September 30, 2018)	255,095			283,476			289,952
Equity Securities	1,996			1,774			1,916
Other Investments	6,627			15,506			10,866
Loans	2,335,591			2,196,215			2,126,100
Allowance for Loan Losses	(20,931		)	(20,196		)	(20,003		)
Net Loans	2,314,660			2,176,019			2,106,097
Premises and Equipment, Net	40,228			30,446			28,601
Goodwill	21,873			21,873			21,873
Other Intangible Assets, Net	1,713			1,852			1,954
Other Assets	64,150			55,614			59,255
Total Assets	$	3,112,822		$	2,988,334		$	2,953,220
LIABILITIES
Noninterest-Bearing Deposits	$	516,876		$	472,768		$	490,469
Interest-Bearing Checking Accounts	801,446			790,781			899,547
Savings Deposits	929,691			818,048			758,727
Time Deposits over $250,000	96,770			73,583			76,226
Other Time Deposits	269,764			190,404			182,886
Total Deposits	2,614,547			2,345,584			2,407,855
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	72,869			54,659			62,503
Federal Home Loan Bank Overnight Advances	48,000			234,000			131,000
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	5,263			—			—
Other Liabilities	29,915			19,507			22,052
Total Liabilities	2,820,594			2,718,750			2,688,410
STOCKHOLDERS’ EQUITY
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2019; $5 Par Value and 1,000,000 Shares Authorized at December 31, 2018 and September 30, 2018	—			—			—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized at September 30, 2019 and 20,000,000 Shares Authorized at December 31, 2018 and September 30, 2018 (19,606,449 Shares Issued at September 30, 2019 and 19,035,565 at December 31, 2018 and September 30, 2018)	19,606			19,035			19,035
Additional Paid-in Capital	334,597			314,533			313,763
Retained Earnings	27,375			29,257			24,258
Unallocated ESOP Shares (5,151 Shares at September 30, 2019; 5,001 Shares at December 31, 2018 and 9,932 Shares at September 30, 2018)	(100		)	(100		)	(200		)
Accumulated Other Comprehensive Loss	(8,979		)	(13,810		)	(12,621		)
Treasury Stock, at Cost (4,632,657 Shares at September 30, 2019; 4,558,207 Shares at December 31, 2018 and 4,584,147 Shares at September 30, 2018)	(80,271		)	(79,331		)	(79,425		)
Total Stockholders’ Equity	292,228			269,584			264,810
Total Liabilities and Stockholders’ Equity	$	3,112,822		$	2,988,334		$	2,953,220

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 September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$	24,620		$	20,839	$	70,543		$	59,606
Interest on Deposits at Banks	182			182		572			474
Interest and Dividends on Investment Securities:
Fully Taxable	2,018			2,187		6,671			6,128
Exempt from Federal Taxes	1,132			1,287		3,606			4,295
Total Interest and Dividend Income	27,952			24,495		81,392			70,503
INTEREST EXPENSE
Interest-Bearing Checking Accounts	500			390		1,435			1,165
Savings Deposits	2,317			901		5,926			2,134
Time Deposits over $250,000	451			301		1,362			833
Other Time Deposits	1,255			370		3,099			911
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	28			15		75			47
Federal Home Loan Bank Advances	820			1,270		3,513			2,340
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	250			251		780			712
Interest on Financing Leases	28			—		71			—
Total Interest Expense	5,649			3,498		16,261			8,142
NET INTEREST INCOME	22,303			20,997		65,131			62,361
Provision for Loan Losses	518			586		1,445			1,961
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	21,785			20,411		63,686			60,400
NONINTEREST INCOME
Income From Fiduciary Activities	2,212			2,262		6,571			7,106
Fees for Other Services to Customers	2,623			2,605		7,570			7,555
Insurance Commissions	1,936			2,024		5,590			6,119
Net Gain on Securities Transactions	146			114		222			355
Net Gain on Sales of Loans	257			54		501			115
Other Operating Income	517			291		1,020			900
Total Noninterest Income	7,691			7,350		21,474			22,150
NONINTEREST EXPENSE
Salaries and Employee Benefits	10,015			9,771		29,061			28,952
Occupancy Expenses, Net	1,324			1,132		4,023			3,742
Technology and Equipment Expense	3,305			2,759		9,689			8,306
FDIC Assessments	(480		)	218		(56		)	658
Other Operating Expense	2,627			2,146		7,634			6,516
Total Noninterest Expense	16,791			16,026		50,351			48,174
INCOME BEFORE PROVISION FOR INCOME TAXES	12,685			11,735		34,809			34,376
Provision for Income Taxes	2,618			2,475		7,074			6,855
NET INCOME	$	10,067		$	9,260	$	27,735		$	27,521
Average Shares Outstanding ¹:
Basic	14,955			14,864		14,927			14,825
Diluted	14,991			14,956		14,968			14,914
Per Common Share:
Basic Earnings	$	0.67		$	0.62	$	1.86		$	1.85
Diluted Earnings	0.67			0.62		1.85			1.84

¹2018 Share and Per Share Amounts have been restated for the September 27, 2019 3% 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 September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Net Income	$	10,067	$	9,260		$	27,735	$	27,521
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Securities Holding Gains (Losses) Arising During the Period	499		(897		)	4,323		(4,017		)
Amortization of Net Retirement Plan Actuarial Loss	127		60			381		181
Amortization of Net Retirement Plan Prior Service Cost	42		20			127		60
Other Comprehensive Income (Loss)	668		(817		)	4,831		(3,776		)
Comprehensive Income	$	10,735	$	8,443		$	32,566	$	23,745

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)



	Nine-Month Period Ended September 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	—		—		27,735			—			—			—			27,735
Other Comprehensive Income	—		—		—			—			4,831			—			4,831
3% Stock Dividend (570,884 Shares)	571		17,737		(18,308		)	—			—			—			—
Cash Dividends Paid, $.757 per Share	—		—		(11,309		)	—			—			—			(11,309		)
Stock Options Exercised, Net (76,775 Shares)	—		802		—			—			—			838			1,640
Shares Issued Under the Directors’ Stock Plan (3,997 Shares)	—		86		—			—			—			44			130
Shares Issued Under the Employee Stock Purchase Plan (11,403 Shares)	—		236		—			—			—			124			360
Shares Issued for Dividend Reinvestment Plans (39,078 Shares)	—		911		—			—			—			422			1,333
Stock-Based Compensation Expense	—		292		—			—			—			—			292
Purchase of Treasury Stock (70,711 Shares)	—		—		—			—			—			(2,368		)	(2,368		)
Balance at September 30, 2019	$	19,606	$	334,597	$	27,375		$	(100	)	$	(8,979	)	$	(80,271	)	$	292,228

	Three-Month Period Ended September 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 June 30, 2019	$	19,035	$	316,229	$	39,397		$	(100	)	$	(9,647	)	$	(80,265	)	$	284,649
Net Income	—		—		10,067			—			—			—			10,067
Other Comprehensive Income	—		—		—			—			668			—			668
3% Stock Dividend (570,884 Shares)	571		17,737		(18,308		)	—			—			—			—
Cash Dividends Paid, $.252 per Share	—		—		(3,781		)	—			—			—			(3,781		)
Stock Options Exercised, Net (14,063 Shares)	—		164		—			—			—			151			315
Shares Issued Under the Employee Stock Purchase Plan (3,455 Shares)	—		73		—			—			—			37			110
Shares Issued for Dividend Reinvestment Plans (12,380 Shares)	—		296		—			—			—			133			429
Stock-Based Compensation Expense	—		98		—			—			—			—			98
Purchase of Treasury Stock (10,151 Shares)	—		—		—			—			—			(327		)	(327		)
Balance at September 30, 2019	$	19,606	$	334,597	$	27,375		$	(100	)	$	(8,979	)	$	(80,271	)	$	292,228

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)



	Nine-Month Period Ended September 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	—		—		27,521			—			—			—			27,521
Other Comprehensive Loss	—		—		—			—			(3,776		)	—			(3,776		)
Impact of the Adoption of ASU 2014-09	—		—		(102		)	—			—			—			(102		)
Impact of the Adoption of ASU 2016-01	—		—		331			—			(331		)	—			—
3% Stock Dividend (554,264 Shares)	554		21,126		(21,680		)	—			—			—			—
Cash Dividends Paid, $.716 per Share ¹	—		—		(10,630		)	—			—			—			(10,630		)
Stock Options Exercised, Net (91,979 Shares)	—		942		—			—			—			1,035			1,977
Shares Issued Under the Directors’ Stock Plan (2,705 Shares)	—		72		—			—			—			31			103
Shares Issued Under the Employee Stock Purchase Plan (10,801 Shares)	—		247		—			—			—			121			368
Shares Issued for Dividend Reinvestment Plans (35,947 Shares)	—		890		—			—			—			412			1,302
Stock-Based Compensation Expense	—		267		—			—			—			—			267
Purchase of Treasury Stock (50,697 Shares)	—		—		—			—			—			(1,823		)	(1,823		)
Balance at September 30, 2018	$	19,035	$	313,763	$	24,258		$	(200	)	$	(12,621	)	$	(79,425	)	$	264,810

	Three-Month Period Ended September 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 June 30, 2018	$	18,481	$	292,020	$	40,326		$	(200	)	$	(11,804	)	$	(79,335	)	$	259,488
Net Income	—		—		9,260			—			—			—			9,260
Other Comprehensive Loss	—		—		—			—			(817		)	—			(817		)
3% Stock Dividend (538,100 Shares)	554		21,126		(21,680		)	—			—			—			—
Cash Dividends Paid, $.245 per Share ¹	—		—		(3,648		)	—			—			—			(3,648		)
Stock Options Exercised, Net (12,978 Shares)	—		138		—			—			—			147			285
Shares Issued Under the Employee Stock Purchase Plan (3,188 Shares)	—		80		—			—			—			36			116
Shares Issued for Dividend Reinvestment Plans (11,642 Shares)	—		310		—			—			—			136			446
Stock-Based Compensation Expense	—		89		—			—			—			—			89
Purchase of Treasury Stock (10,688 Shares)	—		—		—			—			—			(409		)	(409		)
Balance at September 30, 2018	$	19,035	$	313,763	$	24,258		$	(200	)	$	(12,621	)	$	(79,425	)	$	264,810

¹ Cash dividends paid per share have been adjusted for the September 27, 2019 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

# 8

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)



	Nine Months Ended September 30,
Cash Flows from Operating Activities:	2019			2018
Net Income	$	27,735		$	27,521
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses	1,445			1,961
Depreciation and Amortization	3,994			3,576
Net Gain on Securities Transactions	(222		)	(355		)
Loans Originated and Held-for-Sale	(20,612		)	(3,378		)
Proceeds from the Sale of Loans Held-for-Sale	19,424			3,620
Net Gain on the Sale of Loans	(501		)	(115		)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	798			155
Contributions to Retirement Benefit Plans	(492		)	(524		)
Deferred Income Tax Benefit	(644		)	(389		)
Shares Issued Under the Directors’ Stock Plan	130			103
Stock-Based Compensation Expense	292			267
Tax Benefit from Exercise of Stock Options	199			205
Net Increase in Other Assets	(9,302		)	(1,030		)
Net Increase in Other Liabilities	10,480			1,980
Net Cash Provided By Operating Activities	32,724			33,597
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale	79,077			36,663
Purchases of Securities Available-for-Sale	(70,418		)	(84,746		)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity	31,161			49,721
Purchases of Securities Held-to-Maturity	(3,398		)	(4,506		)
Net Increase in Loans	(140,360		)	(176,607		)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	1,282			1,078
Purchase of Premises and Equipment	(6,698		)	(2,371		)
Proceeds from the Sale of a Subsidiary, Net	—			75
Net Decrease (Increase) in Other Investments	8,879			(917		)
Net Cash Used By Investing Activities	(100,475		)	(181,610		)
Cash Flows from Financing Activities:
Net Increase in Deposits	268,963			162,739
Net (Decrease) Increase in Short-Term Federal Home Loan Bank Borrowings	(186,000		)	26,000
Net Increase (Decrease) in Short-Term Borrowings	18,210			(2,463		)
Finance Lease Payments	(19		)	—
Repayments of Federal Home Loan Bank Term Advances	(15,000		)	(10,000		)
Purchase of Treasury Stock	(2,368		)	(1,823		)
Stock Options Exercised, Net	1,640			1,977
Shares Issued Under the Employee Stock Purchase Plan	360			368
Shares Issued for Dividend Reinvestment Plans	1,333			1,302
Cash Dividends Paid	(11,309		)	(10,630		)
Net Cash Provided By Financing Activities	75,810			167,470
Net Increase in Cash and Cash Equivalents	8,059			19,457
Cash and Cash Equivalents at Beginning of Period	84,239			72,838
Cash and Cash Equivalents at End of Period	$	92,298		$	92,295

Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	$	15,329		$	7,946
Income Taxes	7,131			7,493
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,530			606

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 September 30, 2019, December 31, 2018 and September 30, 2018; the results of operations for the three-and nine-month periods ended September 30, 2019 and 2018; the consolidated statements of comprehensive income for the three- and nine-month periods ended September 30, 2019 and 2018; the changes in stockholders' equity for the three-month and nine-month periods ended September 30, 2019 and 2018; and the cash flows for the nine-month periods ended September 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 nine 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 or to 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 was 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 was 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. The discount rate is determined for leases executed subsequent to the January 1, 2019 adoption date based on

# 10

the expected lease term using the secured borrowing rate from the Federal Home Loan Bank of New York as of the effective date of the lease.

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. In May 2019, the FASB issued ASU 2019-05 "Targeted Transition Relief," which allows entities to irrevocably elect the fair value option for certain financial assets measured at amortized cost, not including held-to-maturity investment securities which will continue to be measured at amortized cost. This will apply to those institutions that elect the fair value option on newly originated or purchased financial assets, to avoid the possibility of dual measurement methodologies for identical or similar financial assets.

Although 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, and reverting to an historic loss rate using the straight-line method over a two year reversion 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 adoption of this standard will change the way qualitative factors are determined as compared to the current methodology used under the incurred loss model. The Company has been evaluating various methodologies and data to determine the appropriate qualitative factor loss rates that are not included in the CECL total loss computation using the above-mentioned methods, losses from the reasonable and supportable forecast and reversion process. The Company continues to monitor new regulatory guidance and is updating relevant internal controls and processes. . 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" as part of its disclosure framework, and pursuant to which 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; and 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 or, 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 currently often expensed under US GAAP. For Arrow, the standard becomes effective at January 1, 2020. The Company does not expect that the adoption of this standard will have a material impact on its financial position or 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 September 30, 2019, December 31, 2018 and September 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
September 30, 2019
Available-For-Sale Securities, at Amortized Cost	$	5,003	$	965	$	306,374	$	1,000	$	313,342
Available-For-Sale Securities, at Fair Value	5,056		965		307,361		800		314,182
Gross Unrealized Gains	53		—		1,482		—		1,535
Gross Unrealized Losses	—		—		495		200		695
Available-For-Sale Securities, Pledged as Collateral									232,043

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	—	$	226	$	81	$	—	$	307
From 1 - 5 Years	5,003		299		184,202		—		189,504
From 5 - 10 Years	—		—		84,036		—		84,036
Over 10 Years	—		440		38,055		1,000		39,495

Maturities of Debt Securities, at Fair Value:
Within One Year	$	—	$	227	$	82	$	—	$	309
From 1 - 5 Years	5,056		299		185,197		—		190,552
From 5 - 10 Years	—		—		84,013		—		84,013
Over 10 Years	—		439		38,069		800		39,308

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	—	$	—	$	4,763	$	—	$	4,763
12 Months or Longer	—		—		114,483		800		115,283
Total	$	—	$	—	$	119,246	$	800	$	120,046
Number of Securities in a Continuous Loss Position	—		—		48		1		49

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	—	$	—	$	70	$	—	$	70
12 Months or Longer	—		—		425		200		625
Total	$	—	$	—	$	495	$	200	$	695

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	5,003
US Agency Obligations, at Fair Value	5,056
US Government Agency Securities, at Amortized Cost					$	64,455
US Government Agency Securities, at Fair Value					64,364
Government Sponsored Entity Securities, at Amortized Cost					241,919
Government Sponsored Entity Securities, at Fair Value					242,997

# 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
September 30, 2018
Available-For-Sale Securities, at Amortized Cost	$	60,135	$	2,545	$	284,236	$	1,000	$	347,916
Available-For-Sale Securities, at Fair Value	59,602		2,548		277,461		800		340,411
Gross Unrealized Gains	—		3		201		—		204
Gross Unrealized Losses	533		—		6,976		200		7,709
Available-For-Sale Securities, Pledged as Collateral									219,587

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	4,831	$	1,120	$	167,718	$	—	$	173,669
12 Months or Longer	54,771		—		71,433		800		127,004
Total	$	59,602	$	1,120	$	239,151	$	800	$	300,673
Number of Securities in a Continuous Loss Position	14		5		90		1		110

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	193	$	—	$	3,165	$	—	$	3,358
12 Months or Longer	340		—		3,811		200		4,351
Total	$	533	$	—	$	6,976	$	200	$	7,709

Disaggregated Details:
US Treasury Obligations, at Amortized Cost	$	—
US Treasury Obligations, at Fair Value	—
US Agency Obligations, at Amortized Cost	60,135
US Agency Obligations, at Fair Value	59,602
US Government Agency Securities, at Amortized Cost					$	74,160
US Government Agency Securities, at Fair Value					74,098
Government Sponsored Entity Securities, at Amortized Cost					210,076
Government Sponsored Entity Securities, at Fair Value					203,363

# 14

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



Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
September 30, 2019
Held-To-Maturity Securities, at Amortized Cost	$	215,661	$	39,434	$	255,095
Held-To-Maturity Securities, at Fair Value	219,296		39,832		259,128
Gross Unrealized Gains	3,669		408		4,077
Gross Unrealized Losses	34		10		44
Held-To-Maturity Securities, Pledged as Collateral					244,373

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	21,974	$	3,691	$	25,665
From 1 - 5 Years	112,660		35,743		148,403
From 5 - 10 Years	79,378		—		79,378
Over 10 Years	1,649		—		1,649

Maturities of Debt Securities, at Fair Value:
Within One Year	$	22,007	$	3,689	$	25,696
From 1 - 5 Years	114,246		36,143		150,389
From 5 - 10 Years	81,359		—		81,359
Over 10 Years	1,684		—		1,684

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	763	$	3,082	$	3,845
12 Months or Longer	6,764

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$0.00	15	$479

10-Q	2019-11-05	Quarter: 2019-09-30
10-Q	2019-08-05	Quarter: 2019-06-30
10-Q	2019-05-09	Quarter: 2019-03-31
10-K	2019-03-08	Annual: 2018-12-31
10-Q	2018-11-08	Quarter: 2018-09-30
10-Q	2018-08-08	Quarter: 2018-06-30
10-Q	2018-05-09	Quarter: 2018-03-31
10-K	2018-03-12	Annual: 2017-12-31
10-Q	2017-11-07	Quarter: 2017-09-30
10-Q	2017-08-08	Quarter: 2017-06-30
10-Q	2017-05-09	Quarter: 2017-03-31
10-K	2017-03-14	Annual: 2016-12-31
10-Q	2016-11-09	Quarter: 2016-09-30
10-Q	2016-08-09	Quarter: 2016-06-30
10-Q	2016-05-10	Quarter: 2016-03-31
10-K	2016-03-10	Annual: 2015-12-31
10-Q	2015-11-06	Quarter: 2015-09-30
10-Q	2015-08-06	Quarter: 2015-06-30
10-Q	2015-05-08	Quarter: 2015-03-31
10-K	2015-03-13	Annual: 2014-12-31
10-Q	2014-11-07	Quarter: 2014-09-30
10-Q	2014-08-06	Quarter: 2014-06-30
10-Q	2014-05-08	Quarter: 2014-03-31
10-K	2014-03-17	Annual: 2013-12-31
10-Q	2013-11-12	Quarter: 2013-09-30
10-Q	2013-08-07	Quarter: 2013-06-30
10-Q	2013-05-09	Quarter: 2013-03-31
10-K	2013-03-15	Annual: 2012-12-31
10-Q	2012-11-08	Quarter: 2012-09-30
10-Q	2012-08-09	Quarter: 2012-06-30
10-Q	2012-05-08	Quarter: 2012-03-31
10-K	2012-03-14	Annual: 2011-12-31
10-Q	2011-11-08	Quarter: 2011-09-30
10-Q	2011-08-08	Quarter: 2011-06-30
10-Q	2011-05-10	Quarter: 2011-03-31
10-K	2011-03-10	Annual: 2010-12-31
10-Q	2010-11-05	Quarter: 2010-09-30
10-Q	2010-08-04	Quarter: 2010-06-30
10-Q	2010-05-07	Quarter: 2010-03-31
10-K	2010-03-05	Annual: 2009-12-31

8-K	2020-01-28	Earnings, Exhibits
8-K	2019-10-30	Other Events, Exhibits
8-K	2019-10-22	Earnings, Exhibits
8-K	2019-08-28	Other Events, Exhibits
8-K	2019-07-31	Other Events, Exhibits
8-K	2019-07-22	Earnings, Exhibits
8-K	2019-06-03	Amend Bylaw, Exhibits
8-K	2019-05-08	Shareholder Vote
8-K	2019-04-24	Other Events, Exhibits
8-K	2019-04-23	Earnings, Exhibits
8-K	2019-02-04	Officers, Other Events, Exhibits
8-K	2019-01-29	Earnings, Exhibits
8-K	2018-10-31	Other Events, Exhibits
8-K	2018-10-22	Earnings, Exhibits
8-K	2018-08-29	Other Events, Exhibits
8-K	2018-07-25	Other Events, Exhibits
8-K	2018-07-23	Earnings, Exhibits
8-K	2018-04-25	Other Events, Exhibits
8-K	2018-04-25	Shareholder Vote
8-K	2018-04-23	Earnings, Exhibits
8-K	2018-02-06	Officers, Exhibits
8-K	2018-01-31	Other Events, Exhibits
8-K	2018-01-30	Earnings, Exhibits

EX-15	ex15awarenessletterseptemb.htm
EX-31.1	ex311ceoq32019.htm
EX-31.2	ex312cfoq32019.htm
EX-32	ex32906cert-q32019.htm



	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3. Quantitative and Qualitative Disclosures About Market Risk	71
Item 4. Controls and Procedures	71


PART II - OTHER INFORMATION
Item 1. Legal Proceedings	72
Item 1.A. Risk Factors	72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3. Defaults Upon Senior Securities	72
Item 4. Mine Safety Disclosures	72
Item 5. Other Information	73
Item 6. Exhibits	73

SIGNATURES	74