Loans

12 Months Ended

Dec. 31, 2020

Receivables [Abstract]

Loans

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 $11,085 and $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
	Commercial		Real Estate		Consumer		Residential		Total
December 31, 2020
Loans Past Due 30-59 Days	$	102	$	—	$	4,976	$	261	$	5,339
Loans Past Due 60-89 Days	113		—		2,713		1,279		4,105
Loans Past Due 90 or More Days	78		1,658		1,379		1,224		4,339
Total Loans Past Due	293		1,658		9,068		2,764		13,783
Current Loans	240,261		570,129		850,700		920,157		2,581,247
Total Loans	$	240,554	$	571,787	$	859,768	$	922,921	$	2,595,030
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	184	$	—	$	44	$	228
Nonaccrual Loans	78		1,475		1,470		3,010		6,033
December 31, 2019
Loans Past Due 30-59 Days	$	150	$	—	$	5,670	$	152	$	5,972
Loans Past Due 60-89 Days	42		266		2,700		2,027		5,035
Loans Past Due 90 or more Days	21		326		445		1,807		2,599
Total Loans Past Due	213		592		8,815		3,986		13,606
Current Loans	150,447		509,949		802,383		909,735		2,372,514
Total Loans	$	150,660	$	510,541	$	811,198	$	913,721	$	2,386,120
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	253	$	253
Nonaccrual Loans	81		326		663		2,935		4,005

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

Commercial - The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. 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 $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 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 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	$	1,273	$	5,181
Overdrawn deposit accounts, included in the above balances	238		2,420
Pledged loans  under a blanket collateral agreement to secure borrowings from the Federal Home Loan Bank of New York	859,592		731,240
Residential real estate loans serviced for Freddie Mac, not included    in the balances above	190,169		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
	Commercial		Real Estate		Consumer		Residential		Total
Rollfoward of the Allowance for Loan Losses for the Year Ended:
December 31, 2019	$	1,386	$	5,830	$	9,408	$	4,563	$	21,187
Charge-offs	(37)		(5)		(1,898)		(49)		(1,989)
Recoveries	3		—		712		—		715
Provision	821		4,165		3,340		993		9,319
December 31, 2020	$	2,173	$	9,990	$	11,562	$	5,507	$	29,232
December 31, 2018	$	1,218	$	5,644	$	8,882	$	4,452	$	20,196
Charge-offs	(12)		(29)		(1,603)		(91)		(1,735)
Recoveries	98		—		549		—		647
Provision	82		215		1,580		202		2,079
December 31, 2019	$	1,386	$	5,830	$	9,408	$	4,563	$	21,187
December 31, 2017	$	1,873	$	4,504	$	7,604	$	4,605	$	18,586
Charge-offs	(153)		(17)		(1,246)		(116)		(1,532)
Recoveries	3		12		520		—		535
Provision	(505)		1,145		2,004		(37)		2,607
December 31, 2018	$	1,218	$	5,644	$	8,882	$	4,452	$	20,196
December 31, 2020
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	19	$	—	$	—	$	22	$	41
Allowance for loan losses - Loans Collectively Evaluated for Impairment	2,154		9,990		11,562		5,485		29,191
Ending Loan Balance - Individually Evaluated for Impairment	47		1,128		111		1,417		2,703
Ending Loan Balance - Collectively Evaluated for Impairment	240,507		570,659		859,657		921,504		2,592,327
December 31, 2019
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	5	$	—	$	—	$	42	$	47
Allowance for loan losses - Loans Collectively Evaluated for Impairment	1,381		5,830		9,408		4,521		21,140
Ending Loan Balance - Individually Evaluated for Impairment	35		—		107		959		1,101
Ending Loan Balance - Collectively Evaluated for Impairment	150,625		510,541		811,091		912,762		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
	Commercial		Real Estate		Consumer		Residential		Total
December 31, 2020
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	229,351	$	525,609					$	754,960
Special Mention	1,574		16,213						17,787
Substandard	9,629		29,965						39,594
Doubtful	—		—						—
Credit Risk Profile Based on Payment Activity:
Performing					$	858,298	$	919,867	1,778,165
Nonperforming					1,470		3,054		4,524
December 31, 2019
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	144,283	$	484,267					$	628,550
Special Mention	32		263						295
Substandard	6,345		26,011						32,356
Doubtful	—		—						—
Credit Risk Profile Based on Payment Activity:
Performing					$	810,535	$	910,533	1,721,068
Nonperforming					663		3,188		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 $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
	Commercial		Real Estate		Consumer		Residential		Total
December 31, 2020
Recorded Investment:
With No Related Allowance	$	—	$	1,124	$	112	$	1,174	$	2,410
With a Related Allowance	46		—		—		244		290
Unpaid Principal Balance:
With No Related Allowance	$	—	$	1,128	$	111	$	1,174	$	2,413
With a Related Allowance	47		—		—		244		291
December 31, 2019
Recorded Investment:
With No Related Allowance	$	—	$	—	$	108	$	699	$	807
With a Related Allowance	34		—		—		260		294
Unpaid Principal Balance:
With No Related Allowance	$	—	$	—	$	107	$	699	$	806
With a Related Allowance	35		—		—		260		295
For the Year-To-Date Period Ended:
December 31, 2020
Average Recorded Balance:
With No Related Allowance	$	—	$	562	$	110	$	937	$	1,609
With a Related Allowance	40		—		—		252		$	292
Interest Income Recognized:
With No Related Allowance	$	—	$	—	$	1	$	10	$	11
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	$	—	$	—	$	—	$	—	$	—
With a Related Allowance	—		—		—		—		—
December 31, 2019
Average Recorded Balance:
With No Related Allowance	$	215	$	397	$	105	$	1,152	$	1,869
With a Related Allowance	17		—		—		277		$	294
Interest Income Recognized:
With No Related Allowance	$	—	$	—	$	1	$	8	$	9
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	$	—	$	—	$	—	$	—	$	—
With a Related Allowance	—		—		—		—		—
December 31, 2018
Average Recorded Balance:
With No Related Allowance	$	215	$	787	$	98	$	1,437	$	2,537
With a Related Allowance	243		363		—		314		$	920
Interest Income Recognized:
With No Related Allowance	$	—	$	—	$	1	$	18	$	19
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	$	—	$	—	$	—	$	—	$	—
With a Related Allowance	—		—		—		—		—

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
	Commercial		Real Estate		Consumer		Residential		Total
For the Year Ended:
December 31, 2020
Number of Loans	1		—		5		—		6
Pre-Modification Outstanding Recorded Investment	$	14	$	—	$	77	$	—	$	91
Post-Modification Outstanding Recorded Investment	14		—		77		—		91
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—
Commitments to lend additional funds to modified loans	—		—		—		—		—
December 31, 2019
Number of Loans	—		—		6		—		6
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	68	$	—	$	68
Post-Modification Outstanding Recorded Investment	—		—		68		—		68
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—
Commitments to lend additional funds to modified loans	—		—		—		—		—
December 31, 2018
Number of Loans	1		—		5		—		6
Pre-Modification Outstanding Recorded Investment	$	38	$	—	$	44	$	—	$	82
Post-Modification Outstanding Recorded Investment	38		—		44		—		82
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—
Commitments to lend additional funds to modified loans	—		—		—		—		—

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).