Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]

Fair Value Disclosures [Text Block]

FAIR VALUE OF FINANCIAL INSTRUMENTS (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 on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at March 31, 2012, December 31, 2011 and March 31, 2011 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.

			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)
March 31, 2012
Securities Available-for Sale:
U.S. Agency Obligations	$	65,660	$	—	$	65,660	$	—
State and Municipal Obligations	43,482		—		43,482		—
Collateralized Mortgage Obligations - Residential	129,713		—		129,713		—
Mortgage-Backed Securities - Residential	225,669		—		225,669		—
Corporate and Other Debt Securities	828		—		828		—
Mutual Funds and Equity Securities	1,433		281		1,152		—
Total Securities Available-for-Sale	$	466,785	$	281	$	466,504	$	—
December 31, 2011
Securities Available-for Sale:
U.S. Agency Obligations	$	116,393	$	—	$	116,393	$	—
State and Municipal Obligations	44,999		—		44,999		—
Collateralized Mortgage Obligations - Residential	149,669		—		149,669		—
Mortgage-Backed Securities - Residential	243,043		—		243,043		—
Corporate and Other Debt Securities	1,015		—		1,015		—
Mutual Funds and Equity Securities	1,419		257		1,162		—
Total Securities Available-for Sale	$	556,538	$	257	$	556,281	$	—
March 31, 2011
Securities Available-for Sale:
U.S. Agency Obligations	$	105,291	$	—	$	105,291	$	—
State and Municipal Obligations	98,648		—		98,648		—
Collateralized Mortgage Obligations - Residential	149,753		—		149,753		—
Mortgage-Backed Securities - Residential	188,217		—		188,217		—
Corporate and Other Debt Securities	1,487		—		1,179		308
Mutual Funds and Equity Securities	1,393		430		963		—
Total Securities Available-for Sale	$	544,789	$	430	$	544,051	$	308

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 3 securities available-for-sale at March 31, 2011, 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.

During 2011, we held one security where the fair value was measured using significant unobservable inputs. That security was paid in full during the fourth quarter of 2011. The following table is a reconciliation of the beginning and ending balances for 2011 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
Beginning Balance, January 1, 2011	$	283
Total net gains (realized/unrealized) included in other comprehensive income	25
Ending Balance, March 31, 2011	$	308

There was no other-than-temporary impairment of the assets in the table above during 2012 or 2011.  The only assets or liabilities that Arrow measured at fair value on a nonrecurring basis on March 31, 2012, December 31, 2011 and March 31, 2011 were other real estate owned and collateral dependent impaired loans:

			Fair Value Measurements Using:
Nonrecurring Fair Value Measurements	Total		Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)	Total Gains (Losses)
March 31, 2012:
Collateral Dependent Impaired Loans	$	486	$—	$	486	$—	$(167)
Other Real Estate Owned and Repossessed Assets	555		—	555		—	—
December 31, 2011:
Other Real Estate Owned and Repossessed Assets	516		—	516		—	—
March 31, 2011:
Other Real Estate Owned and Repossessed Assets	60		—	60		—	—

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 a quarterly basis, with no impairment recognized for these assets at March 31, 2012, December 31, 2011 and March 31, 2011.

The following table presents a summary of the fair value hierarchy, the carrying amount and fair value of Arrow’s financial instruments not carried at fair value or an amount approximating fair value:

		March 31, 2012				December 31, 2011				March 31, 2011
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and Due from Banks	1	$	31,128	$	31,128	$	29,598	$	29,598	$	29,798	$	29,798
Interest-Bearing Deposits at Banks	1	106,380		106,380		14,138		14,138		47,205		47,205
Securities Available-for-Sale	1,2,3	466,785		466,785		556,538		556,538		544,789		544,789
Securities Held-to-Maturity	2	200,607		207,779		150,688		159,059		147,217		149,895
Other Investments	1	4,382		4,382		6,722		6,722		7,702		7,702
Net Loans	3	1,122,494		1,147,014		1,116,454		1,141,310		1,120,998		1,142,022
Non-Maturity Deposits	1	1,421,257		1,421,257		1,291,388		1,291,388		1,242,115		1,242,115
Time Deposits	2	339,621		345,001		352,658		359,461		366,004		373,928
Federal Funds Purchased and Securities   Sold Under Agreements to Repurchase	1	16,652		16,652		26,293		26,293		57,762		57,762
FHLBNY Advances	2	30,000		31,310		82,000		83,553		110,000		113,202
Junior Subordinated Obligations Issued   to Unconsolidated Subsidiary Trusts	2	20,000		20,000		20,000		20,000		20,000		20,000
Accrued Interest Receivable	1	6,380		6,380		6,082		6,082		7,132		7,132
Accrued Interest Payable	1	974		974		1,147		1,147		1,755		1,755

Securities held-to-maturity are fair valued 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.

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.