LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of March 31, 2013, December 31, 2012 and March 31, 2012 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 $864, $2,801 and $1,089 as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively, are included in the residential real estate loan balances.



Past Due Loans
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
March 31, 2013
Loans Past Due 30-59 Days	$	428	$	—	$	1,351	$	26	$	1,986	$	1,481	$	5,272
Loans Past Due 60-89 Days	421		—		200		10		375		1,058		2,064
Loans Past Due 90 or more Days	130		—		1,886		—		98		1,302		3,416
Total Loans Past Due	979		—		3,437		36		2,459		3,841		10,752
Current Loans	88,188		27,380		251,805		6,995		351,542		428,097		1,154,007
Total Loans	$	89,167	$	27,380	$	255,242	$	7,031	$	354,001	$	431,938	$	1,164,759

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	—	$	—	$	259	$	259
Nonaccrual Loans	$	253	$	—	$	1,953	$	4	$	334	$	2,674	$	5,218

December 31, 2012
Loans Past Due 30-59 Days	$	1,045	$	—	$	534	$	43	$	2,427	$	407	$	4,456
Loans Past Due 60-89 Days	1,588		—		1,332		17		793		2,466		6,196
Loans Past Due 90 or more Days	494		—		1,871		—		185		1,462		4,012
Total Loans Past Due	3,127		—		3,737		60		3,405		4,335		14,664
Current Loans	102,409		29,149		241,440		6,624		345,695		432,360		1,157,677
Total Loans	$	105,536	$	29,149	$	245,177	$	6,684	$	349,100	$	436,695	$	1,172,341

Loans 90 or More Days Past Due and Still Accruing Interest	$	126	$	—	$	378	$	—	$	42	$	374	$	920
Nonaccrual Loans	$	1,787	$	—	$	2,026	$	1	$	419	$	2,400	$	6,633

March 31, 2012
Loans Past Due 30-59 Days	$	368	$	—	$	427	$	21	$	1,930	$	1,089	$	3,835
Loans Past Due 60-89 Days	44		—		117		20		256		943		1,380
Loans Past Due 90 or more Days	9		—		1,073		15		158		2,704		3,959
Total Loans Past Due	421		—		1,617		56		2,344		4,736		9,174
Current Loans	101,732		10,814		232,700		6,414		326,332		450,381		1,128,373
Total Loans	$	102,153	$	10,814	$	234,317	$	6,470	$	328,676	$	455,117	$	1,137,547

Loans 90 or More Days Past Due and Still Accruing Interest	$	9	$	—	$	—	$	—	$	—	$	112	$	121
Nonaccrual Loans	$	35	$	—	$	1,925	$	15	$	500	$	3,001	$	5,476

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 Year-to-Date Periods:
December 31, 2012	$	2,344		$	601	$	3,050		$	304		$	4,536		$	3,405		$	1,058		$	15,298
Charge-offs	(773		)	—		(11		)	(8		)	(98		)	—			—			(890		)
Recoveries	4			—		—			—			91			—			—			95
Provision	44			11		340			12			(235		)	(13		)	(59		)	100
March 31, 2013	$	1,619		$	612	$	3,379		$	308		$	4,294		$	3,392		$	999		$	14,603

December 31, 2011	$	1,927		$	602	$	3,136		$	350		$	4,496		$	3,414		$	1,078		$	15,003
Charge-offs	(5		)	—		(167		)	(19		)	(106		)	—			—			(297		)
Recoveries	2			—		—			6			59			—			—			67
Provision	(90		)	59		328			15			81			(114		)	1			280
March 31, 2012	$	1,834		$	661	$	3,297		$	352		$	4,530		$	3,300		$	1,079		$	15,053

March 31, 2013
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—
Allowance for loan losses - Loans Collectively Evaluated for Impairment	$	1,619		$	612	$	3,379		$	308		$	4,294		$	3,392		$	999		$	14,603
Ending Loan Balance - Individually Evaluated for Impairment	$	37		$	—	$	1,505		$	—		$	182		$	1,085		$	—		$	2,809
Ending Loan Balance - Collectively Evaluated for Impairment	$	89,130		$	27,380	$	253,737		$	7,031		$	353,819		$	430,853		$	—		$	1,161,950



Allowance for Loan Losses
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Unallocated		Total
December 31, 2012
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	853	$	—	$	—	$	—	$	—	$	—	$	—	$	853
Allowance for loan losses - Loans Collectively Evaluated for Impairment	$	1,491	$	601	$	3,050	$	304	$	4,536	$	3,405	$	1,058	$	14,445
Ending Loan Balance - Individually Evaluated for Impairment	$	1,432	$	—	$	2,528	$	—	$	203	$	1,090	$	—	$	5,253
Ending Loan Balance - Collectively Evaluated for Impairment	$	104,104	$	29,149	$	242,649	$	6,684	$	348,897	$	435,605	$	—	$	1,167,088

March 31, 2012
Allowance for loan losses - Loans Collectively Evaluated for Impairment	$	1,834	$	661	$	3,297	$	352	$	4,530	$	3,300	$	1,079	$	15,053
Ending Loan Balance - Individually Evaluated for Impairment	$	62	$	—	$	1,454	$	—	$	240	$	2,108	$	—	$	3,864
Ending Loan Balance - Collectively Evaluated for Impairment	$	102,091	$	10,814	$	232,863	$	6,470	$	328,436	$	453,009	$	—	$	1,133,683

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 previous 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 previous five years. Prior to this most recent quarter, losses on commercial loans (other than those secured by real estate) were also historically low, but can vary widely from year-to-year; this is the most complex category of loans in our loss analysis. For the whole portfolio, our net charge-offs for the previous 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, although we may exceed that range for all of 2013, due to one large commercial charge-off in the first quarter of 2013.

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 March 31, 2013, December 31, 2012 and March 31, 2012:



Loan Credit Quality Indicators
			Commercial		Commercial		Other
	Commercial		Construction		Real Estate		Consumer		Automobile		Residential		Total
March 31, 2013
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	82,063	$	26,180	$	234,609							$	342,852
Special Mention	183		—		1,385								1,568
Substandard	6,921		1,200		19,248								27,369
Doubtful	—		—		—								—
Credit Risk Profile Based on Payment Activity:
Performing							$	7,027	$	353,667	$	429,004	789,698
Nonperforming							4		334		2,934		3,272

December 31, 2012
Credit Risk Profile by Creditworthiness Category:
Satisfactory	97,085		27,913		225,312								350,310
Special Mention	192		—		1,419								1,611
Substandard	6,872		1,236		18,446								26,554
Doubtful	1,387		—		—								1,387
Credit Risk Profile Based on Payment Activity:
Performing							6,683		348,676		433,922		789,281
Nonperforming							1		424		2,773		3,198

March 31, 2012
Credit Risk Profile by Creditworthiness Category:
Satisfactory	95,385		8,969		213,429								317,783
Special Mention	2,066		—		2,545								4,611
Substandard	4,702		1,845		18,343								24,890
Doubtful	—		—		—								—
Credit Risk Profile Based on Payment Activity:
Performing							6,455		328,176		452,004		786,635
Nonperforming							$	15	$	500	$	3,113	$	3,628

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
March 31, 2013
Recorded Investment:
With No Related Allowance	$	37	$	—	$	1,505	$	—	$	182	$	1,085	$	2,809
With a Related Allowance	—		—		—		—		—		—		—
Unpaid Principal Balance:
With No Related Allowance	37		—		1,505		—		182		1,085		2,809
With a Related Allowance	—		—		—		—		—		—		—

December 31, 2012
Recorded Investment:
With No Related Allowance	$	45	$	—	$	2,528	$	—	$	203	$	1,090	$	3,866
With a Related Allowance	1,387		—		—		—		—		—		1,387
Unpaid Principal Balance:
With No Related Allowance	45		—		2,695		—		203		1,090		4,033
With a Related Allowance	1,387		—		—		—		—		—		1,387

March 31, 2012
Recorded Investment:
With No Related Allowance	$	62	$	—	$	1,454	$	—	$	240	$	2,108	$	3,864
Unpaid Principal Balance:
With No Related Allowance	62		—		1,621		—		240		2,108		4,031

For the Year-To-Date Period Ended:
March 31, 2013
Average Recorded Balance:
With No Related Allowance	$	41	$	—	$	2,017	$	—	$	193	$	1,088	$	3,339
With a Related Allowance	694		—		—		—		—		—		694
Interest Income Recognized:
With No Related Allowance	1		—		—		—		2		4		7
With a Related Allowance	72		—		—		—		—		—		72
Cash Basis Income:
With No Related Allowance	—		—		—		—		—		—		—
With a Related Allowance	72		—		—		—		—		—		72

March 31, 2012
Average Recorded Balance:
With No Related Allowance	$	65	$	—	$	1,584	$	—	$	172	$	2,108	$	3,929
Interest Income Recognized:
With No Related Allowance	2		—		38		—		2		1		43
Cash Basis Income:
With No Related Allowance	—		—		38		—		—		—		38

At March 31, 2013, December 31, 2012 and March 31, 2012, 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 March 31, 2013 and March 31, 2012. 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 Year-To-Date Period Ended:
March 31, 2013
Number of Loans	—		—		—		—		2		—		2
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	—	$	—	$	11	$	—	$	11
Post-Modification Outstanding Recorded Investment	$	—	$	—	$	—	$	—	$	11	$	—	$	11

March 31, 2012
Number of Loans	—		—		—		—		5		—		5
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	—	$	—	$	44	$	—	$	44
Post-Modification Outstanding Recorded Investment	$	—	$	—	$	—	$	—	$	44	$	—	$	44

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 March 31, 2013.