Summary of ARROW FINANCIAL CORP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

JUNE 30, 2009

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), and U.S. Benefits, Inc. (a provider of administrative and recordkeeping services for more complex retirement plans) and Arrow Properties, Inc., (a real estate investment trust, or REIT), 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 300 domestic bank holding companies with $1 to $3 billion in total consolidated assets as identified in the Federal Reserve Board's ("FRB") Bank Holding Company Performance Report as of March 31, 2009. Unless otherwise specified, the peer group data contained herein has been derived from the FRB's March 31, 2009 Report, which is the most recent FRB Report currently available.

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 activity, both locally and nationally, 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
Estimation of potential losses related to Visa
obligation                                              25   3rd paragraph
FDIC Special Assessment                                 25   Next to last paragraph
Impact of Financial Downturn                            25   Last paragraph
Impact of market rate structure on net interest
margin,
 loan yields and deposit rates                          28   Next to last paragraph
                                                        30   4th & last paragraphs
                                                        31   1st paragraph
                                                        31   4th paragraph
                                                        34   1st paragraph
                                                        34   2nd paragraph
Provision for loan losses                               36   1st paragraph under table
Change in the level of loan losses and nonperforming    37   5th paragraph
loans and assets
Future level of residential real estate loans           33   1st paragraph
Future level of indirect loans                          33   6th paragraph
Future level of commercial loans                        33   Last paragraph
Gain on the sale of residential real estate loans       43   1st paragraph
Impact of changing economy                              38   2nd paragraph
Impact of economic downturn                             39   2nd paragraph
Liquidity                                               40   4th paragraph
Impact of changing stock market prices                  45   Next to last 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, changes in economic and market conditions, including unanticipated fluctuations in interest rates or in levels of business activity generally; new developments in state and federal regulation; enhanced competition; emerging technologies; loss of key personnel; unanticipated business opportunities; and similar uncertainties inherent in banking operations or business generally.

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 the period ended December 31, 2008.

USE OF NON-GAAP FINANCIAL MEASURES

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: 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 include many items, but essentially represents goodwill for Arrow.

Selected Quarterly Information:

(In Thousands, Except Per Share Amounts)

                                        Jun 2009     Mar 2009     Dec 2008     Sep 2008     Jun 2008
Net Income                                $4,931       $6,682       $5,012       $5,008       $5,436

Transactions Recorded in Net
Income (Net of Tax):
Net Gain on Sale of Merchant Bank           $161      $1,630      $   ---       $   ---        $ ---
Card Processing1
Other-Than-Temporary Impairment                                      (242)                       ---
(OTTI) 2                                    ---          ---                      (731)
Income from Restitution Payment  3          272           ---          ---          ---          ---
FDIC Special Assessment 4                  (475)          ---          ---          ---          ---
Net Securities Gains (Losses) 2               2          167           249           4          (21)
Net Gains on Sales of Loans 5               141           46            31            8           19

Period-End Shares Outstanding             10,592       10,584       10,546       10,509       10,516
Basic Average Shares Outstanding          10,583       10,575       10,524       10,497       10,593
Diluted Average Shares Outstanding        10,630       10,604       10,588       10,559       10,650
Basic Earnings Per Share                     .47         $.63         $.48         $.48         $.51
Diluted Earnings Per Share                   .46          .63          .47          .47          .51
Cash Dividends Per Share                     .25          .25          .25          .25          .24

Average Assets                        $1,725,739   $1,681,096   $1,687,366   $1,657,666   $1,625,093
Average Equity                           133,718      128,507      127,136      124,601      126,177
Return on Average Assets                   1.15%        1.61%        1.18%        1.20%        1.35%
Return on Average Equity                   14.79        21.09        15.68        15.99        17.33

Average Earning Assets                $1,653,637   $1,610,007   $1,615,240   $1,580,408   $1,548,365
Average Paying Liabilities             1,382,451    1,346,413    1,345,344    1,308,191    1,288,047
Interest Income, Tax-equivalent 6         22,245       22,262       23,446       23,302       22,861
Interest Expense                           6,716        6,792        7,541        7,690        7,751
Net Interest Income,                      15,529       15,470       15,905       15,612       15,110
Tax-equivalent 6
Tax-equivalent Adjustment                    744          739          727          710          746
Net Interest Margin 6                      3.77%        3.90%        3.92%        3.93%        3.92%
Efficiency Ratio Calculation:6
Noninterest Expense                     $12,119      $11,373      $11,273      $10,532      $10,409
Less: Intangible Asset                      (79)         (89)         (89)         (89)         (86)
Amortization
  Net Noninterest Expense               $12,040      $11,284      $11,184      $10,443      $10,323
Net Interest Income,
Tax-Equivalent 6                        $15,529      $15,470      $15,905      $15,612      $15,110
Noninterest Income                        4,844        6,967        4,152        3,089        4,181
Less: Net Securities Gains & OTTI            (4)        (277)         (12)       1,204           35
Less: Net Gain on Sale of
  Merchant Bank Card Processing            (266)      (2,700)         ---          ---          ---
  Adjusted Gross Income                 $20,103      $19,460      $20,045      $19,905      $19,326
Efficiency Ratio 6                        59.89%       57.99%       55.79%       52.46%       53.42%
Period-End Capital Information:
Tier 1 Leverage Ratio                      8.77%        8.64%        8.39%        8.32%        8.45%
Total Shareholders' Equity (i.e.        $134,586     $132,539     $125,802     $125,397     $124,080
Book Value)
Book Value per Share                       12.71        12.52        11.93        11.93        11.80
Intangible Assets                         16,440       16,450       16,378       16,457       16,495
Tangible Book Value per Share6             11.15        10.97        10.38        10.36        10.23
Asset Quality Information:
Net Loans Charged-off as a
 Percentage of Average Loans,
Annualized                                  .09%         .12%         .14%         .07%         .00%
Provision for Loan Losses as a
 Percentage of Average Loans,
Annualized                                 .15          .18          .32          .09          .09
Allowance for Loan Losses as a
 Percentage of Loans, Period-end          1.25         1.22         1.20         1.16         1.20
Allowance for Loan Losses as a
 Percentage of Nonperforming
Loans, Period-end                       383.40       352.65       338.05       444.08       502.17
Nonperforming Loans as a
 Percentage of Loans, Period-end           .32          .35          .35          .26          .24
Nonperforming Assets as a
 Percentage of Total Assets,
Period-end                                 .23          .27          .30          .24          .17
1  See page 25                            4 See page 25, 43
2 See page 26                             5 See page 42, 43
3 See pages 27, 41, 42                    6 See "Use of Non-GAAP Financial Measures" on page 20.

Selected Six-Month Period Information:

(Dollars In Thousands, Except Per Share Amounts)


                                                                  Jun 2009   Jun 2008
Net Income                                                         $11,613    $10,417

Transactions Recorded in Net Income
(Net of Tax):
Net Gain on Sale of Merchant Bank     see page 25                  $1,791       $---
Card Processing
Reversal of VISA Related Litigation   see page 25                     ---        185
Exposure
Gain on Redemption of Visa Inc. Class see page 25                     ---        452
B Shares
Income from Restitution Payment       see page 45, 46                 271        ---
FDIC Special Assessment               see page 25                   (475)        ---
Net Securities Gains (Losses)         see page 35                     170        (21)
Net Gain on the Sale of Premises      see page 45                     ---         69
Net Gain on Sales of Loans            see page 45, 46                 187         24

Period-End Shares Outstanding                                       10,592     10,516
Basic Average Shares Outstanding                                    10,579     10,619
Diluted Average Shares Outstanding                                  10,615     10,673
Basic Earnings Per Share                                           $1.10       $.98
Diluted Earnings Per Share                                          1.09        .98
Cash Dividends                                                       .50        .48

Average Assets                                                  $1,703,541 $1,615,592
Average Equity                                                     131,127    125,436
Return on Average Assets                                             1.37%      1.30%
Return on Average Equity                                           17.86      16.70

Average Earning Assets                                          $1,631,942 $1,539,213
Average Paying Liabilities                                       1,364,533  1,280,459
Interest Income, Tax-equivalent 1                                   44,507     45,693
Interest Expense                                                    13,508     17,046
Net Interest Income, Tax-equivalent 1                               30,999     28,647
Tax-equivalent Adjustment                                            1,483      1,496
Net Interest Margin 1                                                3.83%      3.74%
Efficiency Ratio Calculation 1
Noninterest Expense                                                $23,492    $20,588
Less: Intangible Asset Amortization                                  (168)      (182)
  Net Noninterest Expense                                           23,324     20,406
Net Interest Income, Tax-equivalent 1                               30,999     28,647
Noninterest Income                                                  11,811      9,028
Less: Net Securities (Gains) Losses                                  (281)        35
Less: Net Gain on Sale of Merchant Bank Card
Processing                                                         (2,966)       ---
Less: Gain on Redemption of VISA Inc.                                 ---       (749)
Class B Shares
  Net Gross Income, Adjusted                                        39,563     36,961
Efficiency Ratio 1                                                  58.95%     55.21%
Period-End Capital Information:
Tier 1 Leverage Ratio                                                8.77%      8.45%
Total Shareholders' Equity (i.e. Book                             $134,586   $124,080
Value)
Book Value per Share                                                 12.71      11.80
Intangible Assets                                                   16,440     16,495
Tangible Book Value per Share  1                                     11.15      10.23
Asset Quality Information:
Net Loans Charged-off as a
 Percentage of Average Loans,
Annualized                                                            .10%       .04%
Provision for Loan Losses as a
 Percentage of Average Loans,
Annualized                                                             .17        .10
Allowance for Loan Losses as a
 Percentage of Period-end Loans                                       1.25       1.20
Allowance for Loan Losses as a
 Percentage of Nonperforming Loans                                  383.40     502.17
Nonperforming Loans as a
 Percentage  of Period-end Loans                                       .32        .24
Nonperforming Assets as a
 Percentage of Period-end Total
Assets                                                                 .23        .17

1 See "Use of Non-GAAP Financial Measures" on page 20.

Average Consolidated Balance Sheets and Net Interest Income Analysis

(see "Use of Non-GAAP Financial Measures" on page 20)

(Tax-equivalent Basis using a marginal tax rate of 35%)

(Dollars In Thousands)


Quarter Ended June 30,                       2009                        2008
                                             Interest    Rate            Interest    Rate
                                     Average  Income/ Earned/    Average  Income/ Earned/
                                     Balance  Expense    Paid    Balance  Expense    Paid
Federal Funds Sold                $      ---   $  ---    ---%  $  17,845   $   94   2.12%
Interest-Bearing Bank Deposits       49,638       33   0.27         ---      ---    ---
Securities Available-for-Sale:
 Taxable                             353,691    3,636  4.12      338,160    4,208  5.00
 Non-Taxable                          10,747      148  5.52       26,306      373  5.70
Securities Held-to-Maturity:
 Taxable                               1,178       19  6.47          278        4  5.79
 Non-Taxable                         144,868    1,829  5.06      112,973    1,618  5.76

Loans                              1,093,515   16,580  6.08    1,052,803   16,564  6.33

 Total Earning Assets              1,653,637   22,245  5.40    1,548,365   22,861  5.94

Allowance For Loan Losses           (13,532)                    (12,570)
Cash and Due From Banks               27,464                      33,378
Other Assets                          58,170                      55,920
 Total Assets                     $1,725,739                  $1,625,093

Deposits:
 Interest-Bearing  NOW Deposits    $ 451,350    1,296  1.15    $ 370,458    1,269  1.38
 Regular and Money  Market           298,180      515  0.69      284,695      883  1.25
Savings
 Time Deposits of  $100,000 or       145,335      948  2.62      156,850    1,213  3.11
More
 Other Time Deposits                 249,650    1,877  3.02      238,297    2,051  3.46
  Total Interest-Bearing Deposits  1,144,515    4,636  1.62    1,050,300    5,416  2.07

Short-Term Borrowings                 57,936       34  0.24       55,798      194  1.40
Long-Term Debt                       180,000    2,046  4.56      181,949    2,141  4.73
 Total Interest-Bearing            1,382,451    6,716  1.95    1,288,047    7,751  2.42
Liabilities

Demand Deposits                      186,033                     188,949
Other Liabilities                     23,537                      21,920
 Total Liabilities                 1,592,021                   1,498,916
Shareholders' Equity                 133,718                     126,177
 Total Liabilities and            $1,725,739                  $1,625,093
Shareholders' Equity

Net Interest Income                            15,529                      15,110
(Tax-equivalent Basis)
Net Interest Spread                                      3.45                        3.52
Net Interest Margin                                      3.77                        3.92

Reversal of Tax-equivalent                      (744)   (.18)               (746)   (.19)
Adjustment
Net Interest Income, As Reported              $14,785                     $14,364

Average Consolidated Balance Sheets and Net Interest Income Analysis

(see "Use of Non-GAAP Financial Measures" on page 20)

(Tax-equivalent Basis using a marginal tax rate of 35%)

(Dollars In Thousands)


Six Months Ended June 30,                     2009                         2008
                                              Interest    Rate             Interest    Rate
                                     Average   Income/ Earned/    Average   Income/ Earned/
                                     Balance   Expense    Paid    Balance   Expense    Paid
Federal Funds Sold                $      ---   $   ---    ---%  $  29,771   $   414   2.80%
Interest-bearing Balances             52,691        69    0.26        541         7    2.60
Securities Available-for-Sale:
 Taxable                             326,609     7,096  4.38      323,822     7,927  4.92
 Non-Taxable                          12,663       334  5.32       25,450       744  5.88
Securities Held-to-Maturity:
 Taxable                                 720       22   6.16          282        7   4.99
 Non-Taxable                         140,446     3,608  5.18      113,490     3,245  5.75

Loans                              1,098,813    33,378  6.13    1,045,857    33,349  6.41

 Total Earning Assets              1,631,942    44,507  5.50    1,539,213    45,693  5.97

Allowance For Loan Losses           (13,422)                     (12,489)
Cash and Due From Banks               27,946                       33,105
Other Assets                          57,075                       55,763
 Total Assets                     $1,703,541                   $1,615,592

Deposits:
 Interest-Bearing  NOW Deposits   $  437,827     2,530  1.17   $  354,879     2,698  1.53
 Regular and Money  Market           293,855     1,061  0.73      275,203     1,804  1.32
Savings
 Time Deposits of  $100,000 or       149,019     1,973  2.67      172,230     3,104  3.62
More
 Other Time Deposits                 248,222     3,804  3.09      243,383     4,667  3.86
  Total Interest-Bearing Deposits  1,128,923     9,368  1.67    1,045,695    12,273  2.36

Short-Term Borrowings                 55,610        67  0.24       53,789       449  1.68
Long-Term Debt                       180,000     4,073  4.56      180,975     4,324  4.80
 Total Interest-Bearing            1,364,533    13,508  2.00    1,280,459    17,046  2.68
Liabilities

Demand Deposits                      183,513                      185,533
Other Liabilities                     24,368                       24,164
 Total Liabilities                 1,572,414                    1,490,156
Shareholders' Equity                 131,127                      125,436
 Total Liabilities and            $1,703,541                   $1,615,592
Shareholders' Equity

Net Interest Income                             30,999                       28,647
(Tax-equivalent Basis)
Net Interest Spread                                       3.50                         3.29
Net Interest Margin                                       3.83                         3.74

Reversal of Tax-equivalent                     (1,483)   (.18)              (1,496)   (.20)
Adjustment
Net Interest Income, As Reported               $29,516                      $27,151

OVERVIEW

Sale of Merchant Bank Card Processing to TransFirst: As we previously reported, on March 2, 2009, our bank subsidiaries, Glens Falls National Bank and Trust Company and Saratoga National Bank and Trust Company, sold their merchant bank card processing business for an initial cash payment at closing of $3 million to TransFirst LLC (TransFirst) and a bank designated by TransFirst. In connection with the sale, 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 an estimated $300 thousand cost to terminate certain pre-existing agreements for a net gain of $2.7 million recognized in the first quarter of 2009. In the second quarter of 2009, a final adjustment was negotiated which substantially eliminated the termination fees related to the pre-existing agreements such that our net gain on the sale of the business increased $266 thousand to approximately $2.97 million.

VISA Transactions in 2008 and 2009: On March 28, 2008, VISA Inc. distributed to its member banks, including Glens Falls National Bank and Trust Company, by way of 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 . . .