LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of September 30, 2012, December 31, 2011 and September 30, 2011 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers a loan past due 30 or more days if the borrower is two or more payments past due. Loans held-for-sale of $816, $893 and $537 as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively, are included in the residential real estate loan balances.



Past Due Loans
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
September 30, 2012
Loans Past Due 30-59 Days	$	831	$	—	$	271	$	20	$	2,675	$	2,245	$	6,042
Loans Past Due 60-89 Days	1,764		—		1,051		—		485		822		4,122
Loans Past Due 90 or more Days	216		—		621		—		148		1,278		2,263
Total Loans Past Due	2,811		—		1,943		20		3,308		4,345		12,427
Current Loans	97,612		27,265		233,238		6,837		339,922		435,650		1,140,524
Total Loans	$	100,423	$	27,265	$	235,181	$	6,857	$	343,230	$	439,995	$	1,152,951

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	—	$	—	$	150	$	150
Nonaccrual Loans	$	1,750	$	—	$	1,156	$	1	$	419	$	2,762	$	6,088

December 31, 2011
Loans Past Due 30-59 Days	$	538	$	—	$	284	$	75	$	3,512	$	1,544	$	5,953
Loans Past Due 60-89 Days	197		—		—		12		670		226		1,105
Loans Past Due 90 or more Days	17		—		1,825		6		314		3,056		5,218
Total Loans Past Due	752		—		2,109		93		4,496		4,826		12,276
Current Loans	99,039		11,083		230,040		6,225		317,879		454,915		1,119,181
Total Loans	$	99,791	$	11,083	$	232,149	$	6,318	$	322,375	$	459,741	$	1,131,457

Loans 90 or More Days Past Due and Still Accruing Interest	$	17	$	—	$	684	$	—	$	56	$	905	$	1,662
Nonaccrual Loans	$	6	$	—	$	1,503	$	6	$	431	$	2,582	$	4,528

September 30, 2011
Loans Past Due 30-59 Days	$	432	$	—	$	—	$	44	$	2,821	$	216	$	3,513
Loans Past Due 60-89 Days	134		—		218		6		853		924		2,135
Loans Past Due 90 or more Days	21		—		1,425		—		251		1,986		3,683
Total Loans Past Due	587		—		1,643		50		3,925		3,126		9,331
Current Loans	96,444		8,642		226,965		6,030		311,300		461,979		1,111,360
Total Loans	$	97,031	$	8,642	$	228,608	$	6,080	$	315,225	$	465,105	$	1,120,691

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	300	$	—	$	—	$	526	$	826
Nonaccrual Loans	$	41	$	—	$	1,199	$	—	$	495	$	2,530	$	4,265

Allowance for Loan Losses

The following table presents a roll-forward of the allowance for loan losses and other information pertaining to the allowance for loan losses:



Allowance for Loan Losses
				Commercial			Commercial			Other
	Commercial			Construction			Real Estate			Consumer			Automobile			Residential			Unallocated			Total
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:
June 30, 2012	$	2,098		$	528		$	3,295		$	355		$	4,571		$	3,451		$	913		$	15,211
Charge-offs	—			—			(39		)	(27		)	(105		)	—			—			(171		)
Recoveries	2			—			—			8			47			—			—			57
Provision	22			19			(82		)	(11		)	119			38			45			150
September 30, 2012	$	2,122		$	547		$	3,174		$	325		$	4,632		$	3,489		$	958		$	15,247

June 30, 2011	$	1,076		$	643		$	3,614		$	304		$	4,596		$	3,044		$	1,543		$	14,820
Charge-offs	—			—			—			(22		)	(79		)	(34		)	—			(135		)
Recoveries	1			—			—			14			45			—			—			60
Provision	265			(282		)	327			40			(151		)	63			(87		)	175
September 30, 2011	$	1,342		$	361		$	3,941		$	336		$	4,411		$	3,073		$	1,456		$	14,920

Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:
December 31, 2011	$	1,927		$	602		$	3,136		$	350		$	4,496		$	3,414		$	1,078		$	15,003
Charge-offs	(15		)	—			(206		)	(69		)	(281		)	(33		)	—			(604		)
Recoveries	5			—			—			17			156			—			—			178
Provision	205			(55		)	244			27			261			108			(120		)	670
September 30, 2012	$	2,122		$	547		$	3,174		$	325		$	4,632		$	3,489		$	958		$	15,247

December 31, 2010	$	2,037		$	135		$	2,993		$	328		$	4,760		$	3,163		$	1,273		$	14,689
Charge-offs	(50		)	—			—			(71		)	(367		)	(35		)	—			(523		)
Recoveries	4			—			—			36			149			—			—			189
Provision	(649		)	226			948			43			(131		)	(55		)	183			565
September 30, 2011	$	1,342		$	361		$	3,941		$	336		$	4,411		$	3,073		$	1,456		$	14,920

September 30, 2012
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	809		$	—		$	—		$	—		$	—		$	—		$	—		$	809
Allowance for loan losses - Loans Collectively Evaluated for Impairment	$	1,313		$	547		$	3,174		$	325		$	4,632		$	3,489		$	—		$	13,480
Ending Loan Balance - Individually Evaluated for Impairment	$	1,553		$	—		$	1,574		$	—		$	204		$	1,512		$	—		$	4,843
Ending Loan Balance - Collectively Evaluated for Impairment	$	98,870		$	27,265		$	233,607		$	6,857		$	343,026		$	438,483		$	—		$	1,148,108



Allowance for Loan Losses
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Unallocated		Total
December 31, 2011
Allowance for loan losses - Loans Collectively Evaluated for Impairment	$	1,927	$	602	$	3,136	$	350	$	4,496	$	3,414	$	—	$	13,925
Ending Loan Balance - Individually Evaluated for Impairment	$	66	$	—	$	1,953	$	—	$	268	$	2,108	$	—	$	4,395
Ending Loan Balance - Collectively Evaluated for Impairment	$	99,725	$	11,083	$	230,196	$	6,318	$	322,107	$	457,633	$	—	$	1,127,062

September 30, 2011
Allowance for loan losses - Loans Collectively Evaluated for Impairment	$	1,342	$	361	$	3,941	$	336	$	4,411	$	3,073	$	—	$	13,464
Ending Loan Balance - Individually Evaluated for Impairment	$	—	$	—	$	994	$	—	$	—	$	1,812	$	—	$	2,806
Ending Loan Balance - Collectively Evaluated for Impairment	$	97,031	$	8,642	$	227,614	$	6,080	$	315,225	$	463,293	$	—	$	1,117,885

Through the provision for loan losses, an allowance is maintained that reflects our best estimate of losses related to specifically identified loans and the inherent risk of probable 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 nonaccrual loans over $250 thousand and all troubled debt restructured loans individually for impairment, while we evaluate the remainder of the portfolio on a pooled basis as described below.

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 contains the majority of our total loan charge-offs. We have had only two small losses 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 for the entire loan portfolio has 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 also consider and adjust historical loss factors for qualitative and environmental factors that are likely to impact the inherent risk of loss associated with our existing portfolio. These included:


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


•	Changes in the nature and volume of the portfolio and in the terms of 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 quality of the loan review system


•	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 collectibility 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 net 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 on a quarterly basis.

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 economic conditions within our market area.

Credit Quality Indicators

The following table presents the credit quality indicators by loan category at September 30, 2012, December 31, 2011 and September 30, 2011:



Loan Credit Quality Indicators
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
September 30, 2012
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	93,095	$	25,993	$	214,239							$	333,327
Special Mention	279		—		1,537								1,816
Substandard	7,049		1,272		19,405								27,726
Doubtful	—		—		—								—
Credit Risk Profile Based on Payment Activity:
Performing							$	6,856	$	342,811	$	437,082	786,749
Nonperforming							1		419		2,913		3,333

December 31, 2011
Credit Risk Profile by Creditworthiness Category:
Satisfactory	91,555		9,195		213,413								314,163
Special Mention	3,975		—		458								4,433
Substandard	4,261		1,888		18,278								24,427
Doubtful	—		—		—								—
Credit Risk Profile Based on Payment Activity:
Performing							6,312		321,888		456,254		784,454
Nonperforming							6		487		3,487		3,980

September 30, 2011
Credit Risk Profile by Creditworthiness Category:
Satisfactory	89,740		6,712		205,556								302,008
Special Mention	3,747		—		737								4,484
Substandard	3,544		1,930		22,315								27,789
Doubtful	$	—	$	—	$	—							—
Credit Risk Profile Based on Payment Activity:
Performing							6,080		314,730		462,049		782,859
Nonperforming							$	—	$	495	$	3,056	$	3,551

We use an internally developed system of five credit quality indicators to rate the credit worthiness of each commercial loan 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 and loans with potential for problems due to weakening economic or market conditions; 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. Commercial loans are evaluated on an annual basis, unless the credit quality indicator falls to a level of "substandard" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used to determine any loss, as further described in this footnote.

For the purposes of the table above, nonperforming consumer loans are those loans on nonaccrual status or are 90 days or more past due and still accruing interest.

Impaired Loans

The following table presents information on impaired loans based on whether the impaired loan has a recorded related allowance or has no recorded related allowance:



Impaired Loans
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
September 30, 2012
Recorded Investment:
With No Related Allowance	$	52	$	—	$	1,574	$	—	$	204	$	1,512	$	3,342
With a Related Allowance	1,501		—		—		—		—		—		1,501
Unpaid Principal Balance:
With No Related Allowance	52		—		1,741		—		204		1,512		3,509
With a Related Allowance	1,501		—		—		—		—		—		1,501

December 31, 2011
Recorded Investment:
With No Related Allowance	$	66	$	—	$	1,953	$	—	$	268	$	2,108	$	4,395
Unpaid Principal Balance:
With No Related Allowance	66		—		1,953		—		268		2,108		4,395

September 30, 2011
Recorded Investment:
With No Related Allowance	$	—	$	—	$	994	$	—	$	—	$	1,812	$	2,806
Unpaid Principal Balance:
With No Related Allowance	—		—		994		—		—		1,812		2,806

For the Quarter Ended:
September 30, 2012
Average Recorded Balance:
With No Related Allowance	$	55	$	—	$	1,600	$	—	$	209	$	1,501	$	3,365
With a Related Allowance	1,571		—		—		—		—		—		1,571
Interest Income Recognized:
With No Related Allowance	2		—		10		—		4		3		19
With a Related Allowance	—		—		—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		10		—		—		—		10
With a Related Allowance	—		—		—		—		—		—		—

September 30, 2011
Average Recorded Balance:
With No Related Allowance	$	—	$	—	$	994	$	—	$	—	$	1,812	$	2,806
Interest Income Recognized:



Impaired Loans
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
With No Related Allowance	—		—		—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—		—		—

For the Year-To-Date Period Ended:
September 30, 2012
Average Recorded Balance:
With No Related Allowance	$	59	$	—	$	1,717	$	—	$	229	$	1,703	$	3,708
With a Related Allowance	687		—		—		—		—		—		687
Interest Income Recognized:
With No Related Allowance	5		—		54		—		9		7		75
With a Related Allowance	—		—		—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		54		—		—		—		54
With a Related Allowance	—		—		—		—		—		—		—

September 30, 2011
Average Recorded Balance:
With No Related Allowance	$	—	$	—	$	995	$	—	$	—	$	1,799	$	2,794
Interest Income Recognized:
With No Related Allowance	—		—		—		—		—		23		23
Cash Basis Income:
With No Related Allowance	—		—		—		—		—		—		—

At September 30, 2012, December 31, 2011 and September 30 2011, all impaired loans were considered to be collateral dependent and were therefore evaluated for impairment based on the fair value of collateral less estimated cost to sell. There was no allowance for loan losses allocated to impaired loans at December 31, 2011 and September 30, 2011. Interest income recognized in the table above, represents income earned after the loans became impaired and includes restructured loans in compliance with their modified terms and nonaccrual loans where we have recognized interest income on a cash basis.

Loans Modified in Trouble Debt Restructurings

The following table presents information on loans modified in trouble debt restructurings during the periods indicated:



Loans Modified in Trouble Debt Restructurings During the Period
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
For the Quarter Ended:
September 30, 2012
Number of Loans	—		—		2		—		5		—		7
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	47	$	—	$	41	$	—	$	88
Post-Modification Outstanding Recorded Investment	$	—	$	—	$	47	$	—	$	41	$	—	$	88

September 30, 2011
Number of Loans	—		—		—		—		4		1		5
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	—	$	—	$	33	$	242	$	275
Post-Modification Outstanding Recorded Investment	$	—	$	—	$	—	$	—	$	33	$	242	$	275

For the Year-To-Date Period Ended:
September 30, 2012
Number of Loans	—		—		2		—		12		—		14
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	47	$	—	$	101	$	—	$	148
Post-Modification Outstanding Recorded Investment	$	—	$	—	$	47	$	—	$	101	$	—	$	148

September 30, 2011
Number of Loans	1		—		—		—		13		1		15
Pre-Modification Outstanding Recorded Investment	$	63	$	—	$	—	$	—	$	121	$	242	$	426
Post-Modification Outstanding Recorded Investment	$	63	$	—	$	—	$	—	$	121	$	242	$	426

In general, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of September 30, 2012.