LOANS (In Thousands)

Loan Categories and Past Due Loans

The following table presents loan balances outstanding as of September 30, 2018, December 31, 2017 and September 30, 2017 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers an amortizing loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of $201, $327 and $1,323 as of September 30, 2018, December 31, 2017 and September 30, 2017, respectively, are included in the residential real estate balances for current loans.




			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
September 30, 2018
Loans Past Due 30-59 Days	$	198	$	—	$	5,651	$	2,896	$	8,745
Loans Past Due 60-89 Days	—		—		1,307		47		1,354
Loans Past Due 90 or more Days	76		807		494		1,523		2,900
Total Loans Past Due	274		807		7,452		4,466		12,999
Current Loans	126,838		469,315		686,736		830,212		2,113,101
Total Loans	$	127,112	$	470,122	$	694,188	$	834,678	$	2,126,100

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	192	$	980	$	1,172
Nonaccrual Loans	674		807		540		2,447		4,468

December 31, 2017
Loans Past Due 30-59 Days	$	139	$	—	$	5,891	$	2,094	$	8,124
Loans Past Due 60-89 Days	19		—		1,215		509		1,743
Loans Past Due 90 or more Days	99		807		513		1,422		2,841
Total Loans Past Due	257		807		7,619		4,025		12,708
Current Loans	128,992		443,441		595,208		770,421		1,938,062
Total Loans	$	129,249	$	444,248	$	602,827	$	774,446	$	1,950,770

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	6	$	313	$	319
Nonaccrual Loans	$	588	$	1,530	$	653	$	2,755	5,526

September 30, 2017
Loans Past Due 30-59 Days	$	122	$	442	$	4,781	$	1,675	$	7,020
Loans Past Due 60-89 Days	—		—		914		77		991
Loans Past Due 90 or more Days	102		807		291		1,742		2,942
Total Loans Past Due	224		1,249		5,986		3,494		10,953
Current Loans	125,136		439,467		586,043		747,200		1,897,846
Total Loans	$	125,360	$	440,716	$	592,029	$	750,694	$	1,908,799

Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	41	$	926	$	967
Nonaccrual Loans	$	609	$	1,249	$	507	$	3,117	5,482

The Company disaggregates its loan portfolio into the following four categories:

Commercial - The Company offers a variety of loan options to meet the specific needs of commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. These loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, the Company may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees of the borrowers.

Commercial Real Estate - The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner- and non-owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, the Company also offers commercial construction and land development loans to finance projects, primarily within the communities that we serve. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also secured by first liens on the real estate, which may include apartments, commercial structures, housing business, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.

Consumer Loans - The Company offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. Several loans are unsecured, which carry a higher risk of loss. Also included in this category are automobile loans. The Company primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed.

Residential - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. The Company originates adjustable-rate and fixed-rate one-to-four-family residential real estate loans for the construction, purchase or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in the Company’s market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 80% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. The Company’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is the Company's general practice to underwrite residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, the Company offers fixed home equity loans as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. The Company's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

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			Real Estate			Consumer			Residential			Total
Roll-forward of the Allowance for Loan Losses for the Quarterly Periods:
June 30, 2018	$	944		$	5,838		$	8,337		$	4,521		$	19,640
Charge-offs	—			—			(300		)	(25		)	(325		)
Recoveries	—			—			102			—			102
Provision	99			81			551			(145		)	586
September 30, 2018	$	1,043		$	5,919		$	8,690		$	4,351		$	20,003

June 30, 2017	$	925		$	4,983		$	7,305		$	4,229		$	17,442
Charge-offs	—			(342		)	(280		)	—			(622		)
Recoveries	1			—			74			—			75
Provision	(46		)	446			509			(109		)	800
September 30, 2017	$	880		$	5,087		$	7,608		$	4,120		$	17,695



Allowance for Loan Losses
				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Roll-forward of the Allowance for Loan Losses for the Year-to-Date Periods:
December 31, 2017	$	1,873		$	4,504		$	7,604		$	4,605		$	18,586
Charge-offs	(16		)	—			(895		)	(49		)	(960		)
Recoveries	1			12			403			—			416
Provision	(815		)	1,403			1,578			(205		)	1,961
September 30, 2018	$	1,043		$	5,919		$	8,690		$	4,351		$	20,003

December 31, 2016	$	1,017		$	5,677		$	6,120		$	4,198		$	17,012
Charge-offs	(2		)	(342		)	(847		)	(6		)	(1,197		)
Recoveries	8			—			292			—			300
Provision	(143		)	(248		)	2,043			(72		)	1,580
September 30, 2017	$	880		$	5,087		$	7,608		$	4,120		$	17,695

September 30, 2018
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	84		$	45		$	—		$	48		$	177
Allowance for loan losses - Loans Collectively Evaluated for Impairment	959			5,874			8,690			4,303			19,826
Ending Loan Balance - Individually Evaluated for Impairment	489			812			109			2,013			3,423
Ending Loan Balance - Collectively Evaluated for Impairment	$	126,623		$	469,310		$	694,079		$	832,665		$	2,122,677

December 31, 2017
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	94		$	2		$	—		$	10		$	106
Allowance for loan losses - Loans Collectively Evaluated for Impairment	1,779			4,502			7,604			4,595			18,480
Ending Loan Balance - Individually Evaluated for Impairment	489			1,537			95			1,562			3,683
Ending Loan Balance - Collectively Evaluated for Impairment	$	128,760		$	442,711		$	602,732		$	772,884		$	1,947,087

September 30, 2017
Allowance for loan losses - Loans Individually Evaluated for Impairment	$	104		$	—		$	—		$	34		$	138
Allowance for loan losses - Loans Collectively Evaluated for Impairment	776			5,087			7,608			4,086			17,557
Ending Loan Balance - Individually Evaluated for Impairment	489			1,543			104			1,139			3,275
Ending Loan Balance - Collectively Evaluated for Impairment	$	124,871		$	439,172		$	591,925		$	749,556		$	1,905,524

Through the provision for loan losses, an allowance for loan losses is maintained that reflects the best estimate of the incurred risk of loss in the Company’s loan portfolio as of the balance sheet date. Additions are made to the allowance for loan losses through a periodic provision for loan losses. Actual loan losses are charged against the allowance for loan losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for loan losses.

Loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the Company's independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

The Company uses a two-step process to determine the provision for loan losses and the amount of the allowance for loan losses. The Company performs an evaluation of impaired loans on a quarterly basis. Impaired loans are generally nonaccrual loans over $250 thousand and all troubled debt restructured loans. These impaired loans are generally considered to be collateral dependent with the charge-off, if any, determined based on the value of the collateral less estimated costs to sell.

The remainder of the portfolio is evaluated on a pooled basis, as described below. For each homogeneous loan pool, the Company estimates a total loss factor based on the historical net loss rates adjusted for applicable qualitative factors. The total loss factors assigned to each loan category are updated on a quarterly basis. For the commercial and commercial real estate categories, the loan categories are further segregated by credit risk profile (pools of loans graded pass, special mention and accruing substandard). Additional description of the credit risk classifications is detailed in the Credit Quality Indicators section of this note.

The annualized historical net loss rate is determined for each loan category using a trailing three-year net charge-off average. While historical net loss experience provides a reasonable starting point for analysis, historical net losses, or even recent trends in net losses, do not by themselves form a sufficient basis to determine the appropriate level of the allowance for loan losses. Therefore, the Company also considers and adjusts historical net loss factors for qualitative factors that impact the incurred risk of loss associated with the loan categories within the total loan portfolio. These include:


•	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

Credit Quality Indicators

The following table presents the credit quality indicators by loan category at September 30, 2018, December 31, 2017 and September 30, 2017:



Loan Credit Quality Indicators
			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
September 30, 2018
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	119,217	$	440,114	$	—	$	—	$	559,331
Special Mention	5,949		—		—		—		5,949
Substandard	1,946		29,201		—		—		31,147
Doubtful	—		807		—		—		807
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	693,648	$	832,231	$	1,525,879
Nonperforming	—		—		540		2,447		2,987

December 31, 2017
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	124,961	$	417,362	$	—	$	—	$	542,323
Special Mention	1,341		177		—		—		1,518
Substandard	2,947		25,902		—		—		28,849
Doubtful	—		807		—		—		807
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	602,168	$	771,584	$	1,373,752
Nonperforming	—		—		659		3,068		3,727

September 30, 2017
Credit Risk Profile by Creditworthiness Category:
Satisfactory	$	120,622	$	411,685	$	—	$	—	$	532,307
Special Mention	1,394		1,401		—		—		2,795
Substandard	3,344		26,822		—		—		30,166
Doubtful	—		807		—		—		807
Credit Risk Profile Based on Payment Activity:
Performing	$	—	$	—	$	591,499	$	746,652	$	1,338,151
Nonperforming	—		—		530		4,043		4,573

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

For the allowance calculation, 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 credit quality indicator 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 with collateral 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 generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of incurred risk of loss in our commercial related loan portfolios.

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		Real Estate		Consumer		Residential		Total
September 30, 2018
Recorded Investment:
With No Related Allowance	$	—	$	5	$	108	$	1,712	$	1,825
With a Related Allowance	475		801		—		346		1,622
Unpaid Principal Balance:
With No Related Allowance	—		5		109		1,733		1,847
With a Related Allowance	489		807		—		280		1,576

December 31, 2017
Recorded Investment:
With No Related Allowance	$	—	$	781	$	94	$	1,269	$	2,144
With a Related Allowance	485		725		—		333		1,543
Unpaid Principal Balance:
With No Related Allowance	—		816		95		1,274		2,185
With a Related Allowance	489		721		—		288		1,498

September 30, 2017
Recorded Investment:
With No Related Allowance	$	—	$	818	$	104	$	851	$	1,773
With a Related Allowance	489		725		—		288		1,502
Unpaid Principal Balance:
With No Related Allowance	—		818		90		850		$	1,758
With a Related Allowance	489		723		—		288		1,500

For the Quarter Ended:
September 30, 2018
Average Recorded Balance:
With No Related Allowance	$	—	$	7	$	104	$	1,371	$	1,482
With a Related Allowance	478		794		—		350		1,622
Interest Income Recognized:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

September 30, 2017
Average Recorded Balance:
With No Related Allowance	$	—	$	998	$	96	$	827	$	1,921
With a Related Allowance	496		363		—		288		1,147
Interest Income Recognized:
With No Related Allowance	—		—		1		—		1
With a Related Allowance	—		—		—		—		—
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—



Impaired Loans
			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
For the Year-To-Date Period Ended:
September 30, 2018
Average Recorded Balance:
With No Related Allowance	$	—	$	393	$	101	$	1,491	$	1,985
With a Related Allowance	480		763		—		340		1,583
Interest Income Recognized:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		20		20
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

September 30, 2017
Average Recorded Balance:
With No Related Allowance	$	—	$	854	$	98	$	975	$	1,927
With a Related Allowance	245		363		—		144		752
Interest Income Recognized:
With No Related Allowance	—		—		3		—		3
With a Related Allowance	—		—		—		4		4
Cash Basis Income:
With No Related Allowance	—		—		—		—		—
With a Related Allowance	—		—		—		—		—

At September 30, 2018, December 31, 2017 and September 30, 2017, 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. 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		Real Estate		Consumer		Residential		Total
For the Quarter Ended:
September 30, 2018
Number of Loans	—		—		1		—		1
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	16	$	—	$	16
Post-Modification Outstanding Recorded Investment	—		—		16		—		16
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

September 30, 2017
Number of Loans	1		—		2		—		3
Pre-Modification Outstanding Recorded Investment	$	725	$	—	$	25	$	—	$	750
Post-Modification Outstanding Recorded Investment	725		—		25		—		750
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

For the Year-To-Date Period Ended:
September 30, 2018
Number of Loans	—		—		5		—		5
Pre-Modification Outstanding Recorded Investment	$	—	$	—	$	44	$	—	$	44
Post-Modification Outstanding Recorded Investment	—		—		44		—		44
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

September 30, 2017
Number of Loans	2		—		6		—		8
Pre-Modification Outstanding Recorded Investment	$	1,228	$	—	$	51	$	—	$	1,279
Post-Modification Outstanding Recorded Investment	1,228		—		51		—		1,279
Subsequent Default, Number of Contracts	—		—		—		—		—
Subsequent Default, Recorded Investment	—		—		—		—		—

In general, loans requiring modification are restructured to accommodate the projected cash-flows of the borrower. Such modifications may involve a reduction of the interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance. As indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as of September 30, 2018.