Company Quick10K Filing
Arrow Financial
Price33.43 EPS2
Shares15 P/E18
MCap501 P/FCF15
Net Debt-92 EBIT51
TEV409 TEV/EBIT8
TTM 2019-09-30, in MM, except price, ratios
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8-K 2018-01-30

AROW 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1. Accounting Policies
Note 2. Cash and Cash Equivalents (In Thousands)
Note 3. Investment Securities (In Thousands)
Note 4. Loans (In Thousands)
Note 5. Commitments and Contingencies (In Thousands)
Note 6. Comprehensive Income (In Thousands)
Note 7. Stock - Based Compensation (Dollars in Thousands, Except Share and per Share Amounts)
Note 8. Retirement Benefit Plans (Dollars in Thousands)
Note 9. Earnings per Common Share (In Thousands, Except per Share Amounts)
Note 10. Fair Values (Dollars in Thousands)
Note 11. Leases (Dollars in Thousands)
Note 12. Derivative Instruments and Hedging Activities (In Thousands)
Note 13. Covid - 19 Pandemic
Item 2.
Item 3.
Item 4.
Part II - Other Information
Item 1.
Item 1.A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
EX-15 ex15awarenessletterq12021.htm
EX-31.1 ex311ceoq12021.htm
EX-31.2 ex312cfoq12021.htm
EX-32 ex32906cert-q12021.htm

Arrow Financial Earnings 2021-03-31

Balance SheetIncome StatementCash Flow

arow-20210331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2021
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 York22-2448962
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

250 Glen StreetGlens FallsNew York12801
(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 ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per shareAROWNASDAQ 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. ☑ 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). 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 filerAccelerated filer
Non-accelerated filerSmaller 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    No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding as of April 30, 2021
Common Stock, par value $1.00 per share15,553,329



ARROW FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page

2


PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
 March 31,
2021
December 31,
2020
March 31,
2020
ASSETS  
Cash and Due From Banks$45,602 $42,116 $32,525 
Interest-Bearing Deposits at Banks406,605 338,875 106,004 
Investment Securities: 
Available-for-Sale at Fair Value464,089 365,287 378,186 
Held-to-Maturity (Approximate Fair Value of $221,360 at March 31, 2021; $226,576 at December 31, 2020; and $242,804 at March 31, 2020)
214,561 218,405 238,520 
Equity Securities1,796 1,636 1,689 
FHLB and Federal Reserve Bank Stock5,360 5,349 5,379 
Loans2,639,243 2,595,030 2,414,193 
Allowance for Credit Losses(26,840)(29,232)(23,637)
Net Loans2,612,403 2,565,798 2,390,556 
Premises and Equipment, Net43,057 42,612 40,987 
Goodwill21,873 21,873 21,873 
Other Intangible Assets, Net2,049 1,950 1,640 
Other Assets86,316 84,735 73,973 
Total Assets$3,903,711 $3,688,636 $3,291,332 
LIABILITIES  
Noninterest-Bearing Deposits$751,884 $701,341 $489,151 
Interest-Bearing Checking Accounts992,486 832,434 793,425 
Savings Deposits1,463,229 1,423,358 1,146,683 
Time Deposits over $250,000100,212 123,622 135,854 
Other Time Deposits145,777 153,971 245,892 
Total Deposits3,453,588 3,234,726 2,811,005 
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase6,795 17,486 57,909 
Federal Home Loan Bank Term Advances45,000 45,000 50,000 
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts20,000 20,000 20,000 
Finance Leases5,205 5,217 5,249 
Other Liabilities30,710 31,815 37,771 
Total Liabilities3,561,298 3,354,244 2,981,934 
STOCKHOLDERS’ EQUITY  
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at March 31, 2021, December 31, 2020 and March 31, 2020
   
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (20,194,474 Shares Issued at March 31, 2021 and December 31, 2020 and 19,606,449 at March 31, 2020)
20,194 20,194 19,606 
Additional Paid-in Capital354,358 353,662 336,021 
Retained Earnings51,263 41,899 37,441 
Accumulated Other Comprehensive Loss(3,096)(816)(2,412)
Treasury Stock, at Cost (4,651,719 Shares at March 31, 2021; 4,678,736 Shares at December 31, 2020 and 4,624,348 Shares at March 31, 2020)
(80,306)(80,547)(81,258)
Total Stockholders’ Equity342,413 334,392 309,398 
Total Liabilities and Stockholders’ Equity$3,903,711 $3,688,636 $3,291,332 
    See Notes to Unaudited Interim Consolidated Financial Statements.
3



ARROW FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended March 31
 20212020
INTEREST AND DIVIDEND INCOME  
Interest and Fees on Loans$25,183 $24,874 
Interest on Deposits at Banks85 124 
Interest and Dividends on Investment Securities:
Fully Taxable1,506 2,193 
Exempt from Federal Taxes920 1,035 
Total Interest and Dividend Income27,694 28,226 
INTEREST EXPENSE  
Interest-Bearing Checking Accounts219 487 
Savings Deposits565 2,471 
Time Deposits over $250,000120 533 
Other Time Deposits222 1,000 
Federal Funds Purchased and
  Securities Sold Under Agreements to Repurchase
2 22 
Federal Home Loan Bank Advances193 429 
Junior Subordinated Obligations Issued to
  Unconsolidated Subsidiary Trusts
169 228 
Interest on Financing Leases49 50 
Total Interest Expense1,539 5,220 
NET INTEREST INCOME26,155 23,006 
Provision for Credit Losses(648)2,772 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES26,803 20,234 
NONINTEREST INCOME  
Income From Fiduciary Activities2,378 2,213 
Fees for Other Services to Customers2,609 2,451 
Insurance Commissions1,640 1,632 
Net Gain (Loss) on Securities160 (374)
Net Gain on Sales of Loans1,415 213 
Other Operating Income406 1,559 
Total Noninterest Income8,608 7,694 
NONINTEREST EXPENSE  
Salaries and Employee Benefits11,138 10,383 
Occupancy Expenses, Net1,593 1,449 
Technology and Equipment Expense3,459 3,352 
FDIC Assessments270 219 
Other Operating Expense2,218 2,351 
Total Noninterest Expense18,678 17,754 
INCOME BEFORE PROVISION FOR INCOME TAXES16,733 10,174 
Provision for Income Taxes3,453 2,047 
NET INCOME$13,280 $8,127 
Average Shares Outstanding 1:
  
Basic15,528 15,446 
Diluted15,563 15,476 
Per Common Share:  
Basic Earnings$0.86 $0.53 
Diluted Earnings0.85 0.53 

    1 2020 Share and Per Share Amounts have been restated for the September 25, 2020 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 March 31
20212020
Net Income$13,280 $8,127 
Other Comprehensive (Loss) Income, Net of Tax:
  Net Unrealized Securities Holding (Loss) Gain
  Arising During the Period
(3,812)4,098 
  Net Unrealized Gain (Loss) on Cash Flow Hedge
  Agreements
1,475 (219)
  Reclassification of Net Unrealized Gain on Cash
  Flow Hedge Agreements to Interest Expense
(20) 
  Amortization of Net Retirement Plan Actuarial Loss34 27 
  Amortization of Net Retirement Plan Prior Service Cost 43 39 
Other Comprehensive (Loss) Income(2,280)3,945 
  Comprehensive Income$11,000 $12,072 

    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)

Three Month Period Ended March 31, 2021
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumu-lated
Other Com-
prehensive
Loss
Treasury
Stock
Total
Balance at December 31, 2020$20,194 $353,662 $41,899 $(816)$(80,547)$334,392 
Cumulative impact of adoption of ASU 2016-13120120 
Balance at January 1, 2021 as adjusted for impact of adoption of ASU 2016-1320,194 353,662 42,019 (816)(80,547)334,512 
Net Income— — 13,280 — — 13,280 
Other Comprehensive Income— — — (2,280)— (2,280)
Cash Dividends Paid, $.260 per Share
— — (4,036)— — (4,036)
Stock Options Exercised, Net  (6,927 Shares)
— 94 — — 62 156 
Shares Issued Under the Directors’ Stock
  Plan  (3,172 Shares)
— 70 — — 28 98 
Shares Issued Under the Employee Stock
  Purchase Plan  (4,269 Shares)
— 86 — — 38 124 
Shares Issued for Dividend
  Reinvestment Plans (12,649 Shares)
— 342 — — 113 455 
Stock-Based Compensation Expense— 104 — — — 104 
Balance at March 31, 2021$20,194 $354,358 $51,263 $(3,096)$(80,306)$342,413 
Three Month Period Ended March 31, 2020
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumu-lated
Other Com-
prehensive
Loss
Treasury
Stock
Total
Balance at December 31, 2019$19,606 $335,355 $33,218 $(6,357)$(80,094)$301,728 
Net Income— — 8,127 — — 8,127 
Other Comprehensive Income— — — 3,945 — 3,945 
Cash Dividends Paid, $.252 per Share 1
— — (3,904)— — (3,904)
Stock Options Exercised, Net (14,282 Shares)
— 199 — — 144 343 
Shares Issued Under the Employee Stock
  Purchase Plan  (3,648 Shares)
— 84 — — 37 121 
Shares Issued for Dividend
  Reinvestment Plans (16,001 Shares)
— 280 — — 162 442 
Stock-Based Compensation Expense— 103 — — — 103 
Purchase of Treasury Stock
 (50,021 Shares)
— — — — (1,507)(1,507)
Balance at March 31, 2020$19,606 $336,021 $37,441 $(2,412)$(81,258)$309,398 

1 Cash dividends paid per share have been adjusted for the September 25, 2020 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)
Three Months Ended March 31,
Cash Flows from Operating Activities:20212020
Net Income$13,280 $8,127 
Provision for Credit Losses(648)2,772 
Depreciation and Amortization1,951 1,597 
Net (Gain) Loss on Securities Transactions(160)374 
Loans Originated and Held-for-Sale(24,037)(9,322)
Proceeds from the Sale of Loans Held-for-Sale32,093 7,975 
Net Gain on the Sale of Loans(1,415)(213)
Net Loss (Gain) on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets90 (91)
Contributions to Retirement Benefit Plans(146)(195)
Deferred Income Tax Expense (Benefit) 349 (873)
Shares Issued Under the Directors’ Stock Plan98  
Stock-Based Compensation Expense104 103 
Tax Benefit from Exercise of Stock Options13 28 
Net Increase in Other Assets(3,077)(5,719)
Net Increase in Other Liabilities1,624 8,563 
Net Cash Provided By Operating Activities20,119 13,126 
Cash Flows from Investing Activities:
Proceeds from the Maturities and Calls of Securities Available-for-Sale25,977 17,444 
Purchases of Securities Available-for-Sale(130,481)(33,201)
Proceeds from the Maturities and Calls of Securities Held-to-Maturity4,291 7,075 
Purchases of Securities Held-to-Maturity(619)(717)
Net Increase in Loans(51,866)(27,317)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets259 781 
Purchase of Premises and Equipment(1,311)(1,072)
Net (Increase) Decrease in FHLB and Federal Reserve Bank Stock(11)4,938 
Net Cash Used By Investing Activities(153,761)(32,069)
Cash Flows from Financing Activities:
Net Increase in Deposits218,862 194,951 
Net Decrease in Short-Term Federal Home Loan Bank Borrowings (130,000)
Net (Decrease) Increase in Short-Term Borrowings(10,691)6,810 
Finance Lease Payments(12)(5)
Federal Home Loan Bank Advances 40,000 
Repayments of Federal Home Loan Bank Term Advances (20,000)
Purchase of Treasury Stock (1,507)
Stock Options Exercised, Net156 343 
Shares Issued Under the Employee Stock Purchase Plan124 121 
Shares Issued for Dividend Reinvestment Plans455 442 
Cash Dividends Paid(4,036)(3,904)
Net Cash Provided By Financing Activities204,858 87,251 
Net Increase in Cash and Cash Equivalents71,216 68,308 
Cash and Cash Equivalents at Beginning of Period380,991 70,221 
Cash and Cash Equivalents at End of Period$452,207 $138,529 
Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings$1,626 $5,264 
Income Taxes 344 
Non-cash Investing and Financing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets349 371 

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 March 31, 2021, December 31, 2020 and March 31, 2020; the results of operations for the three month periods ended March 31, 2021 and 2020; the consolidated statements of comprehensive income for the three month periods ended March 31, 2021 and 2020; the changes in stockholders' equity for the three month periods ended March 31, 2021 and 2020; and the cash flows for the three month periods ended March 31, 2021 and 2020. All such adjustments are of a normal recurring nature. 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, 2020 included in Arrow's Annual Report on Form 10-K for the year ended December 31, 2020.

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 (US GAAP) 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.  Due to the uncertainty regarding the impact of the COVID-19 pandemic, management utilized estimates and assumptions in its evaluation of potential impairment of Arrow's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for credit losses. Other estimates include the fair value of financial statements, evaluation of pension and other post-retirement liabilities, an analysis of a need for a valuation allowance for deferred tax assets and a reserve for unfunded loan commitments recorded as an other liability. 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 credit losses.  In connection with the determination of the allowance for credit losses management obtains economic forecasts from reliable sources and appraisals for properties.  The allowance for credit losses is management’s best estimate of the life of loan losses as of the balance sheet date.  While management uses available information to recognize losses on loans, future adjustments to the allowance for credit losses may be necessary based on changes in economic conditions.

Allowance for Credit Losses – Loans
Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required the recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.
Management estimates the allowance balance using relevant available information from internal and external sources related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in credit concentrations, delinquency level, collateral values and underwriting standards as well as changes in economic conditions or other relevant factors. Management judgment is required at each point in the measurement process.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed portfolio segments for estimating loss based on type of borrower and collateral as follows:

Commercial Loans
Commercial Real Estate Loans
Consumer Loans
Residential Loans

Further details related to loan portfolio segments is included in Note 4 Loans.
Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses. The Company utilized regression analyses of peer data, of which the Company is included, where observed credit losses and selected economic factors were utilized to determine suitable loss drivers for modeling lifetime probability of default ("PD") rates. Arrow uses the discounted cash flow ("DCF") method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, PD, and segment-specific loss given default ("LGD") risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions.
8


For the loan segments utilizing the DCF method, (commercial, commercial real estate, and residential) management utilizes externally developed economic forecasts of the following economic factors as loss drivers: national unemployment, gross domestic product and home price index ("HPI"). The economic forecast is applied over a reasonable and supportable forecast period. Arrow utilizes a six quarter reasonable and supportable forecast period with a four quarter reversion to the historic mean on a straight-line basis.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (“TDR”) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Arrow.
Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. The vintage method was selected since the loans within the consumer loan segment are homogeneous, not just by risk characteristic, but loan structure. The loss rate is applied to the loan origination amounts. Arrow maintains, over the life of the loan, the loss curve by vintage year. If estimated losses computed by the vintage method need to be adjusted based on current conditions and the reasonable and supportable economic forecast, these adjustments may be incorporated over a six quarter reasonable and supportable forecast period, reverting to historical losses using a straight-line method over a two year period.
The vintage and DCF models also consider the need to qualitatively adjust expected loss estimates for information not already captured in the quantitative loss estimation process. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components or the portfolio; the experience, ability and depth of lending management and staff; the Company’s credit review system; and the effect of external factors; such as competition, legal and regulatory requirements. These qualitative factor adjustments may increase or decrease the Company's estimate of expected credit losses so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
All loans not included in the vintage analysis method that exceed $250,000 which are on nonaccrual, are evaluated on an individual basis. For collateral dependent financial assets where Arrow has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and Arrow expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, Arrow has elected a practical expedient to measure the allowance for credit loss as the difference between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. In the event where the repayment of a collateral dependent financial asset is expected to be provided substantially through the operating of the collateral, Arrow will use fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Except as set forth below, a loan that has been modified or renewed is considered a TDR when two conditions are met:
The borrower is experiencing financial difficulty, and
Concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.
Arrow's allowance for credit losses reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point it is determined that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required allowance for credit losses. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in Arrow's existing pools based on the underlying risk characteristics of the loan to measure the allowance for credit losses. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and ASC Subtopic 310-40, as extended by the Consolidated Appropriations Act, 2021, if a qualifying loan modification was made for a borrower as the result of the COVID-19 pandemic, this modification was not considered a TDR.

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities
The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures recognized in other liabilities, is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate the estimated credit losses on off-balance sheet credit exposures recognized as other liabilities.

Allowance for Credit Losses – Held to Maturity ("HTM") Debt Securities
Arrow's HTM debt securities are also required to utilize the CECL approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as financial asset type and collateral type adjusted for current conditions and reasonable and supportable
9


forecasts. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.
The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore, the Company did not record a credit loss for these securities.
State and municipal bonds carry an investment grade from an accredited ratings agency, primarily with an investment grade rating. In addition, the Company has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and utilized a municipal loss forecast model for determining PD and LGD rates. Management may exercise discretion to make adjustments based on environmental factors. A calculated expected credit loss for individual securities was determined using the PD and LGD rates. Arrow determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded.

Allowance for Credit Losses – Available for Sale ("AFS") Debt Securities
The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities since AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows are estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Accrued Interest Receivable
Upon adoption of CECL on January 1, 2021, the Company made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within the other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued the Company's policy to write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. Historically, the Company has not experienced uncollectible accrued interest receivable on investment securities.

The following accounting standards have been adopted in the first three months of 2021:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto. ASU 2016-13 introduces new guidance that make substantive changes to the accounting for credit losses. ASU 2016-13 introduces the CECL model, which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses. ASU 2016-13 also modifies certain provisions of the current other-than-temporary impairment model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security’s amortized cost basis and its fair value and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. ASU 2016-13 also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. ASU 2016-13 requires expanded disclosures including, but not limited to, (1) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management’s estimate and the reasons for those changes, (2) financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (3) a rollforward of the allowance for credit losses for HTM and AFS securities. The standard also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 was effective for the Company on January 1, 2020. As permitted by the CARES Act, Arrow deferred the adoption of the CECL methodology in determining credit losses until January 1, 2021. Management expects that the CECL model may create more volatility in the level of our allowance for loan losses from quarter to quarter as changes in the level of allowance for loan losses will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality.
Arrow adopted CECL on January 1, 2021 (“Day 1”) using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures recognized as other liabilities. Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $120,000 as of January 1, 2021 for the cumulative effect of adopting ASC 326. The transition adjustment includes a $1.3 million decrease to the allowance for credit losses on loans, a $1.1 million increase to the estimated credit losses on off-balance sheet credit exposures recorded as other liabilities, and a $41,000 impact to the deferred tax liability. The Company did not record an allowance for HTM debt securities on January 1, 2021 as the amount of credit risk was deemed immaterial. The Company did not record an allowance for credit losses on its AFS debt securities under the
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newly codified AFS debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. Refer to Note 3 Investment Securities and Note 4 Loans (under the captions "Allowance for Credit Losses" and "Loan Credit Quality Indicators") to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q for more information.
In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes" (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. Arrow adopted this standard on January 1, 2021. 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.

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Note 2. CASH AND CASH EQUIVALENTS (In Thousands)

The following table is the schedule of Cash and Cash Equivalents at March 31, 2021, December 31, 2020 and March 31, 2020.
March 31, 2021December 31, 2020March 31, 2020
Cash and Due From Banks$45,602 $42,116 $32,525 
Interest-Bearing Deposits at Banks406,605 338,875 106,004 
Total Cash and Cash Equivalents$452,207 380,991 138,529 
Supplemental Information:
Total required reserves, including vault cash and Federal Reserve Bank deposits 1
$ $ $ 
Restricted cash pledged as collateral related to swap agreements and included in Cash and Due From Banks $ $500 $ 
1.
Until March 2020, Arrow was required to maintain reserve balances with the Federal Reserve Bank of New York. In March 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent to free up liquidity in the banking industry to support lending to households and businesses.
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Note 3.    INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at March 31, 2021, December 31, 2020 and March 31, 2020:
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
March 31, 2021
Available-For-Sale Securities,
  at Amortized Cost
$110,001 $508 $349,911 $1,000 $461,420 
Gross Unrealized Gains138  6,276  6,414 
Gross Unrealized Losses (1,769) (1,776)(200)(3,745)
Available-For-Sale Securities,
  at Fair Value
108,370 508 354,411 800 464,089 
Available-For-Sale Securities,
  Pledged as Collateral, at Fair Value
352,214 
Maturities of Debt Securities,
  at Amortized Cost:
Within One Year$ $68 $58 $ $126 
From 1 - 5 Years65,001 40