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Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
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 June 30, 2017, December 31, 2016 and June 30, 2016 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:
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
Securities Available-for Sale:
 
 
 
 
 
 
 
 
 
U.S. Government & Agency Obligations
$
147,085

 
$
54,676

 
$
92,409

 
$
—

 
 
State and Municipal Obligations
15,441

 
—

 
15,441

 
—

 
 
Mortgage-Backed Securities - Residential
161,077

 
—

 
161,077

 
—

 
 
Corporate and Other Debt Securities
2,299

 
—

 
2,299

 
—

 
 
Mutual Funds and Equity Securities
1,490

 
—

 
1,490

 
—

 
 
  Total Securities Available-for-Sale
$
327,392

 
$
54,676

 
$
272,716

 
$
—

 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Securities Available-for Sale:
 
 
 
 
 
 
 
 
 
U.S. Government & Agency Obligations
$
147,377

 
$
54,706

 
$
92,671

 
$
—

 
 
State and Municipal Obligations
27,690

 
—

 
27,690

 
—

 
 
Mortgage-Backed Securities - Residential
167,239

 
—

 
167,239

 
—

 
 
Corporate and Other Debt Securities
3,308

 
—

 
3,308

 
—

 
 
Mutual Funds and Equity Securities
1,382

 
—

 
1,382

 
—

 
 
Total Securities Available-for Sale
$
346,996

 
$
54,706

 
$
292,290

 
$
—

 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
Securities Available-for Sale:
 
 
 
 
 
 
 
 
 
U.S. Government & Agency Obligations
$
157,990

 
$
—

 
$
157,990

 
$
—

 
 
State and Municipal Obligations
36,425

 
—

 
36,425

 
—

 
 
Mortgage-Backed Securities - Residential
161,728

 
—

 
161,728

 
—

 
 
Corporate and Other Debt Securities
5,555

 
—

 
5,555

 
—

 
 
Mutual Funds and Equity Securities
1,231

 
—

 
1,231

 
—

 
 
Total Securities Available-for Sale
$
362,929

 
$
—

 
$
362,929

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
Collateral Dependent Impaired Loans
$
791

 
$
—

 
$
—

 
$
791

 
$
(146
)
Other Real Estate Owned and Repossessed Assets, Net
1,613

 
—

 
—

 
1,613

 
(584
)
December 31, 2016

 
 
 
 
 
 
 
 
Collateral Dependent Impaired Loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Other Real Estate Owned and Repossessed Assets, Net
$
1,686

 
$
—

 
—

 
1,686

 
$
(587
)
June 30, 2016
 
 
 
 
 
 
 
 
 
Collateral Dependent Impaired Loans
$
1,692

 
$
—

 
$
—

 
$
1,692

 
$
(250
)
Other Real Estate Owned and Repossessed Assets, Net
933

 
—

 
—

 
933

 
(732
)


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).

There were no transfers between Levels 1, 2 and 3 for the three months ended June 30, 2017, December 31, 2016 and June 30, 2016.

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 Company uses the fair value of underlying collateral to estimate the specific reserves for collateral dependent impaired loans. The fair value of underlying collateral is generally determined through independent appraisals, which generally include various Level 3 inputs which are not identifiable. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 15% to 25%. Based on the valuation techniques used, the fair value measurements for collateral dependent impaired loans are classified as Level 3. 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 June 30, 2017, December 31, 2016 and June 30, 2016.

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
June 30, 2017
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
66,077

 
$
66,077

 
$
66,077

 
$
—

 
$
—

Securities Available-for-Sale
327,392

 
327,392

 
54,676

 
272,716

 
—

Securities Held-to-Maturity
348,018

 
350,355

 
—

 
350,355

 
—

Federal Home Loan Bank and Federal
  Reserve Bank Stock
11,035

 
11,035

 
11,035

 
—

 
—

Net Loans
1,861,190

 
1,844,301

 
—

 
—

 
1,844,301

Accrued Interest Receivable
6,563

 
6,563

 
6,563

 
—

 
—

Deposits
2,220,038

 
2,212,256

 
2,018,424

 
193,832

 
—

Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
40,892

 
40,892

 
40,892

 
—

 
—

Federal Home Loan Bank Overnight Advances
122,000

 
122,000

 
122,000

 
—

 
—

Federal Home Loan Bank Term Advances
55,000

 
55,448

 
—

 
55,448

 
—

Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000

 
20,000

 
—

 
20,000

 
—

Accrued Interest Payable
252

 
252

 
252

 
—

 
—

 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
57,355

 
$
57,355

 
$
57,355

 
$
—

 
$
—

Securities Available-for-Sale
346,996

 
346,996

 
54,706

 
292,290

 
—

Securities Held-to-Maturity
345,427

 
343,751

 
—

 
343,751

 
—

Federal Home Loan Bank and Federal
  Reserve Bank Stock
10,912

 
10,912

 
10,912

 
—

 
—

Net Loans
1,736,256

 
1,720,078

 
—

 
—

 
1,720,078

Accrued Interest Receivable
6,684

 
6,684

 
6,684

 
—

 
—

Deposits
2,116,546

 
2,109,557

 
1,917,233

 
192,324

 
—

Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
35,836

 
35,836

 
35,836

 
—

 
—

Federal Home Loan Bank Overnight Advances
123,000

 
123,000

 
123,000

 
—

 
—

Federal Home Loan Bank Term Advances
55,000

 
55,118

 
—

 
55,118

 
—

Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000

 
20,000

 
—

 
20,000

 
—

Accrued Interest Payable
247

 
247

 
247

 
—

 
—

 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
63,115

 
$
63,115

 
$
63,115

 
$
—

 
$
—

Securities Available-for-Sale
362,929

 
362,929

 
—

 
362,929

 
—

Securities Held-to-Maturity
343,814

 
354,778

 
—

 
354,778

 
—

Federal Home Loan Bank and Federal
  Reserve Bank Stock
9,961

 
9,961

 
9,961

 
—

 
—

Net Loans
1,655,692

 
1,664,713

 
—

 
—

 
1,664,713

Accrued Interest Receivable
6,383

 
6,383

 
6,383

 
—

 
—

Deposits
2,072,385

 
2,067,328

 
1,869,865

 
197,463

 
—

Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
41,497

 
41,497

 
41,497

 
—

 
—

Federal Home Loan Bank Overnight Advances
102,000

 
102,000

 
102,000

 
—

 
—

Federal Home Loan Bank Term Advances
55,000

 
56,145

 
—

 
56,145

 
—

Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000

 
20,000

 
—

 
20,000

 
—

Accrued Interest Payable
231

 
231

 
231

 
—

 
—


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.