Edgar Filing: ARROW FINANCIAL CORP

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2005

[ ] 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 of the Exchange Act).
	Yes X No
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
	Yes No X

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 October 31, 2005
Common Stock, par value $1.00 per share		10,355,194

ARROW FINANCIAL CORPORATION

FORM 10-Q/A

September 30, 2005

INDEX

PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements:
	Consolidated Balance Sheets (unaudited) as of September 30, 2005 and December 31, 2004	3
	Consolidated Statements of Income (unaudited) for the Three Month and Nine Month Periods Ended September 30, 2005 and 2004	4
	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Nine Month Periods Ended September 30, 2005 and 2004	5
	Consolidated Statements of Cash Flows (unaudited) for the Nine Month Periods Ended September 30, 2005 (Restated) and 2004	7
	Notes to Unaudited Consolidated Interim Financial Statements	8
	Independent Auditors’ Review Report	13
Item 4.	Controls and Procedures	14
PART II	OTHER INFORMATION
Item 6.	Exhibits	14
SIGNATURES		14

Explanatory Note

This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 is being filed with the U.S. Securities and Exchange Commission to restate the Registrant’s consolidated financial statements as of and for the quarterly period ended September 30, 2005 for the purpose of providing a corrected Consolidated Statement of Cash Flows. The restatement of the Registrant’s consolidated financial statements in this Form 10-Q/A primarily corrects and reclassifies the presentation of the cash flow for acquisitions from financing activities to investing activities. Except as set forth in this Form 10-Q/A, all other Items included in the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 are unaffected by the changes described above and have been omitted from this amendment. The information in this Form 10-Q/A is stated as of September 30, 2005 and except as specifically noted herein, does not reflect any subsequent information or events.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands) (Unaudited)

	September 30, 2005	December 31, 2004
ASSETS
Cash and Due from Banks	$ 41,432	$ 29,805
Federal Funds Sold	---	7,000
Cash and Cash Equivalents	41,432	36,805
Securities Available-for-Sale	306,499	325,248
Securities Held-to-Maturity (Approximate Fair Value of $114,250 at September 30, 2005 and $110,341 at December 31, 2004)	112,823	108,117
Loans	981,331	875,311
Allowance for Loan Losses	(12,212)	(12,046)
Net Loans	969,119	863,265
Premises and Equipment, Net	15,200	14,939
Other Real Estate and Repossessed Assets, Net	241	136
Goodwill	14,359	10,717
Other Intangible Assets, Net	3,021	1,019
Other Assets	21,417	17,703
Total Assets	$1,484,111	$1,377,949
LIABILITIES
Deposits:
Demand	$ 184,221	$ 167,667
Regular Savings, N.O.W. & Money Market Deposit Accounts	619,996	607,820
Time Deposits of $100,000 or More	128,933	85,906
Other Time Deposits	205,857	170,887
Total Deposits	1,139,007	1,032,280
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	58,363	42,256
Other Short-Term Borrowings	1,231	1,720
Federal Home Loan Bank Advances	131,500	150,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000	20,000
Other Liabilities	17,993	13,659
Total Liabilities	1,368,094	1,259,915
SHAREHOLDERS’ EQUITY
Preferred Stock, $5 Par Value; 1,000,000 Shares Authorized	---	---
Common Stock, $1 Par Value; 20,000,000 Shares Authorized (13,883,064 Shares Issued at September 30, 2005 and 13,478,703 Shares Issued at December 31, 2004)	13,883	13,479
Surplus	139,187	127,312
Undivided Profits	19,195	23,356
Unallocated ESOP Shares (83,621 Shares at September 30, 2005 and 93,273 Shares at December 31, 2004)	(1,182)	(1,358)
Accumulated Other Comprehensive (Loss) Income	(3,583)	429
Treasury Stock, at Cost (3,438,290 Shares at September 30, 2005 and 3,189,485 Shares at December 31, 2004)	(51,483)	(45,184)
Total Shareholders’ Equity	116,017	118,034
Total Liabilities and Shareholders’ Equity	$1,484,111	$1,377,949

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months		Nine Months
	Ended September 30,		Ended September 30,
	2005	2004	2005	2004
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$14,077	$12,645	$39,784	$37,923
Interest on Federal Funds Sold	6	5	50	67
Interest and Dividends on Securities Available-for-Sale	3,203	3,414	10,110	10,452
Interest on Securities Held-to-Maturity	1,008	974	2,993	2,960
Total Interest and Dividend Income	18,294	17,038	52,937	51,402

INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More	1,014	387	2,680	1,086
Other Deposits	3,099	2,140	8,222	7,536
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase	215	125	476	249
Other Short-Term Borrowings	5	1	13	5
Federal Home Loan Bank Advances	1,518	1,597	4,573	4,755
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	307	286	878	854
Total Interest Expense	6,158	4,536	16,842	14,485
NET INTEREST INCOME	12,136	12,502	36,095	36,917
Provision for Loan Losses	218	205	626	744
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES	11,918	12,297	35,469	36,173

OTHER INCOME
Income from Fiduciary Activities	1,147	1,112	3,435	3,228
Fees for Other Services to Customers	2,012	1,914	5,560	5,498
Net Gains (Losses) on Securities Transactions	151	(9)	340	201
Insurance Commissions	449	8	1,332	19
Other Operating Income	323	241	591	679
Total Other Income	4,082	3,266	11,258	9,625

OTHER EXPENSE
Salaries and Employee Benefits	5,195	5,059	15,538	14,642
Occupancy Expense of Premises, Net	761	674	2,225	2,068
Furniture and Equipment Expense	760	655	2,271	2,044
Other Operating Expense	2,285	1,902	6,627	5,835
Total Other Expense	9,001	8,290	26,661	24,589

INCOME BEFORE PROVISION FOR INCOME TAXES	6,999	7,273	20,066	21,209
Provision for Income Taxes	2,160	2,305	6,117	6,678
NET INCOME	$ 4,839	$ 4,968	$13,949	$14,531

Average Shares Outstanding:
Basic	10,390	10,411	10,439	10,419
Diluted	10,563	10,652	10,627	10,662

Per Common Share:
Basic Earnings	$ .47	$ .48	$ 1.34	$ 1.39
Diluted Earnings	.46	.47	1.31	1.36

Share and Per Share amounts have been restated for the September 2005 3% stock dividend.

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

	Shares Issued	Common Stock	Surplus	Undivided Profits	Unallo- cated ESOP Shares	Accumulated Other Com- prehensive (Loss) Income	Treasury Stock	Total
Balance at December 31, 2004	13,478,703	$13,479	$127,312	$23,356	$(1,358)	$ 429	$(45,184)	$118,034
Comprehensive Income, Net of Tax:
Net Income	---	---	---	13,949	---	---	---	13,949
Increase in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $570)	---	---	---	---	---	(343)	---	(343)
Net Unrealized Securities Holding Losses Arising During the Period, Net of Tax (Pre-tax $5,763)	---	---	---	---	---	(3,465)	---	(3,465)
Reclassification Adjustment for Net Securities Gains Included in Net Income, Net of Tax (Pre-tax $340)	---	---	---	---	---	(204)	---	(204)
Other Comprehensive Loss								(4,012)
Comprehensive Income								9,937

3% Stock Dividend	404,361	404	10,631	(11,035)	---	---	---	---
Cash Dividends Declared, $.68 per Share	---	---	---	(7,075)	---	---	---	(7,075)
Stock Options Exercised (95,449 Shares)	---	---	116	---	---	---	860	976
Shares Issued Under the Directors’ Stock Purchase Plan (2,264 Shares)	---	---	40	---	---	---	20	60
Shares Issued Under the Employee Stock Purchase Plan (16,786 Shares)	---	---	285	---	---	---	150	435
Tax Benefit for Exercise of Stock Options	---	---	637	---	---	---	---	637
Allocation of ESOP Stock (12,088 Shares)	---	---	166	---	176	---	---	342
Purchase of Treasury Stock (263,159 Shares)	---	---	---	---	---	---	(7,329)	(7,329)
Balance at September 30, 2005	13,883,064	$13,883	$139,187	$19,195	$(1,182)	$(3,583)	$(51,483)	$116,017

Cash dividends declared have been adjusted for the September 2005 3% stock dividend.

Included in the shares issued for the 3% stock dividend in 2005 were treasury shares of 100,545 and unallocated ESOP shares of 2,436.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

	Shares Issued	Common Stock	Surplus	Undivided Profits	Unallo- cated ESOP Shares	Accumulated Other Com- prehensive (Loss) Income	Treasury Stock	Total
Balance at December 31, 2003	13,086,119	$13,086	$113,335	$24,303	$(1,769)	$ 1,084	$(44,174)	$105,865
Comprehensive Income, Net of Tax:
Net Income	---	---	---	14,531	---	---	---	14,531
Increase in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $40)	---	---	---	---	---	(24)	---	(24)
Net Unrealized Securities Holding Losses Arising During the Period, Net of Tax (Pre-tax $444)	---	---	---	---	---	(267)	---	(267)
Reclassification Adjustment for Net Securities Gains Included in Net Income, Net of Tax (Pre-tax $201)	---	---	---	---	---	(121)	---	(121)
Other Comprehensive Loss								(412)
Comprehensive Income								14,119

3% Stock Dividend	392,584	393	11,032	(11,425)	---	---	---	---
Cash Dividends Declared, $.64 per Share	---	---	---	(6,663)	---	---	---	(6,663)
Stock Options Exercised (78,810 Shares)	---	---	133	---	---	---	600	733
Shares Issued Under the Employee Stock Purchase Plan (18,633 Shares)	---	---	298	---	---	---	143	441
Shares Issued Under the Directors’ Stock Plan (1,242 Shares)	---	---	26	---	---	---	10	36
Tax Benefit for Disposition of Stock Options	---	---	249	---	---	---	---	249
Allocation of ESOP Stock (18,889 Shares)	---	---	254	---	267	---	---	521
Purchase of Treasury Stock (79,515 Shares)	---	---	---	---	---	---	(2,150)	(2,150)
Balance at September 30, 2004	13,478,703	$13,479	$125,327	$20,746	$(1,502)	$ 672	$(45,571)	$113,151

Share and Per Share amounts have been restated for the September 2005 3% stock dividend.

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)(Unaudited)

	Nine Months
	Ended September 30,
	2005
	(Restated)	2004
Operating Activities:
Net Income	$ 13,949	$ 14,531
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses	626	744
Depreciation and Amortization	2,174	2,378
Compensation Expense for Allocated ESOP Shares	166	254
Gains on the Sale of Securities Available-for-Sale	(347)	(363)
Losses on the Sale of Securities Available-for-Sale	7	162
Loans Originated and Held-for-Sale	(7,554)	(9,801)
Proceeds from the Sale of Loans Held-for-Sale	8,067	10,355
Net Gains on the Sale of Loans, Premises and Equipment,
Other Real Estate Owned and Repossessed Assets	(90)	(103)
Increase in Deferred Tax Assets	(47)	(47)
Shares Issued Under the Directors’ Stock Plan	60	35
Net Increase in Other Assets	(1,474)	(756)
Net Increase in Other Liabilities	4,564	712
Net Cash Provided By Operating Activities	20,101	18,101
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale	44,222	34,595
Proceeds from the Maturities and Calls of Securities Available-for-Sale	23,715	47,196
Purchases of Securities Available-for-Sale	(55,769)	(57,666)
Proceeds from the Maturities of Securities Held-to-Maturity	7,489	4,539
Purchases of Securities Held-to-Maturity	(12,345)	(8,176)
Net Increase in Loans	(99,215)	(23,351)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	571	678
Purchases of Premises and Equipment	(678)	(1,695)
Net Increase from Branch Acquisitions	47,083	---
Net Cash Used In Investing Activities	(44,927)	(3,880)
Financing Activities:
Net Increase in Deposits	44,515	3,975
Net Increase in Short-Term Borrowings	15,618	9,101
Federal Home Loan Bank Advances	91,500	59,800
Federal Home Loan Bank Repayments	(110,000)	(70,000)
Tax Benefit from Exercise of Stock Options	637	249
Purchases of Treasury Stock	(7,329)	(2,150)
Treasury Stock Issued for Stock-Based Plans	1,411	1,175
Allocation of ESOP Shares	176	267
Cash Dividends Paid	(7,075) (6,663)	(6,663) (6,663)
Net Cash Provided By (Used In) Financing Activities	29,453	(4,246)
Net Increase in Cash and Cash Equivalents	4,627	9,975
Cash and Cash Equivalents at Beginning of Period	36,805	33,326
Cash and Cash Equivalents at End of Period	$41,432	$43,301
Supplemental Cash Flow Information:
Interest Paid	$16,246	$14,612
Income Taxes Paid	3,086	5,837
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	698	690

See Notes to Unaudited Consolidated Interim Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

September 30, 2005

(Dollars in Thousands)

1. Financial Statement Presentation

In the opinion of the management of Arrow Financial Corporation (Arrow), the accompanying unaudited consolidated interim financial statements contain all of the adjustments necessary to present fairly the financial position as of September 30, 2005 and December 31, 2004; the results of operations for the three-month and nine-month periods ended September 30, 2005 and 2004; the changes in shareholders’ equity for the nine-month periods ended September 30, 2005 and 2004; and the cash flows for the nine-month periods ended September 30, 2005 (restated) and 2004. All such adjustments are of a normal recurring nature. The unaudited consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements of Arrow for the year ended December 31, 2004, included in Arrow’s 2004 Annual Report on Form 10-K.

Restatement of the Consolidated Statement of Cash Flows: During the third quarter of 2006, Arrow determined that it was necessary to restate our previously issued financial statements for the quarterly period ended September 30, 2005 to correct certain misclassifications in the Consolidated Statement of Cash Flows.

The restatement principally involves the reclassification of certain cash flows related to Arrow’s acquisition of three HSBC Bank U.S.A., N.A. branches in the second quarter of 2005. Those cash flows, totaling $47,083, should have been presented as investing activities as opposed to financing activities in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2005. The reclassification of these cash flows affects the subtotals of cash flows from investing and financing activities but does not affect the total amount of net increase (decrease) in cash and cash equivalents as presented in the Consolidated Statement of Cash Flows.

In addition to the foregoing, in the previously filed Consolidated Statement of Cash Flows for the nine months ended September 30, 2005, under operating activities, the line item “(Increase) Decrease in Interest Receivable” incorrectly excluded an amount, ($666), that was instead included under “Increase in Other Assets,” and the line item “Increase (Decrease) in Interest Payable” incorrectly excluded an amount, $329, that was instead included under “Increase (Decrease) in Other Liabilities.” However, this change did not affect the total for “Net Cash Provided by Operating Activities.” Under supplemental disclosures, “Interest Paid” incorrectly included an amount, $329, that was a correction commensurate to the change identified in the previous sentence.

In order to conform to common industry presentation practice, and more readily correspond to changes in balance sheet captions, Arrow has combined in the restated Consolidated Statements of Cash Flows, and will combine in future filed Consolidated Statements of Cash Flows, the line item “(Increase) Decrease in Interest Receivable” and “Increase in Other Assets” into a single line item, “Net Increase in Other Assets” and will combine the line items “Increase (Decrease) in Interest Payable” and “Increase (Decrease) in Other Liabilities” into a single line item “Net Increase (Decrease) in Other Liabilities.” The combination of these line items, for all periods presented, has no effect on the amount of net cash provided by operating activities as disclosed in the previously filed Consolidated Statements of Cash Flows.

The restatement does not affect Arrow’s Consolidated Statements of Income, Consolidated Balance Sheets or Consolidated Statements of Changes in Stockholders’ Equity for the affected period. Accordingly, Arrow’s previously reported net income, earnings per share, total assets and regulatory capital as of and for the nine-month period ended September 30, 2005 remain unchanged.

The Consolidated Statement of Cash Flows for the nine-month period ended September 30, 2005, as previously reported and as restated, is reflected on the following page.

1. Financial Statement Presentation (Continued)

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in Thousands)(Unaudited)

	Nine Months
	Ended September 30,
	2005	2005
	(As Previously Reported)	(Restated)
Operating Activities:
Net Income	$ 13,949	$ 13,949
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses	626	626
Depreciation and Amortization	2,174	2,174
Compensation Expense for Allocated ESOP Shares	166	166
Gains on the Sale of Securities Available-for-Sale	(347)	(347)
Losses on the Sale of Securities Available-for-Sale	7	7
Loans Originated and Held-for-Sale	(7,554)	(7,554)
Proceeds from the Sale of Loans Held-for-Sale	8,067	8,067
Net Gains on the Sale of Loans, Premises and Equipment,
Other Real Estate Owned and Repossessed Assets	(90)	(90)
Increase in Deferred Tax Assets	(47)	(47)
Shares Issued Under the Directors’ Stock Plan	60	60
(Increase) Decrease in Interest Receivable	(532)	---
Increase (Decrease) in Interest Payable	267	---
Increase in Other Assets	(942)	---
Increase (Decrease) in Other Liabilities	4,296	---
Net Increase in Other Assets	---	(1,474)
Net Increase (Decrease) in Other Liabilities	---	4,564
Net Cash Provided By Operating Activities	20,100	20,101
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale	44,222	44,222
Proceeds from the Maturities and Calls of Securities Available-for-Sale	23,715	23,715
Purchases of Securities Available-for-Sale	(55,769)	(55,769)
Proceeds from the Maturities of Securities Held-to-Maturity	7,489	7,489
Purchases of Securities Held-to-Maturity	(12,345)	(12,345)
Net Increase in Loans	(99,215)	(99,215)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	571	571
Purchases of Premises and Equipment	(678)	(678)
Net Increase from Branch Acquisitions	---	47,083
Net Cash Used In Investing Activities	(92,010)	(44,927)
Financing Activities:
Net Increase in Deposits	44,515	44,515
Net Increase in Short-Term Borrowings	15,618	15,618
Federal Home Loan Bank Advances	91,500	91,500
Federal Home Loan Bank Repayments	(110,000)	(110,000)
Net Increase from Branch Acquisitions	47,084	---
Tax Benefit from Exercise of Stock Options	637	637
Purchases of Treasury Stock	(7,329)	(7,329)
Treasury Stock Issued for Stock-Based Plans	1,411	1,411
Allocation of ESOP Shares	176	176
Cash Dividends Paid	(7,075) (6,663)	(7,075) (6,663)
Net Cash Provided By Financing Activities	76,537	29,453
Net Increase in Cash and Cash Equivalents	4,627	4,627
Cash and Cash Equivalents at Beginning of Period	36,805	36,805
Cash and Cash Equivalents at End of Period	$41,432	$41,432
Supplemental Cash Flow Information:
Interest Paid	$16,575	$16,246
Income Taxes Paid	3,086	3,086
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	698	698

2. Accumulated Other Comprehensive (Loss) Income (In Thousands)

The following table presents the components, net of tax, of accumulated other comprehensive (loss) income as of September 30, 2005 and December 31, 2004:

	2005	2004
Excess of Additional Pension Liability Over Unrecognized Prior Service Cost	$ (693)	$(351)
Net Unrealized Holding (Losses) Gains on Securities Available-for-Sale	(2,890)	780
Total Accumulated Other Comprehensive (Loss) Income	$(3,583)	$ 429

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

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for the three-month and nine-month periods ended September 30, 2005 and 2004:

	Income	Shares	Per Share
	(Numerator)	(Denominator)	Amount
For the Three Months Ended September 30, 2005:
Basic EPS	$4,839	10,390	$.47
Dilutive Effect of Stock Options	---	173
Diluted EPS	$4,839	10,563	$.46
For the Three Months Ended September 30, 2004:
Basic EPS	$4,968	10,411	$.48
Dilutive Effect of Stock Options	---	241
Diluted EPS	$4,968	10,652	$.47

	Income	Shares	Per Share
	(Numerator)	(Denominator)	Amount
For the Nine Months Ended September 30, 2005:
Basic EPS	$13,949	10,439	$1.34
Dilutive Effect of Stock Options	---	188
Diluted EPS	$13,949	10,627	$1.31
For the Nine Months Ended September 30, 2004:
Basic EPS	$14,531	10,419	$1.39
Dilutive Effect of Stock Options	---	243
Diluted EPS	$14,531	10,662	$1.36

4. Stock-Based Compensation Plans

As allowed by SFAS No. 123, “Share-Based Payment,” Arrow accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost has been reflected in net income for stock awards granted under these plans (other than for certain stock appreciation rights attached to options granted in 1992 and earlier, all of which have been exercised as of January 2002), as all awards granted under these plans have been options having an exercise price equal to the market value of the underlying common stock on the date of grant. However, options granted do generally impact diluted earnings per share by increasing the weighted average diluted shares outstanding and thereby decreasing diluted earnings per share as compared to basic earnings per share.

There were no options granted in the first nine months of 2005. The weighted-average fair value of options granted during 2004 was $8.01 per option. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2004: dividend yield of 2.88%; expected volatility of 28.4%; risk free interest rate of 3.78%; and expected lives of 7.0 years. Arrow also sponsors an Employee Stock Purchase Plan (ESPP) under which employees purchased Arrow’s common stock at a 15% discount below market price at the time of purchase for the first two months of 2005 and prior to then. This discount was changed to 5% discount below market price for all subsequent purchases. Under APB 25, a plan with a discount of 15% or less is not considered compensatory and expense is not recognized. Under SFAS No. 123, however, a stock purchase plan with a discount in excess of 5% is considered a compensatory plan and thus the ESPP was considered a compensatory plan for the first two months of 2005, and the entire discount for that period was considered compensation expense in the pro forma disclosures set forth below. The effects of applying SFAS No. 123 on pro forma net income in the recently completed period may not be representative of the effects on pro forma net income for future periods.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation plans.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2005	2004	2005	2004
Net Income, as Reported	$4,839	$4,968	$13,949	$14,531
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(134)	(133)	(419)	(405)
Pro Forma Net Income	$4,705	$4,835	$13,530	$14,126

Earnings per Share:
Basic - as Reported	$.47	$.48	$1.34	$1.39
Basic - Pro Forma	.45	.46	1.30	1.35
Diluted - as Reported	.46	.47	1.31	1.36
Diluted - Pro Forma	.45	.45	1.27	1.32

In December 2004, the FASB issued a revised SFAS No. 123 (SFAS No. 123R), “Share-Based Payment.” SFAS No. 123R requires that we measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e. the vesting period), which is typically four years for Arrow. In a press release dated April 14, 2005, the SEC delayed the effective date of SFAS No. 123R to the first quarter of 2006.

5. Guarantees

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

For letters of credit, the amount of the collateral obtained, if any, is based on management’s credit evaluation of the counter-party. Arrow had approximately $3.3 million of standby letters of credit on September 30, 2005, most of which will expire within one year and some of which were not collateralized. At that date, all the letters of credit were for private borrowing arrangements. The fair value of the Arrow’s standby letters of credit at September 30, 2005 was insignificant.

6. Retirement Plans (In Thousands)

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

	Pension Benefits		Postretirement Benefits
	2005	2004	2005	2004
Service Cost	$355	$246	$ 1	$ 62
Interest Cost	488	346	2	174
Expected Return on Plan Assets	(734)	(527)	---	---
Amortization of Prior Service Cost (Credit)	(43)	32	---	17
Amortization of Transition Obligation	---	---	---	63
Amortization of Net Loss	114	16	---	43
Net Periodic Benefit Cost	$180	$113	$ 3	$359

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

	Pension Benefits		Postretirement Benefits
	2005	2004	2005	2004
Service Cost	$1,152	$ 738	$ 90	$150
Interest Cost	1,583	1,038	223	368
Expected Return on Plan Assets	(2,385)	(1,581)	---	---
Amortization of Prior Service Cost (Credit)	(140)	96	(11)	(17)
Amortization of Transition Obligation	---	---	50	83
Amortization of Net Loss	371	48	81	135
Net Periodic Benefit Cost	$ 581	$ 339	$433	$719

We previously disclosed in our financial statements for the year ended December 31, 2004 that we do not expect to make a contribution to the qualified defined benefit pension plan during 2005. However, in the second quarter of 2005 we determined that it was appropriate to contribute approximately $792 thousand to the plan, the maximum actuarially recommended contribution for the 2005 plan year.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States, however, final regulations were not issued until January 2005. The Act introduced a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D under the Act. The measures of the accumulated non-pension postretirement benefit obligation at September 30, 2005 and net periodic non-pension postretirement benefit cost for the third quarter of 2005 reflect the benefit associated with the subsidy.

7. Recently Issued Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. The objective of this interpretation was to provide guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. FIN 46 was effective for all VIE’s created after January 31, 2003. However, the FASB postponed that effective date to December 31, 2003. In December 2003, the FASB issued a revised FIN 46 (FIN 46 R), which further delayed this effective date until March 31, 2004 for VIE’s created prior to February 1, 2003, except for special purpose entities, which were required to adopt either FIN 46 or FIN 46 R as of December 31, 2003. The requirements of FIN 46 R resulted in the deconsolidation of our wholly-owned subsidiary trusts, formed to issue redeemable preferred securities (“trust preferred securities”) to the public, the proceeds of which are used by the trust to acquire subordinated debt of Arrow. Under final rules issued February 28, 2005 by the Federal Reserve Board, trust preferred securities may continue to qualify as Tier 1 capital for bank regulatory purposes, in an amount not to exceed 25% of Tier 1 capital. The final rule limits restricted core capital elements to a percentage of the sum of core capital elements, net of goodwill less any associated deferred tax liability. We have issued trust preferred securities in 2003 and 2004 totaling $20 million. Up to half of total capital may consist of so-called "Tier 2" capital, comprising a limited amount of subordinated debt, preferred stock not qualifying as Tier 1 capital, certain other instruments and a limited amount of the allowance for loan losses.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Arrow Financial Corporation:

We have reviewed the consolidated balance sheet of Arrow Financial Corporation and subsidiaries (the “Company”) as of September 30, 2005, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2005 and 2004, and the consolidated statements of changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2005 and 2004. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Arrow Financial Corporation and subsidiaries as of December 31, 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 7, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in Note 1 to the consolidated financial statements, the Company has restated its financial statements for the nine-month period ended September 30, 2005.

/s/ KPMG LLP

Albany, New York

November 9, 2005, except for Note 1, as to which

the date is October 12, 2006

Item 4: Controls and Procedures

Senior management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Arrow's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2005. Based upon that evaluation, including the effects of the restatement of the Consolidated Statement of Cash Flows as described in Note 1 to the Consolidated Financial Statements, senior management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective. Further, there were no changes made in our internal control over financial reporting that occurred during the most recent fiscal quarter that had materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 6.

Exhibits

Exhibit 31.1	Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a)
Exhibit 31.2	Certification of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a)
Exhibit 32	Certifications of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350 and SEC Rule 13a-14(b)/15d-14(b)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ARROW FINANCIAL CORPORATION

Registrant

Date: October 12, 2006	s/Thomas L. Hoy
	Thomas L. Hoy, President and
	Chief Executive Officer and Chairman of the Board

Date: October 12, 2006	s/John J. Murphy
	John J. Murphy, Executive Vice President,
	Treasurer and Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)