Loan balances outstanding as of June 30, 2011, December 31, 2010 and June 30, 2010 consisted of the following:

Loans
As of June 30, 2011, December 31, 2010 and June 30, 2010

	June 30,	December 31,	June 30,
	2011	2010	2010
Commercial	$ 97,201	$ 97,621	$ 93,100
Commercial real estate:
Commercial real estate – construction	6,907	7,090	12,961
Commercial real estate – other	228,542	214,291	203,299
Consumer:
Consumer – other	5,981	6,482	6,728
Consumer – automobile	316,692	334,656	331,303
Residential – prime	464,773	485,368	497,568
Total	$1,120,096	$1,145,508	$1,144,959

Supplemental Information:
Loans held for sale at period-end, included in the above balances	$261	$10,294	---

The following table provides information about loan credit quality at June 30, 2011 and December 31, 2010:

Credit Quality Indicators
As of June 30, 2011

Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category

		Commercial Real	Commercial Real
Indicator	Commercial	Estate - Construction	Estate - Other
Satisfactory	$90,354	$4,967	$206,900
Special Mention	4,222	263	1,048
Substandard	2,625	1,677	20,594
Doubtful	---	---	---
Total	$97,201	$6,907	$228,542

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	Consumer-Other	Consumer-Automobile	Residential-Prime
Performing	$5,981	$316,198	$461,342
Nonperforming	---	494	3,431
Total	$5,981	$316,692	$464,773

Credit Quality Indicators
As of December 31, 2010

Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category

		Commercial Real	Commercial Real
Indicator	Commercial	Estate - Construction	Estate - Other
Satisfactory	$94,290	$5,117	$187,070
Special Mention	160	---	7,318
Substandard	3,171	1,973	19,903
Doubtful	---	---	---
Total	$97,621	$7,090	$214,291

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	Consumer-Other	Consumer-Automobile	Residential-Prime
Performing	$6,477	$333,847	$483,725
Nonperforming	5	809	1,643
Total	$6,482	$334,656	$485,368

We use an internally developed system of five credit quality indicators to rate the credit worthiness of each commercial loan. The system has eight levels of credit quality (the first four have been combined in the preceding table), defined as follows: 1) Satisfactory - Satisfactory borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified; 2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this risk rating include loans to borrowers with deteriorating financial strength and/or earnings record, loans with potential for problems due to weakening economic or market conditions, loans subject to an inadequate loan agreement, loans with insufficient or flawed documentation, loans where the loan officer lacks sufficient expertise to properly control the account, and other deviations from prudent lending practice; 3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard; 4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen the value (i.e. possibility of additional collateral, injection of capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and 5) Loss - Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses. However, this classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Commercial loans are evaluated on an annual basis, unless the credit quality indicator falls to a level of 5 or below, when the loan is evaluated quarterly. The credit quality indictor is one of the factors used to determine any loss, as further described in this footnote.

The following table provides an analysis of the age of the recorded investment in loans that are past due as of June 30, 2011 and December 31, 2010. Consistent with regulatory instructions, Arrow considers an amortizing loan past due 30 or more days only if the borrower is two or more payments past due. Matured loans and all other loans are considered past due 30 or more days based on the payment due date. Nonaccrual loans are included in the first three columns, unless the loan is past due less than 30 days.

Age Analysis of Past Due Loans
As of June 30, 2011

	30-59	60-89	90 Days
	Days	Days	or More	Total		Total
	Past Due	Past Due	Past Due	Past Due	Current	Loans

Commercial	$ 268	$ 251	$ 250	$ 769	$ 96,432	$ 97,201
Commercial Real Estate:
Commercial Real Estate – construction	---	---	---	---	6,907	6,907
Commercial Real Estate – other	76	1,106	169	1,351	227,191	228,542
Consumer:
Consumer-other	58	4	---	62	5,919	5,981
Consumer-automobile	2,853	843	220	3,916	312,776	316,692
Residential-prime	314	1,565	2,269	4,148	460,625	464,773
Total	$3,569	$3,769	$2,908	$10,246	$1,109,850	$1,120,096

Age Analysis of Past Due Loans
As of December 31, 2010

	30-59	60-89	90 Days
	Days	Days	or More	Total		Total
	Past Due	Past Due	Past Due	Past Due	Current	Loans

Commercial	$ 591	$ 377	$ 79	$ 1,047	$ 96,572	$ 97,619
Commercial Real Estate:
Commercial Real Estate – construction	---	---	---	---	7,090	7,090
Commercial Real Estate – other	483	---	254	737	213,554	214,291
Consumer:
Consumer-other	5	---	---	5	6,477	6,482
Consumer-automobile	3,542	1,547	508	5,597	329,061	334,658
Residential-prime	212	1,884	1,145	3,241	482,127	485,368
Total	$4,833	$3,808	$1,986	$10,627	$1,134,881	$1,145,508

Arrow designates certain loans as nonaccrual and suspends the accrual of interest and the amortization of net deferred fees or costs when payment of interest and/or principal is due and unpaid for a period of nonperformance (generally 90 days for consumer installment loans, 120 days for home equity lines of credit and 150 days for other residential real estate loans) or the likelihood of repayment is uncertain in the opinion of management. The nonaccrual status for all commercial loans is evaluated on a loan-by-loan basis. The balance of any accrued interest deemed uncollectible at the date the loan is placed on nonaccrual status is reversed – against earnings for interest accrued during the calendar year and against the allowance for loan losses for prior accrued interest. A loan is returned to accrual status at the later of the date when the past due status of the loan falls below the threshold for nonaccrual status or management deems that it is likely that the borrower will repay all interest and principal. For payments received while the loan is on nonaccrual status, we may recognize interest income on a cash basis if the repayment of the remaining principal and accrued interest is deemed likely. We had no material commitments to make additional advances to borrowers with nonperforming loans at June 30, 2011 or 2010.

The following table presents information concerning loans on nonaccrual status and loans past due 90 or more days and still accruing interest at June 30, 2011 and December 31, 2010:

Loans on Nonaccrual Status and Past Due 90 or More Days and Still Accruing Interest
As of June 30, 2011 and December 31, 2010

	June 30, 2011		December 31, 2010
		90 Days		90 Days
		or More		or More
	Nonaccrual	Past Due	Nonaccrual	Past Due
Commercial	$ 319	$ ---	$ 94	$ ---
Commercial real estate:
Commercial real estate - construction	---	---	---	---
Commercial real estate - other	1,173	110	2,237	83
Consumer:
Consumer – other	---	---	5	---
Consumer – automobile	489	23	809	---
Residential – prime	3,009	422	916	727
Total nonaccrual loans and loans past due 90 or more days and still accruing interest	$4,990	$555	$4,061	$810

We evaluate restructured loans and all commercial and real estate nonaccrual loans over $250 thousand individually for impairment. We determine impairment primarily by evaluating the fair value of all collateral and secondarily by analysis of all other cash-flows available to the borrower to satisfy all contractual loan payments. For return to accrual status and for payments received after the loan has been designated as impaired, we use the same analysis as applied to nonaccrual loans, as described above.

Through the provision for loan losses, an allowance is maintained that reflects our best estimate of probable incurred loan losses related to specifically identified loans and losses for categories of loans in the remaining portfolio. Actual loan losses are charged against this allowance when loans are deemed uncollectible.

We use a two-step process to determine the provision for loans losses and the amount of the allowance for loan losses. We evaluate impaired commercial and real estate loans over $250 thousand individually, as described above, while we evaluate the remainder of the portfolio on a pooled basis as described below.

Homogenous Loan Pools: Under our pooled analysis, we group homogeneous loans as follows, each with its own estimated loss-rate:

Within the group of other commercial and commercial real estate loans, we sub-group loans based on our internal system of risk-rating, which is applied to all commercial and commercial real estate loans. We establish loss rates for each of these pools.

Estimated losses reflect consideration of all significant factors that affect the collectability of the portfolio as of June 30, 2011. In our evaluation, we do both a quantitative and qualitative analysis of the homogeneous pools.

Quantitative Analysis: Quantitatively, we determine the historical loss rate for each homogeneous loan pool. During the past five years we have had little charge-off activity on loans secured by residential real estate. Indirect consumer lending (principally automobile loans) represents a significant component of our total loan portfolio and is the only category of loans that has a history of losses that lends itself to a trend analysis. We have had one small loss on commercial real estate loans in the past five years. Losses on commercial loans (other than those secured by real estate) are also historically low, but can vary widely from year-to-year; this is the most complex category of loans in our loss analysis.

Our net charge-offs for the past five years have been at or near historical lows for our Company. Annualized net charge-offs have ranged from .04% to .09% of average loans during this period.

Qualitative Analysis: While historical loss experience provides a reasonable starting point for our analysis, historical losses, or even recent trends in losses, do not by themselves form a sufficient basis to determine the appropriate level for the allowance. Therefore, we have also considered and adjusted historical loss factors for qualitative and environmental factors that are likely to cause credit losses associated with our existing portfolio. These included:

• Changes in the volume and severity of past due, nonaccrual and adversely classified loans

• Changes in the value of the underlying collateral for collateral dependent loans

• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses

• Changes in the experience, ability, and depth of lending management and other relevant staff

• Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio

• The existence and effect of any concentrations of credit, and changes in the level of such concentrations

• The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio or pool

For each homogeneous loan pool, we estimate a loss factor expressed in basis points for each of the qualitative factors above, and for historical credit losses. We update and change, if necessary, the loss-rates assigned to various pools based on the analysis of loss trends and the change in qualitative and environmental factors.

From June 2004 to June 2006, the Federal Reserve Bank increased prevailing short-term rates in an effort to slow down national economic growth and check potential increases in the inflation rate. However, from August 2007 through December 2008, the Federal Reserve Bank began to cut rates in response to the growing financial crisis in credit markets and evidence of a significant economic recession. In our market area there was little impact from these developments in credit markets and the national economy on unemployment rates, job growth and business failures until the last quarter of 2008; overall, our market area has not experienced in the past six quarters the degree of negative impact on lending, credit and property values that the U.S. as a whole has experienced, although this may change in upcoming periods.

Due to the imprecise nature of the loan loss estimation process and ever changing economic conditions, the risk attributes of our portfolio may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in our analysis of the adequacy of the allowance for loan losses. Management, therefore, has established and held an unallocated portion within the allowance for loan losses reflecting the uncertainty of future economic conditions within our market area. This unallocated portion of the allowance was $1.5 million, or 10.4% of the total allowance for loan losses, at June 30, 2011.

The following summarizes the changes in the allowance for credit losses by portfolio segment for the six-month period ended June 30, 2011:

Allowance for Credit Losses
As of June 30, 2011
		Commercial	Commercial	Other			Unallo-
	Commercial	Construction	Real Estate	Consumer	Automobile	Residential	cated	Total
Beginning balance	$2,037	$135	$2,993	$328	$4,760	$3,163	$1,273	$14,689
Charge-offs	(50)	---	---	(49)	(288)	(1)	---	(388)
Recoveries	3	---	---	22	104	---	---	129
Provision	(914)	508	621	3	20	(118)	270	390
Ending balance	$1.076	$643	$3.614	$304	$4.596	$3.044	$1,543	$14,820
Ending balance: Individually evaluated for impairment	$ ---	$ ---	$ ---	$ ---	$ ---	$ ---
Ending balance: Collectively evaluated for impairment	$1,076	$643	$3,614	$304	$4,596	$3,044
Loans:
Ending balance	$97,201	$6,907	$227,548	$5,981	$316,692	$462,961		$1,117,290
Ending balance: Individually evaluated for impairment	$ --	$ ---	$ 994	$ ---	$ ---	$ 1,812		$ 2,806
Ending balance: Collectively evaluated for impairment	$97,201	$6,907	$228,542	$5,981	$316,692	$464,773		$1,120,096

In general, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. No loans modified during the preceding twelve months subsequently defaulted as of June 30, 2011. The following table presents information on loans that were modified during 2011:

Currently, our off-balance sheet credit exposures are limited to commitments to make future loans and for outstanding letters of credit. We follow the same procedures for evaluating the loss on these financial obligations as for our loans with outstanding balances. Any loss is charged to other operating expenses.