FAIR VALUES (Dollars In Thousands)

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. There are no 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, 2020, December 31, 2019 and March 31, 2019 were securities available-for-sale, equity securities and derivatives. 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)
Fair Value of Assets and Liabilities Measured on a Recurring Basis:
March 31, 2020
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	5,181	$	—	$	5,181	$	—
State and Municipal Obligations	723		—		723		—
Mortgage-Backed Securities	371,482		—		371,482		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	378,186		—		378,186		—
Equity Securities	1,689		—		1,689		—
Total Securities Measured on a Recurring Basis	379,875		—		379,875		—
Derivatives, included in other assets	5,191		—		5,191		—
Total Measured on a Recurring Basis	$	385,066	$	—	$	385,066	$	—
Liabilities:
Derivatives, included in other liabilities	5,191		—		5,191		—
Total Measured on a Recurring Basis	$	5,191	$	—	$	5,191	$	—
December 31, 2019
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	5,054	$	—	$	5,054	$	—
State and Municipal Obligations	764		—		764		—
Mortgage-Backed Securities	350,716		—		350,716		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	357,334				357,334
Equity Securities	2,063		—		2,063		—
Total Securities Measured on a Recurring Basis	359,397		—		359,397		—



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)
Derivatives, included in other liabilities	69		—		69		—
Total Measured on a Recurring Basis	$	359,466	$	—	$	359,466	$	—
Liabilities:
Derivatives, included in other liabilities	$	69	$	—	$	69	$	—
Total Measured on a Recurring Basis	$	69	$	—	$	69	$	—
March 31, 2019
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	35,383	$	—	$	35,383	$	—
State and Municipal Obligations	1,116		—		1,116		—
Mortgage-Backed Securities	261,513		—		261,513		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	298,812				298,812
Equity Securities	1,850		—		1,850		—
Total Securities Measured on a Recurring Basis	$	300,662	$	—	$	300,662	$	—



	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
March 31, 2020
Collateral Dependent Impaired Loans	$	582	$	—	$	—	$	582
Other Real Estate Owned and Repossessed Assets, Net	942		—		—		942		—
December 31, 2019
Collateral Dependent Impaired Loans	$	285	$	—	$	—	$	285
Other Real Estate Owned and Repossessed Assets, Net	1,261		—		—		1,261		(186	)
March 31, 2019
Collateral Dependent Impaired Loans	$	684	$	—	$	—	$	684
Other Real Estate Owned and Repossessed Assets, Net	1,445		—		—		1,445		(101	)

The fair value of financial instruments is determined 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).

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 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 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.

Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent impaired loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. 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 at least annually, with no impairment recognized for these assets at March 31, 2020, December 31, 2019 and March 31, 2019.

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

The fair value for securities held-to-maturity is 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.

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto 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 determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for loan and lease loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the Swap Curve.

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 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 calculated by the FHLBNY.

The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of the stock.

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.

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 Value		Fair Value		Level 1		Level 2		Level 3
March 31, 2020
Cash and Cash Equivalents	$	138,529	$	138,529	$	138,529	$	—	$	—
Securities Available-for-Sale	378,186		378,186		—		378,186		—
Securities Held-to-Maturity	238,520		242,804		—		242,804		—
Equity Securities	1,689		1,689		—		1,689		—
Federal Home Loan Bank and Federal Reserve Bank Stock	5,379		5,379		—		5,379		—
Net Loans	2,390,556		2,368,033		—		—		2,368,033
Accrued Interest Receivable	7,856		7,856		—		7,856		—
Derivatives, included in other assets	5,191		5,191				5,191
Deposits	2,811,005		2,811,668		—		2,811,668		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	57,909		57,909		—		57,909		—
Federal Home Loan Bank Term Advances	50,000		51,194		—		51,194		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	1,392		1,392		—		1,392		—
Derivatives, included in other liabilities	5,191		5,191		—		5,191		—



Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

December 31, 2019
Cash and Cash Equivalents	$	70,221	$	70,221	$	70,221	$	—	$	—
Securities Available-for-Sale	357,334		357,334		—		357,334		—
Securities Held-to-Maturity	245,065		249,618		—		249,618		—
Equity Securities	2,063		2,063		—		2,063
Federal Home Loan Bank and Federal Reserve Bank Stock	10,317		10,317		—		10,317		—
Net Loans	2,364,933		2,332,797		—		—		2,332,797
Accrued Interest Receivable	7,377		7,377		—		7,377		—
Derivatives, included in other assets	69		69		—		69		—
Deposits	2,616,054		2,614,170		—		2,614,170		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	51,099		51,099		—		51,099		—
Federal Home Loan Bank Overnight Advances	130,000		130,000		—		130,000		—
Federal Home Loan Bank Term Advances	30,000		29,993		—		29,993		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	1,436		1,436		—		1,436		—
Derivatives, included in other liabilities	69		69		—		69		—

March 31, 2019
Cash and Cash Equivalents	$	61,229	$	61,229	$	61,229	$	—	$	—
Securities Available-for-Sale	298,812		298,812		—		298,812		—
Securities Held-to-Maturity	279,400		280,414		—		280,414		—
Equity Securities	1,850		1,850		—		1,850
Federal Home Loan Bank and Federal Reserve Bank Stock	7,878		7,878		—		7,878		—
Net Loans	2,214,835		2,164,298		—		—		2,164,298
Accrued Interest Receivable	8,180		8,180		—		8,180		—
Deposits	2,490,097		2,484,479		—		2,484,479		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	58,407		58,407		—		58,407		—
Federal Home Loan Bank Overnight Advances	74,500		74,500		—		74,500		—
Federal Home Loan Bank Term Advances	35,000		34,805		—		34,805		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	737		737		—		737		—