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Fair Value of Financial Instruments
9 Months Ended
Sep. 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 September 30, 2017, December 31, 2016 and September 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:
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Securities Available-for Sale:
 
 
 
 
 
 
 
 
 
U.S. Government & Agency Obligations
$
146,978

 
$
64,730

 
$
82,248

 
$

 
 
State and Municipal Obligations
11,902

 

 
11,902

 

 
 
Mortgage-Backed Securities - Residential
152,806

 

 
152,806

 

 
 
Corporate and Other Debt Securities
2,299

 

 
2,299

 

 
 
Mutual Funds and Equity Securities
1,474

 

 
1,474

 

 
 
  Total Securities Available-for-Sale
$
315,459

 
$
64,730

 
$
250,729

 
$

 
 
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

 
$

 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Securities Available-for Sale:
 
 
 
 
 
 
 
 
 
U.S. Government & 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

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Collateral Dependent Impaired Loans
$
1,502

 
$

 
$

 
$
1,502

 
$
(138
)
Other Real Estate Owned and Repossessed Assets, Net
1,713

 

 

 
1,713

 
(655
)
December 31, 2016

 
 
 
 
 
 
 
 
Collateral Dependent Impaired Loans
$

 
$

 
$

 
$

 
$

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

 
$

 

 
1,686

 
$
(587
)
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
)


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 September 30, 2017, December 31, 2016 and September 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 September 30, 2017, December 31, 2016 and September 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
September 30, 2017
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
80,666

 
$
80,666

 
$
80,666

 
$

 
$

Securities Available-for-Sale
315,459

 
315,459

 
64,730

 
250,729

 

Securities Held-to-Maturity
341,526

 
343,899

 

 
343,899

 

Federal Home Loan Bank and Federal
  Reserve Bank Stock
6,704

 
6,704

 

 
6,704

 

Net Loans
1,891,104

 
1,870,379

 

 

 
1,870,379

Accrued Interest Receivable
7,692

 
7,692

 

 
7,692

 

Deposits
2,307,116

 
2,299,011

 

 
2,299,011

 

Federal Funds Purchased and Securities
  Sold Under Agreements to Repurchase
61,419

 
61,419

 

 
61,419

 

Federal Home Loan Bank Overnight Advances
33,000

 
33,000

 

 
33,000

 

Federal Home Loan Bank Term Advances
55,000

 
55,110

 

 
55,110

 

Junior Subordinated Obligations Issued
  to Unconsolidated Subsidiary Trusts
20,000

 
20,000

 

 
20,000

 

Accrued Interest Payable
260

 
260

 

 
260

 

 
 
 
 
 
 
 
 
 
 
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

 

 
2,109,557

 

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

 

 
 
 
 
 
 
 
 
 
 
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

 

 
2,207,985

 

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

 


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 Federal Home Loan Bank of New York (FHLBNY) yield curve, which is considered representative of Arrows 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 Arrows 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.