[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
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. 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.
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
September 30, 2018
December 31, 2017
September 30, 2017
ASSETS
Cash and Due From Banks
$
57,385
$
42,562
$
55,683
Interest-Bearing Deposits at Banks
34,910
30,276
24,983
Investment Securities:
Available-for-Sale
340,411
300,200
315,459
Held-to-Maturity (Approximate Fair Value of $282,719 at September 30, 2018; $335,901 at December 31, 2017; and $343,899 at September 30, 2017)
289,952
335,907
341,526
Equity Securities
1,916
—
—
Other Investments
10,866
9,949
6,704
Loans
2,126,100
1,950,770
1,908,799
Allowance for Loan Losses
(20,003
)
(18,586
)
(17,695
)
Net Loans
2,106,097
1,932,184
1,891,104
Premises and Equipment, Net
28,601
27,619
26,432
Goodwill
21,873
21,873
21,873
Other Intangible Assets, Net
1,954
2,289
2,395
Other Assets
59,255
57,606
58,303
Total Assets
$
2,953,220
$
2,760,465
$
2,744,462
LIABILITIES
Noninterest-Bearing Deposits
$
490,469
$
441,945
$
448,515
Interest-Bearing Checking Accounts
899,547
907,315
967,250
Savings Deposits
758,727
694,573
696,805
Time Deposits over $250,000
76,226
38,147
28,464
Other Time Deposits
182,886
163,136
166,082
Total Deposits
2,407,855
2,245,116
2,307,116
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
62,503
64,966
61,419
Federal Home Loan Bank Overnight Advances
131,000
105,000
33,000
Federal Home Loan Bank Term Advances
45,000
55,000
55,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts
20,000
20,000
20,000
Other Liabilities
22,052
20,780
23,279
Total Liabilities
2,688,410
2,510,862
2,499,814
STOCKHOLDERS’ EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized
—
—
—
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (19,035,565 Shares Issued at September 30, 2018; 18,481,301 at December 31, 2017 and 18,481,301 at September 30, 2017)
19,035
18,481
18,481
Additional Paid-in Capital
313,763
290,219
289,294
Retained Earnings
24,258
28,818
22,581
Unallocated ESOP Shares (9,932 Shares at September 30, 2018; 9,643 Shares at December 31, 2017 and 20,050 Shares at September 30, 2017)
(200
)
(200
)
(400
)
Accumulated Other Comprehensive Loss
(12,621
)
(8,514
)
(6,135
)
Treasury Stock, at Cost (4,584,147 Shares at September 30, 2018; 4,541,524 Shares at December 31, 2017 and 4,570,291 Shares at September 30, 2017)
(79,425
)
(79,201
)
(79,173
)
Total Stockholders’ Equity
264,810
249,603
244,648
Total Liabilities and Stockholders’ Equity
$
2,953,220
$
2,760,465
$
2,744,462
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 September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans
$
20,839
$
17,996
$
59,606
$
51,693
Interest on Deposits at Banks
182
104
474
242
Interest and Dividends on Investment Securities:
Fully Taxable
2,187
1,924
6,128
5,927
Exempt from Federal Taxes
1,287
1,575
4,295
4,660
Total Interest and Dividend Income
24,495
21,599
70,503
62,522
INTEREST EXPENSE
Interest-Bearing Checking Accounts
390
376
1,165
1,088
Savings Deposits
901
356
2,134
963
Time Deposits over $250,000
301
66
833
187
Other Time Deposits
370
241
911
702
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
15
13
47
29
Federal Home Loan Bank Advances
1,270
700
2,340
1,651
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts
251
197
712
564
Total Interest Expense
3,498
1,949
8,142
5,184
NET INTEREST INCOME
20,997
19,650
62,361
57,338
Provision for Loan Losses
586
800
1,961
1,580
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
20,411
18,850
60,400
55,758
NONINTEREST INCOME
Income From Fiduciary Activities
2,262
2,116
7,106
6,284
Fees for Other Services to Customers
2,605
2,453
7,555
6,875
Insurance Commissions
2,024
2,113
6,119
6,426
Net Gain on Securities
114
10
355
10
Net Gain on Sales of Loans
54
182
115
431
Other Operating Income
291
267
900
867
Total Noninterest Income
7,350
7,141
22,150
20,893
NONINTEREST EXPENSE
Salaries and Employee Benefits
9,771
9,382
28,952
27,740
Occupancy Expenses, Net
2,262
2,371
7,223
7,410
FDIC Assessments
218
225
658
679
Other Operating Expense
3,775
3,570
11,341
10,832
Total Noninterest Expense
16,026
15,548
48,174
46,661
INCOME BEFORE PROVISION FOR INCOME TAXES
11,735
10,443
34,376
29,990
Provision for Income Taxes
2,475
3,027
6,855
8,735
NET INCOME
$
9,260
$
7,416
$
27,521
$
21,255
Average Shares Outstanding 1:
Basic
14,431
14,305
14,393
14,306
Diluted
14,520
14,385
14,479
14,401
Per Common Share:
Basic Earnings
$
0.64
$
0.52
$
1.91
$
1.49
Diluted Earnings
0.64
0.52
1.90
1.48
1 2017 Share and Per Share Amounts have been restated for the September 27, 2018 3% 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 September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Net Income
$
9,260
$
7,416
$
27,521
$
21,255
Other Comprehensive Income, Net of Tax:
Net Unrealized Securities Holding Gains (Losses) Arising During the Period
(897
)
9
(4,017
)
465
Reclassification Adjustments for Securities Gains Included in Net Income
—
(6
)
—
(6
)
Amortization of Net Retirement Plan Actuarial Loss
60
64
181
245
Accretion of Net Retirement Plan Prior Service Credit
20
(2
)
60
(5
)
Other Comprehensive Income (Loss)
(817
)
65
(3,776
)
699
Comprehensive Income
$
8,443
$
7,481
$
23,745
$
21,954
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, 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, $.728 per Share
—
—
(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
Balance at December 31, 2016
$
17,943
$
270,880
$
28,644
$
(400
)
$
(6,834
)
$
(77,381
)
$
232,852
Net Income
—
—
21,255
—
—
—
21,255
Other Comprehensive Income
—
—
—
—
699
—
699
3% Stock Dividend (538,100 Shares)
538
16,661
(17,199
)
—
—
—
—
Cash Dividends Paid, $.707 per Share 1
—
—
(10,119
)
—
—
—
(10,119
)
Stock Options Exercised, Net (34,489 Shares)
—
335
—
—
—
399
734
Shares Issued Under the Directors’ Stock
Plan (3,927 Shares)
—
84
—
—
—
42
126
Shares Issued Under the Employee Stock
Purchase Plan (10,869 Shares)
—
230
—
—
—
121
351
Shares Issued for Dividend
Reinvestment Plans (37,525 Shares)
—
843
—
—
—
413
1,256
Stock-Based Compensation Expense
—
261
—
—
—
—
261
Purchase of Treasury Stock
(83,256 Shares)
—
—
—
—
—
(2,767
)
(2,767
)
Balance at September 30, 2017
$
18,481
$
289,294
$
22,581
$
(400
)
$
(6,135
)
$
(79,173
)
$
244,648
1 Cash dividends paid per share have been adjusted for the September 27, 2018 3% 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)
Nine Months Ended September 30,
Cash Flows from Operating Activities:
2018
2017
Net Income
$
27,521
$
21,255
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses
1,961
1,580
Depreciation and Amortization
3,576
4,247
Net Gains on the Sale of Securities Available-for-Sale
—
(10
)
Net Gain on Equity Securities
(355
)
—
Loans Originated and Held-for-Sale
(3,378
)
(14,890
)
Proceeds from the Sale of Loans Held-for-Sale
3,620
14,481
Net Gain on the Sale of Loans
(115
)
(431
)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets
155
197
Contributions to Retirement Benefit Plans
(524
)
(640
)
Deferred Income Tax Benefit
(389
)
(20
)
Shares Issued Under the Directors’ Stock Plan
103
126
Stock-Based Compensation Expense
267
261
Tax Benefit from Exercise of Stock Options
205
112
Net Increase in Other Assets
(1,030
)
(1,689
)
Net Increase in Other Liabilities
1,980
1,819
Net Cash Provided By Operating Activities
33,597
26,398
Cash Flows from Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale
—
10,015
Proceeds from the Maturities and Calls of Securities Available-for-Sale
36,663
43,617
Purchases of Securities Available-for-Sale
(84,746
)
(22,503
)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity
49,721
39,062
Purchases of Securities Held-to-Maturity
(4,506
)
(36,018
)
Net Increase in Loans
(176,607
)
(156,643
)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets
1,078
830
Purchase of Premises and Equipment
(2,371
)
(1,335
)
Proceeds from the Sale of a Subsidiary, Net
75
72
Net (Increase) Decrease in Other Investments
(917
)
4,208
Net Cash Used By Investing Activities
(181,610
)
(118,695
)
Cash Flows from Financing Activities:
Net Increase in Deposits
162,739
190,570
Net Increase (Decrease) in Short-Term Federal Home Loan Bank Borrowings
26,000
(90,000
)
Net Increase (Decrease) in Short-Term Borrowings
(2,463
)
25,583
Repayments of Federal Home Loan Bank Term Advances
(10,000
)
—
Purchase of Treasury Stock
(1,823
)
(2,767
)
Stock Options Exercised, Net
1,977
734
Shares Issued Under the Employee Stock Purchase Plan
368
351
Shares Issued for Dividend Reinvestment Plans
1,302
1,256
Cash Dividends Paid
(10,630
)
(10,119
)
Net Cash Provided By Financing Activities
167,470
115,608
Net Increase in Cash and Cash Equivalents
19,457
23,311
Cash and Cash Equivalents at Beginning of Period
72,838
57,355
Cash and Cash Equivalents at End of Period
$
92,295
$
80,666
Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings
$
7,946
$
5,168
Income Taxes
7,493
8,404
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets
606
1,055
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 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, 2018, December 31, 2017 and September 30, 2017; the results of operations for the three- and nine-month periods ended September 30, 2018 and 2017; the consolidated statements of comprehensive income for the three- and nine-month periods ended September 30, 2018 and 2017; the changes in stockholders' equity for the nine-month periods ended September 30, 2018 and 2017; and the cash flows for the nine-month periods ended September 30, 2018 and 2017. 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, 2017, included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2017.
Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in the first nine months of 2018:
ASU 2014-09 "Revenue from Contracts With Customers" (Topic 606) was adopted as of January 1, 2018. For additional information, see Revenue Recognition under Significant Accounting Policy Update in this Note.
ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" (Subtopic 825-10) significantly changed the income statement impact of equity investments. For Arrow, the standard became effective for the first quarter of 2018, and requires that equity investments be measured at fair value, with changes in fair value recognized in net income. The cumulative effect of the January 1, 2018 adoption was an increase to retained earnings of $331 thousand with a corresponding decrease to Accumulated Other Comprehensive Loss. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax. ASU 2016-01 also emphasized the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities not make use of a practicability exception in determining the fair value of loans. Accordingly, the Company refined the calculation used to determine the disclosed fair value of its loans as part of adopting this standard. See Note 9 to the unaudited interim consolidated financial statements titled Fair Value of Financial Instruments.
ASU 2016-15 "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments" (Topic 230) will reduce existing diversity in practice with respect to eight specific cash flow issues. Arrow adopted this ASU in the first quarter of 2018.
ASU 2017-01 "Business Combinations" (Topic 805) defines when a set of assets and activities constitutes a business for the purposes of determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update allow for a business to consist of inputs, processes, and the ability to create output. For Arrow, the standard became effective in the first quarter of 2018. This update had no effect on its accounting for acquisitions and dispositions of businesses.
ASU 2017-07 "Compensation-Retirement Benefits" (Topic 715) improves the presentation of net periodic pension cost and net periodic post-retirement benefit cost by requiring that an employer disaggregate the service cost component from the other components of net benefit cost. For Arrow, the standard became effective in the first quarter of 2018. In accordance with the practical expedient adoption method, for all periods presented Arrow used the amounts disclosed in the retirement plans footnote for the prior period retrospective reclassification of the non-service cost components from salaries and benefits to other operating expenses. The adoption of this change in accounting for pension costs did not have a material impact on its financial position or the results of operations.
ASU 2017-09 "Compensation-Stock Compensation" (Topic 718) provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance highlights the requirements for applying modification accounting and the exception criteria relating to changes in share-based payment terms. For Arrow, the standard became effective in the first quarter of 2018. The adoption of this change in accounting for share-based payment awards did not have a material impact on its financial position or the results of operations in periods subsequent to its adoption.
# 8
The following accounting standards have been issued and will become effective for the Company at a future date:
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. For a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. 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 will be January 1, 2019 for Arrow, through a cumulative-effect adjustment to the balance sheet, including retained earnings, as of January 1, 2019. Practical expedients may be elected that would not require Arrow to reassess whether an existing contract contains a lease, to reassess existing leases between operating leases and finance leases and to not reassess initial direct costs for any existing leases. If elected, these practical expedients must be applied together. An entity may also elect a practical expedient, which must 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. In addition, a lessor may make an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components and account for these components as a single lease component. Early adoption of this standard is permitted in any interim or annual period. The Company expects to adopt the new lease standard on January 1, 2019 through a cumulative-effect adjustment without revising prior comparative periods, and elect the practical expedients available to effectively account for leases commenced prior to the effective date. The Company expects assets and liabilities to increase between $7 million and $9 million at the January 1, 2019 adoption date, with no material impact to operating lease expense in its Consolidated Statements of Income.
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. For Arrow, the standard is effective for the first quarter of 2020 and early adoption is allowed in 2019. The Company plans on adopting the standard in the first quarter of 2020, in order to maximize the accumulation of data needed to calculate the new current expected credit loss ("CECL") methodologies. The ASU describes several acceptable methodologies for calculating expected losses on a loan or a pool of loans and requires additional disclosures. The initial adjustment will not be reported in earnings, but as the cumulative effect of a change in accounting principle. The FASB’s Transition Research Group for credit losses still has several outstanding unresolved questions, some of which may have a significant impact on CECL calculations. The Company continues its implementation efforts with the development and testing of various methods within its core model, developing forecast scenarios, monitoring of guidance interpretations and consideration of relevant internal controls and processes. This will likely have the effect of increasing the allowance for loan and lease losses and reducing shareholders' equity, the extent of which will depend upon the nature and characteristics of the Company's loan portfolio and economic conditions and forecasts at the adoption date. The Company expects to remain a well-capitalized financial institution under current regulatory calculations.
In January 2017, the FASB issued ASU 2017-04 "Intangibles-Goodwill and Other" (Topic 350) which simplifies the procedures for evaluating impairment of goodwill. Prior to the adoption of this standard, entities were required to perform procedures to determine the fair value of the underlying assets and liabilities for determining the fair value of assets and liabilities in a business combination. This additional step to impairment testing has been eliminated. Under this ASU, entities will perform goodwill impairment testing by comparing the fair value of a reporting unit to its carrying value. For Arrow, the standard becomes effective in the first quarter of 2019, however, early adoption is permitted. This amendment will not affect the assessment of goodwill impairment since the Company currently performs the analysis of comparing carrying value to fair value of its reporting units that have goodwill and the Company has not had to perform a Step 2 Impairment Test to date.
In March 2017, the FASB issued 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 GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For Arrow, the standard becomes effective in the first quarter of 2019. The Company does not expect that the adoption of this change in accounting for certain callable debt securities 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 2018-13 "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" which as part of its disclosure framework, the FASB has eliminated, amended and added disclosure requirements for fair value measurements. The following disclosure requirements were eliminated: Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy of the timing of transfers between levels of the fair value hierarchy; the valuation processes for Level 3 fair value measurements. For public companies such as Arrow, the following new disclosures will be required: Changes in unrealized gains and losses for the period included in other comprehensive income (OCI); the range and weighted average of significant unobservable inputs used; alternatively, a company may choose to disclose other quantitative information if it determines that it is a more reasonable and rational method that reflects the distribution of unobservable inputs used. For Arrow, the standard becomes effective in the first quarter of 2020. The Company does not expect that the adoption of this change in fair value disclosure will have a material impact on its financial position or the results of operations in periods subsequent to its adoption.
In August 2018, the FASB issued ASU 2018-14 "Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans" which applies to all companies that provide defined benefit pension or other postretirement benefit plans for their employees. Certain disclosure requirements have been eliminated such as reporting the amounts in accumulated other comprehensive income expected to
# 9
be recognized as components of net periodic benefit cost over the next year, and reporting the effects of a one-percentage-point change in the assumed healthcare cost trend rate on the aggregate of the service cost and interest cost components of net periodic benefit cost and on the benefit obligation for postretirement healthcare benefits. New required disclosures for reporting the weighted-average interest rate used to credit cash balance and similar plans that have a promised interest credit, the reasons for significant gains and losses affecting benefit obligations and other requirements for reporting aggregate information related to pension plans. For Arrow, the standard becomes effective at December 31, 2020. The Company does not expect that the adoption of this change affecting defined benefit plan disclosures will have a material impact on its financial position or the results of operations.
In August 2018, the FASB issued ASU 2018-15 "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" which will require companies to defer potentially significant, specified implementation costs incurred in a cloud computing arrangement that are often expensed under current US GAAP. For Arrow, the standard becomes effective at January 1, 2020. The Company is in the process of assessing the impact of this new accounting standard on its financial position and the results of operations in periods subsequent to its adoption.
Significant Accounting Policy Update:
Revenue Recognition - Accounting Standard Codification ("ASC") Topic 606, "Revenue from Contracts with Customers," establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle of Topic 606 requires an entity to recognize revenue in a way that depicts the transfer of goods or services promised to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services as performance obligations are satisfied.
The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective approach. The Company has determined that revenue from specific types of fiduciary activities and insurance commissions are within the scope of this guidance. Under prior GAAP, revenue from fiduciary activities was recognized from settling client estates over the time period the work was performed. With the adoption of Topic 606, revenue is now recognized when the performance obligation is completed, which is when the settlement of the client estate is closed. The impact of this change in revenue recognition was not material to the Company's consolidated financial statements. Under prior GAAP when clients elected to pay premiums on property and casualty insurance policies in installments, revenue was recognized when the premiums were billed. With the adoption of Topic 606, this type of revenue is recognized when the performance obligation is substantially completed, i.e., when the insurance policy is issued. The impact of this change in revenue recognition was not material to the Company's consolidated financial statements. The cumulative effect of the adoption of Topic 606 related to the previously described fiduciary activities and insurance commissions was a decrease in retained earnings by $102 thousand as of January 1, 2018.
The majority of the Company's revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities which are presented in its consolidated income statements as components of net interest income. The following is a description of principal activities from which the Company generates its revenue from noninterest income sources that are within the scope of ASC Topic 606:
Income from Fiduciary Activities: represents revenue derived mainly through the management of client investments which is based on the market value of the covered assets and the fee schedule contained in the applicable account management agreement. Since the revenue is mainly based on the market value of assets, this amount can be volatile as financial markets increase and decrease based on various economic factors. The terms of the account management agreements generally specify that the performance obligations are completed each quarter. Accordingly, the Company mainly recognizes revenue from fiduciary activities on a quarterly basis.
Fees for Other Services to Customers: represents general service fees for monthly deposit account maintenance and account activity plus fees from other deposit-based services. Revenue is recognized when the performance obligation is completed, which is generally on a monthly basis for account maintenance services, or upon the completion of a deposit-related transaction. Payment for these performance obligations is generally received at the time the performance obligations are satisfied.
Insurance Commissions: represents commissions and fees paid by insurance carriers for both property and casualty insurance policies, and for services performed for employment benefits clients. Revenue from the property and casualty insurance business is recognized when the performance obligation is satisfied, which is generally the effective date of the bound coverage since there are no significant performance obligations remaining. Revenue from the employment benefit brokerage business is recognized when the benefit servicing performance obligations are satisfied, generally on a monthly basis.
# 10
Note 2. INVESTMENT SECURITIES (In Thousands)
Management determines the appropriate classification of securities at the time of purchase. Securities reported as held-to-maturity are those debt securities which Arrow has both the positive intent and ability to hold to maturity and are stated at amortized cost. Securities available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income or loss, net of taxes. Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax.
The following table is the schedule of Available-For-Sale Securities at September 30, 2018, December 31, 2017 and September 30, 2017:
Available-For-Sale Securities
U.S. Government & Agency
Obligations
State and
Municipal
Obligations
Mortgage-
Backed
Securities
Corporate
and Other
Debt
Securities
Mutual Funds
and Equity
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
Maturities of Debt Securities,
at Amortized Cost:
Within One Year
$
42,621
$
1,346
$
1,024
$
—
$
44,991
From 1 - 5 Years
17,514
719
164,808
—
183,041
From 5 - 10 Years
—
—
103,597
—
103,597
Over 10 Years
—
480
14,807
1,000
16,287
Maturities of Debt Securities,
at Fair Value:
Within One Year
$
42,410
$
1,346
$
1,025
$
—
$
44,781
From 1 - 5 Years
17,192
722
158,846
—
176,760
From 5 - 10 Years
—
—
102,800
—
102,800
Over 10 Years
—
480
14,790
800
16,070
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
# 11
Available-For-Sale Securities
U.S. Government & Agency
Obligations
State and
Municipal
Obligations
Mortgage-
Backed
Securities
Corporate
and Other
Debt
Securities
Mutual Funds
and Equity
Securities
Total
Available-
For-Sale
Securities
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
December 31, 2017
Available-For-Sale Securities,
at Amortized Cost
$
60,328
$
10,351
$
229,077
$
1,000
$
1,120
$
301,876
Available-For-Sale Securities,
at Fair Value
59,894
10,349
227,596
800
1,561
300,200
Gross Unrealized Gains
—
9
485
—
441
935
Gross Unrealized Losses
434
11
1,966
200
—
2,611
Available-For-Sale Securities,
Pledged as Collateral,
at Fair Value
183,052
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months
$
20,348
$
8,498
$
70,930
$
—
$
—
$
99,776
12 Months or Longer
39,546
—
80,759
800
—
121,105
Total
$
59,894
$
8,498
$
151,689
$
800
$
—
$
220,881
Number of Securities in a
Continuous Loss Position
14
36
55
1
—
106
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months
$
172
$
11
$
363
$
—
$
—
$
546
12 Months or Longer
262
—
1,603
200
—
2,065
Total
$
434
$
11
$
1,966
$
200
$
—
$
2,611
Disaggregated Details:
US Treasury Obligations,
at Amortized Cost
$
—
US Treasury Obligations, at Fair Value
—
US Agency Obligations, at Amortized Cost
60,328
US Agency Obligations, at Fair Value
59,894
US Government Agency
Securities, at Amortized Cost
$
40,832
US Government Agency
Securities, at Fair Value
40,832
Government Sponsored Entity
Securities, at Amortized Cost
188,245
Government Sponsored Entity Securities, at Fair Value
186,764
# 12
Available-For-Sale Securities
U.S. Government & Agency
Obligations
State and
Municipal
Obligations
Mortgage-
Backed
Securities
Corporate
and Other
Debt
Securities
Mutual Funds
and Equity
Securities
Total
Available-
For-Sale
Securities
September 30, 2017
Available-For-Sale Securities,
at Amortized Cost
$
146,976
$
11,875
$
152,858
$
2,500
$
1,120
$
315,329
Available-For-Sale Securities,
at Fair Value
146,978
11,902
152,806
2,299
1,474
315,459
Gross Unrealized Gains
152
27
964
—
354
1,497
Gross Unrealized Losses
150
—
1,016
201
—
1,367
Available-For-Sale Securities,
Pledged as Collateral
206,637
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months
$
89,563
$
—
$
85,091
$
500
$
—
$
175,154
12 Months or Longer
—
—
—
1,800
—
1,800
Total
$
89,563
$
—
$
85,091
$
2,300
$
—
$
176,954
Number of Securities in a
Continuous Loss Position
23
—
31
3
—
57
Unrealized Losses on Securities
in a Continuous Loss Position:
Less than 12 Months
$
150
$
—
$
1,016
$
—
$
—
$
1,166
12 Months or Longer
—
—
—
201
—
201
Total
$
150
$
—
$
1,016
$
201
$
—
$
1,367
Disaggregated Details:
US Treasury Obligations, at Amortized Cost
$
64,711
US Treasury Obligations, at Fair Value
$
64,730
US Agency Obligations, at Amortized Cost
$
82,265
US Agency Obligations, at Fair Value
82,248
US Government Agency
Securities, at Amortized Cost
$
503
US Government Agency
Securities, at Fair Value
505
Government Sponsored Entity
Securities, at Amortized Cost
152,355
Government Sponsored Entity Securities, at Fair Value
152,301
# 13
The following table is the schedule of Held-To-Maturity Securities at September 30, 2018, December 31, 2017 and September 30, 2017:
Held-To-Maturity Securities
State and
Municipal
Obligations
Mortgage-
Backed
Securities
Corporate
and Other
Debt
Securities
Total
Held-To
Maturity
Securities
September 30, 2018
Held-To-Maturity Securities,
at Amortized Cost
$
239,367
$
50,585
$
—
$
289,952
Held-To-Maturity Securities,
at Fair Value
233,557
49,162
—
282,719
Gross Unrealized Gains
261
—
—
261
Gross Unrealized Losses
6,071
1,423
—
7,494
Held-To-Maturity Securities,
Pledged as Collateral
268,229
Maturities of Debt Securities,
at Amortized Cost:
Within One Year
$
19,381
$
—
$
—
$
19,381
From 1 - 5 Years
93,084
48,039
—
141,123
From 5 - 10 Years
124,277
2,546
—
126,823
Over 10 Years
2,625
—
—
2,625
Maturities of Debt Securities,
at Fair Value:
Within One Year
$
19,396
$
—
$
—
$
19,396
From 1 - 5 Years
92,199
46,688
—
138,887
From 5 - 10 Years
119,356
2,474
—
121,830
Over 10 Years
2,606
—
—
2,606
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months
$
95,944
$
46,375
$
—
$
142,319
12 Months or Longer
86,378
2,787
—
89,165
Total
$
182,322
$
49,162
$
—
$
231,484
Number of Securities in a
Continuous Loss Position
535
47
—
582
Unrealized Losses on Securities
in a Continuous Loss Position:
Less than 12 Months
$
1,443
$
1,303
$
—
$
2,746
12 Months or Longer
4,628
120
—
4,748
Total
$
6,071
$
1,423
$
—
$
7,494
Disaggregated Details:
US Government Agency
Securities, at Amortized Cost
$
3,147
US Government Agency
Securities, at Fair Value
2,222
Government Sponsored Entity
Securities, at Amortized Cost
47,438
Government Sponsored Entity Securities, at Fair Value
46,940
# 14
Held-To-Maturity Securities
State and
Municipal
Obligations
Mortgage-
Backed
Securities
Corporate
and Other
Debt
Securities
Total
Held-To
Maturity
Securities
December 31, 2017
Held-To-Maturity Securities,
at Amortized Cost
$
275,530
$
60,377
$
—
$
335,907
Held-To-Maturity Securities,
at Fair Value
275,353
60,548
—
335,901
Gross Unrealized Gains
1,691
269
—
1,960
Gross Unrealized Losses
1,868
98
—
1,966
Held-To-Maturity Securities,
Pledged as Collateral
318,622
Securities in a Continuous
Loss Position, at Fair Value:
Less than 12 Months
$
55,648
$
13,764
$
—
$
69,412
12 Months or Longer
65,152
3,257
—
68,409
Total
$
120,800
$
17,021
$
—
$
137,821
Number of Securities in a
Continuous Loss Position
352
14
—
366
Unrealized Losses on
Securities in a Continuous
Loss Position:
Less than 12 Months
$
442
$
56
$
—
$
498
12 Months or Longer
1,425
43
—
1,468
Total
$
1,867
$
99
$
—
$
1,966
Disaggregated Details:
US Government Agency
Securities, at Amortized Cost
$
2,680
US Government Agency
Securities, at Fair Value
2,661
Government Sponsored Entity
Securities, at Amortized Cost
57,697
Government Sponsored Entity Securities, at Fair Value