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 September 30, 2019, December 31, 2018 and September 30, 2018 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:
September 30, 2019
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	5,056	$	—	$	5,056	$	—
State and Municipal Obligations	965		—		965		—
Mortgage-Backed Securities	307,361		—		307,361		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	314,182		—		314,182		—
Equity Securities	1,996		—		1,996		—
Total Securities Measured on a Recurring Basis	$	316,178	$	—	$	316,178	$	—
Derivatives, included in other assets	498		—		498		—
Total Measured on a Recurring Basis	$	316,676	$	—	$	316,676	$	—
Liabilities:
Derivatives, included in other liabilities	498		—		498		—
Total Measured on a Recurring Basis	$	498	$	—	$	498	$	—
December 31, 2018
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	46,765	$	—	$	46,765	$	—
State and Municipal Obligations	1,195		—		1,195		—
Mortgage-Backed Securities	268,775		—		268,775		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	317,535				317,535
Equity Securities	1,774		—		1,774		—
Total Securities Measured on a Recurring Basis	$	319,309	$	—	$	319,309	$	—



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)
September 30, 2018
Assets:
Securities Available-for Sale:
U.S. Government & Agency Obligations	$	59,602	$	—	$	59,602	$	—
State and Municipal Obligations	2,548		—		2,548		—
Mortgage-Backed Securities	277,461		—		277,461		—
Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	340,411				340,411
Equity Securities	1,916		—		1,916		—
Total Securities Measured on a Recurring Basis	$	342,327	$	—	$	342,327	$	—



	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:
September 30, 2019
Collateral Dependent Impaired Loans	$	324	$	—	$	—	$	324
Other Real Estate Owned and Repossessed Assets, Net	1,274		—		—		1,274		(111	)
December 31, 2018
Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	1,260		—		—		1,260		(132	)
September 30, 2018
Collateral Dependent Impaired Loans	$	857	$	—	$	—	$	857
Other Real Estate Owned and Repossessed Assets, Net	1,220		—		—		1,220		(43	)

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).

There were no transfers between Levels 1, 2 and 3 for the three months ended September 30, 2019, December 31, 2018 and September 30, 2018.

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 on an annual basis, with no impairment recognized for these assets at September 30, 2019, December 31, 2018 and September 30, 2018.

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 residential real estate loans vs. other loans. 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. 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 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.

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
September 30, 2019
Cash and Cash Equivalents	$	92,298	$	92,298	$	92,298	$	—	$	—
Securities Available-for-Sale	314,182		314,182		—		314,182		—
Securities Held-to-Maturity	255,095		259,128		—		259,128		—
Equity Securities	1,996		1,996		—		1,996		—
Federal Home Loan Bank and Federal Reserve Bank Stock	6,627		6,627		—		6,627		—
Net Loans	2,314,660		2,274,701		—		—		2,274,701



Schedule of Fair Values by Balance Sheet Grouping
					Fair Value Hierarchy
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Accrued Interest Receivable	8,097		8,097		—		8,097		—
Derivatives, included in Other Assets	498		498				498
Deposits	2,614,547		2,610,404		—		2,610,404		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	72,869		72,869		—		72,869		—
Federal Home Loan Bank Overnight Advances	48,000		48,000		—		48,000		—
Federal Home Loan Bank Term Advances	30,000		29,988		—		29,988		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	1,500		1,500		—		1,500		—
Derivatives, included in Other Liabilities	498		498		—		498		—

December 31, 2018
Cash and Cash Equivalents	$	84,239	$	84,239	$	84,239	$	—	$	—
Securities Available-for-Sale	317,535		317,535		—		317,535		—
Securities Held-to-Maturity	283,476		280,338		—		280,338		—
Equity Securities	1,774		1,774				1,774
Federal Home Loan Bank and Federal Reserve Bank Stock	15,506		15,506		—		15,506		—
Net Loans	2,176,019		2,114,372		—		—		2,114,372
Accrued Interest Receivable	7,035		7,035		—		7,035		—
Deposits	2,345,584		2,338,410		—		2,338,410		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	54,659		54,659		—		54,659		—
Federal Home Loan Bank Overnight Advances	234,000		234,000		—		234,000		—
Federal Home Loan Bank Term Advances	45,000		44,652		—		44,652		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	570		570		—		570		—

September 30, 2018
Cash and Cash Equivalents	$	92,295	$	92,295	$	92,295	$	—	$	—
Securities Available-for-Sale	340,411		340,411		—		340,411		—
Securities Held-to-Maturity	289,952		282,719		—		282,719		—
Equity Securities	1,916		1,916		—		1,916
Federal Home Loan Bank and Federal Reserve Bank Stock	10,866		10,866		—		10,866		—
Net Loans	2,106,097		2,030,278		—		—		2,030,278
Accrued Interest Receivable	8,028		8,028		—		8,028		—
Deposits	2,407,855		2,398,987		—		2,398,987		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	62,503		62,503		—		62,503		—
Federal Home Loan Bank Overnight Advances	131,000		131,000		—		131,000		—
Federal Home Loan Bank Term Advances	45,000		44,488		—		44,488		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	485		485		—		485		—