Fair Value Measures and Disclosures

3 Months Ended

Jun. 30, 2011

Fair Value Measures and Disclosures

Fair Value Disclosures [Text Block]

9.  Fair Value Measurements and Disclosures (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.  We do not have any nonfinancial assets or liabilities measured at fair value. The only assets or liabilities that Arrow measured at fair value on a recurring basis at June 30, 2011, December 31, 2010 and June 30, 2010 were securities available-for-sale.  Arrow held no securities or liabilities for trading on such date. 

We determine the fair value of financial instruments 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). 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. 

9.  Fair Value Measurements and Disclosures, continued

The fair value measurement of securities available-for-sale on such date was as follows:

		Fair Value Measurements at Reporting Date Using:
Description	Total	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
June 30, 2011:
Securities Available-for Sale:
U.S. Agency Securities	$  49,551	$---	$  49,551	$    ---
State and Municipal Obligations	90,700	---	90,700	---
Collateralized Mortgage Obligations	159,985	---	159,985	---
Mortgage-Backed Securities - Residential	208,044	---	208,044	---
Corporate and Other Debt Securities	1,345	---	1,028	317
Mutual Funds and Equity Securities	1,469	215	1,254	---
Total Securities Available-for-Sale	$511,094	$215	$510,562	$317
December 31, 2010:
Securities Available-for Sale:
U.S. Agency Securities	$  98,173	$  ---	$  98,173	$    ---
State and Municipal Obligations	89,528	---	89,528	---
Collateralized Mortgage Obligations	166,964	---	166,964	---
Mortgage-Backed Securities - Residential	159,926	---	159,926	---
Corporate and Other Debt Securities	1,417	---	1,134	283
Mutual Funds and Equity Securities	1,356	421	935	---
Total Securities Available-for-Sale	$517,364	$421	$516,660	$283
June 30, 2010:
Securities Available-for Sale:
U.S. Agency Securities	$163,858	$---	$163,858	$    ---
State and Municipal Obligations	18,953	---	18,953	---
Collateralized Mortgage Obligations	177,863	---	177,863	---
Mortgage-Backed Securities - Residential	84,552	---	84,552	---
Corporate and Other Debt Securities	1,433	---	1,119	314
Mutual Funds and Equity Securities	1,208	---	1,208	---
Total Securities Available-for-Sale	$447,867	$---	$447,553	$314

Fair value for securities available-for-sale was 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.  There were no assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2011. 

Level 3 securities available-for-sale at June 30, 2011, December 31, 2010 and June 30, 2010, in the table above, included one trust preferred pooled security.   In our analysis of fair value, we determined that the market for this security was inactive.  We reviewed the collateral within the pool and performed a discounted cash flow analysis using additional value estimates from unobservable inputs including expected cash flows after estimated deferrals and defaults.  The discount rate used was based on a market based rate of return including an assumed risk premium for securities with similar credit characteristics plus a market price adjustment for the small size and lack of an established market for this type of security.

9.  Fair Value Measurements and Disclosures, continued

The following table is a reconciliation of the beginning and ending balances for June 30, 2011 and 2010 of the Level 3 assets of Arrow, i.e., as to which fair value is measured using significant unobservable inputs, all of which are securities available-for-sale:

	2011	2010
Beginning Balance, January 1	$283	$305
Transfers In	---	---
Principal payment received	(2)	(3)
Purchases, issuances and settlements	---	---
Total net losses (realized/unrealized):
Included in earnings	---	---
Included in earnings, as a result of other-than-temporary impairment	---	---
Included in other comprehensive income	36	12
Ending Balance, June 30	$317	$314
The amount of total losses for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at period-end, as a result of other-than-temporary impairment	$---	$---

Other impaired assets which might have been included in this table include other real estate owned, mortgage servicing rights, goodwill and other intangible assets.  Arrow evaluates each of these assets for impairment on a quarterly basis, with no impairment recognized for these assets at June 30, 2011, December 31, 2010 or June 30, 2011. 

The following table presents a summary at June 30, 2011, December 31, 2010, and June 30, 2010 of the carrying amount and fair value of Arrow’s financial instruments:

	June 30, 2011		December 31, 2010		June 30, 2010
	Carrying Amount	Fair Value	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Cash and Due from Banks	$    33,202	$    33,202	$    25,961	$   25,961	$    33,071	$   33,071
Interest-Bearing Deposits at Banks	24,118	24,118	5,118	5,118	6,701	6,701
Securities Available-for-Sale	511,094	511,094	517,364	517,364	447,867	447,867
Securities Held-to-Maturity	138,334	143,327	159,938	162,713	158,226	162,077
Other Investments	7,019	7,019	8,602	8,602	9,474	9,474
Net Loans	1,105,276	1,132,069	1,130,819	1,158,129	1,130,548	1,154,469
Non-Maturity Deposits	1,178,912	1,178,912	1,165,599	1,165,599	1,054,314	1,054,314
Time Deposits	362,947	371,578	368,405	377,224	384,709	395,146
Federal Funds Purchased and Securities   Sold Under Agreements to Repurchase	60,361	60,361	51,581	51,581	60,847	60,847
Other Short-Term Borrowings	2,211	2,211	1,633	1,633	1,619	1,619
FHLBNY Advances	90,000	93,236	130,000	134,676	150,000	156,776
Junior Subordinated Obligations Issued to    Unconsolidated Subsidiary Trusts	20,000	20,000	20,000	20,000	20,000	20,000
Accrued Interest Receivable	6,689	6,689	6,512	6,512	6,464	6,464
Accrued Interest Payable	1,549	1,549	1,957	1,957	2,094	2,094

Fair value for securities held-to-maturity was 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.

Fair values for loans are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect 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 discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.  The estimate of maturity is based on historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.   Fair value for nonperforming loans is generally based on recent external appraisals.  If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

9.  Fair Value Measurements and Disclosures, continued

The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty.  The discount rates are estimated using the FHLBNY yield curve, which is considered representative of Arrow’s time deposit rates.

The fair value of FHLBNY advances is estimated based on the discounted value of contractual cash flows.  The discount rate is estimated using current rates on FHLBNY advances with similar maturities and call features.

Based on Arrow’s capital adequacy, the book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable (indexed to LIBOR) and Arrow is well-capitalized.