Note on Terminology - In this Quarterly Report on Form 10-Q, the terms "Arrow," "the registrant," "the company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. Arrow is a two-bank holding company headquartered in Glens Falls, New York. Our banking subsidiaries are Glens Falls National Bank and Trust Company (Glens Falls National) whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company (Saratoga National) whose main office is located in Saratoga Springs, New York. Our non-bank subsidiaries include Capital Financial Group, Inc. (an insurance agency specializing in selling and servicing group health care policies), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to our proprietary mutual funds), Arrow Properties, Inc. (a real estate investment trust, or REIT) and U.S. Benefits, Inc. (a provider of administrative and recordkeeping services for more complex retirement plans), all of which are subsidiaries of Glens Falls National.

At certain points in this Report, our performance is compared with that of our "peer group" of financial institutions. Unless otherwise specifically stated, this peer group is comprised of the group of 286 domestic bank holding companies with $1 to $3 billion in total consolidated assets as identified in the Federal Reserve Board's "Bank Holding Company Performance Report" for December 31, 2008 (the most recent such Report currently available), and peer group data has been derived from such Report.

Forward Looking Statements - The information contained in this Quarterly Report on Form 10-Q contains statements that are not historical in nature but rather are based on our beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "expects," "believes," "anticipates," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Some of these statements, such as those included in the interest rate sensitivity analysis in Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on our general perceptions of market conditions and trends in business activity, both our own and in the banking industry generally, as well as current management strategies for future operations and development.

Examples of forward-looking statements in this Report are referenced in the table below:

Topic                                                      Page  Location
Impact of market rate structure on net interest margin,
  loan yields and deposit rates                             20   3rd paragraph
                                                            22   1st paragraph
                                                            22   3rd paragraph
                                                            23   1st paragraph
                                                            25   Next to last paragraph
Provision for loan losses                                   27   1st paragraph under table
Change in the level of and nonperforming loans and assets   28   5th paragraph
Future level of residential real estate loans               24   3rd paragraph
Impact of competition for indirect loans                    24   Last two paragraphs
Liquidity                                                   17   2nd paragraph
                                                            31   4th paragraph

These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast.
Factors that could cause or contribute to such differences include, but are not limited to, rapid and dramatic changes in economic and market conditions, such as the U.S. economy has recently experienced and continues to experience, sharp fluctuations in interest rates, economic activity, and consumer spending patterns; sudden changes in the market for products we provide, such as real estate loans; new developments in state and federal regulation; enhanced competition from unforeseen sources; and similar uncertainties inherent in banking operations or business generally. In the current environment of substantial economic turmoil affecting all sectors of business in the U.S., including the financial sector, all forward-looking statements should be understood as embracing a substantial degree of uncertainty far exceeding that accompanying such statements under normal economic conditions.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events. This Quarterly Report should be read in conjunction with our Annual Report on Form 10-K for December 31, 2008.

The Securities and Exchange Commission (SEC) has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Company's reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. As a parallel measure with Regulation G, the SEC stipulated in Item 10 of its Regulation S-K that public companies must make the same types of supplemental disclosures whenever they include non-GAAP financial measures in their filings with the SEC. The SEC has exempted from the definition of "non-GAAP financial measures" certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures or SEC filings, supplemental information is not required.
The following measures used in this Report, which although commonly utilized by financial institutions have not been specifically exempted by the SEC, may constitute "non-GAAP financial measures" within the meaning of the SEC's new rules, although we are unable to state with certainty that the SEC would so regard them.

Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution, to correct any distortion that might otherwise arise from the fact that the two institutions typically will have different proportions of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices.

The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest income. Net interest income as utilized in calculating the efficiency ratio is typically expressed on a tax-equivalent basis. Moreover, most financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (deducted from noninterest expense) and securities gains or losses (excluded from noninterest income), as well as certain nonrecurring components, such as gain or loss from sale of business lines. We follow these practices.

Tangible Book Value per Share: Tangible equity is total shareholders' equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total shareholders' equity including intangible assets divided by total shares issued and outstanding. Intangible assets as a category of assets includes many items, but is essentially represented by goodwill for Arrow.

Selected Quarterly Information:

(In Thousands, Except Per Share Amounts)

                                     Mar 2009       Dec 2008       Sep 2008       Jun 2008       Mar 2008
Net Income                             $6,682         $5,012         $5,008         $5,436         $4,981

Transactions Recorded in Net
Income (Net of Tax):
Sale of Merchant Bank Card            $1,630        $   ---         $   ---          $ ---         $ ---
Processing 1
Visa Litigation 2                        ---            ---             ---            ---           185
Gain on Redemption of Visa Inc.           ---            ---                                          452
Class B Shares 2                                                        ---            ---
Other-Than-Temporary Impairment                        (242)                           ---            ---
(OTTI) 3                                 ---                          (731)
Net Securities Gains (Losses)            167             249             4            (21)            ---
Net Gain on the Sale of Premises          ---            ---            ---            ---            69
Net Gains on Sales of Loans               46              31              8             19              5
Net Gains on the Sale of Other
Real Estate Owned                           2            18             ---            ---           ---

Period End Shares Outstanding          10,584         10,546         10,509         10,516         10,637
Basic Average Shares Outstanding       10,575         10,524         10,497         10,593         10,645
Diluted Average Shares Outstanding     10,604         10,588         10,559         10,650         10,694
Basic Earnings Per Share                 $.63           $.48           $.48           $.51           $.47
Diluted Earnings Per Share                .63            .47            .47            .51            .47
Cash Dividends Per Share                  .25            .25            .25            .24            .24

Average Assets                     $1,681,096     $1,687,366     $1,657,666     $1,625,093     $1,606,082
Average Equity                        128,507        127,136        124,601        126,177        124,686
Return on Average Assets                1.61%          1.18%          1.20%          1.35%          1.25%
Return on Average Equity                21.09          15.68          15.99          17.33          16.07

Average Earning Assets             $1,610,007     $1,615,240     $1,580,408     $1,548,365     $1,530,061
Average Paying Liabilities          1,346,413      1,345,344      1,308,191      1,288,047      1,272,871
Interest Income, Tax-Equivalent 4      22,262         23,446         23,302         22,861         22,832
Interest Expense                        6,792          7,541          7,690          7,751          9,295
Net Interest Income,                   15,470         15,905         15,612         15,110         13,537
Tax-Equivalent 4
Tax-Equivalent Adjustment                 739            727            710            746            750
Net Interest Margin 4                   3.90%          3.92%          3.93%          3.92%          3.56%
Efficiency Ratio Calculation: 4
Noninterest Expense                  $11,373        $11,273        $10,532        $10,409        $10,179
Less: Intangible Asset                   (89)           (89)           (89)           (86)           (96)
Amortization
  Net Noninterest Expense            $11,284        $11,184        $10,443        $10,323        $10,083
Net Interest Income,
Tax-Equivalent 4                     $15,470        $15,905        $15,612        $15,110        $13,537
Noninterest Income                     6,967          4,152          3,089          4,181          4,847
Less: Net Securities Gains & OTTI       (277)           (12)         1,204             35            ---
Less: Gain on Merchant Bank Card      (2,700)           ---            ---            ---            ---
Processing Sale
Less: Gain on Visa Stock                 ---            ---            ---            ---           (749)
Redemption
  Adjusted Gross Income              $19,460        $20,045        $19,905        $19,326        $17,635
Efficiency Ratio 4                     57.99%         55.79%         52.46%         53.42%         57.18%
Period-End Capital Information:
Tier 1 Leverage Ratio                   8.64%          8.39%          8.32%          8.45%          8.54%
Total Shareholders' Equity (i.e.     $132,539       $125,802       $125,397       $124,080       $127,051
Book Value)
Book Value per Share                    12.52          11.93          11.93          11.80          11.94
Intangible Assets                      16,450         16,378         16,457         16,495         16,593
Tangible Book Value per Share 4         10.97          10.38          10.36          10.23          10.38
Asset Quality Information
Net Loans Charged-off as a
 Percentage of Average Loans,
Annualized                               .12%           .14%           .07%           .00%           .08%
Provision for Loan Losses as a
 Percentage of Average Loans,
Annualized                              .18            .32            .09            .09            .11
Allowance for Loan Losses as a
 Percentage of Loans, Period-end       1.22           1.20           1.16           1.20           1.20
Allowance for Loan Losses as a
 Percentage of Nonperforming
Loans, Period-end                    352.65         338.05         444.08         502.17         407.05
Nonperforming Loans as a
 Percentage of Loans, Period-end        .35            .35            .26            .24            .29
Nonperforming Assets as a
 Percentage of Total Assets,
Period-end                              .27            .30            .24            .17            .20

1 See page 17, 1st paragraph 3 See page 18, 1st paragraph 2 See page 18, 4th paragraph 4 See "Use of Non-GAAP Financial Measures" on page 14.

Average Consolidated Balance Sheets and Net Interest Income Analysis

(see "Use of Non-GAAP Financial Measures" on page 14)

(Fully Taxable Basis using a marginal tax rate of 35%)

(Dollars In Thousands)


Quarter Ended March 31,                       2009                         2008
                                              Interest    Rate             Interest    Rate
                                      Average  Income/ Earned/     Average  Income/ Earned/
                                      Balance  Expense    Paid     Balance  Expense    Paid
Federal Funds Sold                   $   ---   $  ---     ---% $   41,698   $  320    3.09%
Interest-Bearing Bank Deposits        55,777       36   0.26        1,082        7   2.60
Securities Available-for-Sale:
 Taxable                             299,228    3,460   4.69      309,483    3,719   4.83
 Non-Taxable                          14,599      186   5.17       24,595      371   6.07
Securities Held-to-Maturity:
 Taxable                                 257        3   4.73          286        3   4.22
 Non-Taxable                         135,975    1,779   5.31      114,007    1,627   5.74

Loans                              1,104,171   16,798   6.17    1,038,910   16,785   6.50

 Total Earning Assets              1,610,007   22,262   5.61    1,530,061   22,832   6.00

Allowance For Loan Losses            (13,313)                     (12,408)
Cash and Due From Banks               28,432                       32,831
Other Assets                          55,970                       55,598
 Total Assets                     $1,681,096                   $1,606,082

Deposits:
 Interest-Bearing  NOW Deposits   $  424,154    1,234   1.18   $  339,296    1,429   1.69
 Regular and Money  Market           289,481      546   0.76      265,712      921   1.39
Savings
 Time Deposits of  $100,000 or       152,744    1,025   2.72      187,610    1,891   4.05
More
 Other Time Deposits                 246,777    1,927   3.17      248,471    2,616   4.23
  Total Interest-Bearing Deposits  1,113,156    4,732   1.72    1,041,089    6,857   2.65

Short-Term Borrowings                 53,257       33   0.25       51,782      255   1.98
Long-Term Debt                       180,000    2,027   4.57      180,000    2,183   4.88
 Total Interest-Bearing            1,346,413    6,792   2.05    1,272,871    9,295   2.94
Liabilities

Demand Deposits                      180,966                      182,118
Other Liabilities                     25,210                       26,407
 Total Liabilities                 1,552,589                    1,481,396
Shareholders' Equity                 128,507                      124,686
 Total Liabilities and            $1,681,096                   $1,606,082
Shareholders' Equity

Net Interest Income                            15,470                       13,537
(Tax-equivalent Basis)
Net Interest Spread                                     3.56                         3.06
Net Interest Margin                                     3.90                         3.56

Reversal of Tax-Equivalent                       (739)  (.19)                 (750)  (.20)
Adjustment
Net Interest Income, As Reported              $14,731                      $12,787

OVERVIEW

Sale of Merchant Bank Card Processing to TransFirst: As we previously reported, on March 2, 2009, our bank subsidiaries, Glens Falls Bank and Trust Company and Saratoga National Bank and Trust Company, transferred their merchant bank card processing business for a cash payment of $3 million to TransFirst LLC (TransFirst) and a bank designated by TransFirst. In connection with the transfer, we entered into a relationship with TransFirst under which TransFirst will provide merchant bank card processing to merchant customers of our subsidiary banks. The gain was offset, in part, by a $300 thousand cost to terminate certain preexisting agreements for a net gain of $2.7 million recognized in the first quarter of 2009.

Continued Financial Market Turmoil: Since Fall 2007, the Dow Jones Industrial Average (Dow Jones) slid from a high of over 14,000 to a low of under 7,000, with the most dramatic change occurring during the fourth quarter of 2008 and the first quarter of 2009. The financial markets and particularly the banking sector have felt the impact of losses on subprime mortgages and other credit portfolios and loss of short-term liquidity, resulting in the September 2008 failure of Lehman Brothers Holdings (Lehman) and the distressed sales of Bear Stearns and Merrill Lynch. In addition, the number of bank failures, while not at historic highs, has risen to levels not seen for several years. Community banks such as ours that were not underwriting subprime residential real estate loans and were not investing significant amounts in private issue collateralized debt obligations have not typically experienced the significant losses in their loan or investment portfolios or the liquidity concerns that many of the larger financial institutions have experienced. However, the magnitude of turmoil in the markets has had a significant impact on the operations of all banks, including ours, and to the extent the U.S. economy continues in its present weakened state, our financial condition and results of operations will likely be negatively impacted, to some extent, in forthcoming periods.

Decision Not to Participate in U.S. Treasury TARP CCP: As previously disclosed in our Current Report on Form 8-K filed with the SEC on January 27, 2009, our Board of Directors determined in late January 2009, after we had applied to the U.S. Treasury Department and federal bank regulators for participation in the U.S. Government's Capital Purchase Plan ("CPP"), an element of the larger Troubled Assets Relief Program ("TARP"), and after we had been preliminarily approved by the Department of Treasury for participation, that we would not proceed ahead and sell shares of our preferred stock to the Treasury Department and would decline to participate. The basic reason for the Board's decision, as discussed in the Form 8-K, was that the Company's financial and liquidity positions remained sufficiently strong at year-end such that the potential loss of Board and management flexibility entailed in CPP participation was deemed too high a cost to warrant participation.

Economic recession and loan quality: As the economic recession got underway in late 2007, our market area of northeastern New York was relatively sheltered from falling real estate values and increasing unemployment. As the recession became stronger and deeper in late 2008 and early 2009, even northeastern New York began to feel the impact of the worsening national economy, reflected in a regional slow-down in real estate sales and increasing unemployment. By year-end 2008, we had experienced a small but measurable decline in the credit quality of our loan portfolio, although by standard measures our portfolio continued to appear stronger than the average for our peer group. Our levels of nonperforming assets and delinquent loans at March 31, 2009 remained consistent with December 31, 2008 levels, but were elevated when compared with March 31, 2008 results (see the table "Summary of the Allowance and Provision for Loan Losses" on page 27 of this Report). Nonperforming loans amounted to $3.8 million at March 31, 2009, a decrease of $112 thousand from the prior year-end 2008. The ratio of nonperforming loans to period-end loans was .35% at March 31, 2009, unchanged from year-end 2008. By way of comparison, this ratio for our peer group increased by 128 basis points from 1.08% at December 31, 2007 to 2.36% at December 31, 2008.

On an annualized basis, the ratio of our loans charged-off (net of recoveries) to average loans was .12% for the first quarter 2009, or about the same as the .14% ratio for the last quarter of 2008. The allowance for loan losses, as a percentage of period-end loans, rose from 1.20% at December 31, 2008 to 1.22% at March 31, 2009.

Recent trends in our three major loan portfolio segments are as follows:

o

Commercial and Commercial Real Estate Loans: We lend to small and medium size businesses, which typically do not encounter liquidity problems, since we often also provide support for their supplementary liquidity needs. However, current unemployment rates in our region are higher than in the past few years and the number of jobs has decreased, and some small and medium-sized businesses that borrow from us are experiencing revenue fall-off and financial pressure.

o

Residential Real Estate Loans: We have not experienced a notable increase in our foreclosure rates, primarily due to the fact that we did not originate or participate in underwriting subprime loans.

o

Indirect Automobile Loans: These loans comprise over 30% of our loan portfolio.
We have experienced moderate but not significant increases in our delinquency rate and level of charge-offs in the fourth quarter of 2008 and the first quarter of 2009.

Investment securities and other-than-temporary impairment: We hold a $2.0 million par value senior unsecured bond issued by Lehman. On September 15, 2008, Lehman declared bankruptcy resulting in a significant decline in the fair value of the bond. During 2008, we deemed the decline to be other-than-temporary in the third quarter 2008, and, accordingly, recognized a non-cash other-than-temporary impairment charge to earnings of $973 thousand net of tax (a $.09 reduction in diluted earnings per share). The remaining estimated fair value of our Lehman bond of $400 thousand has been included in non-performing assets as of March 31, 2009. The Lehman bankruptcy proceedings are ongoing and the ultimate value of our bond is subject to further change.

Corporate bonds and other debt securities represented only $5.5 million, or 1.2%, of our $474.4 million investment securities portfolio at March 31, 2009.
We did not hold any preferred or common stock of Fannie Mae or Freddie Mac. As of quarter-end 2009, we had not experienced any impairment issues with our holdings of mortgage-backed securities or CMO's all of which are guaranteed by federal agencies or government sponsored enterprises.

Liquidity and access to credit markets: We did not experience and have not experienced any liquidity issues during 2008 or thus far in 2009. The terms of our lines of credit with our correspondent banks, the FHLBNY and the Federal Reserve Bank, have not changed in recent periods, except for some increases in the maximum borrowing capacity. In general, to satisfy our liquidity needs we rely on asset-based liquidity (i.e. funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source (overnight lending arrangements with our correspondent banks, FHLBNY overnight and term advances and the Federal Reserve Bank discount window). During the recent period of bank failures, some institutions experienced a run on deposits, even though there was no reasonable expectation that depositors would lose any of their insured deposits. We maintain, and periodically test, a contingency liquidity plan whose purpose is to ensure that we can generate an adequate amount of cash to meet a wide variety of potential liquidity crises. (See our general liquidity discussion on page 31.)

Effect of VISA public offering, stock redemption and litigation reserves: On March 28, 2008, VISA Inc. distributed to member banks, in a mandatory redemption of 38.7% of its Class B shares held by the member banks, some of the proceeds realized by Visa from the initial public offering and sale of its Class A shares just then completed. With another portion of the IPO proceeds, Visa established a $3 billion escrow to cover certain, but not all, of its continuing litigation liabilities. Accordingly, during the first quarter of 2008, we recorded the following transactions:

•

A gain of $749 thousand from the mandatory redemption by Visa from us of 38.7% of our Class B Visa Inc. shares, reflected in noninterest income, and

•

A reversal of $306 thousand of the $600 thousand accrual previously recorded by us at December 31, 2007, representing our then estimated proportional share of Visa litigation costs, which reversal was reflected as a reduction in 2008 other operating expense.

In October 2008, Visa announced that it had settled the lawsuit with Discover . . .