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 September 30, 2016, December 31, 2015 and September 30, 2015 were securities available-for-sale. Arrow held no securities or liabilities for trading on such dates.

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		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Fair Value of Assets and Liabilities Measured on a Recurring Basis:
September 30, 2016
Securities Available-for Sale:
U.S. Agency Obligations	$	153,926	$	—	$	153,926	$	—
State and Municipal Obligations	31,628		—		31,628		—
Mortgage-Backed Securities - Residential	148,087		—		148,087		—
Corporate and Other Debt Securities	4,299		—		4,299		—
Mutual Funds and Equity Securities	1,250		—		1,250		—
Total Securities Available-for-Sale	$	339,190	$	—	$	339,190	$	—
December 31, 2015
Securities Available-for Sale:
U.S. Agency Obligations	$	155,782	$	—	$	155,782	$	—
State and Municipal Obligations	52,408		—		52,408		—
Mortgage-Backed Securities - Residential	178,588		—		178,588		—
Corporate and Other Debt Securities	14,299		—		14,299		—
Mutual Funds and Equity Securities	1,232		—		1,232		—
Total Securities Available-for Sale	$	402,309	$	—	$	402,309	$	—
September 30, 2015
Securities Available-for Sale:
U.S. Agency Obligations	$	162,518	$	—	$	162,518	$	—
State and Municipal Obligations	55,486		—		55,486		—
Mortgage-Backed Securities - Residential	161,637		—		161,637		—
Corporate and Other Debt Securities	16,672		—		16,672		—
Mutual Funds and Equity Securities	1,246		—		1,246		—
Total Securities Available-for Sale	$	397,559	$	—	$	397,559	$	—

Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
September 30, 2016
Collateral Dependent Impaired Loans	$	2,640	$	—	$	—	$	2,640	$	(240	)
Other Real Estate Owned and Repossessed Assets, Net	1,016		—		—		1,016		(319		)
December 31, 2015
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	2,018		—		—		2,018		(687		)
September 30, 2015
Collateral Dependent Impaired Loans	$	902	$	—	$	—	$	902	$	(322	)
Other Real Estate Owned and Repossessed Assets, Net	585		—		—		585		(135		)

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; and


•	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).

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 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 Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent impaired loans was based on third-party appraisals of the collateral. The fair value of other real estate owned was based on third-party appraisals. 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 September 30, 2016, December 31, 2015 and September 30, 2015.

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
September 30, 2016
Cash and Cash Equivalents	$	102,059	$	102,059	$	102,059	$	—	$	—
Securities Available-for-Sale	339,190		339,190		—		339,190		—
Securities Held-to-Maturity	338,238		347,441		—		347,441		—
Federal Home Loan Bank and Federal Reserve Bank Stock	5,371		5,371		5,371		—		—
Net Loans	1,690,241		1,696,929		—		—		1,696,929
Accrued Interest Receivable	7,046		7,046		7,046		—		—
Deposits	2,213,187		2,207,985		2,004,182		203,803		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	38,589		38,589		38,589		—		—
Federal Home Loan Bank Overnight Advances	—		—		—		—		—
Federal Home Loan Bank Term Advances	55,000		55,955		—		55,955		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	247		247		247		—		—

December 31, 2015
Cash and Cash Equivalents	$	51,068	$	51,068	$	51,068	$	—	$	—
Securities Available-for-Sale	402,309		402,309		—		402,309		—
Securities Held-to-Maturity	320,611		325,930		—		325,930		—
Federal Home Loan Bank and Federal Reserve Bank Stock	8,839		8,839		8,839		—		—
Net Loans	1,557,914		1,557,511		—		—		1,557,511
Accrued Interest Receivable	6,360		6,360		6,360		—		—
Deposits	2,030,423		2,024,224		1,840,606		183,618		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	23,173		19,421		19,421		—		—
Federal Home Loan Bank Overnight Advances	82,000		82,000		82,000		—		—
Federal Home Loan Bank Term Advances	55,000		55,063		—		55,063		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	231		231		231		—		—

September 30, 2015
Cash and Cash Equivalents	$	69,691	$	69,691	$	69,691	$	—	$	—
Securities Available-for-Sale	397,559		397,559		—		397,559		—
Securities Held-to-Maturity	317,480		324,009		—		324,009		—
Federal Home Loan Bank and Federal Reserve Bank Stock	5,143		5,143		5,143		—		—
Net Loans	1,521,151		1,530,930		—		—		1,530,930
Accrued Interest Receivable	6,949		6,949		6,949		—		—
Deposits	2,082,051		2,076,658		1,887,237		189,421		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	24,414		24,414		24,414		—		—
Federal Home Loan Bank Overnight Advances	—		—		—		—		—
Federal Home Loan Bank Term Advances	55,000		56,630		—		56,630		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	306		306		306		—		—

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

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 all other deposits is equal to the carrying value.

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.