SEC Info - Arrow Financial Corp. - ‘10-K’ for 12/31/20

Available-For-Sale Securities,
at Amortized Cost

i 65,002

i 528

i 290,967

i 1,000

i 357,497

Available-For-Sale Securities,
at Fair Value

i 65,112

i 528

i 298,847

i 800

i 365,287

Gross Unrealized Gains

i 184

i —

i 7,934

i —

i 8,118

Gross Unrealized Losses

i 74

i —

i 54

i 200

i 328

Available-For-Sale Securities,
Pledged as Collateral,
at Fair Value

i 244,411

Maturities of Debt Securities,
at Amortized Cost:

Within One Year

i —

i 68

i 12,223

i —

i 12,291

From 1 - 5 Years

i 50,002

i 60

i 273,808

i —

i 323,870

From 5 - 10 Years

i 15,000

i 400

i 4,936

i 1,000

i 21,336

Over 10 Years

i —

Maturities of Debt Securities,
at Fair Value:

Within One Year

i —

i 68

i 12,373

i —

i 12,441

From 1 - 5 Years

i 50,133

i 60

i 281,592

i —

i 331,785

From 5 - 10 Years

i 14,979

i 400

i 4,882

i 800

i 21,061

Over 10 Years

i —

Securities in a Continuous
Loss Position, at Fair Value:

Less than 12 Months

i 29,926

i —

i 29,926

12 Months or Longer

i —

i 4,882

i 800

i 5,682

Total

i 29,926

i —

i 4,882

i 800

i 35,608

Number of Securities in a
Continuous Loss Position

i 4

i —

i 1

i 6

Unrealized Losses on
Securities in a Continuous
Loss Position:

Less than 12 Months

i 74

i —

i 74

12 Months or Longer

i —

i 54

i 200

i 254

Total

i 74

i —

i 54

i 200

i 328

Disaggregated Details:

US Agency Obligations,
at Amortized Cost

i 65,002

US Agency Obligations,
at Fair Value

i 65,112

US Government Agency
Securities, at Amortized Cost

i 12,696

US Government Agency
Securities, at Fair Value

i 12,683

Government Sponsored Entity
Securities, at Amortized Cost

i 278,271

Government Sponsored Entity
Securities, at Fair Value

i 286,164

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

Available-For-Sale Securities,
at Amortized Cost

i 5,002

i 764

i 349,944

i 1,000

i —

i 356,710

Available-For-Sale Securities,
at Fair Value

i 5,054

i 764

i 350,716

i 800

i —

i 357,334

Gross Unrealized Gains

i 52

i —

i 1,852

i —

i 1,904

Gross Unrealized Losses

i —

i 1,080

i 200

i —

i 1,280

Available-For-Sale Securities,
Pledged as Collateral,
at Fair Value

i 164,426

Securities in a Continuous
Loss Position, at Fair Value:

Less than 12 Months

i —

i 52,491

i —

i 52,491

12 Months or Longer

i —

i 97,164

i 800

i —

i 97,964

Total

i —

i 149,655

i 800

i —

i 150,455

Number of Securities in a
Continuous Loss Position

i —

i 54

i 1

i —

i 55

Unrealized Losses on
Securities in a Continuous
Loss Position:

Less than 12 Months

i —

i 317

i —

i 317

12 Months or Longer

i —

i 763

i 200

i —

i 963

Total

i —

i 1,080

i 200

i —

i 1,280

Disaggregated Details:

US Agency Obligations,
at Amortized Cost

i 5,002

US Agency Obligations,
at Fair Value

i 5,054

US Government Agency
Securities, at Amortized Cost

i 61,102

US Government Agency
Securities, at Fair Value

i 60,616

Government Sponsored Entity
Securities, at Amortized Cost

i 288,842

Government Sponsored Entity
Securities, at Fair Value

i 290,100

The following table is the schedule of Held-To-Maturity Securities at December 31, 2020 and 2019:

Held-To-Maturity Securities

State and
Municipal
Obligations

Mortgage-
Backed
Securities

Total
Held-To
Maturity
Securities

Held-To-Maturity Securities,
at Amortized Cost

i 192,352

i 26,053

i 218,405

Held-To-Maturity Securities,
at Fair Value

i 199,429

i 27,147

i 226,576

Gross Unrealized Gains

i 7,080

i 1,094

i 8,174

Gross Unrealized Losses

i 3

i —

i 3

Held-To-Maturity Securities,
Pledged as Collateral, at Fair Value

i 211,176

Maturities of Debt Securities,
at Amortized Cost:

Within One Year

i 15,465

i 3,503

i 18,968

From 1 - 5 Years

i 140,380

i 22,550

i 162,930

From 5 - 10 Years

i 35,503

i —

i 35,503

Over 10 Years

i 1,004

i —

i 1,004

Maturities of Debt Securities,
at Fair Value:

Within One Year

i 15,537

i 3,590

i 19,127

From 1 - 5 Years

i 145,436

i 23,557

i 168,993

From 5 - 10 Years

i 37,435

i —

i 37,435

Over 10 Years

i 1,021

i —

i 1,021

Securities in a Continuous
Loss Position, at Fair Value:

Less than 12 Months

i 1,513

i —

i 1,513

12 Months or Longer

i —

Total

i 1,513

i —

i 1,513

Number of Securities in a
Continuous Loss Position

i 4

i —

i 4

Unrealized Losses on Securities
in a Continuous Loss Position:

Less than 12 Months

i 3

i —

i 3

12 Months or Longer

i —

Total

i 3

i —

i 3

Disaggregated Details:

US Government Agency
Securities, at Amortized Cost

i 9,440

US Government Agency
Securities, at Fair Value

i 9,762

Government Sponsored Entity
Securities, at Amortized Cost

i 16,613

Government Sponsored Entity
Securities, at Fair Value

i 17,385

Held-To-Maturity Securities

State and
Municipal
Obligations

Mortgage-
Backed
Securities

Total
Held-To
Maturity
Securities

Held-To-Maturity Securities,
at Amortized Cost

i 208,243

i 36,822

i 245,065

Held-To-Maturity Securities,
at Fair Value

i 212,319

i 37,299

i 249,618

Gross Unrealized Gains

i 4,170

i 477

i 4,647

Gross Unrealized Losses

i 94

i —

i 94

Held-To-Maturity Securities,
Pledged as Collateral, at Fair Value

i 237,969

Securities in a Continuous
Loss Position, at Fair Value:

Less than 12 Months

i 1,438

i —

i 1,438

12 Months or Longer

i 1,994

i —

i 1,994

Total

i 3,432

i —

i 3,432

Number of Securities in a
Continuous Loss Position

i 10

i —

i 10

Unrealized Losses on Securities
in a Continuous Loss Position:

Less than 12 Months

i 85

i —

i 85

12 Months or Longer

i 9

i —

i 9

Total

i 94

i —

i 94

Disaggregated Details:

US Government Agency
Securities, at Amortized Cost

i 1,703

US Government Agency
Securities, at Fair Value

i 1,720

Government Sponsored Entity
Securities, at Amortized Cost

i 35,119

Government Sponsored Entity
Securities, at Fair Value

i 35,579

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

Securities in a continuous loss position, in the tables above for December 31, 2020 and December 31, 2019 do not reflect any deterioration of the credit worthiness of the issuing entities. U.S. agency issues, including mortgage-backed securities, are all rated AAA by Moody's and AA+ by Standard and Poor's. The state and municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured. Obligations issued by school districts are supported by state aid. For any non-rated municipal securities, credit analysis is performed in-house based upon data that has been submitted by the issuers to the NY State Comptroller. That analysis shows no deterioration in the credit worthiness of the municipalities. Subsequent to December 31, 2020, there were no securities downgraded below investment grade.

Because Arrow expects to recover the entire cost basis according to the contractual terms of each debt security, there is no current intention to sell any of our temporarily impaired securities, and because it is not more likely than not that it would be required to sell the securities prior to recovery, the impairment is considered temporary.

Pledged securities, in the tables above, are primarily used to collateralize state and municipal deposits, as required under New York State law. A small portion of the pledged securities are used to collateralize repurchase agreements and pooled deposits of our trust customers.

The following table is the schedule of Equity Securities at December 31, 2020 and 2019.


Equity Securities

	December 31,
	2020		2019

Equity Securities, at Fair Value	$	i 1,636	$	i 2,063

The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the years ended December 31, 2020 and 2019 :

December 31,

2020

2019

Net (Loss) Gain on Equity Securities

( i 427)

i 289

Less: Net gain (loss) recognized during the reporting period on equity securities sold during the period

i —

Unrealized net (loss) gain recognized during the reporting period on equity securities still held at the reporting date

( i 427)

i 289

Schedule of Federal Reserve Bank and Federal Home Loan Bank Stock (at cost)

December 31,

2020

2019

Federal Reserve Bank Stock

i 1,150

i 1,138

Federal Home Loan Bank Stock

i 4,199

i 9,179

Total Federal Reserve Bank and Federal Home Loan Bank Stock

i 5,349

i 10,317

Note 5: i LOANS (Dollars In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of December 31, 2020 and December 31, 2019 and an analysis of the recorded investment in loans that are past due at these dates. Loans held-for-sale of $ i 11,085 and $ i 150 as of December 31, 2020, and December 31, 2019, respectively, are included in the residential real estate balances for current loans.

Schedule of Past Due Loans by Loan Category

Commercial

Real Estate

Consumer

Residential

Total

Loans Past Due 30-59 Days

i 102

i —

i 4,976

i 261

i 5,339

Loans Past Due 60-89 Days

i 113

i —

i 2,713

i 1,279

i 4,105

Loans Past Due 90 or More Days

i 78

i 1,658

i 1,379

i 1,224

i 4,339

Total Loans Past Due

i 293

i 1,658

i 9,068

i 2,764

i 13,783

Current Loans

i 240,261

i 570,129

i 850,700

i 920,157

i 2,581,247

Total Loans

i 240,554

i 571,787

i 859,768

i 922,921

i 2,595,030

Loans 90 or More Days Past Due and Still Accruing Interest

i —

i 184

i —

i 44

i 228

Nonaccrual Loans

i 78

i 1,475

i 1,470

i 3,010

i 6,033

Loans Past Due 30-59 Days

i 150

i —

i 5,670

i 152

i 5,972

Loans Past Due 60-89 Days

i 42

i 266

i 2,700

i 2,027

i 5,035

Loans Past Due 90 or more Days

i 21

i 326

i 445

i 1,807

i 2,599

Total Loans Past Due

i 213

i 592

i 8,815

i 3,986

i 13,606

Current Loans

i 150,447

i 509,949

i 802,383

i 909,735

i 2,372,514

Total Loans

i 150,660

i 510,541

i 811,198

i 913,721

i 2,386,120

Loans 90 or More Days Past Due and Still Accruing Interest

i —

i 253

Nonaccrual Loans

i 81

i 326

i 663

i 2,935

i 4,005

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

Commercial - The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. Generally, these loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, the Company may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees to support the borrowing, as permitted by applicable law.

Commercial Real Estate - The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner and non owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, the Company also offers commercial construction and land development loans to finance projects. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project. Many of the commercial and commercial real estate loans are in industries that have been heavily impacted by the COVID-19 pandemic. In 2020, Arrow originated $ i 142.7 million of PPP loans.

Consumer Loans - This category is primarily comprised of automobile loans. Arrow primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most automobile loans

carry a fixed rate of interest with principal repayment terms typically ranging from three to i seven years. Automobile loans are underwritten on a secured basis using the underlying collateral being financed. Arrow also offers a variety of consumer installment loans to finance other personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to i five years, based upon the nature of the collateral and size of the loan. In addition to installment loans, Arrow also offers personal lines of credit and overdraft protection. Several of these consumer loans are unsecured, which carry a higher risk of loss.

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

Schedule of Supplemental Loan Information


	2020		2019
Supplemental Information:
Unamortized deferred loan origination costs, net of deferred loan origination fees, included in the above balances	$	i 1,273	$	i 5,181
Overdrawn deposit accounts, included in the above balances	i 238		i 2,420
Pledged loans under a blanket collateral agreement to secure borrowings from the Federal Home Loan Bank of New York	i i 859,592 /		i 731,240
Residential real estate loans serviced for Freddie Mac, not included in the balances above	i 190,169		i 139,094

Allowance for Loan Losses

The following table presents a roll forward of the allowance for loan losses and other information pertaining to the allowance for loan losses:

Allowance for Loan Losses

Commercial

Real Estate

Consumer

Residential

Total

Rollfoward of the Allowance for Loan Losses for the Year Ended:

i 1,386

i 5,830

i 9,408

i 4,563

i 21,187

Charge-offs

( i 37)

( i 5)

( i 1,898)

( i 49)

( i 1,989)

Recoveries

i 3

i —

i 712

i —

i 715

Provision

i 821

i 4,165

i 3,340

i 993

i 9,319

i 2,173

i 9,990

i 11,562

i 5,507

i 29,232

i 1,218

i 5,644

i 8,882

i 4,452

i 20,196

Charge-offs

( i 12)

( i 29)

( i 1,603)

( i 91)

( i 1,735)

Recoveries

i 98

i —

i 549

i —

i 647

Provision

i 82

i 215

i 1,580

i 202

i 2,079

i 1,386

i 5,830

i 9,408

i 4,563

i 21,187

December 31, 2017

i 1,873

i 4,504

i 7,604

i 4,605

i 18,586

Charge-offs

( i 153)

( i 17)

( i 1,246)

( i 116)

( i 1,532)

Recoveries

i 3

i 12

i 520

i —

i 535

Provision

( i 505)

i 1,145

i 2,004

( i 37)

i 2,607

i 1,218

i 5,644

i 8,882

i 4,452

i 20,196

Allowance for loan losses - Loans Individually Evaluated for Impairment

i 19

i —

i 22

i 41

Allowance for loan losses - Loans Collectively Evaluated for Impairment

i 2,154

i 9,990

i 11,562

i 5,485

i 29,191

Ending Loan Balance - Individually Evaluated for Impairment

i 47

i 1,128

i 111

i 1,417

i 2,703

Ending Loan Balance - Collectively Evaluated for Impairment

i 240,507

i 570,659

i 859,657

i 921,504

i 2,592,327

Allowance for loan losses - Loans Individually Evaluated for Impairment

i 5

i —

i 42

i 47

Allowance for loan losses - Loans Collectively Evaluated for Impairment

i 1,381

i 5,830

i 9,408

i 4,521

i 21,140

Ending Loan Balance - Individually Evaluated for Impairment

i 35

i —

i 107

i 959

i 1,101

Ending Loan Balance - Collectively Evaluated for Impairment

i 150,625

i 510,541

i 811,091

i 912,762

i 2,385,019

Through the provision for loan losses, an allowance for loan losses is maintained that reflects Arrow's best estimate of the inherent risk of loss in the Company’s loan portfolio as of the balance sheet date. Additions are made to the allowance for loan losses through a periodic provision for loan losses. Actual loan losses are charged against the allowance for loan losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for loan losses.

Loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the Company's independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

The Company uses a two-step process to determine the provision for loan losses and the amount of the allowance for loan losses. An evaluation of impaired loans is performed on a quarterly basis. Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral-dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. In general, Arrow's impaired loans are collateral-dependent impaired loans that have limited exposure or require limited specific reserves because of collateral support with respect to these loans. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.

The remainder of the portfolio is evaluated on a pooled basis, as described below. For each homogeneous loan pool, a total loss factor is estimated based on the historical net loss rates adjusted for applicable qualitative factors. The total loss factors assigned to each loan category are updated on a quarterly basis. For the commercial, commercial construction, and commercial real estate categories, the loan categories are further segregated by credit risk profile (pools of loans graded pass, special mention and accruing substandard). Additional description of the credit risk classifications is detailed in the Credit Quality Indicators section of this note.

The historical net loss rate is determined for each loan category using a rolling average annual twelve quarter look-back period of the respective segment that have occurred within each pool of loans over the loss emergence period (LEP). While historical net loss experience provides a reasonable starting point for the analysis, historical net losses, or even recent trends in net losses, do not by themselves form a sufficient basis to determine the appropriate level of the allowance for loan losses. Therefore, historical net loss factors are considered and adjusted for qualitative factors that impact the incurred risk of loss associated with the loan categories within the total loan portfolio. These include:

•Changes in the volume and severity of past due, nonaccrual and adversely classified loans

•Changes in the nature and volume of the portfolio and in the terms of loans

•Changes in the value of the underlying collateral for collateral dependent loans

•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating loan losses

•Changes in the quality of the loan review system

•Changes in the experience, ability, and depth of lending management and other relevant staff

•Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio

•The existence and effect of any concentrations of credit, and changes in the level of such concentrations

•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated loan losses in the existing portfolio or pool

Loan Credit Quality Indicators

The following table presents the credit quality indicators by loan category at December 31, 2020 and December 31, 2019:

Loan Credit Quality Indicators

Commercial

Real Estate

Consumer

Residential

Total

Credit Risk Profile by Creditworthiness Category:

Satisfactory

i 229,351

i 525,609

i 754,960

Special Mention

i 1,574

i 16,213

i 17,787

Substandard

i 9,629

i 29,965

i 39,594

Doubtful

i —

Credit Risk Profile Based on Payment Activity:

Performing

i 858,298

i 919,867

i 1,778,165

Nonperforming

i 1,470

i 3,054

i 4,524

Credit Risk Profile by Creditworthiness Category:

Satisfactory

i 144,283

i 484,267

i 628,550

Special Mention

i 32

i 263

i 295

Substandard

i 6,345

i 26,011

i 32,356

Doubtful

i —

Credit Risk Profile Based on Payment Activity:

Performing

i 810,535

i 910,533

i 1,721,068

Nonperforming

i 663

i 3,188

i 3,851

For the purposes of the table above, nonperforming consumer and residential loans are those loans on nonaccrual status or are 90 days or more past due and still accruing interest.

The recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $ i 660 thousand.

For the allowance calculation, an internally developed system of five credit quality indicators to rate the credit worthiness of each commercial loan defined as follows:

1) Satisfactory - "Satisfactory" borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified;

2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. "Special mention" assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this credit quality indicator include loans to borrowers with deteriorating financial strength and/or earnings record and loans with potential for problems due to weakening economic or market conditions;

3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard;

4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen

the value (i.e. possibility of additional collateral, injection of capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and

5) Loss - Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses.

Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of inherent risk of loss in our commercial related loan portfolios.

Impaired Loans

The following table presents information on impaired loans based on whether the impaired loan has a recorded allowance or no recorded allowance:

Impaired Loans

Commercial

Real Estate

Consumer

Residential

Total

Recorded Investment:

With No Related Allowance

i —

i 1,124

i 112

i 1,174

i 2,410

With a Related Allowance

i 46

i —

i 244

i 290

Unpaid Principal Balance:

With No Related Allowance

i —

i 1,128

i 111

i 1,174

i 2,413

With a Related Allowance

i 47

i —

i 244

i 291

Recorded Investment:

With No Related Allowance

i —

i 108

i 699

i 807

With a Related Allowance

i 34

i —

i 260

i 294

Unpaid Principal Balance:

With No Related Allowance

i —

i 107

i 699

i 806

With a Related Allowance

i 35

i —

i 260

i 295

For the Year-To-Date Period Ended:

Average Recorded Balance:

With No Related Allowance

i —

i 562

i 110

i 937

i 1,609

With a Related Allowance

i 40

i —

i 252

i 292

Interest Income Recognized:

With No Related Allowance

i —

i 1

i 10

i 11

With a Related Allowance

i —

Cash Basis Income:

With No Related Allowance

i —

With a Related Allowance

i —

Average Recorded Balance:

With No Related Allowance

i 215

i 397

i 105

i 1,152

i 1,869

With a Related Allowance

i 17

i —

i 277

i 294

Interest Income Recognized:

With No Related Allowance

i —

i 1

i 8

i 9

With a Related Allowance

i —

Cash Basis Income:

With No Related Allowance

i —

With a Related Allowance

i —

Average Recorded Balance:

With No Related Allowance

i 215

i 787

i 98

i 1,437

i 2,537

With a Related Allowance

i 243

i 363

i —

i 314

i 920

Interest Income Recognized:

With No Related Allowance

i —

i 1

i 18

i 19

With a Related Allowance

i —

Cash Basis Income:

With No Related Allowance

i —

With a Related Allowance

i —

At December 31, 2020, all impaired loans were considered to be collateral dependent and were therefore evaluated for impairment based on the fair value of collateral less estimated cost to sell. Interest income recognized in the table above, represents income earned after the loans became impaired and includes restructured loans in compliance with their modified terms and nonaccrual loans where we have recognized interest income on a cash basis.

Loans Modified in Trouble Debt Restructurings

The following table presents information on loans modified in trouble debt restructurings during the periods indicated:

Loans Modified in Trouble Debt Restructurings During the Period

Commercial

Real Estate

Consumer

Residential

Total

For the Year Ended:

Number of Loans

i 1

i —

i 5

i —

i 6

Pre-Modification Outstanding Recorded Investment

i 14

i —

i 77

i —

i 91

Post-Modification Outstanding Recorded Investment

i 14

i —

i 77

i —

i 91

Subsequent Default, Number of Contracts

i —

Subsequent Default, Recorded Investment

i —

Commitments to lend additional funds to modified loans

i —

Number of Loans

i —

i 6

i —

i 6

Pre-Modification Outstanding Recorded Investment

i —

i 68

i —

i 68

Post-Modification Outstanding Recorded Investment

i —

i 68

i —

i 68

Subsequent Default, Number of Contracts

i —

Subsequent Default, Recorded Investment

i —

Commitments to lend additional funds to modified loans

i —

Number of Loans

i 1

i —

i 5

i —

i 6

Pre-Modification Outstanding Recorded Investment

i 38

i —

i 44

i —

i 82

Post-Modification Outstanding Recorded Investment

i 38

i —

i 44

i —

i 82

Subsequent Default, Number of Contracts

i —

Subsequent Default, Recorded Investment

i —

Commitments to lend additional funds to modified loans

i —

In general, prior to the novel coronavirus (COVID-19) pandemic, loans requiring modification were restructured to accommodate the projected cash-flows of the borrower. Such modifications may have involved a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of December 31, 2020 or December 31, 2019. In accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and ASC Subtopic 310-40, if a qualifying loan modification was made for a borrower as the result of the COVID-19 pandemic, this modification was not considered a troubled debt restructuring (TDR).

Note 6: i PREMISES AND EQUIPMENT (Dollars In Thousands)

A summary of premises and equipment at December 31, 2020 and 2019 is presented below:


	2020		2019
Land and Bank Premises	$	i 39,624	$	i 39,342
Equipment, Furniture and Fixtures	i 33,276		i 30,529
Leasehold Improvements	i 4,632		i 3,758
Total Cost	i 77,532		i 73,629
Accumulated Depreciation and Amortization	( i 39,911)		( i 38,171)
Net Owned Premises and Equipment	i 37,621		i 35,458
Leased Assets (see Note 18)	i 4,991		i 5,171
Net Premises and Equipment	$	i 42,612	$	i 40,629

Amounts charged to expense for depreciation totaled $ i 3,080, $ i 2,211 and $ i 1,891 in 2020, 2019 and 2018, respectively.

Note 7: i OTHER INTANGIBLE ASSETS (Dollars In Thousands)

The following table presents information on Arrow’s other intangible assets (other than goodwill) as of December 31, 2020, 2019 and 2018:

Mortgage

Servicing

Rights1

Customer Intangibles2

Total

Gross Carrying Amount, December 31, 2020

i 2,850

i 4,382

i 9,479

Accumulated Amortization

( i 2,018)

( i 3,264)

( i 7,529)

Net Carrying Amount, December 31, 2020

i 832

i 1,118

i 1,950

Gross Carrying Amount, December 31, 2019

i 2,229

i 4,382

i 8,858

Accumulated Amortization

( i 1,913)

( i 3,037)

( i 7,197)

Net Carrying Amount, December 31, 2019

i 316

i 1,345

i 1,661

Rollforward of Intangible Assets:

Balance, December 31, 2017

i 437

i 1,852

i 2,289

Intangible Assets Acquired

i —

Intangible Assets Disposed

i —

Amortization of Intangible Assets

( i 175)

( i 262)

( i 437)

Balance, December 31, 2018

i 262

i 1,590

i 1,852

Intangible Assets Acquired

i 168

i —

i 168

Intangible Assets Disposed

i —

Amortization of Intangible Assets

( i 114)

( i 245)

( i 359)

Balance, December 31, 2019

i 316

i 1,345

i 1,661

Intangible Assets Acquired

i 621

i —

i 621

Intangible Assets Disposed

i —

Amortization of Intangible Assets

( i 105)

( i 227)

( i 332)

Balance, December 31, 2020

i 832

i 1,118

i 1,950

1 Amortization of mortgage servicing rights is reported in the Consolidated Statements of Income as a reduction of mortgage servicing fee income, which is included with fees for other services to customers.

2 Amortization of customer intangibles are reported in the Consolidated Statements of Income as a component of other operating expense.

The following table presents the remaining estimated annual amortization expense for Arrow's intangible assets as of December 31, 2020:

Mortgage
Servicing Rights

Customer Intangibles

Total

Estimated Annual Amortization Expense:

2021

i 181

i 211

i 392

2022

i 160

i 193

i 353

2023

i 140

i 176

i 316

2024

i 132

i 155

i 287

2025

i 132

i 107

i 239

2026 and beyond

i 87

i 276

i 363

Total

i 832

i 1,118

i 1,950

Note 8: i COMMITMENTS AND CONTINGENCIES (Dollars In Thousands)

The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of December 31, 2020 and 2019:


Balance at December 31,	2020		2019
Notional Amount:
Commitments to Extend Credit	$	i 399,882	$	i 349,718
Standby Letters of Credit	i 3,703		i 3,129
Fair Value:
Commitments to Extend Credit	$	i —	$	i —
Standby Letters of Credit	i 28		i 31

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.

Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at December 31, 2020 and 2019 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from i 1% to i 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at December 31, 2020 and 2019 were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.

Note 9: i TIME DEPOSITS (Dollars In Thousands)

The following summarizes the contractual maturities of time deposits during years subsequent to December 31, 2020:


Year of Maturity	Total Time Deposits
2021	$	i 218,079
2022	i 21,998
2023	i 9,686
2024	i 6,249
2025	i 3,835
2026 and beyond	i 17,746
Total	$	i 277,593

Note 10: i DEBT (Dollars in Thousands)

Schedule of Short-Term Borrowings:


	2020		2019
Balances at December 31:
Overnight Advances from the Federal Home Loan Bank of New York	$	i —	$	i 130,000
Securities Sold Under Agreements to Repurchase	i 17,486		i 51,099
Total Short-Term Borrowings	$	i 17,486	$	i 181,099

Maximum Borrowing Capacity at December 31:
Federal Funds Purchased	$	i 52,000	$	i 67,000
Federal Home Loan Bank of New York	i i 859,592 /		i 731,240
Federal Reserve Bank of New York	i 610,643		i 583,369

The securities sold under agreements to repurchase ("repo accounts") shown above represent collateralized borrowings with certain commercial customers located primarily within the Company's service area. All repo accounts at December 31, 2020 and 2019 have overnight maturities. Repo accounts are not covered by federal deposit insurance and are secured by Arrow's own qualified investment securities. The Company retains the right to substitute similar type securities and has the right to withdraw all excess collateral applicable to repo accounts whenever the collateral values are in excess of the related repurchase liabilities. However, as a means of mitigating market risk, the Company maintains excess collateral to cover normal changes in the repurchase liability by monitoring daily usage. At December 31, 2020, there were no material amounts of securities at risk with any one customer. The Company maintains control of these securities through the use of third-party safekeeping arrangements. i Investment securities with a fair value of $ i 19.2 million and $ i 62.4 million were pledged as collateral for the securities sold under agreements to repurchase at December 31, 2020 and 2019, respectively, and are presented in the table below: /


	2020		2019
Balances at December 31:

Mortgage-Backed Securities	i 19,189		i 62,372
Total Pledged Collateral for Repo Accounts	$	i 19,189	$	i 62,372

Arrow's subsidiary banks have in place unsecured federal funds lines of credit with two correspondent banks. As a member of the FHLBNY, Arrow participates in the advance program which allows for overnight and term advances up to the limit of pledged collateral, including FHLBNY stock, residential real estate and home equity loans (see Note 4, "Investment Securities" and Note 5, "Loans"). The investment in FHLBNY stock is proportional to the total of Arrow's overnight and term advances (see the Schedule of Federal Reserve Bank and Federal Home Loan Bank Stock in Note 4, Investment Securities, to the notes to the Consolidated Financial Statements). Arrow's bank subsidiaries have also established borrowing facilities with the Federal Reserve Bank of New York for potential “discount window” advances, pledging certain consumer loans as collateral (see Note 5, Loans, to the notes to the Consolidated Financial Statements).

Long Term Debt - FHLBNY Term Advances

In addition to overnight advances, Arrow also borrows longer-term funds from the FHLBNY.

Maturity Schedule of FHLBNY Term Advances:

Balances

Weighted Average Rate

Final Maturity

2020

2019

2020

2019

First Year

i —

i 25,000

i —

i 2.02

Second Year

i 5,000

i —

i 1.81

i —

Third Year

i 20,000

i 5,000

i 1.75

i 1.81

Fourth Year

i 20,000

i —

i 1.76

i —

Fifth Year

i —

Total

i 45,000

i 30,000

i 1.77

i 1.98

Long Term Debt - Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures

During 2020, there were outstanding i two classes of financial instruments issued by i two separate subsidiary business trusts of Arrow, identified as “Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts” on the Consolidated Balance Sheets and the Consolidated Statements of Income.

The first of the i two classes of trust-issued instruments outstanding at year-end was issued by Arrow Capital Statutory Trust II ("ACST II"), a Delaware business trust established on July 16, 2003, upon the filing of a certificate of trust with the Delaware Secretary of State. In July 2003, ACST II issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST II trust preferred securities"). The rate on the securities is variable, adjusting quarterly to the 3-month LIBOR plus i 3.15%. ACST II used the proceeds of the sale of its trust preferred securities to purchase an identical amount of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST II trust preferred securities. The ACST II trust preferred securities became redeemable after July 23, 2008 and mature on July 23, 2033.

The second of the i two classes of trust-issued instruments outstanding at year-end was issued by Arrow Capital Statutory Trust III ("ACST III"), a Delaware business trust established on December 23, 2004, upon the filing of a certificate of trust with the Delaware Secretary of State. On December 28, 2004, the ACST III issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST III"). The rate on the ACST III trust preferred securities is a variable rate, adjusted quarterly, equal to the 3-month LIBOR plus i 2.00%. ACST III used the proceeds of the sale of its trust preferred securities to purchase an identical amount of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST III trust preferred securities. The ACST III trust preferred securities became redeemable on or after March 31, 2010 and mature on December 28, 2034. Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $ i 20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges.

The primary assets of the i two subsidiary trusts having trust preferred securities outstanding at year-end, ACST II and ACST III (the “Trusts”), are Arrow's junior subordinated debentures discussed above, and the sole revenues of the Trusts are payments received by them from Arrow with respect to the junior subordinated debentures. The trust preferred securities issued by the Trusts are non-voting. All common voting securities of the Trusts are owned by Arrow. Arrow used the net proceeds from its sale of junior subordinated debentures to the Trusts, facilitated by the Trust’s sale of their trust preferred securities to the purchasers thereof, for general corporate purposes. The trust preferred securities and underlying junior subordinated debentures, with associated expense that is tax deductible, qualify as Tier I capital under regulatory definitions.

Arrow's primary source of funds to pay interest on the debentures that are held by the Trusts are current dividends received by Arrow from its subsidiary banks. Accordingly, Arrow's ability to make payments on the debentures, and the ability of the Trusts to make payments on their trust preferred securities, are dependent upon the continuing ability of Arrow's subsidiary banks to pay dividends to Arrow. Since the trust preferred securities issued by the subsidiary trusts and the underlying junior subordinated debentures issued by Arrow at December 31, 2020, 2019 and 2018 are classified as debt for financial statement purposes, the expense associated with these securities is recorded as interest expense in the Consolidated Statements of Income for the three years.

Schedule of Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures


	2020			2019
ACST II
Balance at December 31,	$	i 10,000		$	i 10,000
Period End:
Variable Interest Rate	i 3.37		%	i 5.25		%
Fixed Interest Rate resulting from cash flow hedge agreement	i 4.00		%	i

ACST III
Balance at December 31,	$	i 10,000		$	i 10,000
Period End:
Variable Interest Rate	i 2.22		%	i 4.10		%
Fixed Interest Rate resulting from cash flow hedge agreement	i 2.86		%	i

Note 11: i COMPREHENSIVE INCOME (LOSS), NET OF TAX (Dollars In Thousands)

The following table presents the components of other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018:

Schedule of Comprehensive Income (Loss)

Before-Tax
Amount

Tax
Expense
(Benefit)

Net-of-Tax
Amount

2020

Net Unrealized Securities Holding Gains Arising During the Period

i 7,129

( i 1,823)

i 5,306

Reclassification Adjustment for Securities Losses Included in Net Income

i 37

( i 9)

i 28

Net Unrealized Gains on Cash Flow Swap

i 651

( i 166)

i 485

Net Retirement Plan Losses

( i 337)

i 86

( i 251)

Net Retirement Plan Prior Service Cost

( i 472)

i 119

( i 353)

Amortization of Net Retirement Plan Actuarial Loss

i 227

( i 58)

i 169

Amortization of Net Retirement Plan Prior Service Cost

i 211

( i 54)

i 157

Other Comprehensive Income

i 7,446

( i 1,905)

i 5,541

2019

Net Unrealized Securities Holding Gains Arising During the Period

i 5,580

( i 1,418)

i 4,162

Net Retirement Plan Gains

i 3,505

( i 891)

i 2,614

Amortization of Net Retirement Plan Actuarial Loss

i 684

( i 174)

i 510

Amortization of Net Retirement Plan Actuarial Loss

i 224

( i 57)

i 167

Other Comprehensive Income

i 9,993

( i 2,540)

i 7,453

2018

Net Unrealized Securities Holding Losses Arising During the Period

( i 2,839)

i 723

( i 2,116)

Net Retirement Plan Losses

( i 3,798)

i 965

( i 2,833)

Net Retirement Plan Prior Service Cost

( i 453)

i 115

( i 338)

Amortization of Net Retirement Plan Actuarial Loss

i 325

( i 83)

i 242

Amortization of Net Retirement Plan Actuarial Loss

i 108

( i 28)

i 80

Other Comprehensive Loss

( i 6,657)

i 1,692

( i 4,965)

i The following table presents the changes in accumulated other comprehensive income by component:

Changes in Accumulated Other Comprehensive Income (Loss) by Component (1)

Unrealized

Defined Benefit Plan Items

Gains and

Unrealized

Losses on

Gain On

Net

Net Prior

Available-for-

Cash Flow

Actuarial

Service

Sale Securities

Swap

Gain (Loss)

(Cost ) Credit

Total

For the Year-To-Date periods ended:

i 465

i —

( i 5,847)

( i 975)

( i 6,357)

Other comprehensive income (loss) before reclassifications

i 5,306

i 485

( i 251)

( i 353)

i 5,187

Amounts reclassified from accumulated other comprehensive income

i 28

i 169

i 157

i 354

Net current-period other comprehensive income (loss)

i 5,334

i 485

( i 82)

( i 196)

i 5,541

i 5,799

i 485

( i 5,929)

( i 1,171)

( i 816)

( i 3,697)

i —

( i 8,971)

( i 1,142)

( i 13,810)

Other comprehensive income before reclassifications

i 4,162

i —

i 2,614

i —

i 6,776

Amounts reclassified from accumulated other comprehensive income

i —

i 510

i 167

i 677

Net current-period other comprehensive income

i 4,162

i —

i 3,124

i 167

i 7,453

i 465

i —

( i 5,847)

( i 975)

( i 6,357)

December 31, 2017

( i 1,250)

—

( i 6,380)

( i 884)

( i 8,514)

Other comprehensive loss before reclassifications

( i 2,116)

—

( i 2,833)

( i 338)

( i 5,287)

Amounts reclassified from accumulated other comprehensive loss

i —

—

i 242

i 80

i 322

Net current-period other comprehensive loss

( i 2,116)

—

( i 2,591)

( i 258)

( i 4,965)

Amounts reclassified from accumulated other comprehensive loss

( i 331)

—

( i 331)

( i 3,697)

—

( i 8,971)

( i 1,142)

( i 13,810)

(1) All amounts are net of tax. Amounts in parentheses indicate debits.

The following table presents the reclassifications out of accumulated other comprehensive income:

Reclassifications Out of Accumulated Other Comprehensive Income (1)

Amounts Reclassified

Details about Accumulated Other

from Accumulated Other

Affected Line Item in the Statement

Comprehensive Income Components

Comprehensive Income

Where Net Income Is Presented

For the Year-to-date periods ended:

Unrealized gains and losses on available-for-sale securities

( i 37)

Loss on Securities Transactions, Net

( i 37)

Total before tax

i 9

Provision for Income Taxes

( i 28)

Net of tax

Amortization of defined benefit pension items

Prior-service credit

( i 211)

(2)

Salaries and Employee Benefits

Actuarial Loss

( i 227)

(2)

Salaries and Employee Benefits

( i 438)

Total before tax

i 112

Provision for Income Taxes

( i 326)

Net of tax

Total reclassifications for the period

( i 354)

Net of tax

Unrealized gains and losses on available-for-sale securities

i —

Loss on Securities Transactions, Net

i —

Total before tax

i —

Provision for Income Taxes

i —

Net of tax

Amortization of defined benefit pension items

Prior-service credit

( i 224)

(2)

Salaries and Employee Benefits

Actuarial Loss

( i 684)

(2)

Salaries and Employee Benefits

( i 908)

Total before tax

i 231

Provision for Income Taxes

( i 677)

Net of tax

Total reclassifications for the period

( i 677)

Net of tax

Reclassifications Out of Accumulated Other Comprehensive Income (1)

Amounts Reclassified

Details about Accumulated Other

from Accumulated Other

Affected Line Item in the Statement

Comprehensive Income Components

Comprehensive Income

Where Net Income Is Presented

Unrealized gains and losses on available-for-sale securities

i —

Gain on Securities Transactions, Net

i —

Total before tax

i —

Provision for Income Taxes

i —

Net of tax

Amortization of defined benefit pension items

Prior-service credit

( i 108)

(2)

Salaries and Employee Benefits

Actuarial Loss

( i 325)

(2)

Salaries and Employee Benefits

( i 433)

Total before tax

i 111

Provision for Income Taxes

( i 322)

Net of tax

Total reclassifications for the period

( i 322)

Net of tax

(1) Amounts in parentheses indicate debits to profit/loss.

(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see retirement benefit plans footnote for additional details).

Note 12: i STOCK BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established i three stock-based compensation plans: an Incentive and Non-qualified Stock Option Plan (Long Term Incentive Plan), an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September 25, 2020 i 3% stock dividend.

Long Term Incentive Plan

The Long Term Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance units and performance shares. The Compensation Committee of the Board of Directors administers the Long Term Incentive Plan.

Shares Available for Grant at Period-End

i 178,391

Stock Options - Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire i ten years from the date of grant. The options usually vest over a i four-year period.

The following table summarizes information about stock option activity for the year ended December 31, 2020.

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (in years)

Aggregate Intrinsic Value

Outstanding at January 1, 2020

i 248,495

i 26.78

Granted

i 52,324

i 34.25

Exercised

( i 33,895)

i 22.07

Forfeited

( i 2,834)

i 28.79

Outstanding at December 31, 2020

i 264,090

i 28.84

i 6.48

i 285

Vested at Period-End

i 140,686

i 26.06

i 5.01

i 542

Expected to Vest

i 123,404

i 32.01

i 8.17

i —

The following is the Schedule of Stock Options Granted Under the Long Term Incentive Plan by Exercise Price Range.

Exercise Price Ranges

$ i 19.70 to $ i 19.73

$ i 20.26 to $ i 20.73

$ i 21.85 to $ i 22.30

$ i 29.89 to $ i 30.01

$ i 33.06

$ i 34.25

Total

Outstanding at December 31, 2020

Number of Stock Options Outstanding

i 8,477

i 28,623

i 36,885

i 97,537

i 40,244

i 52,324

i 264,090

Weighted-Average Remaining Contractual Life (in years)

i 1.24

i 2.29

i 4.73

i 7.61

i 6.07

i 9.08

i 6.48

Weighted-Average Exercise Price

i 19.72

i 20.54

i 22.15

i 29.95

i 33.06

i 34.25

i 28.83

Vested at December 31, 2020

Number of Stock Options Outstanding

i 8,477

i 28,623

i 36,885

i 36,032

i 30,669

i —

i 140,686

Weighted-Average Remaining Contractual Life (in years)

i 1.24

i 2.29

i 4.73

i 7.44

i 6.07

i 0

i 5.01

Weighted-Average Exercise Price

i 19.72

i 20.54

i 22.15

i 29.97

i 33.06

i —

i 26.06

i The following is the Schedule of Other Information on Stock Options Granted.

2020

2019

2018

Stock Options Granted

i 52,324

i 55,167

i 56,722

Weighted Average Grant Date Information:

Fair Value of Options Granted

i 4.84

i 5.42

i 5.27

Fair Value Assumptions:

Dividend Yield

i 2.90

i 3.26

i 2.98

Expected Volatility

i 20.25

i 22.58

i 21.55

Risk Free Interest Rate

i 1.53

i 2.63

i 2.68

Expected Lives (in years)

i 6.68

i 8.68

i 6.98

Amount Expensed During the Year

i 301

i 316

i 322

Compensation Costs for Non-vested Awards Not Yet Recognized

i 440

i 487

i 504

Weighted Average Expected Vesting Period, In Years

i 2.17

i 2.07

i 2.74

Proceeds From Stock Options Exercised

i 748

i 1,792

i 2,255

Tax Benefits Related to Stock Options Exercised

i 52

i 227

i 240

Intrinsic Value of Stock Options Exercised

i 282

i 1,073

i 1,552

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest i three years from the grant date. Once vested, the restricted stock units become vested units and are no longer forfeitable. Vested units settle upon retirement of the recipient. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.

The following table summarizes information about restricted stock unit activity for the year ended December 31, 2020. The Company started granting restricted stock units in 2018.


	Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2020	i 7,721	$	i 30.27
Granted	i 3,942	$	i 34.25
Vested	i —	$	i —
Canceled	i —	$	i —
Non-vested at December 31, 2020	i 11,663	$	i 31.62

Non-vested at January 1, 2019	i 3,582	$	i 30.70
Granted	i 4,139	$	i 29.89
Vested	i —	$	i —
Canceled	i —	$	i —
Non-vested at December 31, 2019	i 7,721	$	i 30.27

Non-vested at January 1, 2018	i —	$	i —
Granted	i 3,582	$	i 30.70
Vested	i —	$	i —
Canceled	i —	$	i —
Non-vested at December 31, 2018	i 3,582	i 30.70

The following table presents information on the amounts expensed related to Restricted Stock Units awarded pursuant to the Long Term Incentive Plan for the year ended December 31, 2020.


	2020		2019		2018
Amount Expensed During the Year	$	i 119	$	i 75	$	i 34
Compensation Costs for Non-vested Awards Not Yet Recognized	i 141		i 126		i 76

Employee Stock Purchase Plan

Arrow sponsors an ESPP under which employees purchase Arrow's common stock at a i 5% discount below market price. Under current accounting guidance, a stock purchase plan with a discount of i 5% or less is not considered a compensatory plan.

Employee Stock Ownership Plan

Arrow maintains an employee stock ownership plan (“ESOP”). Substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The ESOP borrowed funds from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock. The notes required annual payments of principal and interest through 2019. As the debt was repaid, shares were released from collateral based on the proportion of debt paid to total debt outstanding for the year and allocated to active employees. At December 31, 2020, there was no outstanding balance remaining on the loans and therefore no remaining unallocated shares. In addition, the Company makes additional cash contributions to the Plan each year.

Schedule of ESOP Compensation Expense


	2020		2019		2018
ESOP Compensation Expense	$	i 1,619	$	i 1,368	$	i 1,400

Prior to December 31, 2019, shares pledged as collateral were reported as unallocated ESOP shares in stockholders’ equity. As shares were released from collateral, Arrow reported compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings per share computations. During the year ended December 31, 2019, all remaining unallocated shares were released.

Note 13: i RETIREMENT BENEFIT PLANS (Dollars in Thousands)

Arrow sponsors qualified and nonqualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate in effect for November of the prior year with a minimum interest credit of i 3.0%. The service credits under the cash balance plan are equal to i 6.0% of eligible salaries for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from i 6.0% to i 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under ERISA. Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.

Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. Arrow’s policy is to fund the cost of postretirement benefits based on the current cost of the underlying policies. However, the health care plan provision allows for grandfathered participants to receive automatic increases of Company contributions each year based on the increase in inflation and limited to a maximum of i 5%.

As of December 31, 2020, Arrow uses the sex-distinct amount-weighted Pri-2012 mortality tables for employees, healthy annuitants and contingent survivors, adjusted for mortality improvements with the Scale MP-2020 mortality improvement scale on a generational basis for the Pension Plan and the sex-distinct amount-weighted White Collar tables for employees and healthy annuitants, adjusted for mortality improvements with the scale MP-2020 mortality improvement scale on a generational basis for the Select Executive Retirement Plan. As of December 31, 2020, Arrow updated its mortality assumption used for the Postretirement Plan to the sex-distinct Pri.H-2012 headcount-weighted mortality tables for employees and healthy annuitants, adjusted for mortality improvements with the Scale MP-2020 mortality improvement scale on a generational basis. The change in mortality tables resulted in a decrease in liabilities for the Employees' Pension Plan, the Select Executive Retirement Plan and the Postretirement Benefit Plan.

The interest rates used in determining the present value of a lump sum payment/annuitizing cash balance accounts were changed to the segment rates in effect for the January 1, 2020 plan year ( i 0.53%, i 2.31%, i 3.09%) as of December 31, 2020.

Effective January 1, 2021, Glens Falls National Bank and Trust Company amended the Arrow Financial Corporation Employees' Pension Plan. The plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The plan amendment is the following:

Effective January 1, 2021, the benefit payable to or on behalf of each participant:

•whose employment with the Employer (or any predecessor Employer, except as noted below) terminated on or before January 1, 2016;

•who satisfied the requirements for early, normal, or late retirement as of such termination;

•who never participated in the United Vermont Bancorporation Plan and;

•who is, or whose Beneficiary is, receiving monthly benefit payments from the Plan as of January 1, 2021 (including a Participant or Beneficiary who shall commence receiving benefits from the Plan as of January 1, 2021), shall be increased by three percent ( i 3%).

The foregoing increase shall be applied to the monthly benefit actually payable to the Participant, or to the Participant's Beneficiary, as of January 1, 2021, determined after all applicable adjustments, regardless of whether such benefit had been determined under the Company's plan or the plan of a predecessor employer that had been merged into the Plan.

The plan amendment caused a $ i 351,638 increase in the Projected Benefit Obligation creating a positive service cost which will be amortized over i 9.70 years (the average expected future service of active plan participants.)

Effective January 1, 2021, Glens Falls National Bank and Trust Company amended the Arrow Financial Corporation Employees' Select Executive Retirement Plan. The plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The plan amendment provides a special adjustment to the monthly benefit payment for certain retirees. The plan amendment caused a $ i 122,797 increase in the Projected Benefit Obligation creating a positive prior service cost which will be amortized over i 12.5 years.

The following tables set forth changes in the plans’ benefit obligations (projected benefit obligation for pension benefits and accumulated benefit obligation for postretirement benefits) and changes in the plans’ assets and the funded status of the pension plans and other postretirement benefit plan at December 31:

Schedule of Defined Benefit Plan Disclosures

Employees'
Pension
Plan

Select
Executive
Retirement
Plan

Postretirement
Benefit
Plans

Defined Benefit Plan Funded Status

Fair Value of Plan Assets

i 59,837

i —

Benefit Obligation

i 44,877

i 5,820

i 9,028

Funded Status of Plan

i 14,960

( i 5,820)

( i 9,028)

Fair Value of Plan Assets

i 57,051

i —

Benefit Obligation

i 42,322

i 5,194

i 8,652

Funded Status of Plan

i 14,729

( i 5,194)

( i 8,652)

Change in Benefit Obligation

Benefit Obligation, at January 1, 2020

i 42,322

i 5,194

i 8,652

Service Cost 1

i 1,663

i 408

i 123

Interest Cost 2

i 1,544

i 192

i 310

Plan Participants' Contributions

i —

i 454

Amendments

i 352

i 122

i —

Actuarial Loss

i 2,901

i 369

i 151

Benefits Paid

( i 3,905)

( i 465)

( i 662)

Benefit Obligation, at December 31, 2020

i 44,877

i 5,820

i 9,028

Benefit Obligation, at January 1, 2019

i 38,069

i 4,710

i 7,706

Service Cost 1

i 1,527

i 324

i 121

Interest Cost 2

i 1,765

i 217

i 364

Plan Participants' Contributions

i —

i 485

Actuarial Loss

i 2,960

i 409

i 670

Benefits Paid

( i 1,999)

( i 466)

( i 694)

Benefit Obligation, at December 31, 2019

i 42,322

i 5,194

i 8,652

Change in Fair Value of Plan Assets

Fair Value of Plan Assets, at January 1, 2020

i 57,051

i —

Actual Return on Plan Assets

i 6,691

i —

Employer Contributions

i —

i 465

i 208

Plan Participants' Contributions

i —

i 454

Benefits Paid

( i 3,905)

( i 465)

( i 662)

Fair Value of Plan Assets, at December 31, 2020

i 59,837

i —

Fair Value of Plan Assets, at January 1, 2019

i 48,445

i —

Actual Return on Plan Assets

i 10,605

i —

Employer Contributions

i —

i 466

i 209

Plan Participants' Contributions

i —

i 485

Benefits Paid

( i 1,999)

( i 466)

( i 694)

Fair Value of Plan Assets, at December 31, 2019

i 57,051

i —

Accumulated Benefit Obligation at December 31, 2020

i 44,613

i 5,740

i 9,028

Employees'
Pension
Plan

Select
Executive
Retirement
Plan

Postretirement
Benefit
Plans

Amounts Recognized in the Consolidated Balance Sheets

Prepaid Pension Asset

i 14,960

i —

Accrued Benefit Liability

i —

( i 5,820)

( i 9,028)

Net Benefit Recognized

i 14,960

( i 5,820)

( i 9,028)

Prepaid Pension Asset

i 14,729

i —

Accrued Benefit Liability

i —

( i 5,194)

( i 8,652)

Net Benefit Recognized

i 14,729

( i 5,194)

( i 8,652)

Amounts Recognized in Other Comprehensive Income (Loss)

For the Year Ended December 31, 2020

Net Unamortized (Gain) Loss Arising During the Period

( i 182)

i 368

i 151

Net Prior Service Cost Arising During the Period

i 349

i 123

i —

Amortization of Net Loss

( i 81)

( i 146)

i —

Amortization of Prior Service Credit

( i 63)

( i 42)

( i 106)

Total Other Comprehensive Income for Pension and
Other Postretirement Benefit Plans

i 23

i 303

i 45

For the Year Ended December 31, 2019

Net Unamortized (Gain) Loss Arising During the Period

( i 4,584)

i 409

i 670

Amortization of Net (Loss) Gain

( i 613)

( i 113)

i 42

Amortization of Prior Service Cost

( i 69)

( i 54)

( i 101)

Total Other Comprehensive (Loss) Income for Pension and
Other Postretirement Benefit Plans

( i 5,266)

i 242

i 611

For the Year Ended December 31, 2018

Net Unamortized Loss (Gain) Arising During the Period

i 4,480

( i 17)

( i 665)

Net Prior Service Cost Arising During the Period

i —

i 453

Amortization of Net Gain

( i 194)

( i 131)

i —

Amortization of Prior Service Credit (Cost)

i 49

( i 57)

( i 100)

Total Other Comprehensive Income (Loss) for Pension and
Other Postretirement Benefit Plans

i 4,335

( i 205)

( i 312)

Accumulated Other Comprehensive Income

Net Actuarial Loss (Gains)

i 5,482

i 2,497

( i 30)

Prior Service Cost

i 533

i 459

i 578

Total Accumulated Other Comprehensive Income, Before Tax

i 6,015

i 2,956

i 548

Net Actuarial Loss (Gain)

i 5,745

i 2,275

( i 181)

Prior Service Cost

i 244

i 378

i 685

Total Accumulated Other Comprehensive Income, Before Tax

i 5,989

i 2,653

i 504

Amounts that will be Amortized from Accumulated
Other Comprehensive Income the Next Year

Net Actuarial Loss

i —

i 153

i 30

Prior Service Cost

i 78

i 48

i 106

100

Employees'
Pension
Plan

Select
Executive
Retirement
Plan

Postretirement
Benefit
Plans

Net Periodic Benefit Cost

For the Year Ended December 31, 2020

Service Cost 1

i 1,663

i 408

i 123

Interest Cost 2

i 1,544

i 192

i 310

Expected Return on Plan Assets 2

( i 3,608)

i —

Amortization of Prior Service Cost 2

i 63

i 42

i 106

Amortization of Net Loss 2

i 81

i 146

i —

Net Periodic Benefit Cost

( i 257)

i 788

i 539

For the Year Ended December 31, 2019

Service Cost 1

i 1,527

i 324

i 121

Interest Cost 2

i 1,765

i 217

i 364

Expected Return on Plan Assets 2

( i 3,060)

i —

Amortization of Prior Service Cost 2

i 69

i 54

i 101

Amortization of Net Loss 2

i 613

i 113

( i 42)

Net Periodic Benefit Cost

i 914

i 708

i 544

For the Year Ended December 31, 2018

Service Cost 1

i 1,557

i 414

i 136

Interest Cost 2

i 1,598

i 192

i 333

Expected Return on Plan Assets 2

( i 3,362)

i —

Amortization of Prior Service (Credit) Cost 2

( i 49)

i 57

i 100

Amortization of Net Loss 2

i 194

i 131

i —

Net Periodic Benefit (Credit) Cost

( i 62)

i 794

i 569

Weighted-Average Assumptions Used in
Calculating Benefit Obligation

Discount Rate

i 3.14

i 3.19

i 3.17

Rate of Compensation Increase

i 3.50

Interest Rate Credit for Determining
Projected Cash Balance Account

i 3.00

Interest Rates segments to Annuitize Cash
Balance Account (Segment 1, Segment 2 and Segment 3,
respectively)

i 0.53%, i 2.31% and i 3.09%

Interest Rates to Convert Annuities to Actuarially
Equivalent Lump Sum Amounts (Segment 1, Segment 2 and
Segment 3, respectively)

i 0.53%, i 2.31% and i 3.09%

Discount Rate

i 3.72

i 3.75

i 3.76

Rate of Compensation Increase

i 3.50

Interest Rate Credit for Determining
Projected Cash Balance Account

i 3.00

101

Employees'
Pension
Plan

Select
Executive
Retirement
Plan

Postretirement
Benefit
Plans

Weighted-Average Assumptions Used in
Calculating Net Periodic Benefit Cost

Discount Rate

i 3.72

i 3.75

i 3.76

Expected Long-Term Return on Plan Assets

i 6.50

Rate of Compensation Increase

i 3.50

Interest Rate Credit for Determining
Projected Cash Balance Account

i 3.00

Interest Rates to Annuitize Cash
Balance Account (Segment 1, Segment 2, and Segment 3,
respectively)

i 0.53%, i 2.31% and i 3.09%

Interest Rates to Convert Annuities to Actuarially
Equivalent Lump Sum Amounts (Segment 1, Segment 2 and
Segment 3, respectively)

i 0.53%, i 2.31% and i 3.09%

Discount Rate

i 4.81

i 4.80

i 4.81

Expected Long-Term Return on Plan Assets

i 6.50

Rate of Compensation Increase

i 3.50

Interest Rate Credit for Determining
Projected Cash Balance Account

i 3.00

Discount Rate

i 4.24

i 4.18

i 4.22

Expected Long-Term Return on Plan Assets

i 6.50

Rate of Compensation Increase

i 3.50

Interest Rate Credit for Determining
Projected Cash Balance Account

i 3.00

Footnotes:

1.Included in Salaries and Employee Benefits on the Consolidated Statements of Income

2.Included in Other Operating Expense on the Consolidated Statements of Income

102

Schedule of Defined Benefit Plan Disclosures

Information about Defined Benefit Plan Assets - Employees' Pension Plan

Fair Value Measurements Using:

Asset Category

Quoted Prices
in Active Markets
for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Total

Percent of Total

Target Allocation Minimum

Target Allocation Maximum

Cash

i —

i 15.0

Interest-Bearing Money Market Fund

i 1,124

i —

i 1,124

i 1.9

i —

i 15.0

Arrow Common Stock1

i 5,332

i —

i 5,332

i 8.9

i —

i 10.0

North Country Funds - Equity 2

i 25,741

i —

i 25,741

i 43.0

Other Mutual Funds - Equity

i 17,336

i —

i 17,336

i 29.0

Total Equity Funds

i 43,077

i —

i 43,077

i 72.0

i 55.0

i 85.0

North Country Funds - Fixed income 2

i 8,534

i —

i 8,534

i 14.3

Other Mutual Funds - Fixed Income

i 805

i —

i 805

i 1.3

Total Fixed Income Funds

i 9,339

i —

i 9,339

i 15.6

i 10.0

i 30.0

Alternative ETF

i 965

i —

i 965

i 1.6

i —

i 20.0

Total

i 59,837

i —

i 59,837

i 100.0

Cash

i —

i 15.0

Interest-Bearing Money Market Fund

i 2,742

i —

i 2,742

i 4.8

i —

i 15.0

Arrow Common Stock1

i 6,542

i —

i 6,542

i 11.5

i —

i 10.0

North Country Funds - Equity 2

i 21,209

i —

i 21,209

i 37.2

Other Mutual Funds - Equity

i 15,868

i —

i 15,868

i 27.8

Total Equity Funds

i 37,077

i —

i 37,077

i 65.0

i 55.0

i 85.0

North Country Funds - Fixed income 2

i 8,692

i —

i 8,692

i 15.2

Other Mutual Funds - Fixed Income

i 793

i —

i 793

i 1.4

Total Fixed Income Funds

i 9,485

i —

i 9,485

i 16.6

i 10.0

i 30.0

Alternative ETF

i 1,205

i —

i 1,205

i 2.1

i —

i 20.0

Total

i 57,051

i —

i 57,051

i 100.0

Footnotes:

1 Payment for the acquisition of Arrow Financial Corporation common stock was under 10% of the total fair value of the employee's pension plan assets at the time of acquisition.

2 The North Country Funds - Equity and the North Country Funds - Fixed Income are publicly traded mutual funds advised by Arrow's subsidiary, North Country Investment Advisers, Inc.

103

Schedule of Defined Benefit Plan Disclosures

Employees'
Pension
Plan

Select
Executive
Retirement
Plan

Postretirement
Benefit
Plans

Expected Future Benefit Payments

2021

i 2,739

i 453

i 694

2022

i 2,604

i 433

i 684

2023

i 3,235

i 412

i 664

2024

i 3,068

i 580

i 663

2025

i 3,417

i 559

i 675

2026 - 2030

i 15,146

i 2,476

i 3,280

Estimated Contributions During 2021

i —

i 453

i 694

Assumed Health Care Cost Trend Rates

Health Care Cost Trend
Rate Assumed for Next Year

i 7.00

Rate to which the Cost Trend
Rate is Assumed to Decline
(the Ultimate Trend Rate)

i 3.78

Year that the Rate Reaches
the Ultimate Trend Rate

i 2075

Health Care Cost Trend
Rate Assumed for Next Year

i 6.75

Rate to which the Cost Trend
Rate is Assumed to Decline
(the Ultimate Trend Rate)

i 3.78

Year that the Rate Reaches
the Ultimate Trend Rate

i 2075

Fair Value of Plan Assets (Defined Benefit Plan):

For information on fair value measurements, including descriptions of level 1, 2 and 3 of the fair value hierarchy and the valuation methods employed by Arrow, see Note 2, Summary of Significant Accounting Policies, and Note 17, Fair Values.

The fair value of level 1 financial instruments in the table above are based on unadjusted, quoted market prices from exchanges in active markets.

In accordance with ERISA guidelines, the Board authorized the purchase of Arrow common stock up to 10% of the fair market value of the plan's assets at the time of acquisition.

104

Pension Plan Investment Policies and Strategies:

The Company maintains a non-contributory pension benefit plan covering substantially all employees for the purpose of rewarding long and loyal service to the Company. The pension assets are held in trust and are invested in a prudent manner for the exclusive purpose of providing benefits to participants. The investment objective is to achieve an inflation-protected rate of return that meets the actuarial assumption which is used for funding purposes. The investment strategy attempts to maximize the investment return on assets at a level of risk deemed appropriate by the Company while complying with ERISA and any applicable regulations and laws. The investment strategy utilizes asset allocation as a principal determinant for establishing the risk/reward profile of the assets. Asset allocation ranges are established, periodically reviewed, and adjusted as funding levels, and participant benefit characteristics change. Active and passive investment management is employed to help enhance the risk/return profile of the assets.

The plan’s assets are invested in a diversified portfolio of equity securities comprised of companies with small, mid, and large capitalizations. Both domestic and international equities are allowed to provide further diversification and opportunity for return in potentially higher growth economies with lower correlation of returns. Growth and value styles of investment are employed to increase the diversification and offer varying opportunities for appreciation. The fixed income portion of the plan may be invested in U.S. dollar denominated debt securities that shall be rated within the top four ratings categories by nationally recognized ratings agencies. The fixed income portion will be invested without regard to industry or sector based on analysis of each target security’s structural and repayment features, current pricing and trading opportunities as well as credit quality of the issuer. Individual bonds with ratings that fall below the Plan’s rating requirements will be sold only when it is in the best interests of the Plan. Hybrid investments, such as convertible bonds, may be used to provide growth characteristics while offering some protection to declining equity markets by having a fixed income component. Alternative investments such as Treasury Inflation Protected Securities, commodities, and REITs may be used to further enhance diversification while offering opportunities for return. In accordance with ERISA guidelines, common stock of the Company may be purchased up to 10% of the fair market value of the Plan’s assets at the time of acquisition. Derivative investments are prohibited in the plan.

The return on assets assumption was developed through review of historical market returns, historical asset class volatility and correlations, current market conditions, the Plan’s past experience, and expectations on potential future market returns. The assumption represents a long-term average view of the performance of the assets in the Plan, a return that may or may not be achieved during any one calendar year. The assumption is based on the return of the Plan using the historical 15 year return adjusted for the potential for lower than historical returns due to low interest rates.

Cash Flows - We were not required to and we did not make any contribution to our qualified pension plan in 2020. Arrow makes contributions for its postretirement benefits in an amount equal to actual expenses for the year.

Note 14: i OTHER EXPENSES (Dollars In Thousands)

Other operating expenses included in the Consolidated Statements of Income are as follows:

2020

2019

2018

Legal and Other Professional Fees

i 2,516

i 2,469

i 2,460

Postage and Courier

i 957

i 1,051

i 982

Advertising and Promotion

i 1,140

i 1,236

i 1,083

Stationery and Printing

i 713

i 834

i 782

Intangible Asset Amortization

i 227

i 245

i 262

All Other

i 3,411

i 4,595

i 3,507

Total Other Operating Expense

i 8,964

i 10,430

i 9,076

105

Note 15: i INCOME TAXES (Dollars In Thousands)

The provision for income taxes is summarized below:

Current Tax Expense:

2020

2019

2018

Federal

i 10,791

i 7,706

i 7,668

State

i 2,485

i 1,550

i 1,450

Total Current Tax Expense

i 13,276

i 9,256

i 9,118

Deferred Tax Expense (Benefit):

Federal

( i 1,569)

i 427

( i 40)

State

( i 671)

( i 83)

( i 52)

Total Deferred Tax Expense (Benefit)

( i 2,240)

i 344

( i 92)

Total Provision for Income Taxes

i 11,036

i 9,600

i 9,026

The provisions for income taxes differed from the amounts computed by applying the U.S. Federal Income Tax Rate of 21% to pre-tax income as a result of the following:

2020

2019

2018

Statutory Federal Tax Rate

i 21.0

Increase (Decrease) Resulting From:

Tax-Exempt Income

( i 2.1)

( i 2.7)

( i 3.1)

Nondeductible Interest Expense

i 0.1

i 0.2

i 0.1

State Taxes, Net of Federal Income Tax Benefit

i 2.6

i 2.3

i 2.4

Tax benefit from stock based compensation

( i 0.1)

( i 0.3)

( i 0.4)

Other Items, Net

( i 0.2)

( i 0.1)

Effective Tax Rate

i 21.3

i 20.4

i 19.9

106

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are presented below:


	2020		2019
Deferred Tax Assets:
Allowance for Loan Losses	$	i 7,472	$	i 5,383
Lease liabilities	i 2,717		i 2,787
Pension and Deferred Compensation Plans	i 3,149		i 2,923
Pension Liability Included in Accumulated Other Comprehensive Income	i 2,439		i 2,329
Historic Tax Credit	i 1,394		i —
Other	i 385		i 352

Total Gross Deferred Tax Assets	i 17,556		i 13,774
Valuation Allowance for Deferred Tax Assets	i —		i —
Total Gross Deferred Tax Assets, Net of Valuation Allowance	$	i 17,556	$	i 13,774
Deferred Tax Liabilities:
Pension Plans	$	i 5,368	$	i 5,270
Depreciation	i 3,018		i 1,943
ROU assets	i 2,638		i 2,748
Deferred Income	i 2,327		i 3,215
Net Unrealized Gains on Equity Securities	i 132		i 240
Net Unrealized Gains on Securities Available-for-Sale Included in Accumulated Other Comprehensive Income	i 1,991		i 160
Goodwill	i 3,474		i 3,502
Gain on Cash Flow Hedge Agreements	i 166		$	i —
Total Gross Deferred Tax Liabilities	$	i 19,114	$	i 17,078

Deferred Tax Liability, Net	$	i 1,558	$	i 3,304

Management believes that the realization of the recognized gross deferred tax assets at December 31, 2020 and 2019 is more likely than not, based on historic earnings and expectations as to future taxable income.

Interest and penalties are recorded as a component of the provision for income taxes, if any. There are no current examinations of our Federal or state income tax returns, nor have we been notified of any upcoming examinations. Tax years 2017 through 2020 are subject to Federal and New York State examination. Management annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of December 31, 2020.

Note 16: i EARNINGS PER SHARE (Dollars In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share ("EPS") for each of the years in the three-year period ended December 31, 2020. All share and per share amounts have been adjusted for the September 25, 2020 i 3% stock dividend.

Earnings Per Share

Year-to-Date Period Ended:

12/31/2020

12/31/2019

12/31/2018

Earnings Per Share - Basic:

Net Income

i 40,827

i 37,475

i 36,279

Weighted Average Shares - Basic

i 15,465

i 15,388

i 15,285

Earnings Per Share - Basic

i 2.64

i 2.44

i 2.37

Earnings Per Share - Diluted:

Net Income

i 40,827

i 37,475

i 36,279

Weighted Average Shares - Basic

i 15,465

i 15,388

i 15,285

Dilutive Average Shares Attributable to Stock Options

i 14

i 45

i 85

Weighted Average Shares - Diluted

i 15,479

i 15,433

i 15,370

Earnings Per Share - Diluted

i 2.64

i 2.43

i 2.36

107

Note 17: i FAIR VALUES (Dollars In Thousands)

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and requires certain disclosures about fair value measurements. There are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at December 31, 2020 and 2019 were securities available-for-sale, equity securities and derivatives. Arrow held no securities or liabilities for trading on such dates. For information on fair value measurements, including descriptions of level 1, 2 and 3 of the fair value hierarchy and the valuation methods employed by Arrow, see Note 2, Summary of Significant Accounting Policies.

The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:

Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis

Fair Value Measurements at Reporting Date Using:

Fair Value of Assets and Liabilities Measured on a Recurring Basis:

Fair Value

Quoted Prices
In Active Markets for Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Assets:

Securities Available-for Sale:

U.S. Government & Agency Obligations

i 65,112

i —

i 65,112

i —

State and Municipal Obligations

i 528

i —

i 528

i —

Mortgage-Backed Securities

i 298,847

i —

i 298,847

i —

Corporate and Other Debt Securities

i 800

i —

i 800

i —

Total Securities Available-for-Sale

i 365,287

i —

i 365,287

i —

Equity Securities

i 1,636

i —

i 1,636

i —

Total Securities Measured on a Recurring Basis

i 366,923

i —

i 366,923

i —

Derivatives, included in other assets

i 5,080

i —

i 5,080

i —

Total Measured on a Recurring Basis

i 372,003

i —

i 372,003

i —

Liabilities:

Derivatives, included in other liabilities

i 5,080

i —

i 5,080

i —

Total Measured on a Recurring Basis

i 5,080

i —

i 5,080

i —

Assets:

Securities Available-for Sale:

U.S. Government & Agency Obligations

i 5,054

i —

i 5,054

i —

State and Municipal Obligations

i 764

i —

i 764

i —

Mortgage-Backed Securities

i 350,716

i —

i 350,716

i —

Corporate and Other Debt Securities

i 800

i —

i 800

i —

Total Securities Available-for-Sale

i 357,334

i —

i 357,334

i —

Equity Securities

i 2,063

i —

i 2,063

i —

Total Securities Measured on a Recurring Basis

i 359,397

i —

i 359,397

i —

Derivatives, included in other assets

i 69

i —

i 69

i —

Total Measured on a Recurring Basis

i 359,466

i —

i 359,466

i —

Liabilities:

Derivatives, included in other liabilities

i 69

i —

i 69

i —

Total Measured on a Recurring Basis

i 69

i —

i 69

i —

108

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:

Fair Value

Quoted Prices
In Active Markets for Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Gains (Losses) Recognized in Earnings

Collateral Dependent Impaired Loans

i 594

i —

i 594

i —

Other Real Estate Owned and Repossessed Assets, Net

i 155

i —

i 155

i —

Collateral Dependent Impaired Loans

i 285

i —

i 285

i —

Other Real Estate Owned and Repossessed Assets, Net

i 1,261

i —

i 1,261

( i 186)

The fair value of financial instruments is determined under the following hierarchy:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

There were no transfers between Levels 1, 2 and 3 for the years ended December 31, 2020 or 2019.

Fair Value Methodology for Assets and Liabilities Measured on a Recurring Basis

The fair value of level 1 securities available-for-sale are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of level 2 securities available-for-sale are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. The fair value of Level 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.

Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent impaired loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment on an annual basis, with no impairment recognized for these assets at December 31, 2020 and 2019.

Fair Value Methodology for Financial Instruments Not Measured on a Recurring or Nonrecurring Basis

The fair value for securities held-to-maturity is determined utilizing an independent bond pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories. The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for loan and lease loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the swap curve.

The fair value of time deposits is calculated using the replacement cost of funds approach, which is based on the discounted value of contractual cash flows. The discount rates are estimated using the Federal Home Loan Bank of New York ("FHLBNY") yield curve, which is considered representative of Arrow’s replacement cost of funds. A cash flow is generated separately to

109

represent the functional cost of maintaining each account; this cash flow is discounted to FHLBNY yield curve, in conjunction with the contractual cash flows.

The fair value of all other deposits is equal to the carrying value. The fair value of FHLBNY advances are as calculated by the FHLBNY. The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of the stock.

The fair value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are equal to book value with adjustments for the fair market value of their associated interest rate swaps. The fair value is determined by starting with book value as these outstanding securities have a floating rate coupon that is tied to 3-month LIBOR. Through the use of interest rate swaps, the coupons are synthetically fixed, so an adjustment for market value of swap is applied. The market value of interest rate swaps are provided by a third party counterparty.

Fair Value by Balance Sheet Grouping

The following table presents a summary of the carrying amount, the fair value or an amount approximating fair value and the fair value hierarchy of Arrow’s financial instruments:

Schedule of Fair Values by Balance Sheet Grouping

Fair Value Hierarchy

Carrying
Amount

Fair
Value

Level 1

Level 2

Level 3

Cash and Cash Equivalents

i 380,991

i —

Securities Available-for-Sale

i 365,287

i —

i 365,287

i —

Securities Held-to-Maturity

i 218,405

i 226,576

i —

i 226,576

i —

Equity Securities

i 1,636

Federal Home Loan Bank and Federal Reserve Bank Stock

i 5,349

i —

i 5,349

i —

Net Loans

i 2,565,798

i 2,558,903

i —

i 2,558,903

Accrued Interest Receivable

i 7,495

i —

i 7,495

i —

Derivatives, included in other assets

i 5,080

i —

i 5,080

i —

Deposits

i 3,234,726

i 3,234,387

i —

i 3,234,387

i —

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

i 17,486

i —

i 17,486

i —

Federal Home Loan Bank Term Advances

i 45,000

i 46,474

i —

i 46,474

i —

Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts

i 20,000

i —

i 20,000

i —

Accrued Interest Payable

i 326

i —

i 326

i —

Derivatives, included in other liabilities

i 5,080

i —

i 5,080

i —

Cash and Cash Equivalents

i 70,221

i —

Securities Available-for-Sale

i 357,334

i —

i 357,334

i —

Securities Held-to-Maturity

i 245,065

i 249,618

i —

i 249,618

i —

Equity Securities

i 2,063

Federal Home Loan Bank and Federal Reserve Bank Stock

i 10,317

i —

i 10,317

i —

Net Loans

i 2,364,933

i 2,332,797

i —

i 2,332,797

Accrued Interest Receivable

i 7,377

i —

i 7,377

i —

Derivatives, included in other assets

i 69

i —

i 69

i —

Deposits

i 2,616,054

i 2,614,170

i —

i 2,614,170

i —

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

i 51,099

i —

i 51,099

i —

Federal Home Loan Bank Overnight Advances

i 130,000

i —

i 130,000

i —

Federal Home Loan Bank Term Advances

i 30,000

i 29,993

i —

i 29,993

i —

Junior Subordinated Obligations Issued
to Unconsolidated Subsidiary Trusts

i 20,000

i —

i 20,000

i —

Accrued Interest Payable

i 1,436

i —

i 1,436

i —

Derivatives, included in other liabilities

i 69

i —

i 69

i —

110

Note 18: i i LEASES (Dollars In Thousands) /

The Company is a lessee in its leases, which are mainly for financial services locations in addition to leases for corporate vehicles. These leases generally require the Company to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, the Company pays the variable payments to the lessor, and in other leases, the Company pays the variable payments directly to the applicable third party. None of the Company's current leases include any residual value guarantees or any subleases, and there are no significant rights or obligations of the Company for leases that have not commenced as of the reporting date.

Arrow leases i four of its branch offices, at market rates, from Stewart’s Shops Corp. Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a director on the board of directors of each of Arrow and Saratoga National Bank and Trust Company. Additional information regarding this relationship can be found in Arrow's Proxy Statement for its Annual Meeting of Shareholders to be held May 6, 2020 under the caption "Corporate Governance - Related Party Transactions."

The following includes quantitative data related to the Company's leases as of and for the twelve months ended December 31, 2020 and December 31, 2019:

Twelve Months Ended

Finance Lease Amounts:

Classification