Summary of ARROW FINANCIAL CORP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 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), 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).

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 June 30, 2009. Unless otherwise specified, the peer group data contained herein has been derived from the FRB's June 30, 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, or anticipated trends or developments unique to our own business, as well as current management strategies for our 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
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 under table
                                                        34   2nd paragraph under table
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   2nd paragraph
Future level of indirect consumer loans                 33   7th paragraph
Future level of commercial loans                        34   1st paragraph
Gain on the sale of residential real estate loans       43   2nd paragraph
Impact of changing economy                              38   2nd paragraph
Impact of economic downturn                             39   2nd paragraph
Liquidity                                               41   1st paragraph
Impact of changing stock market prices                  42   3rd paragraph under table
                                                        45   2nd paragraph under table

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, possible sudden and significant changes in economic and market conditions, fluctuations in interest rates (more likely upward than downward), asset inflation or deflation, continuing oscillations 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, except as may be required in connection with regular or periodic reports filed under Section 13(a) of the Securities Exchange Act of 1934 or other registration statements or disclosures filed under the federal securities laws. 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 the sale of a business line. We follow these practices.

Tangible Book Value per Share and 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:

(Dollars In Thousands, Except Per Share Amounts)

                                        Sep 2009     Jun 2009     Mar 2009     Dec 2008     Sep 2008
Net Income                                $5,062       $4,931       $6,682       $5,012       $5,008

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 2                       29            2          167           249           4
Net Gains on Sales of Loans 5                10          141           46            31            8

Period-End Shares Outstanding             10,916       10,909       10,901       10,863       10,825
Basic Average Shares Outstanding          10,912       10,901       10,892       10,840       10,812
Diluted Average Shares Outstanding        10,982       10,948       10,922       10,906       10,876
Basic Earnings Per Share                     .46          .45         $.61         $.42         $.46
Diluted Earnings Per Share                   .46          .45          .61          .42          .46
Cash Dividends Per Share                     .24          .24          .24          .24          .24

Average Assets                        $1,778,893   $1,725,739   $1,681,096   $1,687,366   $1,657,666
Average Equity                           136,397      133,718      128,507      127,136      124,601
Return on Average Assets                   1.13%        1.15%        1.61%        1.18%        1.20%
Return on Average Equity                   14.72        14.79        21.09        15.68        15.99

Average Earning Assets                $1,706,626   $1,653,637   $1,610,007   $1,615,240   $1,580,408
Average Paying Liabilities             1,417,218    1,382,451    1,346,413    1,345,344    1,308,191
Interest Income, Tax-equivalent 6         22,499       22,245       22,262       23,446       23,302
Interest Expense                           6,462        6,716        6,792        7,541        7,690
Net Interest Income,                      16,037       15,529       15,470       15,905       15,612
Tax-equivalent 6
Tax-equivalent Adjustment                    835          744          739          727          710
Net Interest Margin 6                      3.73%        3.77%        3.90%        3.92%        3.93%
Efficiency Ratio Calculation:6
Noninterest Expense                     $11,401      $12,119      $11,373      $11,273      $10,532
Less: Intangible Asset                      (79)         (79)         (89)         (89)         (89)
Amortization
  Net Noninterest Expense               $11,322      $12,040      $11,284      $11,184      $10,443
Net Interest Income,
Tax-Equivalent 6                        $16,037      $15,529      $15,470      $15,905      $15,612
Noninterest Income                        3,976        4,844        6,967        4,152        3,089
Less: Net Securities Gains & OTTI           (48)          (4)        (277)         (12)       1,204
Less: Net Gain on Sale of
  Merchant Bank Card Processing             ---         (266)      (2,700)         ---          ---
  Adjusted Gross Income                 $19,965      $20,103      $19,460      $20,045      $19,905
Efficiency Ratio 6                        56.71%       59.89%       57.99%       55.79%       52.46%
Period-End Capital Information:
Tier 1 Leverage Ratio                      8.37%        8.77%        8.64%        8.39%        8.32%
Total Shareholders' Equity (i.e.        $139,304     $134,586     $132,539     $125,802     $125,397
Book Value)
Book Value per Share                       12.76        12.71        12.52        11.93        11.93
Intangible Assets                         16,353       16,440       16,450       16,378       16,457
Tangible Book Value per Share6             11.26        11.15        10.97        10.38        10.36
Asset Quality Information:
Net Loans Charged-off as a
 Percentage of Average Loans,
Annualized                                  .08%         .09%         .12%         .14%         .07%
Provision for Loan Losses as a
 Percentage of Average Loans,
Annualized                                 .15          .15          .18          .32          .09
Allowance for Loan Losses as a
 Percentage of Loans, Period-end          1.25         1.25         1.22         1.20         1.16
Allowance for Loan Losses as a
 Percentage of Nonperforming
Loans, Period-end                       299.07       383.40       352.65       338.05       444.08
Nonperforming Loans as a
 Percentage of Loans, Period-end           .42          .32          .35          .35          .26
Nonperforming Assets as a
 Percentage of Total Assets,
Period-end                                 .26          .23          .27          .30          .24
1  See page 25                            4 See page 25, 44, 46
2 See page 26                             5 See page 43, 45, 46
3 See pages 27, 44, 45                    6 See "Use of Non-GAAP Financial Measures" on page 20.

Selected Nine-Month Period Information:

(Dollars In Thousands, Except Per Share Amounts)


                                                                  Sep 2009   Sep 2008
Net Income                                                         $16,675    $15,425

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
Other-Than-Temporary Impairment       see page 26                     ---       (731)
(OTTI)
Income from Restitution Payment       see page 44, 45                 271        ---
FDIC Special Assessment               see page 25                   (475)        ---
Net Securities Gains (Losses)         see page 35                     199       (17)
Net Gain on the Sale of Premises      see page 45                     ---         69
Net Gain on Sales of Loans            see page 45, 46                 197         32

Period-End Shares Outstanding                                       10,916     10,825
Basic Average Shares Outstanding                                    10,902     10,896
Diluted Average Shares Outstanding                                  10,951     10,954
Basic Earnings Per Share                                           $1.53      $1.42
Diluted Earnings Per Share                                          1.52       1.41
Cash Dividends                                                       .73        .71

Average Assets                                                  $1,728,934 $1,629,719
Average Equity                                                     132,903    125,155
Return on Average Assets                                             1.29%      1.26%
Return on Average Equity                                           16.77      16.46

Average Earning Assets                                          $1,657,111 $1,553,046
Average Paying Liabilities                                       1,382,287  1,289,771
Interest Income, Tax-equivalent 1                                   67,006     68,995
Interest Expense                                                    19,970     24,736
Net Interest Income, Tax-equivalent 1                               47,036     44,259
Tax-equivalent Adjustment                                            2,318      2,206
Net Interest Margin 1                                                3.79%      3.81%
Efficiency Ratio Calculation 1
Noninterest Expense                                                $34,893    $31,120
Less: Intangible Asset Amortization                                  (247)      (271)
  Net Noninterest Expense                                           34,646     30,849
Net Interest Income, Tax-equivalent 1                               47,036     44,259
Noninterest Income                                                  15,787     12,117
Less: Net Securities (Gains) Losses                                  (329)     1,239
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                                        59,528     56,866
Efficiency Ratio 1                                                  58.20%     54.25%
Period-End Capital Information:
Tier 1 Leverage Ratio                                                8.37%      8.32%
Total Shareholders' Equity (i.e. Book                             $139,304   $125,397
Value)
Book Value per Share                                                 12.76      11.58
Intangible Assets                                                   16,353     16,457
Tangible Book Value per Share  1                                     11.26      10.06
Asset Quality Information:
Net Loans Charged-off as a
 Percentage of Average Loans,
Annualized                                                            .09%       .05%
Provision for Loan Losses as a
 Percentage of Average Loans,
Annualized                                                             .16        .10
Allowance for Loan Losses as a
 Percentage of Period-end Loans                                       1.25       1.16
Allowance for Loan Losses as a
 Percentage of Nonperforming Loans                                  299.07     444.08
Nonperforming Loans as a
 Percentage  of Period-end Loans                                       .42        .26
Nonperforming Assets as a
 Percentage of Period-end Total
Assets                                                                 .26        .24

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 September 30,                  2009                        2008
                                             Interest    Rate            Interest    Rate
                                     Average  Income/ Earned/    Average  Income/ Earned/
                                     Balance  Expense    Paid    Balance  Expense    Paid
Federal Funds Sold                $      ---  $   ---    ---%  $  10,158    $  49   1.92%
Interest-Bearing Bank Balances        62,301       41   0.26         929        4   1.71
Securities Available-for-Sale:
 Taxable                             366,000    3,520  3.82      345,281    4,224  4.87
 Non-Taxable                          17,013      189  4.41       18,608      249  5.32
Securities Held-to-Maturity:
 Taxable                               1,254       21  6.64          272        3  4.39
 Non-Taxable                         160,237    2,015  4.99      121,869    1,622  5.29

Loans                              1,099,821   16,713  6.03    1,083,291   17,151  6.30

 Total Earning Assets              1,706,626   22,499  5.23    1,580,408   23,302  5.87

Allowance For Loan Losses           (13,721)                    (12,732)
Cash and Due From Banks               28,208                      35,673
Other Assets                          57,780                      54,317
 Total Assets                     $1,778,893                  $1,657,666

Deposits:
 Interest-Bearing  NOW Deposits    $ 443,841    1,144  1.02    $ 353,171    1,167  1.31
 Regular and Money  Market           310,991      503  0.64      288,307      863  1.19
Savings
 Time Deposits of  $100,000 or       167,681      925  2.19      178,041    1,291  2.88
More
 Other Time Deposits                 253,359    1,830  2.87      242,069    1,965  3.23
  Total Interest-Bearing Deposits  1,175,872    4,402  1.49    1,061,588    5,286  1.98

Short-Term Borrowings                 61,346       30  0.19       63,198      222  1.40
Long-Term Debt                       180,000    2,030  4.47      183,405    2,182  4.73
 Total Interest-Bearing            1,417,218    6,462  1.81    1,308,191    7,690  2.34
Liabilities

Demand Deposits                      199,611                     200,193
Other Liabilities                     25,667                      24,681
 Total Liabilities                 1,642,496                   1,533,065
Shareholders' Equity                 136,397                     124,601
 Total Liabilities and            $1,778,893                  $1,657,666
Shareholders' Equity

Net Interest Income                            16,037                      15,612
(Tax-equivalent Basis)
Net Interest Spread                                      3.42                        3.53
Net Interest Margin                                      3.73                        3.93

Reversal of Tax-Equivalent                      (835)   (.19)               (710)   (.18)
Adjustment
Net Interest Income, As Reported              $15,202                     $14,902

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)


Nine Months Ended September 30,               2009                          2008
                                               Interest    Rate             Interest    Rate
                                      Average   Income/ Earned/     Average  Income/ Earned/
                                      Balance   Expense    Paid     Balance  Expense    Paid
Federal Funds Sold                $       --- $     ---    ---%   $  23,186   $  463   2.67%
Interest-Bearing Bank Balances         55,929       110   0.26          672       11   2.19
Securities Available-for-Sale:
 Taxable                              339,884    10,616  4.18       331,027   12,151  4.90
 Non-Taxable                           14,129       523  4.95        23,153      993  5.73
Securities Held-to-Maturity:
 Taxable                                  900        43  6.39           279       10  4.79
 Non-Taxable                          147,116     5,623  5.11       116,303    4,867  5.59

Loans                               1,099,153    50,091  6.09     1,058,426   50,500  6.37

 Total Earning Assets               1,657,111    67,006  5.41     1,553,046   68,995  5.93

Allowance For Loan Losses            (13,523)                      (12,571)
Cash and Due From Banks                28,034                        33,967
Other Assets                           57,312                        55,277
 Total Assets                      $1,728,934                    $1,629,719

Deposits:
 Interest-Bearing  NOW Deposits    $  439,854     3,674  1.12    $  354,305    3,865  1.46
 Regular and Money  Market            299,629     1,564  0.70       279,603    2,667  1.27
Savings
 Time Deposits of  $100,000 or        155,308     2,898  2.49       174,181    4,395  3.37
More
 Other Time Deposits                  249,953     5,634  3.01       242,942    6,632  3.65
  Total Interest-Bearing Deposits   1,144,744    13,770  1.61     1,051,031   17,559  2.23

Short-Term Borrowings                  57,543        97    0.23      56,949      671    1.57
Long-Term Debt                        180,000     6,103  4.53       181,791    6,506  4.78
 Total Interest-Bearing             1,382,287    19,970  1.93     1,289,771   24,736  2.56
Liabilities

Demand Deposits                       188,938                       190,456
Other Liabilities                      24,806                        24,337
 Total Liabilities                  1,596,031                     1,504,564
Shareholders' Equity                  132,903                       125,155
 Total Liabilities and             $1,728,934                    $1,629,719
Shareholders' Equity

Net Interest Income                              47,036                       44,259
(Tax-equivalent Basis)
Net Interest Spread                                        3.48                         3.37
Net Interest Margin                                        3.79                         3.81

Reversal of Tax-Equivalent                      (2,318)   (.19)              (2,206)   (.19)
Adjustment
Net Interest Income, As Reported                $44,718                      $42,053

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, which we recognized in the first quarter of 2009. In the second quarter of 2009, a post-closing adjustment to the purchase price substantially eliminated the termination fees related to the pre-existing agreements such that . . .