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Derivative Instruments and Hedging Activities | 3 Months Ended
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Mar. 31, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (In Thousands) Arrow is exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Arrow manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, Arrow enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in Arrow's assets or liabilities. Arrow's goal is to have a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. Derivatives Not Designated as Hedging Instruments Arrow enters into interest rate swap agreements with its commercial customers to provide them with a long-term fixed rate, while simultaneously entering into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure. These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present material exposure to Arrow's consolidated statements of income. Arrow records its interest rate swap agreements at fair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income. The following table depicts the fair value adjustment recorded related to the notional amount of derivatives, not designated as hedging instruments, outstanding as well as the notional amount of the interest rate swap agreements:
Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements
| March 31, 2024 |  | December 31, 2023 |  | March 31, 2023
Fair value adjustment included in other assets | $ | 6,111 |  |  | $ | 6,208 |  |  | $ | 6,206 |
Fair value adjustment included in other liabilities | 6,111 |  |  | 6,208 |  |  | 6,206 |
Notional amount | 107,991 |  |  | 123,197 |  |  | 126,637 |
Derivatives Designated as Hedging Instruments Arrow entered into two pay-fixed portfolio layer method ("PLM") fair value swaps, designated as hedging instruments, with a total notional amount of $250 million and $50 million, respectively, in the third quarter of 2023. Arrow is designating the fair value swaps under PLM. Under PLM, the hedged items are designated as hedged layers of a closed portfolio of financial loans that are anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swaps at fair value on the Consolidated Balance Sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swaps on the Consolidated Balance Sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk. The following table depicts the fair value adjustment recorded related to the notional amount of derivatives, designed as hedging instruments, outstanding as well as the notional amount of the interest rate swap agreements:
Derivatives Designated as Hedging Instruments - Fair Value Agreements
| March 31, 2024 |  | December 31, 2023 |  | March 31, 2023
Fair value adjustment included in other assets | $ | — |  |  | $ | — |  |  | $ | — |
Fair value adjustment included in other liabilities | 1,109 |  |  | 5,678 |  |  | — |
Notional amount | 300,000 |  |  | 300,000 |  |  | — |
The following table summarizes the effect of the fair value hedging relationship recognized on the unaudited interim consolidated statement of income:
Derivatives Designated as Hedging Instruments - Fair Value Agreements
| Three Months Ended |  | Twelve Months Ended |  | Three Months Ended
| March 31, 2024 |  | December 31, 2023 |  | March 31, 2023
Hedged Asset | $ | 1,243 |  |  | $ | 5,849 |  |  | $ | — |
Fair value derivative designated as hedging instrument | (1,255) |  |  | (5,828) |  |  | — |
Total (loss) gain recognized in the consolidated statements of income with interest and fees on loans | (12) |  |  | 21 |  |  | — |
The following table represents the carrying value of the PLM hedged assets and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset:
Derivatives Designated as Hedging Instruments - Fair Value Swap Agreements
| March 31, 2024 |  | December 31, 2023 |  | March 31, 2023
Carrying Value of Portfolio Layer Method Hedged Asset | $ | 301,243 |  |  | $ | 305,849 |  |  | $ | — |
Cumulative Fair Value Hedging Adjustment | 1,243 |  |  | 5,849 |  |  | — |
In the fourth quarter of 2023, Arrow entered into two interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amounts were $100 million and $75 million, respectively. Arrow entered into pay-fixed interest rate swaps to convert rolling 90 days brokered deposits. For derivatives that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI") and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statement of income.
Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
| March 31, 2024 |  | December 31, 2023 |  | March 31, 2023
Fair value adjustment included in other liabilities | $ | 97 |  |  | $ | 2,710 |  |  | $ | — |
Amount of gain (loss) recognized in AOCI | 3,068 |  |  | (2,553) |  |  | — |
Amount of gain reclassified from AOCI interest expense | 455 |  |  | 157 |  |  | — |
In addition, Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges. For derivatives that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings. The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statement of income.
Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
| Three Months Ended |  | Twelve Months Ended |  | Three Months Ended
| March 31, 2024 |  | December 31, 2023 |  | March 31, 2023
Fair value adjustment included in other assets | $ | 5,393 |  |  | $ | 4,998 |  |  | $ | 4,843 |
Amount of gain (loss) recognized in AOCI | $ | 153 |  |  | $ | (1,355) |  |  | $ | (800) |
Amount of loss reclassified from AOCI to interest expense | (242) |  |  | (907) |  |  | (198) |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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