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 Quarter Ended June 30, 2003

[   ] 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.

Yes    X        No        

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

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 31, 2003

Common Stock, par value $1.00 per share

7,900,794

PART I

FINANCIAL INFORMATION

Item 1.

Consolidated Balance Sheets

    as of June 30, 2003 and December 31, 2002

Consolidated Statements of Income

    for the Three Month and Six Month Periods ended June 30, 2003 and 2002

Consolidated Statements of Changes in Shareholders’ Equity

    for the Six Month Periods Ended June 30, 2003 and 2002

Consolidated Statements of Cash Flows

    for the Six Month Periods Ended June 30, 2003 and 2002

Notes to Unaudited Consolidated Interim Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II

OTHER INFORMATION

Item 1

Legal Proceedings

Item 2

Change in Securities and Use of Proceeds

Item 3

Defaults Upon Senior Securities

Item 4

Submission of Matters to a Vote of Security Holders

Item 5

Other Information

Item 6

Exhibits and Reports on Form 8-K

SIGNATURES

June 30,

2003   

December 31,

2002      

ASSETS

Cash and Due from Banks

$     30,598

$     29,141

Federal Funds Sold

              ---

       3,000

  Cash and Cash Equivalents

      30,598

      32,141

Securities Available-for-Sale

314,966

326,661

Securities Held-to-Maturity  (Approximate Fair    

  Value of $99,948 in 2003 and $79,476 in 2002)

 95,048

 74,505

Loans

848,778

811,292

  Allowance for Loan Losses

     (11,518)

       (11,193)

     Net Loans

     837,260

     800,099

Premises and Equipment, Net

 13,902

 13,715

Other Real Estate and Repossessed Assets, Net

 198

 194

Goodwill

9,297

9,297

Other Intangible Assets, Net

400

418

Other Assets

        15,489

         14,391

      Total Assets

$1,317,158

$1,271,421

LIABILITIES          

Deposits:            

  Demand

$   142,421

$   133,644

  Regular Savings, N.O.W. & Money Market Deposit Accounts

574,286

565,545

  Time Deposits of $100,000 or More

 80,610

 60,095

  Other Time Deposits

      195,173

      198,723

      Total Deposits

     992,490

     958,007

Short-Term Borrowings:

  Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

45,275

44,078

  Other Short-Term Borrowings

 1,926

 4,420

Federal Home Loan Bank Advances

150,000

145,000

Guaranteed Preferred Beneficial Interests in

   Corporation’s Junior Subordinated Debentures

5,000

5,000

Other Liabilities

      17,778

      13,514

      Total Liabilities

 1,212,469

 1,170,019

SHAREHOLDERS’ EQUITY

Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized

---

---

Common Stock, $1 Par Value; 20,000,000 Shares Authorized

   (10,468,895 Shares Issued at June 30, 2003 and at December 31,  2002)

10,469

10,469

Surplus

115,627

115,110

Undivided Profits

19,144

13,611

Unallocated ESOP Shares (97,212 Shares at June 30, 2003

    and at December 31, 2002)

(1,822)

(1,822)

Accumulated Other Comprehensive Income

 2,406

 3,253

Treasury Stock, at Cost (2,472,725 Shares at June 30,    

  2003 and 2,440,090 Shares at December 31, 2002)

      (41,135)

      (39,219)

      Total Shareholders’ Equity

     104,689

     101,402

      Total Liabilities and Shareholders’ Equity

$1,317,158

$1,271,421

Three Months      

Six Months     

Ended June 30,  

Ended June 30,  

2003

2002

2003

2002

INTEREST AND DIVIDEND INCOME

Interest and Fees on Loans

$13,863

$14,196

$27,784

$28,342

Interest on Federal Funds Sold

 16

52

45

83

Interest and Dividends on Securities Available-for-Sale

2,973

3,792

6,285

7,199

Interest on Securities Held-to-Maturity

      859

      838

   1,692

   1,675

Total Interest and Dividend Income

 17,711

 18,878

 35,806

 37,299

INTEREST EXPENSE   

Interest on Deposits:

Time Deposits of $100,000 or More

 501

 645

  922

1,308

Other Deposits

3,084

3,905

 6,363

7,646

Interest on Short-Term Borrowings:  

Federal Funds Purchased and Securities Sold   

Under Agreements to Repurchase

 91

120

191

238

Other Short-Term Borrowings

        2

        8

        3

       25

Federal Home Loan Bank Advances

    1,715

    1,574

    3,421

    3,066

Guaranteed Preferred Beneficial Interests in

   Corporation’s Junior Subordinated Debentures

      119

     119

      238

      238

Total Interest Expense

   5,512

 6,371

  11,138

  12,521

NET INTEREST INCOME

12,199

12,507

24,668

24,778

Provision for Loan Losses

      405

     615

      810

   1,230

NET INTEREST INCOME AFTER

  PROVISION FOR LOAN LOSSES

 11,794

11,892

  23,858

  23,548

OTHER INCOME

Income from Fiduciary Activities

927

986

1,794

2,048

Fees for Other Services to Customers

1,708

1,502

3,325

2,847

Net Gains on Securities Transactions

141

153

509

173

Other Operating Income

      480

      256

      659

      478

Total Other Income

   3,256

   2,897

   6,287

   5,546

OTHER EXPENSE  

Salaries and Employee Benefits

4,676

4,630

9,426

9,144

Occupancy Expense of Premises, Net

628

593

1,267

1,196

Furniture and Equipment Expense

746

647

1,417

1,259

Other Operating Expense

   2,013

  1,887

    3,968

   3,930

Total Other Expense

   8,063

  7,757

 16,078

  15,529

INCOME BEFORE PROVISION FOR INCOME TAXES

6,987

7,032

14,067

13,565

Provision for Income Taxes

   2,232

   2,255

   4,506

   4,321

NET INCOME

  $ 4,755

  $ 4,777

 $ 9,561

 $ 9,244

Average Shares Outstanding:

  Basic

7,905

7,990

7,911

8,001

  Diluted

8,089

8,186

8,084

8,189

Per Common Share:   

  Basic Earnings

$   .60

$   .60

$1.21

$1.16

  Diluted Earnings

    .59

    .58

  1.18

  1.13

Accumulated

Unallo-

Other Com-

cated

prehensive

Shares

Common

Undivided

ESOP

(Loss)

Treasury

Issued

Stock

Surplus

Profits

Shares

 Income

Stock

Total

Balance at December 31, 2002

10,468,895

$10,469

$115,110

$13,611

$(1,822)

$ 3,253

$(39,219)

$101,402

Comprehensive Income, Net of Tax:

  Net Income

---

---

---

9,561

---

---

---

    9,561

  Net Unrealized Securities Holding

    Losses Arising During the Period,

    Net of Tax (Pre-tax $900)   

---

---

---

---

---

 (541)

---

 (541)

  Reclassification Adjustment for

    Net Securities Gains Included in

    Net Income, Net of Tax

    (Pre-tax $509)

---

---

---

---

---

   (306)

---

      (306)

      Other Comprehensive Loss

     (847)

        Comprehensive Income

   8,714

Cash Dividends Declared,

  $.51 per Share

---

---

---

(4,028)

---

---

---

(4,028)

Stock Options Exercised

  (33,194 Shares)

---

---

 260

---

---

---

294

554

Shares Issued Under the Directors’

  Stock Plan (880 Shares)

---

---

 21

---

---

---

  8

 29

Shares Issued Under the Employee

  Stock Purchase Plan (11,499

  Shares)

---

---

193

---

---

---

104

297

Tax Benefit for Disposition of

  Stock Options

---

---

43

---

---

---

---

43

Purchase of Treasury Stock

  (78,208 Shares)

            ---

        ---

         ---

         ---

       ---

        ---

    (2,322)

    (2,322)

Balance at June 30, 2003

10,468,895

$10,469

$115,627

$19,144

$(1,822)

$ 2,406

$(41,135)

$104,689

Accumulated

Unallo-

Other Com-

cated

prehensive

Shares

Common

Undivided

ESOP

(Loss)

Treasury

Issued

Stock

Surplus

Profits

Shares

 Income

Stock

Total

Balance at December 31, 2001

9,970,376

$9,970

$99,459

$17,268

$(1,941)

$ 1,562

$(34,814)

$91,504

Comprehensive Income, Net of Tax:

  Net Income

---

---

---

9,244

---

---

---

    9,244

  Increase in Additional Pension

    Liability Over Unrecognized

    Prior Service Costs (Pre-tax $147)

---

---

---

---

---

(88)

---

(88)

  Net Unrealized Securities Holding

    Gains Arising During the Period,

    Net of Tax (Pre-tax $2,918)

---

---

---

---

---

1,772

---

1,772

  Reclassification Adjustment for

    Net Securities Gains Included in

    Net Income, Net of Tax

    (Pre-tax $173)

---

---

---

---

---

   (105)

---

      (105)

      Other Comprehensive Income

    1,579

      Comprehensive Income

  10,823

Cash Dividends Declared,

  $.46 per Share

---

---

---

(3,662)

---

---

---

(3,662)

Stock Options Exercised

  (34,155 Shares)

---

---

162

---

---

---

302

464

Shares Issued Under the Directors’

   Stock Plan (572 Shares)

---

---

 11

---

---

---

  6

 17

Shares Issued Under the Employee

  Stock Purchase Plan (11,315

  Shares)

---

---

170

---

---

---

100

270

Tax Benefit for Disposition of

  Stock Options

---

---

75

---

---

---

---

75

Purchase of Treasury Stock

  (92,737 Shares)

---

---

---

---

---

---

(2,586)

(2,586)

Allocation of ESOP Stock

  (1,300 Shares)

            ---

        ---

         12

         ---

        27

        ---

           ---

        39

Balance at June 30, 2002

9,970,376

$9,970

$99,889

$22,850

$(1,914)

$ 3,141

$(36,992)

$96,944

Six Months         

Ended June 30,      

2003

2002

Operating Activities:

Net Income

 $ 9,561

 $ 9,244

Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities:

Provision for Loan Losses

  810

1,230

Depreciation and Amortization

2,793

1,448

        Compensation Expense for Allocated ESOP Shares

---

 39

Gains on the Sale of Securities Available-for-Sale

(550)

(173)

Losses on the Sale of Securities Available-for-Sale

  41

 ---

Loans Originated and Held-for-Sale

(14,994)

         (3,143)

Proceeds from the Sale of Loans Held-for-Sale

15,366

3,156

    Net (Gains) Losses on the Sale of Loans, Premises and Equipment,

Other Real Estate Owned and Repossessed Assets

(319)

4

Tax Benefit for Disposition of Stock Options

43

75

Decrease (Increase) in Deferred Tax Assets

122

 (254)

(Increase) Decrease in Interest Receivable

 184

 (171)

(Decrease) in Interest Payable

   (141)

(205)

(Increase) Decrease in Other Assets

(918)

 443

Increase (Decrease) n Other Liabilities

    4,406

      (643)

Net Cash Provided By Operating Activities

  16,404

  11,050

Investing Activities:

Proceeds from the Sale of Securities Available-for-Sale

   96,541

   23,097

Proceeds from the Maturities and Calls of Securities Available-for-Sale

   81,117

   40,004

Purchases of Securities Available-for-Sale

 (168,968)

 (82,802)

Proceeds from the Maturities of Securities Held-to-Maturity

   1,197

     956

Purchases of Securities Held-to-Maturity

 (21,754)

 (52)

Net Increase in Loans

  (38,487)

  (21,275)

Proceeds from the Sales of Premises and Equipment,

Other Real Estate Owned and Repossessed Assets

     470

     770

Purchases of Premises and Equipment

      (779)

      (798)

Net Cash Used In Investing Activities

 (50,663)

 (40,100)

Financing Activities:

Net Increase in Deposits

 34,483

 15,641

Net (Decrease) Increase in Short-Term Borrowings

   (1,297)

    2,732

Federal Home Loan Bank Advances

20,000

20,000

Federal Home Loan Bank Repayments

(15,000)

    ---

Purchases of Treasury Stock

(2,322)

(2,586)

Treasury Stock Issued for Stock-Based Plans

     880

     751

Cash Dividends Paid

    (4,028)

    (3,662)

Net Cash Provided By Financing Activities

  32,716

  32,876

Net (Decrease) Increase in Cash and Cash Equivalents

(1,573)

 3,826

Cash and Cash Equivalents at Beginning of Period

   32,141

   41,944

Cash and Cash Equivalents at End of Period

 $30,598

 $45,770

Supplemental Cash Flow Information:

Interest Paid

 $11,278

 $12,726

Income Taxes Paid

   1,224

   5,414

Transfer of Loans to Other Real Estate Owned and Repossessed Assets

     516

     607

2003

2002

Excess of Additional Pension Liability Over Unrecognized Prior Service Cost

$  (706)

$  (706)

Net Unrealized Holding Gains on Securities Available-for-Sale

  3,112

  3,959

  Total Accumulated Other Comprehensive Income

$2,406

$3,253

Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

For the Three Months Ended June 30, 2003:

Basic EPS

$4,755

  7,905

$.60

Dilutive Effect of Stock Options

       ---

   184

Diluted EPS

$4,755

8,089

$.59

For the Three Months Ended June 30, 2002:

Basic EPS

$4,777

  7,990

$.60

Dilutive Effect of Stock Options

       ---

   196

Diluted EPS

$4,777

8,186

$.58

Income