UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
Or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York						22-2448962
(State or other jurisdiction of						(IRS Employer Identification
incorporation or organization)						Number)
250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code:   (518) 745-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.								x   Yes          No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
							Yes          No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer			Accelerated filer   x
Non-accelerated filer       (Do not check if a smaller reporting company)				Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).								Yes      x   No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class						Outstanding as of July 29, 2011
Common Stock, par value $1.00 per share						11,359,117

ARROW FINANCIAL CORPORATION

FORM 10-Q

June 30, 2011

INDEX

PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements:
	Consolidated Balance Sheets     as of June 30, 2011, December 31, 2010 and June 30, 2010	3
	Consolidated Statements of Income     for the Three and Six Month Periods Ended June 30, 2011 and 2010	4
	Consolidated Statements of Changes in Stockholders’ Equity     for the Six Month Periods Ended June 30, 2011 and 2010	5
	Consolidated Statements of Cash Flows     for the Six Month Periods Ended June 30, 2011 and 2010	7
	Notes to Unaudited Consolidated Interim Financial Statements	8
	Independent Auditors’ Review Report	25
Item 2.	Management's Discussion and Analysis of    Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	56
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1.A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Removed and Reserved	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
SIGNATURES		57

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)(Unaudited)

		June 30,		December 31,	June 30,
		2011		2010	2010
ASSETS
Cash and Due from Banks	$    33,202		$     25,961		$  33,071
Interest-Bearing Deposits at Banks		24,118		5,118	6,701
Investment Securities:
Available-for-Sale		511,094		517,364	447,867
Held-to-Maturity (Approximate Fair Value of $143,327 at June 30, 2011, $162,713 at December 31, 2010 and $162,077 at June 30, 2010)		138,334		159,938	158,226
Other Investments		7,019		8,602	9,474
Loans		1,120,096		1,145,508	1,144,959
Allowance for Loan Losses		(14,820)		(14,689)	(14,411)
Net Loans		1,105,276		1,130,819	1,130,548
Premises and Equipment, Net		19,490		18,836	19,252
Other Real Estate and Repossessed Assets, Net		31		58	23
Goodwill		20,823		15,783	15,783
Other Intangible Assets, Net		4,221		1,458	1,423
Accrued Interest Receivable		6,689		6,512	6,464
Other Assets		31,477		17,887	17,287
Total Assets		$1,901,774		$1,908,336	$1,846,119
LIABILITIES
Noninterest-Bearing Deposits		$  219,403		$  214,393	$  201,839
NOW Accounts		545,022		569,076	485,837
Savings Deposits		414,487		382,130	366,639
Time Deposits of $100,000 or More		123,640		120,330	134,220
Other Time Deposits		239,307		248,075	250,489
Total Deposits		1,541,859		1,534,004	1,439,024
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		60,361		51,581	60,847
Other Short-Term Borrowings		2,211		1,633	1,619
Federal Home Loan Bank Advances		90,000		130,000	150,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts		20,000		20,000	20,000
Accrued Interest Payable		1,549		1,957	2,094
Other Liabilities		22,205		16,902	19,832
Total Liabilities		1,738,185		1,756,077	1,693,416
STOCKHOLDERS’ EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized		---		---	---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized    (15,625,512 Shares Issued at June 30, 2011 and at December 31, 2010, and 15,170,399 Shares Issued at June 30, 2010)		15,626		15,626	15,170
Additional Paid-in Capital		194,276		191,068	179,850
Retained Earnings		30,039		24,577	29,757
Unallocated ESOP Shares (118,292 Shares at June 30, 2011, 132,296 Shares   at December 31, 2010, and 87,551 Shares at June 30, 2010)		(2,600)		(2,876)	(1,876)
Accumulated Other Comprehensive Loss		(2,983)		(6,423)	(1,682)
Treasury Stock, at Cost (4,152,043 Shares at June 30, 2011, 4,237,435 Shares
at December 31, 2010, and 4,111,704 Shares at June 30, 2010)		(70,769)		(69,713)	(68,516)
Total Stockholders’ Equity		163,589		152,259	152,703
Total Liabilities and Stockholders’ Equity		$1,901,774		$1,908,336	$1,846,119

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 (In Thousands, Except Per Share Amounts) (Unaudited)

Shares and Per Share Amounts have been restated for the September 2010 3% stock dividend.

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 (In Thousands, Except Share and Per Share Amounts) (Unaudited)

(Continued on Next Page)

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 (In Thousands, Except Share and Per Share Amounts) (Unaudited)

Cash dividends paid in 2010 have been restated for the September 2010 3% stock dividend.

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands) (Unaudited)

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

FORM 10-Q

June 30, 2011

1.   Accounting Policies

In the opinion of the management of Arrow Financial Corporation (Arrow), the accompanying unaudited consolidated interim financial statements contain all of the adjustments necessary to present fairly the financial position as of June 30, 2011, December 31, 2010 and June 30, 2010; the results of operations for three and six-month periods ended June 30, 2011 and 2010; the changes in stockholders’ equity for the six-month periods ended June 30, 2011 and June 30, 2010; and the cash flows for the six-month periods ended June 30, 2011 and 2010.  All such adjustments are of a normal recurring nature.  The preparation of financial statements requires the use of management estimates.  The unaudited consolidated interim financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, 2010, included in Arrow’s 2010 Form 10-K.

Recent Accounting Pronouncements:

ASU 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. ASU 2011-05 eliminates the option of presenting the components of comprehensive income as part of the statement of changes in stockholders’ equity and provides an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two but separate consecutive statements.  The update is effective, retrospectively, for interim and annual periods beginning after December 15, 2011.  The changes are limited to matters of presentation and will not have an impact on our financial condition or results of operation.

ASU 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In 2006, the FASB and the International Accounting Standards Board (IASB) published a Memorandum of Understanding, which has served as the foundation of the Boards’ efforts to create a common set of high quality global accounting standards. Consistent with the Memorandum of Understanding and the Boards’ commitment to achieving that goal, the amendments in ASU 2011-04 are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs).The Boards worked together to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style).  The amendments in ASU 2011-04 explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. We have determined that this pronouncement will not have a material impact on our financial condition or results of operations.

ASU 2011-03, Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements. The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity if all of the following conditions are met: 1. The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred. 2. The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price. 3. The agreement is entered into contemporaneously with, or in contemplation of, the transfer.  The update is effective, retrospectively, for interim and annual periods beginning after December 15, 2011.  Currently, we report all of our repurchase agreements as secured borrowings and accordingly, we have determined that this pronouncement will not have a material impact on our financial condition or results of operations.

ASU 2011-02, Receivables (Topic 310) – A Creditor’s determination of whether a Restructuring Is a Trouble Debt Restructuring. ASU 2011-02 provides additional guidance in evaluating whether a restructuring constitutes a troubled debt restructuring.  Under this guidance, a creditor must separately conclude that both of the following exist: 1. The restructuring constitutes a concession. 2. The debtor is experiencing financial difficulties.  The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We have determined that this pronouncement will not have a material impact on our financial condition or results of operations.

1.    Accounting Policies, continued

ASU 2010-20, Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses & ASU 2011-01, Receivables (Topic 310) – Deferral of the Effective Date of Disclosures about Trouble Debt Restructurings in Update No. 2010-20: The main objective of this guidance is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This pronouncement requires additional disclosures to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  These new disclosures are required for interim and annual reporting periods ending on or after December 15, 2010, except for disclosures relating to loan modifications, which were subsequently extended to interim and annual filings after June 15, 2011.  We have determined that this pronouncement will not have a material impact on our financial condition or results of operations.

2.   Comprehensive Income (In Thousands)

The following table presents the components, net of tax, of accumulated other comprehensive loss as of June 30, 2011, December 31, 2010, and June 30, 2010:

	June 30,	December 31,	June 30,
	2011	2010	2010
Retirement Plan Net Loss	$(10,648)	$(10,610)	$(9,881)
Retirement Plan Prior Service Cost	741	432	342
Net Unrealized Securities Holding Gains	6,924	3,755	7,857
Total Accumulated Other Comprehensive Loss	$ (2,983)	$ (6,423)	$(1,682)

3.   Earnings Per Share (In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for the six-month periods ended June 30, 2011 and 2010, as restated for the September 2010 3% stock dividend:

	Income	Shares	Per Share
	(Numerator)	(Denominator)	Amount
For the Three Months Ended June 30, 2011:
Basic EPS	$5,849	11,387	$.51
Dilutive Effect of Stock Options	---	12
Diluted EPS	$5,849	11,399	$.51
For the Three Months Ended June 30, 2010:
Basic EPS	$5,714	11,307	$.51
Dilutive Effect of Stock Options	---	37
Diluted EPS	$5,714	11,344	$.50
For the Six Months Ended June 30, 2011:
Basic EPS	$11,130	11,361	$.98
Dilutive Effect of Stock Options	---	17
Diluted EPS	$11,130	11,378	$.98
For the Six Months Ended June 30, 2010:
Basic EPS	$11,129	11,284	$.99
Dilutive Effect of Stock Options	---	39
Diluted EPS	$11,129	11,323	$.98

4.   Investments, Debt and Equity Securities (In Thousands)

A summary of the amortized costs and the approximate fair values of securities at June 30, 2011, December 31, 2010, and June 30, 2010 are presented below.  Amortized cost is reported net of other-than-temporary impairment charges.

Securities Available-for-Sale:

	Amortized Cost	Fair Value	Gross Unrealized Gains	Gross Unrealized Losses
June 30, 2011:
U.S. Agency Securities	$ 49,312	$ 49,551	$   239	$   ---
State and Municipal Obligations	90,451	90,700	251	2
Collateralized Mortgage Obligations	152,751	159,985	7,311	77
Mortgage-Backed Securities – Residential	204,443	208,044	3,815	214
Corporate and Other Debt Securities	1,357	1,345	---	12
Mutual Funds and Equity Securities	1,314	1,469	165	10
Total Securities Available-for-Sale	$499,628	$511,094	$11,781	$ 315
December 31, 2010:
U.S. Agency Securities	$  97,943	$  98,173	$   326	$      96
State and Municipal Obligations	89,471	89,528	72	15
Collateralized Mortgage Obligations	161,247	166,964	6,692	975
Mortgage-Backed Securities – Residential	159,636	159,926	2,532	2,242
Corporate and Other Debt Securities	1,516	1,417	---	99
Mutual Funds and Equity Securities	1,333	1,356	70	47
Total Securities Available-for-Sale	$511,146	$517,364	$9,692	$3,474
June 30, 2010:
U.S. Agency Securities	$162,937	$163,858	$     921	$    --
State and Municipal Obligations	18,876	18,953	84	7
Collateralized Mortgage Obligations	169,355	177,863	8,547	39
Mortgage-Backed Securities – Residential	80,824	84,552	3,728	---
Corporate and Other Debt Securities	1,552	1,433	---	119
Mutual Funds and Equity Securities	1,311	1,208	51	154
Total Securities Available-for-Sale	$434,855	$447,867	$13,331	$319

Securities Held-to-Maturity:

		Amortized Cost	Fair Value	Gross Unrealized Gains	Gross Unrealized Losses
June 30, 2011:
State and Municipal Obligations		$137,334	$142,327	$5,008	$15
Corporate and Other Debt Securities		1,000	1,000	---	---
Total Securities Held-to-Maturity		$138,334	$143,327	$5,008	$15
December 31, 2010:
State and Municipal Obligations		$158,938	$161,713	$2,911	$136
Corporate and Other Debt Securities		1,000	1,000	---	---
Total Securities Held-to-Maturity		$159,938	$162,713	$2,911	$136
June 30, 2010:
State and Municipal Obligations		$157,226	$161,077	$3,970	$119
Corporate and Other Debt Securities		1,000	1,000	---	---
Total Securities Held-to-Maturity		$158,226	$162,077	$3,970	$119

4.     Investments, Debt and Equity Securities, continued

As reported in the Consolidated Balance Sheets, Other Investments include Federal Home Loan Bank of New York (“FHLBNY”) and Federal Reserve Bank (“FRB”) stock, which are reported at cost.  FHLBNY and FRB stock are restricted investment securities and amounted to $6,060 and $959 at June 30, 2011, respectively, $7,743 and $859 at December 31, 2010, respectively, and $8,642 and $832 at June 30, 2010, respectively.  The required level of FHLBNY stock is based on the amount of FHLBNY borrowings and is pledged to secure those borrowings.   While some Federal Home Loan Banks have stopped paying dividends and repurchasing stock upon reductions in debt levels, the FHLBNY continues to pay dividends and repurchase its stock.  Accordingly, we have not recognized any impairment on our holdings of FHLBNY common stock.  However, the FHLBNY has reported impairment issues among its holdings of mortgage-backed securities.

A summary of the maturities of securities as of June 30, 2011 is presented below.  Mutual funds and equity securities, which have no stated maturity, are not included in the table below.  Collateralized mortgage obligations and other mortgage-backed-securities are included in the schedule based on their expected average lives.  Actual maturities will differ from the table below because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Maturities of Debt Securities:		Available-for-Sale		Held-to-Maturity
		Amortized Cost	Fair Value	Amortized Cost	Fair Value
Within One Year:
U.S. Agency Securities		$ 15,754	$  15,824	$         ---	$          ---
State and Municipal Obligations		66,530	66,580	16,057	16,234
Collateralized Mortgage Obligations		19,685	19,897	---	---
Mortgage-Backed Securities – Residential		2,238	2,309	---	---
Total		104,207	104,610	16,057	16,234
From 1 - 5 Years:
U.S. Agency Securities		33,558	33,727	---	---
State and Municipal Obligations		20,180	20,355	51,686	52,778
Collateralized Mortgage Obligations		96,013	101,434	---	---
Mortgage-Backed Securities – Residential		159,910	162,114	---	---
Corporate and Other Debt Securities		28	28	---	---
Total		309,689	317,658	51,686	52,778
From 5 - 10 Years:
State and Municipal Obligations		1,098	1,122	59,191	62,535
Collateralized Mortgage Obligations		37,053	38,653	---	---
Mortgage-Backed Securities – Residential		24,137	24,965	---	---
Total		62,288	64,740	59,191	62,535
Over 10 Years:
State and Municipal Obligations		2,643	2,643	10,400	10,780
Mortgage-Backed Securities – Residential		18,158	18,657	---	---
Corporate and Other Debt Securities		1,329	1,317	1,000	1,000
Total		22,130	22,617	11,400	11,780
Total Debt Securities		$498,314	$509,625	$138,334	$143,327

The fair value of securities pledged to secure repurchase agreements amounted to $60,361, $51,581 and $60,847 at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.  The fair value of securities pledged to secure public and trust deposits and for other purposes totaled $371,408, $382,142 and $327,439 at June 30, 2011, December 31, 2010, and June 30, 2010, respectively.  Other mortgage-backed securities at June 30, 2011, December 31, 2010 and June 30, 2010 included $1,325, $1,598 and $1,865, respectively, of loans previously securitized by Arrow, which it continues to service.

4.     Investments, Debt and Equity Securities, continued

The table above for June 30, 2011 consists of 33 securities where the current fair value is less than the related amortized cost.  These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing entities.  All of the CMO’s are agency backed and are all rated AAA, as are the mortgage-backed securities.  The municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured.  Obligations issued by school districts are supported by state aid.  For any non-rated municipal securities, credit analysis shows no widespread deterioration in the credit worthiness of the municipalities.  Corporate and other debt securities consist of one private placement trust preferred, and one trust preferred pool.  The private placement trust preferred is rated AAA by Standard & Poor’s; the trust preferred pool is rated investment grade, with the privately issued securities securing the note performing.  Subsequent to June 30, 2011, there were no securities downgraded below investment grade.  

The unrealized losses on these temporarily impaired securities are primarily the result of changes in interest rates for fixed rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and/or changes in the level of prepayments for mortgage related securities.   Because we do not currently intend to sell any of our temporarily impaired securities, and because it is not more likely than not that we would be required to sell the securities prior to recovery, the impairment is considered temporary.

The table above for December 31, 2010 consists of 104 securities where the current fair value is less than the related amortized cost.  These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing entities.  Agency-backed CMOs are all rated AAA, as are the mortgage-backed securities.  The municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured.  Obligations issued by school districts are supported by state aid.  For any non-rated municipal securities, third party credit analysis shows no deterioration in the credit worthiness of the municipalities.  Corporate and other debt securities consist of one private placement trust preferred, and one trust preferred pool.  The private placement trust preferred is rated AAA by Standard & Poor’s; the trust preferred pool is rated investment grade, with the privately issued securities securing the note performing.  Subsequent to December 31, 2010, there were no securities downgraded below investment grade.  

4.     Investments, Debt and Equity Securities, continued

The table above for June 30, 2010 consists of 96 securities where the current fair value is less than the related amortized cost.  These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing entities.  Agency-backed CMOs are all rated AAA, as are the mortgage-backed securities.  The municipal obligations are general obligations supported by the general taxing authority of the issuer, and in some cases are insured.  Obligations issued by school districts are supported by state aid.  For any non-rated municipal securities, credit analysis shows no deterioration in the credit worthiness of the municipalities.  Corporate and other debt securities consist of one private placement trust preferred, and one trust preferred pool.  The private placement trust preferred is rated AAA by Standard & Poor’s; the trust preferred pool is rated investment grade, with the privately issued securities securing the note performing.  Subsequent to June 30, 2010, there were no securities downgraded below investment grade.  

Other-Than-Temporary Impairment

On a quarterly basis, Arrow performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, Arrow then assesses whether the unrealized loss is other-than-temporary. An unrealized loss on a debt security is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided that Arrow does not intend to sell the underlying debt security and it is more-likely-than not that Arrow would not have to sell the debt security prior to recovery.

At June 30, 2011 and December 31, 2010 mutual funds and equity securities included shares of one common stock that had been deemed to be other-than-temporarily impaired.  The common stock had a book value of $1,469 prior to the recognition of $375 in losses charged to earnings for the year ended December 31, 2009.  The approximate fair value for this security was $1,210, 1,050 and $948 at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.  During the second quarter of 2011, we recorded a $17 other-than-temporary impairment on a security in our held-to-maturity portfolio.

5.     Loans

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	---

Credit Quality Indicators

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

5.     Loans, continued

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.

Past Due Loans

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.

5.      Loans, continued

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

Nonaccrual Loans and Loans Past Due 90 or More Days and Still Accruing Interest

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.

5.      Loans, continued

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

Impaired Loans

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.

5.      Loans, continued

Allowance for Loan Losses

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:

i)

Secured and unsecured commercial loans,

ii)

Secured construction and development loans,

iii)

Secured commercial loans – non-owner occupied,

iv)

Secured commercial loans – owner occupied,

v)

One to four family residential real estate loans,

vi)

Home equity loans,

vii)

Indirect loans – low risk tiers (based on credit scores),

viii)

Indirect loans – high risk tiers, and

ix)

Other consumer loans.

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 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 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.  

5.      Loans, continued

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:

Loan Modifications

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:

Loans Modified During 2011
	Number of Loans	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Commercial Other	1	$  62	$  62
Automobile	9	88	88
Total	10	$150	$150

Off-Balance Sheet Credit Exposures

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.

6.   Retirement Plans (In Thousands)

The following table provides the components of net periodic benefit costs for the three months ended June 30:

	Pension Benefits		Postretirement Benefits
	2011	2010	2011	2010
Service Cost	$395	$282	$  40	$ 36
Interest Cost	431	438	67	105
Expected Return on Plan Assets	(746)	(468)	---	---
Accretion of Prior Service Credit	(3)	(19)	(28)	(24)
Amortization of Net Loss	233	235	23	17
Net Periodic Benefit Cost	$310	$468	$102	$134

The following table provides the components of net periodic benefit costs for the six months ended June 30:

	Pension Benefits		Postretirement Benefits
	2011	2010	2011	2010
Service Cost	$  715	$  565	$ 80	$ 73
Interest Cost	910	875	182	223
Expected Return on Plan Assets	(1,390)	(1,055)	---	---
Accretion of Prior Service Credit	(6)	(38)	(57)	(48)
Amortization of Net Loss	465	471	47	34
Net Periodic Benefit Cost	$  694	$  818	$252	$282

We contributed $1.5 million to our qualified pension plan in both 2011 and 2010, although we were not required to make any contribution in either year.  The expected 2011 contribution for the nonqualified plan is $396.  Arrow makes contributions for its postretirement benefits in an amount equal to actual expenses for the year.  The expected contribution is estimated to be $344 for 2011.

7.   Stock-Based Compensation Plans (Dollars In Thousands)

Under our 2008 Long-Term Incentive Plan, we granted options in both the first quarters of 2011 and 2010 to purchase shares of our common stock.  The fair values of the options were estimated on the date of grant using the Black-Scholes option-pricing model.  The fair value of our grants is expensed over the four year vesting period.  The expense for the second quarter of 2011 and 2010 was $92 and $78, respectively.  The expense for the first six months of 2011 and 2010 was $174 and $147, respectively.  Other information on the options is presented in the following table:

Grants Issued During the First Quarter:	2011	2010
Shares Granted	74,648	73,336
Fair Value of Options Granted	$6.43	$6.43
Assumptions:
Dividend Yield	4.00%	3.80%
Expected Volatility	36.5%	35.4%
Risk Free Interest Rate	2.54%	3.14%
Expected Lives (in years)	6.40	7.79

7.   Stock-Based Compensation Plans (Continued)

The following table presents the activity in Arrow’s compensatory stock options for the first six months of 2011 and 2010:

	2011		2010
Options:	Shares	Weighted- Average Exercise Price	Shares	Weighted- Average Exercise Price
Outstanding at January 1	466,944	$22.75	452,502	$21.70
Granted	74,648	25.47	73,336	23.86
Exercised	(14,717)	21.30	(27,315)	11.69
Forfeited	(10,071)	26.84	---	---
Outstanding at June 30	516,804	23.11	498,523	22.56
Exercisable at June 30	339,475	22.74	334,343	22.61

Arrow also sponsors an Employee Stock Purchase Plan under which employees purchase Arrow’s common stock at a 5% discount below market price.  Under current accounting guidance, a stock purchase plan with a discount of 5% or less is not considered a compensatory plan.   

8.   Guarantees

Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.  Standby and other letters of credit are conditional commitments issued by Arrow to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Typically, these instruments have terms of twelve months or less.  Some expire unused, and therefore, the total amounts do not necessarily represent future cash requirements.  Some have automatic renewal provisions.

For letters of credit, the amount of the collateral obtained, if any, is based on management’s credit evaluation of the counter-party.   Arrow had approximately $8.3 million of standby letters of credit on June 30, 2011, most of which will expire within one year and some of which were not collateralized.  At that date, all standby letters of credit were for private borrowing arrangements.  The fair value of Arrow’s standby letters of credit at June 30, 2011 was insignificant.

9.  Fair Value Measurements and Disclosures (In Thousands)

FASB ASC Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and requires certain disclosures about fair value measurements.  We do not have any nonfinancial assets or liabilities measured at fair value. The only assets or liabilities that Arrow measured at fair value on a recurring basis at June 30, 2011, December 31, 2010 and June 30, 2010 were securities available-for-sale.  Arrow held no securities or liabilities for trading on such date.  

We determine the fair value of financial instruments under the following hierarchy:

"

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

"

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).  

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  

9.  Fair Value Measurements and Disclosures, continued

The fair value measurement of securities available-for-sale on such date was as follows:

		Fair Value Measurements at Reporting Date Using:
Description	Total	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
June 30, 2011:
Securities Available-for Sale:
U.S. Agency Securities	$  49,551	$---	$  49,551	$    ---
State and Municipal Obligations	90,700	---	90,700	---
Collateralized Mortgage Obligations	159,985	---	159,985	---
Mortgage-Backed Securities - Residential	208,044	---	208,044	---
Corporate and Other Debt Securities	1,345	---	1,028	317
Mutual Funds and Equity Securities	1,469	215	1,254	---
Total Securities Available-for-Sale	$511,094	$215	$510,562	$317
December 31, 2010:
Securities Available-for Sale:
U.S. Agency Securities	$  98,173	$  ---	$  98,173	$    ---
State and Municipal Obligations	89,528	---	89,528	---
Collateralized Mortgage Obligations	166,964	---	166,964	---
Mortgage-Backed Securities - Residential	159,926	---	159,926	---
Corporate and Other Debt Securities	1,417	---	1,134	283
Mutual Funds and Equity Securities	1,356	421	935	---
Total Securities Available-for-Sale	$517,364	$421	$516,660	$283
June 30, 2010:
Securities Available-for Sale:
U.S. Agency Securities	$163,858	$---	$163,858	$    ---
State and Municipal Obligations	18,953	---	18,953	---
Collateralized Mortgage Obligations	177,863	---	177,863	---
Mortgage-Backed Securities - Residential	84,552	---	84,552	---
Corporate and Other Debt Securities	1,433	---	1,119	314
Mutual Funds and Equity Securities	1,208	---	1,208	---
Total Securities Available-for-Sale	$447,867	$---	$447,553	$314

Fair value for securities available-for-sale was determined utilizing an independent bond pricing service for identical assets or significantly similar securities.  The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models.  Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.  There were no assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2011.  

Level 3 securities available-for-sale at June 30, 2011, December 31, 2010 and June 30, 2010, in the table above, included one trust preferred pooled security.   In our analysis of fair value, we determined that the market for this security was inactive.  We reviewed the collateral within the pool and performed a discounted cash flow analysis using additional value estimates from unobservable inputs including expected cash flows after estimated deferrals and defaults.  The discount rate used was based on a market based rate of return including an assumed risk premium for securities with similar credit characteristics plus a market price adjustment for the small size and lack of an established market for this type of security.

9.  Fair Value Measurements and Disclosures, continued

The following table is a reconciliation of the beginning and ending balances for June 30, 2011 and 2010 of the Level 3 assets of Arrow, i.e., as to which fair value is measured using significant unobservable inputs, all of which are securities available-for-sale:

	2011	2010
Beginning Balance, January 1	$283	$305
Transfers In	---	---
Principal payment received	(2)	(3)
Purchases, issuances and settlements	---	---
Total net losses (realized/unrealized):
Included in earnings	---	---
Included in earnings, as a result of other-than-temporary impairment	---	---
Included in other comprehensive income	36	12
Ending Balance, June 30	$317	$314
The amount of total losses for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at period-end, as a result of other-than-temporary impairment	$---	$---

Other impaired assets which might have been included in this table include other real estate owned, mortgage servicing rights, goodwill and other intangible assets.  Arrow evaluates each of these assets for impairment on a quarterly basis, with no impairment recognized for these assets at June 30, 2011, December 31, 2010 or June 30, 2011.  

The following table presents a summary at June 30, 2011, December 31, 2010, and June 30, 2010 of the carrying amount and fair value of Arrow’s financial instruments: