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ARROW FINANCIAL CORPORATION

FORM 10-K

INDEX

PART I

Item 1. Business

A. General

B. Lending Activities

C. Supervision and Regulation

D. Competition

E. Statistical Disclosure (Guide 3)

F. Legislative Developments

G. Executive Officers of the Registrant

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

Cautionary Statement under Federal Securities Laws

Critical Accounting Policies

Peer Group Comparisons

A. Overview

B. Results of Operations

I. Net Interest Income

II. Provision for Loan Losses and Allowance for Loan Losses

III. Other Income

IV. Other Expense

V. Income Taxes

C. Financial Condition

I. Investment Portfolio

II. Loan Portfolio

a. Distribution of Loans

b. Risk Elements

III. Summary of Loan Loss Experience

IV. Deposits

V. Time Deposits of $100,000 or More

D. Liquidity

E. Capital Resources and Dividends

F. Fourth Quarter Results

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions

Item 14. Controls and Procedures

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Signatures

Certifications

Exhibits Index

PART I

Item 1: Business

A. GENERAL

Arrow Financial Corporation (the "Company"), a New York corporation, was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. The Company owns two nationally chartered banks in New York, Glens Falls National Bank and Trust Company, Glens Falls, New York ("GFNB"), and Saratoga National Bank and Trust Company, Saratoga Springs, New York ("SNB"), as well as five non-bank subsidiaries, the operations of which are not significant. The Company owns directly or indirectly all voting stock of all its subsidiaries.

Our Internet address is www.arrowfinancial.com. We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

The business of the Company consists primarily of the ownership, supervision and control of its bank subsidiaries. The Company provides its subsidiaries with various advisory and administrative services and coordinates the general policies and operation of the subsidiary banks. There were 393 full-time equivalent employees of the Company and the subsidiary banks at December 31, 2002.

	Subsidiary Banks (dollars in thousands)
	Glens Falls National Bank & Trust Co.	Saratoga National Bank & Trust Co.
Total Assets at Year-End	$1,119,659	$158,370
Trust Assets Under Administration and Investment Management at Year-End (Not Included in Total Assets)	$611,571	$ 8,860
Date Organized	1851	1988
Employees	367	26
Offices	23	3
Counties of Operation	Warren, Washington Saratoga, Essex & Clinton	Saratoga
Main Office	250 Glen Street Glens Falls, NY	171 So. Broadway Saratoga Springs, NY

The Company offers a full range of commercial and consumer financial products. The subsidiary banks' deposit base consists of deposits derived principally from the communities which the banks serve. The banks target their lending activities to consumers and small and mid-sized companies in the banks' immediate geographic areas. Through its banks' trust departments, the Company provides retirement planning, trust and estate administration services for individuals and pension, profit-sharing and employee benefit plan administration for corporations.

B. LENDING ACTIVITIES

The Company, through its subsidiary banks engages in a wide range of lending activities, including commercial and industrial lending primarily to small and mid-sized companies; mortgage lending for residential and commercial properties; and consumer installment and home equity financing. The Company also maintains an active indirect lending program through its sponsorship of dealer programs, under which it purchases dealer paper from automobile and other dealers meeting pre-established specifications. Historically, the Company has sold a portion of its residential real estate loan originations into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (Freddie Mac) and state housing agencies, while retaining the servicing rights. Loan sales into the secondary market have diminished in the past several years, however, as the Company has sought to increase its own portfolio. During 2001, the Company securitized $30.2 million of residential real estate loans. This involved the sale of the mortgage loans and the concurrent purchase of Freddie Mac guaranteed mortgage-backed securities, with the sold loans representing the underlying collateral. In addition to interest earned on loans, the Company receives facility fees for various types of commercial and industrial credits, and commitment fees for extension of letters of credit and certain types of loans.

Generally, the Company continues to implement conservative lending strategies and policies that are intended to protect the quality of the loan portfolio. These include stringent underwriting and collateral control procedures and credit review systems through which intensive reviews are conducted. It is the Company's policy to discontinue the accrual of interest on loans when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of repayment is, in the opinion of management, uncertain (see Part II, Item 7.C.II.b., "Risk Elements"). Income on such loans is thereafter recognized only upon receipt.

The Company lends primarily to borrowers within its geographic area. The loan portfolio does not include any foreign loans or any significant risk concentrations except as described in Note 26 to the Consolidated Financial Statements in Part II, Item 8 of this report. The Company does not participate in loan syndications, either as originator or as a participant. The portfolio, in general, is fully collateralized, and many commercial loans are further secured by personal guarantees.

In 2000, the Company formed a subsidiary, North Country Investment Advisers, Inc., which is an investment adviser registered with the U. S. Securities and Exchange Commission. NCIA advises two SEC-registered mutual funds, the North Country Intermediate Bond Fund and the North Country Equity Growth Fund. Currently, the investors in these funds consist primarily of individual, corporate and institutional trust customers of the Company, but both funds intend to seek a broader distribution of fund shares in forthcoming periods, involving, among other things, retail marketing initiatives.

In 2001, the Company established a subsidiary insurance agency, NC Financial Services, Inc., which is licensed by the State of New York to sell various insurance products, including life insurance, fixed annuities and long-term health care products. The agency is headquartered in Warrensburg, New York. It is expected that the agency ultimately will operate throughout the Company's service area from multiple Company locations.

C. SUPERVISION AND REGULATION

The following generally describes the regulation to which the Company and its affiliates are subject. Bank holding companies and banks are extensively regulated under both federal and state law. To the extent that the following information summarizes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular laws and regulations. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company.

The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act) and is subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Additionally, as a "bank holding company" under New York state law, the Company is subject to regulation by the New York State Banking Department. The two subsidiary banks are both nationally chartered banks and are subject to supervision and examination by the Office of the Comptroller of the Currency ("OCC"). The banks are members of the Federal Reserve System and the deposits of each subsidiary bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per depositor. The BHC Act generally prohibits the Company from engaging, directly or indirectly, in activities other than banking, activities closely related to banking, and certain other financial activities. Under the BHC Act, a bank holding company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, 5% or more of the voting shares of another bank or bank holding company (unless it already owns a majority of such shares). Bank holding companies are able to acquire banks or other bank holding companies located in all 50 states, and 48 of the 50 states permit banks headquartered in other states to branch into their states, although in some cases only by acquisition of existing banks in such states. As a result of the Gramm-Leach-Bliley Act, bank holding companies are now permitted to affiliate with a much broader array of other financial institutions than was previously permitted, including insurance companies, investment banks and merchant banks. See Item 1.F., "Legislative Developments."

An important area of banking regulation is the establishment by federal regulators of minimum capitalization standards. The Federal Reserve Board has adopted various "capital adequacy guidelines" for its use in the examination and supervision of bank holding companies. The risk-based capital guidelines assign risk weightings to all assets and certain off-balance sheet items and establish an 8% minimum ratio of qualified total capital to the aggregate dollar amount of risk-weighted assets (which is almost always less than the dollar amount of such assets without risk weighting). At least half of total capital must consist of "Tier 1" capital, which comprises common equity, retained earnings and a limited amount of permanent preferred stock, less goodwill. Up to half of total capital may consist of so-called "Tier 2" capital, comprising a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of the allowance for loan losses. The Federal Reserve Board's other important guideline for measuring a bank holding company's capital is the leverage ratio standard, which establishes minimum limits on the ratio of a bank holding company's "Tier 1" capital to total tangible assets (not risk-weighted). For top-rated holding companies, the minimum leverage ratio is 3%, but lower-rated companies may be required to meet substantially greater minimum ratios. The subsidiary banks are subject to similar capital requirements adopted by their primary federal regulator, the Office of the Comptroller of the Currency.

Under applicable law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. The regulators have established five capital classifications for banking institutions, the highest being "well capitalized." Under regulations adopted by the federal bank regulators, a banking institution is considered "well capitalized" if it has a total risk-adjusted capital ratio of 10% or greater, a Tier 1 risk-adjusted capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any regulatory order or written directive regarding capital maintenance. The Company and each of its subsidiary banks currently qualify as "well capitalized." The year-end 2002 capital ratios of the Company and its subsidiary banks are set forth in Part II, Item 7.E. "Capital Resources and Dividends."

A holding company's ability to pay dividends or repurchase its outstanding stock, as well as its ability to expand its business through acquisitions of additional banking organizations or permitted non-bank companies, may be restricted if capital falls below these minimum capitalization standards or other informal capital guidelines that the regulators may apply from time to time to specific banking organizations. In addition to these potential regulatory limitations on the payment of dividends, the Company and its subsidiary banks' ability to pay dividends is subject to various restrictions under applicable corporate laws. The ability of the Company and the banks to pay dividends in the future is, and is expected to continue to be, influenced by regulatory policies, capital guidelines and applicable law.

In cases where banking regulators have significant concerns regarding the financial condition, assets or operations of a bank or bank holding company, the regulators may take enforcement action or impose enforcement orders, formal or informal, against the organization. Neither the Company nor any of its subsidiaries is now, or has been within the past year, subject to any formal or informal regulatory enforcement action or order.

D. COMPETITION

The Company faces intense competition in all markets it serves. Traditional competitors are other local commercial banks, savings banks, savings and loan institutions and credit unions, as well as local offices of major regional and money center banks. Also, non-banking financial organizations, such as consumer finance companies, insurance companies, securities firms, money market and mutual funds and credit card companies offer substantive equivalents of transaction accounts and various loan and financial products, even though these non-banking organizations are not subject to the same regulatory restrictions and capital requirements that apply to the Company and its subsidiary banks. As a result of the Gramm-Leach-Bliley Act (discussed further in Part I.1.F., below), such non-banking financial organizations now may be in a position not only to offer comparable products to those offered by the Company, but actually to establish, acquire or affiliate with commercial banks themselves.

E. STATISTICAL DISCLOSURE

Set forth below is an index identifying the location in this Report of various items of statistical information required to be included in this Report by the SEC's industry guide for Bank Holding Companies.

Required Information	Location in Report
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential	Part II, Item 7.B.I.
Investment Portfolio	Part II, Item 7.C.I.
Loan Portfolio	Part II, Item 7.C.II.
Summary of Loan Loss Experience	Part II, Item 7.C.III.
Deposits	Part II, Item 7.C.IV.
Return on Equity and Assets	Part II, Item 6.
Short-Term Borrowings	Part II, Item 8. Note 9.

F. LEGISLATIVE DEVELOPMENTS

The Sarbanes-Oxley Act (the "Act"), signed into law on July 30, 2002, adopted a wide range of measures applicable to publicly-traded companies. Generally, the Act seeks to improve the quality of financial reporting of these companies, strengthen the independence of their auditors, and compel them to adopt good corporate governance practices. The Act places substantial additional duties on directors, officers, auditors and attorneys of public companies. Among other specific measures, the Act requires that chief executive officers and chief financial officers certify periodically to the SEC regarding the accuracy of the company's financial statements and the integrity of its internal controls. The Act also accelerates insiders' reporting obligations for transactions in company securities, restricts certain executive officer and director transactions, imposes new obligations on corporate audit committees, and provides for enhanced review of company filings by the SEC. As part of the general effort to improve public company auditing, the Act placed limits on consulting services that may be performed by a company's independent auditors and creates a public company accounting oversight board, which will set auditing standards, inspect registered public accounting firms, and possess enforcement powers, subject to oversight by the SEC.

In November 1999, Congress enacted the Gramm-Leach-Bliley Act ("GLBA"), which permitted bank holding companies to engage in a wider range of financial activities. Under GLBA for example, bank holding companies may underwrite all types of insurance and annuity products and all types of securities products and mutual funds, and may engage in merchant banking activities. Bank holding companies that wish to engage in these or other newly-permitted financial activities generally must do so through separate "financial" subsidiaries and may themselves be required to register (and qualify to register) as so-called "financial holding companies." A bank holding company that does not register as a financial holding company will remain a bank holding company subject to substantially the same regulatory restrictions and permitted activities as applied to bank holding companies prior to GLBA (See Part I.1.C., "Supervision and Regulations," above). The Company has not yet elected to become a "financial holding company" but continues to evaluate the opportunities provided by GLBA. Under GLBA, as well as the Fair Credit Reporting Act amendment of 1996, all financial institutions have become subject to more stringent customer privacy regulations.

In 1995, the federal bank regulatory authorities promulgated a set of revised regulations addressing the responsibilities of banking organizations under the Community Reinvestment Act ("CRA"). The revised regulations place additional emphasis on the actual experience of a bank in making loans in low- and moderate-income areas within its service area as a key determinant in evaluation of the bank's compliance with the statute. As in the prior regulations, bank regulators are authorized to bring enforcement actions against banks under the CRA only in the context of bank expansion or acquisition transactions.

The FDIC levies assessments on various deposit obligations of the Company's banking subsidiaries. Since 1996, the premium paid by the best-rated banks (including the Company's subsidiary banks) has been a flat charge of $2 thousand per year. Also in that year, Congress enacted the Deposit Insurance Funds Act, under which deposits insured by the Bank Insurance Fund ("BIF"), such as the deposits of the Company's banks, are subject to assessment for payment on bond obligations financing the FDIC's Savings Association Insurance Fund ("SAIF") at a rate 1/5 the rate paid on deposits by SAIF-insured thrift institutions. Accordingly, the deposits of the Company's banks were assessed an additional 1.160 cents per $100 of insured deposits in 1999, 1.220 cents per $100 of insured deposits in 1998 and an additional 1.256 cents in 1997. Beginning in 2000, the BIF and SAIF rates were equalized. For institutions with the lowest risk classification (including the Company) the BIF rate increased to 2.120 and the SAIF rate decreased from 5.800 to 2.120. The rate is adjusted quarterly, depending on the need of the fund. At December 31, 2002 the rate had decreased to 1.680 cents per $100 of insured deposits.

Various federal bills that would significantly affect banks are introduced in Congress from time to time. The Company cannot estimate the likelihood of any currently pending banking bills being enacted into law, or the ultimate effect that any such potential legislation, if enacted, would have upon its financial condition or operations.

G. EXECUTIVE OFFICERS OF THE REGISTRANT

The names and ages of the executive officers of the Company and positions held by each are presented in the following table. The officers are elected annually by the Board of Directors.

Name	Age	Positions Held and Years from Which Held
Thomas L. Hoy	54	President and CEO since January 1, 1997 and President and CEO of Glens Falls National Bank since 1995. Mr. Hoy was Executive Vice President of Glens Falls National Bank prior to 1995. Mr. Hoy has been with the Company since 1974.
John J. Murphy	51	Executive Vice President, Treasurer and CFO since 1993. Mr. Murphy has served as Senior Vice President, Treasurer and CFO of the Company since 1983. Mr. Murphy has been with the Company since 1973.
John C. Van Leeuwen	59	Senior Vice President and Chief Credit Officer since 1995. Prior to 1995, Mr. Van Leeuwen served as Vice President and Loan Review Officer. Mr. Van Leeuwen has been with the Company since 1985.
Gerard R. Bilodeau	56	Senior Vice President and Secretary since 1994. Mr. Bilodeau was Vice President and Secretary from 1993 to 1994 and was Director of Personnel prior to 1993. Mr. Bilodeau has been with the Company since 1969.

Item 2: Properties

The Company is headquartered at 250 Glen Street, Glens Falls, New York. The building is owned by the Company's subsidiary, Glens Falls National Bank, and serves as the bank's main office. Glens Falls National Bank owns nineteen additional offices and leases three others at market rates. The Company's other subsidiary bank, Saratoga National Bank, owns its three offices. Rental costs of premises did not exceed 5% of operating costs in 2002.

In the opinion of management of the Company, the physical properties of the Company and the subsidiary banks are suitable and adequate.

Item 3: Legal Proceedings

The Company is not the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of its business.

On an ongoing basis, the Company's subsidiary banks are the subjects of or parties to various legal claims which arise in the normal course of their business. The various pending legal claims against the subsidiary banks will not, in the opinion of management based upon consultation with counsel, result in any material liability.

Item 4: Submission of Matters to a Vote of Security Holders

None in the fourth quarter of 2002.

PART II

Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters

The common stock of Arrow Financial Corporation is traded on The Nasdaq Stock Market^SM under the symbol AROW.

The high and low prices listed below represent actual sales transactions, as reported by Nasdaq, and have been restated for the November 2002 five percent stock dividend.

	Sales Price		Cash Dividends Declared
	Low	High
2001
First Quarter	$16.327	$21.429	$.190
Second Quarter	17.574	23.129	.209
Third Quarter	20.907	27.102	.209
Fourth Quarter	25.952	28.571	.219
2002
First Quarter	$26.667	$28.810	$.219
Second Quarter	26.524	34.210	.238
Third Quarter	26.695	34.505	.238
Fourth Quarter	24.810	34.970	.250

The payment of dividends by the Company is at the discretion of the Board of Directors and is dependent upon, among other things, the Company's earnings, financial condition and other factors, including applicable legal and regulatory restrictions. See "Capital Resources and Dividends" in Part II, Item 7.E. of this report.

There were approximately 2,915 holders of record of common stock at December 31, 2002. The Company has no other class of stock outstanding.

Item 6: Selected Financial Data

FIVE YEAR SUMMARY OF SELECTED DATA

Arrow Financial Corporation and Subsidiaries

(Dollars In Thousands, Except Per Share Data)

Consolidated Statements of Income Data:		2002	2001	2000	1999	1998
Interest and Dividend Income		$75,145	$78,357	$75,624	$67,135	$63,033
Interest Expense		25,106	33,172	37,368	29,266	28,142
Net Interest Income		50,039	45,185	38,256	37,869	34,891
Provision for Loan Losses		2,288	2,289	1,471	1,424	1,386
Net Interest Income After Provision for Loan Losses		47,751	42,896	36,785	36,445	33,505
Other Income 1		11,213	10,324	10,784	9,382	8,172
Net Gains (Losses) on Securities Transactions		100	195	(595)	(4)	408
Other Expense 2		31,397	30,544	27,582	27,298	24,506
Income Before Provision for Income Taxes		27,667	22,871	19,392	18,525	17,579
Provision for Income Taxes		8,773	7,055	5,711	5,666	5,744
Net Income		$18,894	$15,816	$13,681	$12,859	$11,835
Earnings Per Common Share: 3
Basic		$ 2.37	$ 1.97	$ 1.70	$ 1.53	$ 1.36
Diluted		2.32	1.94	1.69	1.51	1.34
Per Common Share: 3
Cash Dividends		$ .95	$ .83	$ .73	$ .66	$ .59
Book Value		12.78	11.42	10.11	8.82	8.99
Tangible Book Value 4		11.56	10.17	8.74	7.37	7.50
Consolidated Year-End Balance Sheet Data:
Total Assets		$1,271,421	$1,151,007	$1,081,354	$1,001,107	$939,029
Securities Available-for-Sale		326,661	251,694	229,026	228,364	267,731
Securities Held-to-Maturity		74,505	74,956	60,580	55,467	63,016
Loans		811,292	755,124	735,769	655,820	546,126
Nonperforming Assets		2,756	3,798	2,630	2,745	3,592
Deposits		958,007	885,498	858,925	795,197	775,597
Federal Home Loan Bank Advances		145,000	115,000	85,200	85,000	45,000
Other Borrowed Funds		53,498	42,645	42,697	36,021	24,032
Shareholders' Equity		101,402	91,504	80,781	72,287	77,146
Selected Key Ratios:
Return on Average Assets		1.55%	1.41%	1.30%	1.33%	1.36%
Return on Average Equity		19.49	18.17	18.60	17.02	15.51
Dividend Payout		40.95	42.65	43.01	43.98	43.78

¹ Other Income in 2000 includes the net gain on the sale of the credit card portfolio of $825.

² Amortization of goodwill was discontinued effective January 1, 2002 upon the third quarter adoption of SFAS No. 147.

³ Per share amounts have been adjusted for subsequent stock splits and dividends, including the most recent November 2002 five percent stock dividend.

⁴ Tangible book value excludes from total equity intangible assets, primarily goodwill and intangible assets associated with prior branch purchases.

Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement under Federal Securities Laws: The information contained in this Annual Report on Form 10-K contains statements that are not historical in nature but rather are based on management's 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 section 7A, below, 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. Others are based on management's 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	Section	Page	Location
Impact of Legislative Developments	Part I, Item 1.F.	7	Last sentence
Impact of Changing Interest Rates on Earnings	Part II, Item 7.C.II.a.	29	1st Paragraph, 1st sentence
	Part II, Item 7.C.IV.	35	Last paragraph in item "IV. DEPOSITS"
Adequacy of the Allowance for Loan Losses	Part II, Item 7.B.II.	18	5th paragraph
	Part II, Item 7.C.III.	33	2nd paragraph under the "ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES"
Liquidity	Part II, Item 7.D.	37	Last paragraph in "D. LIQUIDITY"

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, unexpected changes in economic and market conditions, including unanticipated fluctuations in interest rates; new developments in state and federal regulation; enhanced competition from unforeseen sources; new emerging technologies; unexpected loss of key personnel; and similar risks 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. The Company undertakes no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events.

Critical Accounting Policies: In order to prepare the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management was required to make estimates and assumptions that affected the amounts reported in these statements. There are uncertainties inherent in making these estimates and assumptions which could materially affect the results of operations and financial position. Management considers the allowance for loan losses and liabilities for retirement plans to be critical accounting policies. The adequacy of the allowance for loan losses is sensitive to changes in current economic conditions that may make it difficult for borrowers to meet their contractual obligations. A severe downward trend in the economy, regional or national, may require the Company to increase the allowance for loan losses resulting in a negative impact on its results of operations and financial condition. The Company has a variety of pension and retirement plans. Liabilities under these plans rely on estimates of future salary increases, numbers of employees and employee retention, discount rates and long-term rates of investment return. Changes in these assumptions due to changes in the financial markets, the economy or the Company's own operations may result in material changes to the Company's results of operations and financial condition.

The following discussion and analysis focuses on and reviews the Company's results of operations for each of the years in the three-year period ended December 31, 2002 and the financial condition of the Company as of December 31, 2002 and 2001. The discussion below should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein.

A. OVERVIEW

Summary of 2002 Financial Results

The Company reported net income of $18.9 million for 2002 an increase of $3.1 million, or 19.5%, compared to net income of $15.8 million for 2001. Diluted earnings per share increased $.38, or 19.6%, from 2001 to 2002 and $.25, or 14.8%, from 2000 to 2001. The increase in net income between 2001 and 2002 was primarily attributable to an 11.0% increase in net interest income between the two years, itself attributable primarily to a comparable increase in average earning assets.

Selected Financial Information:

(Dollars In Thousands, Except Per Share Amounts)

Per share amounts have been restated for the 2002 five percent stock dividend.

	2002	2001	2000
Net Interest Income (tax-equivalent basis)	$52,179	$47,026	$39,856
Net Securities Gains (Losses)	100	195	(595)
Goodwill and Intangible Asset Amortization 1	37	944	944
Net Income	18,894	15,816	13,681
Diluted Average Shares Outstanding	8,156	8,153	8,091
Diluted Earnings Per Share	$2.32	$1.94	$1.69
Cash Dividends	.95	.83	.73
Stock Dividends	5%	5%	---
Core Diluted Earnings Per Share 2	$2.29	$1.92	$1.68
Average Assets	$1,216,381	$1,122,605	$1,051,525
Average Earning Assets	1,158,490	1,066,240	992,957
Average Paying Liabilities	970,128	897,737	849,620
Average Equity	96,952	87,035	73,552
Return on Average Assets	1.55%	1.41%	1.30%
Return on Average Equity	19.49	18.17	18.60
Net Interest Margin 3	4.50	4.41	4.01
Efficiency Ratio 4	49.47	51.61	52.60
Tangible Book Value per Share 5	$11.56	$10.17	$8.74
Net Loans Charged-off as a Percentage of Average Loans	.11%	.17%	.08%
Provision for Loan Losses as a Percentage of Average Loans	.30	.31	.21
Allowance for Loan Losses as a Percentage of Period-end Loans	1.38	1.29	1.19
Allowance for Loan Losses as a Percentage of Nonperforming Loans	436.89	282.72	424.67
Nonperforming Loans as a Percentage of Period-end Loans	.32	.46	.28
Nonperforming Assets as a Percentage of Period-end Total Assets	.22	.33	.24

¹ Amortization of goodwill was discontinued, effective January 1, 2002, upon the adoption of SFAS No. 147.

² Core Diluted Earnings Per Share excludes gains/losses on securities and OREO transactions and one-time material non-recurring items of income and

expense. The amounts necessary to reconcile reported net income to core net income for 2002, 2001 and 2000 include (net of tax): securities

gains (losses) ($60, $116 and $(352)), OREO transactions ($14, $61 and $17), non-recurring other income of $158 in 2002, gain on the sale of credit card

loans of $488 in 2000 and non-recurring other expense of $51 in 2000.

³ Net Interest Margin is the ratio of tax-equivalent net interest income to average earning assets.

⁴ The Efficiency Ratio is the ratio of noninterest expense less goodwill and other intangible asset amortization to the sum of tax-

equivalent net interest income and other income less net securities gains or losses.

⁵ Tangible Book Value is calculated based on total equity less intangible assets, including goodwill associated with prior

branch acquisitions.

Peer Group Comparisons: At certain points in the ensuing discussion and analysis, the Company's performance is compared with that of its peer group of financial institutions. Peer data has been obtained from the Federal Reserve Board's "Bank Holding Company Performance Report." Unless otherwise specifically stated, the Company's peer group is comprised of the group of 166 domestic bank holding companies with $1 to $3 billion in total consolidated assets.

At December 31, 2002, the Company's tangible book value per share (calculated based on shareholders' equity reduced by intangible assets including goodwill, mortgage servicing rights and intangible pension plan assets) amounted to $11.56, an increase of $1.39, or 13.7%, from year-end 2001. The increase was primarily attributable to retained earnings and net unrealized gains, net of tax, on securities available-for-sale during 2002, offset in part by periodic repurchases of the Company's common stock. As of the last trading day of 2002, the average of the Company's bid and asked stock price was $30.80, resulting in a trading multiple of 2.66 to tangible book value.

The Board of Directors increased the quarterly cash dividend twice in 2002, to $.25 per share by the fourth quarter. Total cash dividends (as adjusted) were $.95 for 2002, compared to $.83 for 2001, an increase of $.12 or 14.5%.

Nonperforming loans amounted to $2.6 million at December 31, 2002, a decrease of $876 thousand from the prior year-end. Loans charged-off (net of recoveries) against the allowance for loan losses were $815 thousand for 2002, as compared to $1.3 million for the prior year. At year-end 2002, the allowance for loan losses, at $11.2 million, represented a coverage ratio to total loans of 1.38%, as compared to 1.29% at the prior year-end.

Sale of Credit Card Portfolio and Servicing Business in 2000

Prior to 2000, the Company serviced its own credit card portfolio as well as the credit card portfolios for several smaller financial institutions. In 2000, the Company determined that it would no longer engage in the consumer credit card servicing business and that it would sell the business as well as its existing consumer credit card balances to MBNA America Bank, N.A., an organization widely recognized as an industry leader. The decision to discontinue this activity was driven by the fact that the consumer credit card business, including both card issuance and account servicing, has increasingly become a commodity operation that requires great scale. Management also expected that its credit card customers would receive a broader array of account benefits and services under MBNA's programs after the sale, and such has been the case. The sale, which resulted in a net gain of $825 ($488 net of tax), was completed in the third quarter of 2000. The Company continues to manage its merchant credit card and debit card programs.

B. RESULTS OF OPERATIONS

The following analysis of net interest income, the provision for loan losses, noninterest income, noninterest expense and income taxes, highlights the factors that are primarily responsible for the Company's results of operations for 2002 and the prior two years.

I. NET INTEREST INCOME (Tax-equivalent Basis)

Net interest income represents the difference between interest and dividends earned on loans, securities and other earning assets and interest paid on deposits and other sources of funds. Changes in net interest income result from changes in the level and mix of earning assets and sources of funds (volume) and changes in the yields earned and interest rates paid (rate). Net interest margin is the ratio of net interest income to average earning assets. Net interest income may also be described as the product of average earning assets and the net interest margin.

COMPARISON OF NET INTEREST INCOME

(Dollars In Thousands) (Tax-equivalent Basis)

		Years Ended December 31,			Change From Prior Year
					2002		2001
		2002	2001	2000	Amount	%	Amount	%
Interest and Dividend Income		$77,285	$80,198	$77,224	$(2,913)	(3.6)%	$ 2,974	3.9%
Interest Expense		25,106	33,172	37,368	(8,066)	(24.3)	(4,196)	(11.2)
Net Interest Income		$52,179	$47,026	$39,856	$ 5,153	11.0	$ 7,170	18.0

On a tax-equivalent basis, net interest income was $52.2 million in 2002, an increase of $5.2 million, or 11.0%, from $47.0 million in 2001. This compared to a $7.2 million, or 18.0%, increase between 2000 and 2001. Factors contributing to the increase in net interest income are discussed in the following section.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

The following table presents net interest income components on a tax-equivalent basis and reflects changes between periods attributable to movement in either the average daily balances or average rates for both earning assets and interest-bearing liabilities. Changes attributable to both volume and rate have been allocated proportionately between the categories.

CHANGE IN NET INTEREST INCOME

(In Thousands) (Fully Taxable Basis)

		2002 Compared to 2001			2001 Compared to 2000
		Change in Net Interest Income			Change in Net Interest Income
		Due to:			Due to:
Interest and Dividend Income:		Volume	Rate	Total	Volume	Rate	Total
Federal Funds Sold		$ ---	$ (452)	$ (452)	$ 597	$ (154)	$ 443
Securities Available-for-Sale:
Taxable		2,740	(2,602)	138	4	(1,268)	(1,264)
Non-Taxable		399	(22)	377	67	(26)	41
Securities Held-to-Maturity:
Taxable		(3)	(6)	(9)	2	2	4
Non-Taxable		535	(310)	225	512	34	546
Loans		2,129	(5,321)	(3,192)	4,081	(877)	3,204
Total Interest and Dividend Income		5,800	(8,713)	(2,913)	5,263	(2,289)	2,974
Interest Expense:
Deposits:
Interest-Bearing NOW Deposits		1,298	(1,251)	47	529	(1,561)	(1,032)
Regular and Money Market Savings		664	(2,233)	(1,569)	276	(811)	(535)
Time Deposits of $100,000 or More		(1,988)	(1,959)	(3,947)	(777)	(2,015)	(2,792)
Other Time Deposits		126	(2,650)	(2,524)	(231)	(628)	(859)
Total Deposits		100	(8,093)	(7,993)	(203)	(5,015)	(5,218)
Short-Term Borrowings		141	(737)	(596)	58	(578)	(520)
Long-Term Debt		812	(289)	523	1,941	(399)	1,542
Total Interest Expense		1,053	(9,119)	(8,066)	1,796	(5,992)	(4,196)
Net Interest Income		$4,747	$ 406	$5,153	$3,467	$3,703	$7,170

The following table reflects the components of the Company's net interest income, setting forth, for years ended December 31, 2002, 2001 and 2000 (I) average balances of assets, liabilities and shareholders' equity, (II) interest and dividend income earned on earning assets and interest expense incurred on interest-bearing liabilities, (III) average yields earned on earning assets and average rates paid on interest-bearing liabilities, (IV) the net interest spread (average yield less average cost) and (V) the net interest margin (yield) on earning assets. Rates are computed on a tax-equivalent basis. The yield on securities available-for-sale is based on the amortized cost of the securities. Nonaccrual loans are included in average loans, while unearned income has been eliminated.

AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

Arrow Financial Corporation and Subsidiaries

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

(Dollars In Thousands)

Years Ended December 31	2002			2001			2000
		Interest	Rate		Interest	Rate		Interest	Rate
	Average	Income/	Earned/	Average	Income/	Earned/	Average	Income/	Earned/
	Balance	Expense	Paid	Balance	Expense	Paid	Balance	Expense	Paid
Federal Funds Sold	$ 19,418	$ 308	1.59%	$ 19,410	$ 760	3.92%	$ 5,125	$ 317	6.19%
Securities Available-
for-Sale:
Taxable	277,657	14,236	5.13	228,588	14,098	6.17	228,530	15,362	6.72
Non-Taxable	11,119	547	4.92	3,053	170	5.57	1,904	129	6.78
Securities Held-to-Maturity:
Taxable	544	33	6.07	593	42	7.08	560	38	6.79
Non-Taxable	74,456	4,753	6.38	66,278	4,528	6.83	58,779	3,982	6.77
Loans	775,296	57,408	7.40	748,318	60,600	8.10	698,059	57,396	8.22
Total Earning Assets	1,158,490	77,285	6.67	1,066,240	80,198	7.52	992,957	77,224	7.78
Allowance For Loan Losses	(10,556)			(9,038)			(8,301)
Cash and Due From Banks	31,386			28,850			25,802
Other Assets	37,061			36,553			41,067
Total Assets	$1,216,381			$1,122,605			$1,051,525
Deposits:
Interest-Bearing NOW Deposits	$ 282,365	4,431	1.57	$ 209,719	4,384	2.09	$ 189,667	5,416	2.86
Regular and Money Market Savings	230,039	3,170	1.38	198,573	4,739	2.39	188,303	5,274	2.80
Time Deposits of $100,000 or More	81,770	2,269	2.77	135,982	6,216	4.57	149,834	9,008	6.01
Other Time Deposits	201,253	7,543	3.75	198,745	10,067	5.07	203,116	10,926	5.38
Total Interest-Bearing Deposits	795,427	17,413	2.19	743,019	25,406	3.42	730,920	30,624	4.19
Short-Term Borrowings	39,468	562	1.42	34,711	1,158	3.34	33,515	1,678	5.01
Long-Term Debt	135,233	7,131	5.27	120,007	6,608	5.51	85,185	5,066	5.95
Total Interest- Bearing Funds	970,128	25,106	2.59	897,737	33,172	3.70	849,620	37,368	4.40
Demand Deposits	132,208			122,618			114,062
Other Liabilities	17,093			15,215			14,291
Total Liabilities	1,119,429			1,035,570			977,973
Shareholders' Equity	96,952			87,035			73,552
Total Liabilities and Shareholders' Equity	$1,216,381			$1,122,605			$1,051,525
Net Interest Income (Fully Taxable Basis)		52,179			47,026			39,856
Reversal of Tax Equivalent Adjustment		(2,140)			(1,841)			(1,600)
Net Interest Income		$50,039			$45,185			$38,256
Net Interest Spread			4.08%			3.82%			3.38%
Net Interest Margin			4.50%			4.41%			4.01%

CHANGES IN NET INTEREST INCOME DUE TO RATE

YIELD ANALYSIS		December 31,
		2002	2001	2000
Yield on Earning Assets		6.67%	7.52%	7.78%
Cost of Interest-Bearing Liabilities		2.59	3.70	4.40
Net Interest Spread		4.08%	3.82%	3.38%
Net Interest Margin		4.50%	4.41%	4.01%

Of the $5.2 million increase in net interest income in 2002 over the prior year, $4.7 million was attributable to increased volume of earning assets and only $406 thousand to rate change (i.e., the fact that the cost of deposits and other funds decreased at a faster rate than the yield on earning assets). This contrasted with the prior year, when rate changes generated a $3.7 million increase in net interest income out of a total increase of $7.2 million.

The following items have a major impact on changes in net interest income due to rate: general interest rate changes, the ratio of the Company's rate sensitive assets to rate sensitive liabilities (interest rate sensitivity gap) during periods of interest rate changes and the level of nonperforming loans. The Federal Reserve Board attempts to influence prevailing federal funds and prime interest rates and sets changes to the Federal Reserve Bank discount rate. The following chart presents rate changes in recent years:

Key Interest Rate Changes 1999 - 2002

		Federal
Date	Discount Rate	Funds Rate	Prime Rate
November 6, 2002	.75%	1.25%	4.25%
December 11, 2001	1.25	1.75	4.75
November 6, 2001	1.50	2.00	5.00
October 2, 2001	2.00	2.50	5.50
September 17, 2001	2.50	3.00	6.00
August 21, 2001	3.00	3.50	6.50
June 27, 2001	3.25	3.75	6.75
May 15, 2001	3.50	4.00	7.00
April 18, 2001	4.00	4.50	7.50
March 20, 2001	4.50	5.00	8.00
January 31, 2001	5.00	5.50	8.50
January 3, 2001	5.50	6.00	9.00
May 16, 2000	6.00	6.50	9.50
March 21, 2000	5.50	6.00	9.00
February 2, 2000	5.25	5.75	8.75
November 16, 1999	5.00	5.50	8.50
August 25, 1999	4.75	5.25	8.25
June 30, 1999	4.50	5.00	8.00

The Company's net interest income, for the past several years, has been very sensitive to changes in interest rates. As indicated in the table above, prevailing interest rates economy-wide began to increase in the second half of 1999 through the second half of 2000. This marked a turnaround from a long period of flat or slowly-declining prevailing interest rates. The 1999 rate hikes had a moderate negative impact on the Company's financial results for 1999, which continued to show decreases from prior periods in the average rate earned on earning assets and the average rate paid on earning liabilities, as well as decreases in the Company's net interest spread and net interest margin. However, the full and negative impact of rising rates was felt in 2000, when the decrease in net interest income due to rates was significant.

In the first quarter of 2001, the Federal Reserve Board reversed direction and began decreasing short-term interest rates rapidly and significantly in response to perceived weakening in the economy. By December 2001, the total decrease in prevailing short-term interest rates for the year was 475 basis points. After eleven months with no rate changes, the Federal Reserve Board decreased rates another 50 basis points in November 2002. As a result, the Company experienced a decrease in the cost of deposits in all quarters of 2001 and 2002. Although decreases in deposit rates began to be experienced in the first quarter of 2001, the Company did not experience a decrease in the average yield in its loan portfolio until the second quarter of 2001. Since that time, yields on the loan portfolio have decreased each successive quarter in 2001 and 2002, as well. See the "Loan Portfolio" section in the discussion of "Financial Condition" later on in this Report, for a more complete analysis of yield trends in the loan portfolio.

When the Federal Reserve Board decreased short-term interest rates by 50 basis points in November 2002, this decrease had a limited impact on the Company's deposit rates, because rates on several of the Company's deposit products, such as savings and NOW accounts, were already priced at such low levels that a 50 basis point decrease in rates was not practical or sustainable, although the Company did lower rates to a much smaller extent on certain non-maturity deposit products.

Most important, the decreasing rate environment had a positive impact on net interest income during 2001 and 2002, as net interest margins increased both years.

The net interest margin for 2002 was 4.50%, an increase of 9 basis points from the 4.41% margin for 2001. The net interest spread between the two years increased by 26 basis points. These increases in margin and spread were attributable to the fact that during a period of decreasing market rates the Company's paying liabilities repriced downward at a faster rate than its earning assets. In turn, a major factor influencing this development was the relocation of a significant dollar amount of maturing time deposits into other lower cost deposit accounts, a relocation that often accompanies falling interest rates but also often proves temporary.

In both rising and falling rate environments, the Company faces significant competitive pricing pressures in its marketplace for both deposits and loans, and thus ultimately both assets and liabilities may be expected to reprice proportionately in response to changes in market rates.

The net interest margin for 2001 was 4.41%, an increase of 40 basis points from the 4.01% margin for 2000. The net interest spread between the two years increased by 44 basis points. As in 2002, these significant increases in margin and spread were attributable to the fact that during a period of decreasing market rates the Company's paying liabilities repriced downward at a faster rate than its earning assets.

A discussion of the impact on net interest income resulting from changes in interest rates vis a vis the repricing patterns of the Company's earning assets and interest-bearing liabilities is included later in this report under Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."

CHANGES IN NET INTEREST INCOME DUE TO VOLUME

AVERAGE BALANCES

(Dollars In Thousands)

		Years Ended December 31,			Change From Prior Year
					2002		2001
		2002	2001	2000	Amount	%	Amount	%
Earning Assets		$1,158,490	$1,066,240	$992,957	$92,250	8.7%	$73,283	7.4%
Interest-Bearing Liabilities		970,128	897,737	849,620	72,391	8.1	48,117	5.7
Demand Deposits		132,208	122,618	114,062	9,590	7.8	8,556	7.5
Total Assets		1,216,381	1,122,605	1,051,525	93,776	8.4	71,080	6.8
Earning Assets to Total Assets		95.24%	94.98%	94.43%	.26%	0.3	.55%	0.6

In general, changes in the volume of earning assets and interest-bearing liabilities will result in corresponding changes in net interest income. That is, as assets and liabilities increase, so will net interest income. However, changes due to volume can be enhanced or restricted by shifts within the relative mix of earning assets or interest-bearing liabilities between instruments of different rates. The change in net interest income due to changes in volume was an increase of $4.7 million in 2002 and an increase of $3.5 million in 2001.

During 2002, average earning assets increased $92.3 million, an increase of 8.7%. Average paying liabilities grew at a somewhat slower pace, increasing by $72.4 million, or 8.1%. The combined effect of these changes in volume was to increase net interest income by approximately 10.0%, before giving effect to the 1.0% positive impact on net interest income resulting from the change in interest rates discussed in the previous section.

During 2002, the Company experienced its growth in average earning assets primarily within the investment portfolio (which accounted for approximately 71% of the increase) and secondarily within the loan portfolio (approximately 29%). While it is the intention of the Company ultimately to invest the greatest portion of its earning assets into high quality loans, most of the increase in the sources of funds from December 31, 2001 to December 31, 2002 was redeployed, at least for the present, into the investment securities portfolio. As reported on the Consolidated Statement of Cash Flows, the cash flow received from the maturities and calls of securities in the available-for-sale portfolio amounted to $91.3 million for 2002. Most of these cash flows are from the monthly amortization of mortgage-backed securities. Among other needs, this cash flow is available to fund loan growth or for redeployment in the available-for-sale portfolio.

The fastest growing segment of the loan portfolio for several years preceding 2001 was indirect consumer loans, which are primarily auto loans financed through local dealerships from whom the Company acquires the dealer paper. While this segment still represents the largest portion of the loan portfolio, the outstanding balances of indirect loans remained little changed at year-end 2002 from year-end 2001 and 2000. For 2002, the average balances of indirect loans were actually $12.4 million below the average balances for 2001, as the portfolio experienced a net decrease prior to recovering in the fourth quarter of 2002. The increase in the average loan balances from 2001 to 2002 was attributable to the residential real estate ($25.3 million) and the commercial loan ($17.9 million) portfolios.

The Company's $72.4 million growth in average paying liabilities in 2002 was experienced primarily in traditional banking deposit products, which increased by $52.4 million, or 7.1%, from year-end 2001 to year-end 2002, and secondarily in Federal Home Loan Bank (FHLB) borrowings, which increased by $15.2 million, or 13.2%, from year-end 2001 to year-end 2002. The increase in deposit balances during 2002 was generated by the Company's pre-existing branch network, although the Company's Saratoga National Bank and Trust Company franchise did open its third branch (the second branch in Saratoga Springs) at the beginning of 2002. No other branches were added or acquired in 2002.

During 2001, average earning assets increased $73.3 million, an increase of 7.4%. Average paying liabilities grew at a somewhat slower pace, increasing by $48.1 million, or 5.7%. The combined effect was to increase net interest income by approximately 8.7%, before giving effect to the positive impact on net interest income resulting from the change in interest rates discussed in the previous section.

In 2001 (unlike in 2002) the Company experienced its growth in average earning assets principally within the loan portfolio. During 2001, the Company securitized approximately $30 million of residential real estate loan balances and retained ownership of the resulting mortgage-backed securities for the purpose of providing additional liquidity and collateral for pledging purposes. Without the securitization, increases in loan balances would have represented over 70% of the increase in average earning assets between the two years.

The outstanding balances of indirect consumer loans remained little changed at year-end 2001 from year-end 2000. During 2001, adjusted for reductions of loans through securitizations, residential real estate loans increased $32.8 million, or 15.5%. Commercial loans increased by $21.3 million, or 17.4%, representing the other area of significant growth within the loan portfolio.

The Company's growth in average paying liabilities in 2001 was experienced both in traditional banking deposit products, which increased by $26.6 million, or 3.1%, from year-end 2000 to year-end 2001, and in borrowings, which increased by $29.8 million, or 35.0%, from year-end 2000 to year-end 2001. The increase in deposit balances during 2001 was generated by the Company's pre-existing branch network. No branches were added or acquired in 2001. The primary source of new borrowings by the Company in 2001 was advances from the FHLB (see Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this report).

Increases in the volume of loans and deposits, as well as yields and costs by type, are discussed later in this report under Item 7.C. "Financial Condition."

II. PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

Management considers its accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty involved in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Company's results of operations. See Note 1 to the consolidated financial statements, as well as the discussion below, for a description of the Company's policy with respect to estimating the level of the allowance for loan losses.

Through the provision for loan losses, an allowance (reserve) is maintained for estimated loan losses. Actual loan losses are charged against this allowance when loans are deemed uncollectible. In evaluating the adequacy of the allowance for loan losses, management considers various risk factors influencing asset quality. The analysis is performed on a loan by loan basis for impaired and large balance loans, and by portfolio type for smaller balance homogeneous loans. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers' financial conditions or prospects.

The determination of actual provisions for loan losses on an ongoing basis is largely influenced by the prevailing level of nonperforming loans, the level of loans actually charged-off against the allowance for loan losses during the prior periods, contemporary changes in the mix and volume of loan categories within the loan portfolio and overall changes in the size of the portfolio.

The quality of the Company's loan portfolio remains strong and, to date, has not been negatively affected either by the loan growth experienced in recent periods or by the recent weakening in the national and regional economy. At period-end, the ratio of nonperforming loans (loans 90 days or more and accruing interest plus nonaccrual loans) as a percentage of total loans was .32% for the Company. The September 30, 2002 ratio for the Company's peer group was .77%.

While management believes that the 2002 year-end allowance was adequate under the circumstances, there can be no assurances that future economic or financial developments, including general interest rate increases or a slowdown in the economy, might not lead to increased provisions to the allowance or a higher incidence of loan charge-offs.

The provision for loan losses was $2.3 million for 2002, virtually unchanged from 2001. During 2002, loan losses charged against the allowance, net of recoveries, were $815 thousand, a decrease of $481 thousand, or 37.1%, from the 2001 amount. During the second quarter of 2001, the Company charged-off $512 thousand on one commercial loan. Disregarding this item, net charge-offs for 2002 increased by $31 thousand, or 4.0%, over 2001. Net charge-offs as a percentage of average loans outstanding was .11% for 2002. Net charge-offs, on an annualized basis, for the Company's peer group at September 30, 2002 was .27% of average loans, or 145.5% higher than the Company's ratio. If the current economic recession continues or worsens, management anticipates that net charge-offs will exceed the levels experienced in recent years.

At December 31, 2002, nonperforming loans amounted to $2.6 million, a decrease of $876 thousand, or 25.5%, from the balance at year-end 2001. The decrease was primarily attributable to one $749 thousand commercial loan that was designated as nonperforming at year-end 2001, which was paid-off in full by the borrower during December 2002. While nonperforming loans and net loans charged-off improved in 2002, as compared to 2001, the continued growth in the loan portfolio resulted in the 2002 provision for loan losses remaining consistent with 2001.

At December 31, 2002, the allowance for loan losses was $9.7 million, or 1.38%, of total loans, as compared to $8.7 million, or 1.29% of total loans at December 31, 2001. The allowance for loan losses represented 437% of the amount of nonperforming loans at December 31, 2002, as compared to 283% of nonperforming loans at December 31, 2001.

During 2001, loan losses charged against the allowance, net of recoveries, were $1.3 million, an increase of $768 thousand, or 145%, from the prior year amount. During the second quarter of 2001, the Company charged-off $512 thousand on one commercial loan. Management believes that the factors that led to this charge-off were unique and isolated and are not indicative of any emerging pattern of increasing charge-offs above historical levels.

Net charge-offs as a percentage of average loans outstanding was .17% for 2001. The provision for loan losses, as a percentage of average loans outstanding was .31% for 2001. Net charge-offs, on an annualized basis, for the Company's peer group at September 30, 2001 was .26% of average loans, or 52.9% higher than the Company's ratio.

At December 31, 2001, nonperforming loans amounted to $3.4 million, an increase of $1.4 million, or 67.3%, from the balance at year-end 2000. The increase was primarily attributable to two commercial loans, totaling $1.6 million, which were placed on nonaccrual status during the fourth quarter of 2001.

The provision for loan losses was $1.5 million for 2000, an increase of $47 thousand, or 3.3%, from 1999. At December 31, 2000, nonperforming loans amounted to $2.1 million, essentially unchanged from the balance at December 31, 1999. At December 31, 2000, the allowance for loan losses was $8.7 million, or 1.19% of total loans. The allowance for loan losses represented 425% of the amount of nonperforming loans at that date. During 2000, loan losses charged against the allowance, net of recoveries, were $528 thousand, or .08%, of average loans for the period, an increase of $146 thousand, or 38%, from the prior year amount. The principal reason for the increase in net loan losses in 2000 as compared with 1999 was a recovery of $315 thousand in the 1999 period related to the final repayment of a large commercial loan. Excluding the large recovery, net loan losses for 1999 would have exceeded those for 2000, and would have represented .12% of average loans. The provision for loan losses charged to expense for 2000 was $1.5 million, or .21%, of average loans for the period.

SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES

(Dollars In Thousands) (Loans, Net of Unearned Income)

Years-Ended December 31,		2002	2001	2000	1999	1998
Loans at End of Period		$ 811,292	$ 755,124	$ 735,769	$ 655,820	$546,126
Average Loans		775,296	748,318	698,059	600,719	514,348
Total Assets at End of Period		1,271,421	1,151,007	1,081,354	1,001,107	939,029
Nonperforming Assets:
Nonaccrual Loans:
Construction		$ ---	$ ---	$ ---	$ ---	$ ---
Commercial Real Estate		69	87	94	50	191
Commercial Loans		375	1,610	161	147	671
Residential Real Estate Loans		516	469	572	873	1,049
Consumer Loans		1,511	1,034	930	720	359
Total Nonaccrual Loans		2,471	3,200	1,757	1,790	2,270
Loans Past Due 90 or More Days and
Still Accruing Interest		91	238	298	307	657
Restructured Loans in Compliance with
Modified Terms		---	---	---	---	---
Total Nonperforming Loans		2,562	3,438	2,055	2,097	2,927
Repossessed Assets		143	66	150	62	38
Other Real Estate Owned		51	294	425	586	627
Total Nonperforming Assets		$ 2,756	$ 3,798	$ 2,630	$ 2,745	$3,592
Allowance for Loan Losses:
Balance at Beginning of Period		$ 9,720	$ 8,727	$ 7,784	$ 6,742	$6,191
Loans Charged-off:
Commercial, Financial
and Agricultural		(24)	(653)	(42)	(75)	(166)
Real Estate - Commercial		---	---	(20)	(33)	(43)
Real Estate - Construction		---	(2)	(2)	---	---
Real Estate - Residential		(37)	(103)	(29)	(64)	(133)
Installment Loans to Individuals		(1,060)	(883)	(764)	(861)	(836)
Total Loans Charged-off		(1,121)	(1,641)	( 857)	(1,033)	(1,178)
Recoveries of Loans Previously Charged-off:
Commercial, Financial
and Agricultural		33	65	34	326	19
Real Estate - Commercial		17	16	15	18	---
Real Estate - Construction		---	---	---	---	---
Real Estate - Residential		3	21	11	12	23
Installment Loans to Individuals		253	243	269	295	301
Total Recoveries of Loans Previously Charged-off		306	345	329	651	343
Net Loans Charged-off		(815)	(1,296)	(528)	(382)	(835)
Provision for Loan Losses
Charged to Expense		2,288	2,289	1,471	1,424	1,386
Balance at End of Period		$11,193	$ 9,720	$ 8,727	$ 7,784	$6,742
Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage of Average Loans		.11%	.17%	.08%	.06%	.16%
Provision for Loan Losses as a Percentage of Average Loans		.30	.31	.21	.24	.27
Allowance for Loan Losses as a Percentage of Period-end Loans		1.38	1.29	1.19	1.19	1.23
Allowance for Loan Losses as a Percentage of Nonperforming Loans		436.89	282.72	424.67	371.20	230.32
Nonperforming Loans as a Percentage of Period-end Loans		.32	.46	.28	.32	.54
Nonperforming Assets as a Percentage of Period-end Total Assets		.22	.33	.24	.27	.38

III. OTHER INCOME

The majority of other (i.e., noninterest) income constitutes fee income from services, principally fees and commissions from fiduciary services, deposit account service charges, computer processing fees to correspondents and other recurring fee income. Net gains or losses on the sale of securities available-for-sale is another category of other income.

ANALYSIS OF OTHER INCOME

(Dollars In Thousands)

	Years Ended December 31,			Change From Prior Year
				2002		2001
	2002	2001	2000	Amount	%	Amount	%
Income from Fiduciary Activities	$ 3,863	$ 4,059	$ 3,681	$(196)	(4.8)%	$ 378	10.3%
Fees for Other Services to Customers	6,189	5,302	5,222	887	16.7	80	1.5
Net Gains (Losses) on Securities Transactions	100	195	(595)	(95)	(48.7)	790	(132.8)
Net Gain on Sale of Credit Card Portfolio	---	---	825	---	---	(825)	(100.0)
Other Operating Income	1,161	963	1,056	198	20.6	(93)	(8.8)
Total Other Income	$11,313	$10,519	$10,189	$ 794	7.5	$ 330	3.2

Total other income increased $794 thousand, or 7.5%, from 2001 to 2002. Without regard to net securities transactions, total other income was $11.2 million for 2002 and $10.3 million for 2001, an increase of $889 thousand, or 8.6%.

For 2002, income from fiduciary activities decreased $196 thousand, or 4.8%, from 2001. At year-end 2002, the market value of assets under trust administration and investment management amounted to $620.4 million, a decrease of $78.5 million, or 11.2%, from year-end 2001. The decrease in the market value of assets under trust administration and investment management principally reflected the general decline in the equity markets during 2002, which more than offset the increase in number of accounts under administration during the year. Fiduciary account fees, in general, are tied to the value of assets under administration.

Income from fiduciary activities includes income from funds under investment management in the Company-advised North Country Funds, which include the North Country Equity Growth Fund (NCEGX) and the North Country Intermediate Bond Fund (NCBDX). On a combined basis, these funds reached a market value of $84.8 million at December 31, 2002. The funds were introduced in March 2001, and are advised by the Company's subsidiary, North Country Investment Advisors, Inc. Currently, the funds are owned almost entirely by qualified employee benefit plan accounts. The Company began to offer these funds on a retail basis through its branches during 2002. Included as an investor in the funds is the Company's pension plan, which owns shares in the funds with a market value of $13.6 million at December 31, 2002.

Fees for other services to customers include deposit account service charges, credit card and debit card merchant processing fees, safe deposit box fees and loan servicing fees. These fees amounted to $6.2 million in 2002, an increase of $887 thousand, or 16.7%, from 2001. Over half of the increase was attributable to increases in deposit service charges. An increase in credit card and debit card merchant processing fees also made a significant contribution to the total increase in fees for other services to customers.

During 2002, the Company realized net securities gains of $100 thousand on the sale of $40.8 million from its available-for-sale portfolio. The primary purpose of the sales were to restructure the maturity profile of the investment portfolio.

Other operating income includes net gains on the sale of loans and other real estate owned, if any, as well as other miscellaneous revenues. For 2002, other operating income increased $198 thousand, or 20.6%. The increase was primarily attributable to an increase in data processing servicing fee income received from one upstate New York bank and a one-time benefit from the demutualization of an insurance company for the Company's group employee insurance trust.

From 2000 to 2001, total other income increased $330 thousand, or 3.2%. Without regard to net securities transactions and the net gain on the sale of the credit card portfolio, total other income was $10.3 million for 2001 and $10.0 million for 2000, an increase of $365 thousand, or 3.7%.

For 2001, income from fiduciary activities increased $378 thousand, or 10.3%, from 2000. The increase was in large part attributable to an increase in the number of trust accounts under administration and investment management which more than offset the general decline in the equity markets and consequent negative impact on the value of assets under administration. At year-end 2001, the market value of assets under trust administration and investment management amounted to $699.0 million, a decrease of $46.1 million, or 6.2%, from year-end 2000.

Fees for other services to customers include deposit account service charges, credit card and debit card merchant processing fees, safe deposit box fees and loan servicing fees. These fees amounted to $5.3 million in 2001, an increase of $80 thousand, or 1.5%, from 2000.

During 2001, the Company realized net securities gains of $195 thousand on the sale of $13.5 million from its available-for-sale portfolio.

In the past, the primary component of other operating income was fees earned on servicing credit card portfolios for correspondent banks. With the sale of the credit card portfolio at the end of the third quarter of 2000, the Company also discontinued servicing credit card portfolios for most of its correspondent banks. Thus, income from servicing credit card portfolios decreased significantly between the two years, falling to $224 thousand in 2001 from $486 thousand in 2000. Beginning in 2002, the Company discontinued servicing the remainder of the correspondent banks' portfolios. The loss in income resulting from this discontinuation of business was accompanied by similar reductions in expense also attributable to this discontinuation. Other operating income also includes net gains on the sale of loans and other real estate owned, as well as other miscellaneous revenues. For 2001, other operating income decreased $93 thousand, or 8.8%. Disregarding the credit card servicing component, other operating income actually increased by $169 thousand, or 29.6%. The increase was primarily attributable to data processing servicing fee income received from one upstate New York bank.

The sale of the credit card portfolio in 2000 was discussed in the Overview at the beginning of Item 7.

IV. OTHER EXPENSE

Other (i.e., noninterest) expense is a means of measuring the delivery cost of services, products and business activities of the Company. The key components of other expense are presented in the following table.

ANALYSIS OF OTHER EXPENSE

(Dollars In Thousands)

	Years Ended December 31,			Change From Prior Year
				2002		2001
	2002	2001	2000	Amount	%	Amount	%
Salaries and Employee Benefits	$18,858	$17,233	$15,592	$1,625	9.4%	$1,641	10.5%
Occupancy Expense of Premises, Net	2,330	2,248	1,978	82	3.6	270	13.7
Furniture and Equipment Expense	2,440	2,462	2,466	(22)	(0.9)	(4)	(0.2)
Other Operating Expense	7,769	8,601	7,546	(832)	(9.7)	1,055	14.0
Total Other Expense	$31,397	$30,544	$27,582	$ 853	2.8	$2,962	10.7

Other expense for 2002 amounted to $31.4 million, an increase of $853 thousand, or 2.8%, from 2001. This comparison was significantly affected by a change in accounting principles between the two periods. The significant change was the discontinuance in 2002 of goodwill amortization upon the adoption of SFAS No. 147, retroactive to January 1, 2002. Goodwill amortization for 2001 was $907 thousand, but was $0 for 2002. Disregarding goodwill amortization, the increase in other expense between the two years would have been substantially higher, specifically, $1.8 million, or a 5.8% increase.

One comparative measure of operating expenses for financial institutions is the efficiency ratio. The efficiency ratio (a ratio where lower is better) is calculated as the ratio of other expense to the sum of tax equivalent net interest income and other income. Excluded from the calculation are goodwill amortization and any net securities gains or losses. For 2002, the efficiency ratio for the Company was 49.5%, an improvement from the 2001 ratio of 51.6%. The Company's 2002 ratio also compares favorably to the year-to-date ratio for the Company's peer group of 59.2% as of September 30, 2002.

Salaries and employee benefits increased $1.6 million, or 9.4%, from 2001 to 2002. Salaries increased $785 thousand, or 6.6%, from 2001 to 2002. The increase was attributable to normal merit pay increases, as well as to the hiring of additional employees late in 2001 principally to staff the new West Avenue office of Saratoga National Bank and Trust Company in Saratoga Springs, New York, and the Company's new insurance agency subsidiary. Employee benefits increased $840 thousand, or 15.7% during the period. In 2002, all categories of employee benefits experienced increases from 2001, except incentive compensation, which decreased slightly. The most significant increase to employee benefits was an increase in expenses for the Company's defined benefit pension plan. During 2002, the Company adopted a "cash balance" plan for all new employees. Current employees were offered the opportunity to switch to the "cash balance" plan or to remain with the prior plan, under which retirement benefits are calculated on a "final pay" formula. Over 90% of current employees elected to switch to the cash balance plan.

Occupancy expense increased $82 thousand, or 3.6%, from 2001 to 2002. Most of the increase was attributable to increased costs of insurance and real estate taxes. Furniture and equipment expense decreased slightly by $22 thousand, or 0.9%, from 2001 to 2002.

Other operating expense increased $75 thousand, or 1.0%, from 2001 to 2002, without considering goodwill amortization, which was included in other operating expense in 2001 but not in 2002 due to a change in accounting principles, as discussed above.

In 2001, other expense amounted to $30.5 million, an increase of $3.0 million, or 10.7%, from 2000.

Salaries and employee benefits increased $1.6 million, or 10.5%, from 2000 to 2001. Salaries increased $655 thousand, or 5.8%, between the periods. The increase was attributable to normal merit pay increases, as well as to the hiring of additional employees. Employee benefits increased $986 thousand, or 22.5% during the period. In 2001, all categories of employee benefits experienced increases from 2000, including $184 thousand for pension plan expenses, $263 thousand related to health and similar benefit plans and $476 thousand related to incentive compensation plans.

Occupancy expense increased $270 thousand, or 13.7%, from 2000 to 2001. Most of the increase was attributable to increased costs in building maintenance and insurance. Furniture and equipment expense decreased slightly by $4 thousand, or 0.2%, from 2000 to 2001. Other operating expense increased $1.1 million, or 14.0%, from 2000 to 2001. Areas of other expense experiencing the greatest increases were advertising ($141 thousand), supplies ($156 thousand), legal and other professional fees ($162 thousand) and the cost of third party computer processing for trust operations ($429 thousand).

V. INCOME TAXES

The following table sets forth the Company's provision for income taxes and effective tax rates for the periods presented.

INCOME TAXES AND EFFECTIVE RATES

(Dollars in Thousands)

	Years Ended December 31,			Change From Prior Year
				2002		2001
	2002	2001	2000	Amount	%	Amount	%
Provision for Income Taxes	$8,773	$7,055	$5,711	$1,718	24.4%	$1,344	23.5%
Effective Tax Rate	31.7%	30.8%	29.5%	0.9%	2.9	1.3%	4.4

The provisions for federal and state income taxes amounted to $8.8 million, $7.1 million and $5.7 million for 2002, 2001 and 2000, respectively. The effective income tax rates for 2002, 2001 and 2000 were 31.7%, 30.8% and 29.5%, respectively. The increase in the effective tax rates from 2000 to 2001 and from 2001 to 2002 was primarily attributable to the greater proportionate increase in taxable income over the level of tax-exempt income.

C. FINANCIAL CONDITION

I. INVESTMENT PORTFOLIO

Investment securities are classified as held-to-maturity, trading, or available-for-sale, depending on the purposes for which such securities were acquired and are being held. Securities held-to-maturity are debt securities that the Company has both the positive intent and ability to hold to maturity; such securities are stated at amortized cost. Debt and equity securities that are bought and held principally for the purpose of sale in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings and reported net of taxes in accumulated other comprehensive income or loss. At December 31, 2002, the Company held no trading securities.

Securities Available-for-Sale:

The following table sets forth the carrying value of the Company's securities available-for-sale portfolio, at year-end 2002, 2001 and 2000.

SECURITIES AVAILABLE-FOR-SALE

(In Thousands)

		December 31,
		2002	2001	2000
U.S. Treasury and Agency Obligations		$ 59,319	$ 6,754	$ 29,491
State and Municipal Obligations		17,984	10,248	1,904
Collateralized Mortgage Obligations		96,460	77,500	51,140
Other Mortgage-Backed Securities		133,872	137,809	127,437
Corporate and Other Debt Securities		9,316	11,432	12,197
Mutual Funds and Equity Securities		9,710	7,951	6,857
Total		$326,661	$251,694	$229,026

Other mortgage-backed securities principally consisted of agency mortgage pass-through securities. Pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. Collateralized mortgage obligations ("CMOs") separate the repayments into two or more components (tranches), where each tranche has a separate estimated life and yield. The Company's practice is to purchase pass-through securities and collateralized mortgage obligations guaranteed by federal agencies and tranches of CMOs with shorter maturities. Included in corporate and other debt securities are highly rated corporate bonds and commercial paper. Approximately $8.7 million, or 90.3%, of mutual funds and equity securities are required holdings of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York stock.

The following table sets forth the maturities of the Company's securities available-for-sale portfolio as of December 31, 2002. CMO's and other mortgage-backed securities are included in the table based on their expected average lives. Mutual funds and equity securities, which have no stated maturity, are included in the after 10 year category.

MATURITIES OF SECURITIES AVAILABLE-FOR-SALE

(In Thousands)

		Within One Year	After 1 But Within 5 Years	After 5 But Within 10 Years	After 10 Years	Total
U.S. Treasury and Agency Obligations		$ 3,021	$ 54,198	$ 2,099	$ ---	$ 59,319
State and Municipal Obligations		6,019	10,379	280	1,306	17,984
Collateralized Mortgage Obligations		10,242	75,697	10,521	---	96,460
Other Mortgage-Backed Securities		5,186	115,574	11,469	1,643	133,872
Corporate and Other Debt Securities		---	6,321	---	2,995	9,316
Mutual Funds and Equity Securities		---	---	---	9,710	9,710
Total		$24,468	$262,170	$24,369	$15,654	$326,661

The following table sets forth the tax-equivalent yields of the Company's securities available-for-sale portfolio at December 31, 2002.

YIELDS ON SECURITIES AVAILABLE-FOR-SALE

(Fully Tax-Equivalent Basis)

		Within One Year	After 1 But Within 5 Years	After 5 But Within 10 Years	After 10 Years	Total
U.S. Treasury and Agency Obligations		7.00%	2.75%	6.42%	---%	3.09%
State and Municipal Obligations		3.20	3.66	7.33	7.22	3.81
Collateralized Mortgage Obligations		5.08	4.62	5.08	---	4.72
Other Mortgage-Backed Securities		7.68	5.23	4.98	5.79	5.31
Corporate and Other Debt Securities		---	7.30	---	6.19	6.93
Mutual Funds and Equity Securities		---	---	---	5.92	5.92
Total		5.13	4.7	5.14	5.88	4.64

The yields on debt securities shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the amortized cost of the securities at December 31, 2002. Yields on obligations of states and municipalities exempt from federal taxation were computed on a fully tax-equivalent basis using a marginal tax rate of 35%. Dividend earnings derived from equity securities were adjusted to reflect applicable federal income tax exclusions.

At December 31, 2002 and 2001, the weighted average maturity was 2.8 and 4.2 years, respectively, for debt securities in the available-for-sale portfolio. At December 31, 2002, the net unrealized gain on securities available-for-sale amounted to $6.6 million. The net unrealized gain or loss on such securities, net of tax, is reflected in accumulated other comprehensive income/loss. The net unrealized gain at December 31, 2002 represents a $3.8 million increase since December 31, 2001 and is primarily attributable to the increased fair value of the debt securities portfolios resulting from falling interest rates during 2002.

For further information regarding the Company's portfolio of securities available-for-sale, see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report.

Securities Held-to-Maturity:

The following table sets forth the carrying value of the Company's portfolio of securities held-to-maturity for each of the last three years.

SECURITIES HELD-TO-MATURITY

(In Thousands)

		December 31,
		2002	2001	2000
State and Municipal Obligations		$74,505	$74,956	$60,580

For information regarding the fair value at December 31, 2002, of the Company's portfolio of securities held-to-maturity, see Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this report.

The following table sets forth the maturities of the Company's portfolio of securities held-to-maturity, as of December 31, 2002.

MATURITIES OF SECURITIES HELD-TO-MATURITY

(In Thousands)

		Within One Year	After 1 But Within 5 Years	After 5 But Within 10 Years	After 10 Years	Total
State and Municipal Obligations		$8,712	$25,341	$39,215	$ 1,237	$74,505

The following table sets forth the tax-equivalent yields of the Company's portfolio of securities held-to-maturity at December 31, 2002.

YIELDS ON SECURITIES HELD-TO-MATURITY

(Fully Tax-Equivalent Basis)

		Within One Year	After 1 But Within 5 Years	After 5 But Within 10 Years	After 10 Years	Total
State and Municipal Obligations		4.38%	6.86%	6.53%	8.02%	6.42%

The yields shown in the table above are calculated by dividing annual interest, including accretion of discounts and amortization of premiums, by the carrying value of the securities at December 31, 2002. Yields on obligations of states and municipalities exempt from federal taxation were computed on a fully tax-equivalent basis using a marginal tax rate of 35%.

During 2002, 2001 and 2000, the Company sold no securities from the held-to-maturity portfolio. The weighted-average maturity of the held-to-maturity portfolio was 5.3 years and 6.4 years at December 31, 2002 and 2001, respectively.

II. LOAN PORTFOLIO

The amounts and respective percentages of loans outstanding represented by each principal category on the dates indicated were as follows:

a. DISTRIBUTION OF LOANS

(Dollars In Thousands)

	December 31,
	2002		2001		2000		1999		1998
	Amount	%	Amount	%	Amount	%	Amount	%	Amount	%
Commercial, Financial and Agricultural	$ 75,659	10	$ 74,026	10	$ 60,850	8	$ 46,818	7	$ 35,961	6
Real Estate - Commercial	97,683	12	79,337	11	70,129	10	66,273	10	58,420	11
Real Estate - Construction	10,754	1	8,036	1	5,063	1	4,505	1	3,406	1
Real Estate - Residential	295,265	36	259,883	34	265,325	36	252,660	39	238,425	44
Indirect Loans	317,706	39	315,046	42	314,871	42	257,068	39	178,969	33
Other Installment Loans to Individuals	14,225	2	18,796	2	19,531	3	28,496	4	30,945	5
Total Loans	811,292	100	755,124	100	735,769	100	655,820	100	546,126	100
Allowance for Loan Losses	(11,193)		(9,720)		(8,727)		7,784)		(6,742)
Total Loans, Net	$800,099		$745,404		$727,042		$648,036		$539,384

Indirect Loans: At year-end 2002, indirect loans remained the largest segment of the loan portfolio. Indirect loans are almost entirely auto vehicle acquisition loans to consumers financed through local dealerships where, by prior arrangement, the Company acquires the dealer paper. In the years prior to 2001, the Company experienced strong growth in these loans. Throughout 2001 and 2002, however, this sector of the portfolio remained flat, and the balance at year-end 2002 was essentially unchanged from December 31, 2000. As a percentage of total loans, indirect loans fell from 42% at December 31, 2001 to 39% at the end of 2002. During 2002, normal amortization and prepayments offset new originations of indirect loans, as each amounted to approximately $150 million, or 48% of the outstanding balances. Prepayments accelerated in the fall of 2001 and continued at a pace exceeding historical levels throughout 2002 as manufacturers offered attractive financing alternatives. During 2000 and 1999, indirect loans increased significantly, both in total and as a percentage of the loan portfolio. In 2000, these loans increased $57.8 million, or 22.5%, and in 1999, these loans increased $78 million, or 43.6%.

Residential Real Estate Loans: Residential real estate loans represented the second largest segment at year-end 2002, at 36% of total loans. Residential real estate loans increased $35 million during the year as originations of $95 million were offset by normal amortization, refinancings and prepayments. During 2001 residential real estate loans decreased $5.5 million, or 2.1%, from the prior year-end. Originations exceeded repayments by approximately $25 million, but the portfolio amount declined due to the $30 million in loan securitizations cited earlier in this report. In effect, the securitized loans were not sold but merely transferred to the Company's securities available-for-sale portfolio. In 2000, residential real estate loans increased $12.7 million, or 5.0% and in 1999, this segment increased by $14 million, or 6.0%.

Commercial and Commercial Real Estate Loans: In 2002, for the fourth year in a row, the Company experienced significant growth in commercial and commercial real estate loans outstanding. At December 31, 2002 these loans had increased by $20.0 million, or 13.0%, over year-end 2001 levels, and represented 22% of total loans outstanding, increasing from 21% at year-end 2001. During 2001, commercial and commercial real estate loans increased by $22.4 million, or 17.1%. In 2000 and 1999, respectively, these loans increased by $17.9 million and $18.7 million, representing increases of 15% and 19.8%, respectively.

The following table indicates the changing mix in the Company's loan portfolio by presenting the quarterly average balances for the Company's significant loan products for the past five quarters. The ensuing tables present the percentage of total loans represented by each category as well as the annualized tax-equivalent yield.

LOAN PORTFOLIO

Quarterly Average Loan Balances

(Dollars In Thousands)

		Quarter Ending
		Dec 2002	Sep 2002	Jun 2002	Mar 2002	Dec 2001
Commercial and Commercial Real Estate		$170,465	$168,204	$162,611	$154,732	$151,742
Residential Real Estate		247,642	235,248	227,530	219,264	210,656
Home Equity		30,379	29,468	28,701	28,709	29,013
Indirect Consumer Loans		314,655	308,681	307,486	312,912	321,265
Other Consumer Loans		37,287	37,441	38,781	40,457	41,592
Total Loans		$800,428	$779,042	$765,109	$756,074	$754,268

Percentage of Total Quarterly Average Loans

		Quarter Ending
		Dec 2002	Sep 2002	Jun 2002	Mar 2002	Dec 2001
Commercial and Commercial Real Estate		21.3%	21.6%	21.3%	20.4%	20.1%
Residential Real Estate		30.9	30.2	29.7	29.0	27.9
Home Equity		3.8	3.8	3.8	3.8	3.8
Indirect Consumer Loans		39.3	39.6	40.1	41.4	42.6
Direct Consumer Loans		4.7	4.8	5.1	5.4	5.6
Total Loans		100.0%	100.0%	100.0%	100.0%	100.0%

Quarterly Tax-Equivalent Yield on Loans

		Quarter Ending
		Dec 2002	Sep 2002	Jun 2002	Mar 2002	Dec 2001
Commercial and Commercial Real Estate		7.21%	7.24%	7.26%	7.42%	7.99%
Residential Real Estate		7.04	7.16	7.29	7.46	7.43
Home Equity		5.76	6.02	6.19	6.43	7.29
Indirect Consumer Loans		7.20	7.48	7.70	7.81	7.96
Direct Consumer Loans		8.69	8.99	8.88	8.92	9.07
Total Loans		7.16	7.35	7.49	7.64	7.85

In general, management expects the Company's yield on its loan portfolio will be impacted by actions the Federal Reserve Board takes from time to time affecting prevailing interest rates. There is a time lag, however, between the Federal Reserve's changes in prevailing rates and the impact of those changes on the Company's loan portfolio. As discussed above in this Report in the section entitled "Changes in Net Interest Income Due to Rate," prevailing interest rates, after increasing steadily throughout 2000, decreased steadily in 2001 and 2002 in response to the Federal Reserve Board's sizable rate-cutting actions during all four quarters of 2001 and in November 2002. The yield on the Company's loan portfolio has been and will continue to be affected by these rate changes, although the decrease in average yields on loans and other earning assets has lagged behind the decrease in average rates paid on deposits. Loan yields began to fall over the second half of 2001 and in all quarters of 2002. Many of the loans in the commercial portfolio have variable rates tied to prime or U.S. Treasury indices. Additionally, there is a significant amount of cash flow from normal amortization and prepayments in all loan categories, and this cash flow reprices at current rates as new loans are generated at the lower current yields.

The following table indicates the respective maturities and repricing structure of the Company's commercial, financial and agricultural loans and its real estate - construction loans at December 31, 2002. For purposes of determining relevant maturities, loans are assumed to mature at (but not before) their scheduled repayment dates as required by contractual terms. Demand loans and overdrafts are included in the "Within 1 Year" maturity category. All of the real estate - construction loans are for single family houses where the Company has made a commitment for permanent financing.

MATURITY AND REPRICING OF COMMERCIAL LOANS

(In Thousands)

		Within 1 Year	After 1 But Within 5 Years	After 5 Years	Total
Commercial, Financial and Agricultural		$23,493	$33,578	$18,588	$75,659
Real Estate - Construction		50	1,631	9,073	10,754
Total		$23,543	$35,209	$27,661	$86,413
Fixed Interest Rates		$ 7,261	$27,197	$12,262	$46,720
Variable Interest Rates		16,282	8,012	15,399	39,693
Total		$23,543	$35,209	$27,661	$86,413

COMMITMENTS AND LINES OF CREDIT

Letters of credit represent extensions of credit granted in the normal course of business which are not reflected in the financial statements because the commitments were not funded at period-end. As of December 31, 2002, the total contingent liability for standby letters of credit amounted to $2.1 million. In addition to these instruments, the Company has issued lines of credit to customers, including home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit, which also may be unfunded or only partially funded from time to time. Commercial lines, generally issued for a period of one year, are usually extended to provide for the working capital requirements of the borrower. At December 31, 2002, the Company had outstanding unfunded loan commitments in the aggregate amount of approximately $128.6 million.

b. RISK ELEMENTS

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The Company designates loans as nonaccrual when the payment of interest and/or principal is due and unpaid for a designated period (generally 90 days) or when the likelihood of the full repayment of principal and interest is, in the opinion of management, uncertain. Under the Uniform Retail Credit Classification and Account Management Policy, established by banking regulators, fixed-maturity consumer loans must generally be charged-off no later than when 120 days past due. Open-end credits and residential real estate loans should be charged-off no later than when 180 days past due. Commercial loans are evaluated for charge-off on a loan-by-loan basis. There were no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 2002.

Loans past due 90 days or more and still accruing interest, as identified in the table presented earlier in Part II, Item 7.B.II., labeled "SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES," are those loans which were contractually past due 90 days or more but because of expected repayments, were still accruing interest.

SFAS No. 114 requires that all impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on (I) the present value of expected future cash flows discounted at the loan's effective interest rate, (II) the loan's observable market price or (III) the fair value of the collateral if the loan is collateral dependent. The Company applies the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250,000, and to all restructured loans. Allowances for losses for the remaining smaller-balance loans are evaluated under SFAS No. 5. Under the provisions of SFAS No. 114, the Company determines impairment for collateralized loans based on fair value of the collateral less estimated cost to sell. For other loans, impairment is determined by comparing the recorded value of the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method for impaired loans on a loan by loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual or cash basis.

At December 31, 2002 one commercial loan was considered impaired under SFAS No. 114 with a recorded investment of $319 thousand, an allowance for loan losses of $160 thousand and a net carrying amount of $159 thousand. This loan was included in nonaccrual loans in the schedule of nonperforming loans.

At December 31, 2002, nonperforming loans amounted to $2.6 million, a decrease of $876 thousand, or 25.5%, from the balance at year-end 2001. The decrease was primarily attributable to one $749 thousand commercial loan designated nonperforming at year-end 2001, which was paid-off by the borrower during December 2002. Total nonperforming loans at year-end 2002 represented .32% of period-end loans, a decrease from .46% at year-end 2001. The ratio of nonperforming loans to average loans for the Company's peer group at September 30, 2002 was .77%, or 140.6% higher than the Company's ratio at December 31, 2002.

During 2002 income recognized on year-end balances of nonaccrual loans was $110 thousand. Income that would have been recognized during that period on nonaccrual loans if all such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $215 thousand.

At December 31, 2001, two commercial loans were considered impaired loans under SFAS No. 114 with a recorded investment of $1.6 million, an allowance for loan losses of $800 thousand and a net carrying amount of $800 thousand. These loans were included in nonaccrual loans in the schedule of nonperforming loans above. There were no impaired loans at December 31, 2000 or 1999 within the scope of SFAS No. 114.

At December 31, 2001, nonperforming loans amounted to $3.4 million, an increase of $1.4 million, or 67.3%, from the balance at year-end 2000. The increase was attributable to the two impaired commercial loans described in the preceding paragraph, which were placed on nonaccrual status during the fourth quarter of 2001. The allowance for loan losses, at December 31, 2001, included specific impairment allowances of $800 thousand for these two loans. Total nonperforming loans at year-end 2001 represented .46% of period-end loans, an increase from .28% at year-end 2000. The ratio of nonperforming loans to average loans for the Company's peer group at September 30, 2001 was .79%, or 71.7% higher than the Company's ratio at December 31, 2001.

During 2001 income recognized on year-end balances of nonaccrual loans was $189 thousand. Income that would have been recognized during that period on nonaccrual loans if all such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $258 thousand.

At December 31, 2000, nonaccrual loans amounted to $1.8 million, a decrease of $33 thousand from December 31, 1999. Loans past due 90 or more days and still accruing interest amounted to $298 thousand at December 31, 2000, a decrease of $9 thousand from December 31, 1999. Total nonperforming loans at year-end 2000 represented .28% of period-end loans, a decrease from .32% at year-end 1999.

During 2000 income recognized on year-end balances of nonaccrual loans was $75 thousand. Income that would have been recognized during that period on nonaccrual loans if all such had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period) was $176 thousand.

POTENTIAL PROBLEM LOANS

On at least a quarterly basis, the Company applies an internal credit quality rating system to commercial loans that are either past due or fully performing loans which may exhibit certain characteristics that could reflect a potential weakness. Loans are placed on nonaccrual status when the likely amount of future principal and interest payments are expected to be less than the contractual amounts, even if such loans are not 90 days past due. Because of this approach toward placing commercial loans on nonaccrual status, the Company normally does not identify any significant number of potential problem loans in its portfolio that do not otherwise meet one of the classifications discussed above (e.g., nonaccrual, troubled debt restructurings). At year-end 2002, the Company had identified only one credit that, although still accruing interest, exhibited such significant weakness as to warrant mention as a potential problem. A portion of this commercial credit, totaling $319 thousand, had been placed on nonaccrual status, while the remaining amount of the credit, totaling $2.0 million, was identified as a potential problem loan, but continues to accrue interest. This same loan was identified as a potential problem loan at December 31, 2001, when the amount of the loan on nonaccrual status was $850 thousand. The balance was reduced during 2002 by cash payments from the borrower.

Late in the first quarter of 2003, a commercial borrower announced plans to discontinue its principal and, potentially, all aspects of its business operation. The borrower is currently indebted to the Company's lead bank in the aggregate amount of $2.322 million through three separate loans. Two loans totaling $1.831 million are essentially fully collateralized by high grade, liquid, marketable securities. These two loans are further collateralized by a blanket lien on equipment and various other assets. A third loan with a current balance of $491 thousand is secured by commercial real estate having an estimated market value significantly in excess of the loan balance. All loans contain cross-collateralization provisions. There are no commitments to extend additional credit to the borrower. Consequently, the Company believes that its risk of credit loss to this borrower, at this time, is very limited. The Company is closely monitoring the matter and is in regular communication with management of the borrower.

The balance of other non-current loans to which interest income was being accrued (i.e. loans 30-89 days past due as defined in bank regulatory agency guidance) totaled $5.7 million at December 31, 2002 and represented 0.71% of loans outstanding at that date, as compared to approximately $5.3 million, or 0.70% of loans at December 31, 2001. These non-current loans were composed of approximately $4.7 million of consumer loans, principally indirect motor vehicle loans, $649 thousand of residential real estate loans and commercial loans of $392 thousand.

The overall level of the Company's performing loans which demonstrate characteristics of potential weakness from time to time is for the most part dependent on economic conditions in northeastern New York State. In general, the economy in the Company's geographic market area was relatively strong in the 1997-2000 period. As the country slid into a mild recession in 2001 and continued throughout 2002, the economic downturn was not as severe in northeastern New York State. In the "Capital District" in and around Albany and in the area north of the Capital District, which are the Company's principal service areas, unemployment remained below the national average. The unemployment rate has been at or above the national average in Essex County, near the Canadian border, during 2002.

FOREIGN OUTSTANDINGS - None

LOAN CONCENTRATIONS

The loan portfolio is well diversified. There are no concentrations of credit that exceed 10% of the portfolio, other than the general categories reported in the preceding Section II.a. of this report. For further discussion, see Note 26 to the Consolidated Financial Statements in Part II, Item 8 of this report.

OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

Other real estate owned (OREO) consists of real property acquired in foreclosure. OREO is carried at the lower of (i) fair value less estimated cost to sell or (ii) the recorded investment in the loan at the date of foreclosure, or cost. The Company establishes allowances for OREO losses. The allowances are established and monitored on a property by property basis and reflect management's ongoing estimate of the property's estimated fair value less costs to sell (when such amount is less than cost). For all periods, all OREO was held for sale. Repossessed assets consist almost entirely of automobiles.

DISTRIBUTION OF OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

(Net of Allowance) (In Thousands)

		December 31,
		2002	2001	2000	1999	1998
Single Family 1 - 4 Units		$ 51	$ 294	$ 425	$ 586	$ 540
Commercial Real Estate		---	---	---	---	86
Construction		---	---	---	---	1
Other Real Estate Owned, Net		51	294	425	586	627
Repossessed Assets		143	66	150	62	38
Total Other Real Estate Owned and Repossessed Assets		$194	$360	$575	$648	$665

The following table summarizes changes in the net carrying amount of other real estate owned for each of the periods presented.

SCHEDULE OF CHANGES IN OTHER REAL ESTATE OWNED

(Net of Allowance) (In Thousands)

		2002	2001	2000	1999	1998
Balance at Beginning of Year		$ 294	$ 425	$ 586	$ 627	$ 315
Properties Acquired Through Foreclosure		114	222	554	592	679
Writedown of Properties Previously Foreclosed		---	(6)	---	(24)	---
Sales		(357)	(347)	(715)	(609)	(367)
Balance at End of Year		$ 51	$ 294	$ 425	$ 586	$ 627

The following is a summary of changes in the allowance for OREO losses:

ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES

(In Thousands)

		2002	2001	2000	1999	1998
Balance at Beginning of Year		$ 6	$---	$ 24	$ 59	$ 65
Writedowns of Properties Previously Foreclosed		---	6	---	24	---
Charge-Offs		(6)	---	(24)	(59)	(6)
Balance at End of Year		$ ---	$ 6	$ ---	$ 24	$ 59

During 2002, the Company acquired two properties totaling $114 thousand through foreclosure. Also during the year, the Company sold seven properties with a carrying amount of $317 thousand for a net gain of $40 thousand. The Company received other payments on foreclosed properties of $41 thousand.

During 2001, the Company acquired five properties totaling $222 thousand through foreclosure. Also during the year, the Company sold five properties with a carrying amount of $290 thousand for a net gain of $103 thousand. The Company received other payments on foreclosed properties of $57 thousand.

During 2000, the Company acquired nine properties totaling $554 thousand through foreclosure. Also during the year, the Company sold thirteen properties with a carrying amount of $715 thousand for a net gain of $29 thousand.

III. SUMMARY OF LOAN LOSS EXPERIENCE

The Company monitors credit quality through a continuous review of the entire loan portfolio. All significant loans (primarily commercial and commercial real estate loans) are reviewed at least semi-annually, and those under special supervision are reviewed at least quarterly. Additionally, regulatory examiners perform periodic examinations of the Company's loan portfolios and report on these examinations to management. The boards of directors of the Company's subsidiary banks, upon recommendations from management, determine the extent of charge-offs and have the final decision-making responsibility in authorizing charge-offs.

Through the provision for loan losses, an allowance (reserve) is maintained for probable loan losses. Actual loan losses are charged against this allowance when they are identified. In evaluating the adequacy of the allowance for loan losses, management considers various risk factors influencing asset quality. The analysis is performed on a loan by loan basis for impaired and large balance loans, and by portfolio type for smaller balance homogeneous loans. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers' economic outlook and financial condition and prospects.

In addition to conclusions regarding the adequacy of the allowance, the provision for loan losses is influenced by the total size of the loan portfolio, the level of nonperforming loans, by the level of loans actually charged-off against the allowance during prior periods and the change in the mix of loan categories within the loan portfolio.

The table in Part II, Item 7.B.II. "Provision for Loan Losses and Allowance for Loan Losses" presents a summary of the activity in the Company's allowance for loan losses.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a general allowance applicable to losses inherent in the loan portfolio. For internal operating purposes, the allowance is not allocated among loan categories.

In the following table, the allowance has been allocated among the loan categories indicated solely for purposes of complying with disclosure requirements of the Securities and Exchange Commission. However, this allocation should not be interpreted as a projection of (I) likely sources of future charge-offs, (II) likely proportional distribution of future charge-offs among loan categories or (III) likely amounts of future charge-offs. Since management regards the allowance as a general balance and has assigned unallocated values to categories in the table solely for purposes of compliance with the disclosure requirements, the amounts presented do not represent the total balance available to absorb future charge-offs that might occur within the designated categories.

On a quarterly basis, management risk-classifies delinquent or problem loans in the commercial, commercial real estate and real estate construction portfolios as special mention, substandard, doubtful or loss. Reserves are assigned to all loans by either a specific allocation, a risk-classified loss percentage or by a percentage applied to individual categories of loans.

Subject to the qualifications noted above, an allocation of the allowance for loan losses by principal classification and the proportion of the related loan balance is presented below as of December 31 for each of the years indicated.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars in Thousands)

		2002	2001	2000	1999	1998
Commercial, Financial and Agricultural		$ 3,662	$2,922	$2,026	$1,696	$1,219
Real Estate-Commercial		916	731	507	276	505
Real Estate-Construction		---	---	---	---	---
Real Estate-Residential Mortgage		1,458	997	1,322	1,295	1,529
Installment Loans to Individuals		4,253	4,012	4,160	3,823	3,308
Unallocated		904	1,058	712	694	181
Total		$11,193	$9,720	$8,727	$7,784	$6,742

PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS

		2002	2001	2000	1999	1998
Commercial, Financial and Agricultural		10%	10%	8%	7%	6%
Real Estate-Commercial		12	11	10	10	11
Real Estate-Construction		1	1	1	1	1
Real Estate-Residential Mortgage		36	34	36	39	44
Installment Loans to Individuals		41	44	45	43	38
Total		100%	100%	100%	100%	100%

IV. DEPOSITS

The following table sets forth the average balances of and average rates paid on deposits for the periods indicated.

AVERAGE DEPOSIT BALANCES

Years Ended December 31,

(Dollars In Thousands)

		2002		2001		2000
		Average Balance	Rate	Average Balance	Rate	Average Balance	Rate
Demand Deposits		$132,208	--%	$122,618	--%	$114,062	--%
Interest-Bearing Demand Deposits		282,365	1.57	209,719	2.09	189,667	2.86
Regular and Money Market Savings		230,039	1.38	198,573	2.39	188,303	2.80
Time Deposits of $100,000 or More		81,770	2.77	135,982	4.57	149,834	6.01
Other Time Deposits		201,253	3.75	198,745	5.07	203,116	5.38
Total Deposits		$927,635	1.88	$865,637	2.93	$844,982	3.62

During 2002, average deposit balances increased by $62.0 million, or 7.2%, from 2001. The increase in deposit balances during 2002 was generated by the Company's pre-existing branch network, although the Company did open a second branch in Saratoga Springs at the beginning of the year. No other branches were added or acquired in 2002.

Average deposit balances increased $20.7 million, or 2.4%, from 2000 to 2001. Deposit growth originated from the Company's existing branch network. No branches were acquired or added in 2001.

The following table presents the quarterly average balance by deposit type and the percentage of total deposits represented by each deposit type for each of the most recent five quarters.

DEPOSIT PORTFOLIO

Quarterly Average Deposit Balances (Dollars In Thousands)

		Quarter Ending
		Dec 2002	Sep 2002	Jun 2002	Mar 2002	Dec 2001
Demand Deposits		$135,915	$138,336	$129,844	$124,543	$127,021
Interest-Bearing Demand Deposits		313,517	273,069	287,832	254,496	242,948
Regular and Money Market Savings		254,415	236,890	217,526	210,767	204,514
Time Deposits of $100,000 or More		64,158	71,257	93,760	98,382	118,678
Other Time Deposits		203,139	206,136	198,910	196,718	199,234
Total Deposits		$971,144	$925,688	$927,872	$884,906	$892,395

The Company typically experiences seasonally high balances in the first and last quarters of the year due to the cyclicality of municipal deposits which typically are included in time deposits of $100,000 or more. In comparing average deposits for the fourth quarters of 2002 and 2001, balances increased $78.7 million, or 8.8%. All categories of non-maturity deposits increased between the two comparative quarters. As is typical in falling rate environments, many depositors placed maturing time deposits in non-maturity deposits during the third and fourth quarters of 2001 and into 2002 as well, presumably as a temporary investment until rates start to rise again. This was also true for the Company's municipal depositors who also maintained high balances in NOW accounts at both year-end 2001 and 2002. The most significant change in deposit mix in 2002 was the substantial decrease in time deposits of $100,000 or more, both as a percentage of the portfolio and in absolute terms. The total quarterly average balances as a percentage of total deposits are illustrated in the table below.

Percentage of Total Quarterly Average Deposits

		Quarter Ending
		Dec 2002	Sep 2002	Jun 2002	Mar 2002	Dec 2001
Demand Deposits		14.0%	14.9%	14.0%	14.1%	14.2%
Interest-Bearing Demand Deposits		32.3	29.5	31.1	28.8	27.2
Regular and Money Market Savings		26.2	25.6	23.4	23.8	22.9
Time Deposits of $100,000 or More		6.6	7.7	10.1	11.1	13.3
Other Time Deposits		20.9	22.3	21.4	22.2	22.4
Total Deposits		100.0%	100.0%	100.0%	100.0%	100.0%

Time deposits of $100,000 or more are to a large extent comprised of municipal deposits and are obtained on a competitive bid basis.

Quarterly Cost of Deposits

		Quarter Ending
		Dec 2002	Sep 2002	Jun 2002	Mar 2002	Dec 2001
Demand Deposits		---%	---%	---%	---%	---%
Interest-Bearing Demand Deposits		1.54	1.49	1.66	1.59	1.64
Regular and Money Market Savings		1.24	1.38	1.45	1.47	1.74
Time Deposits of $100,000 or More		2.75	2.87	2.76	2.73	3.15
Other Time Deposits		3.38	3.67	3.88	4.09	4.37
Total Deposits (Including Non-Interest-Bearing)		1.71	1.83	1.97	2.02	2.24

In general, rates paid by the Company on its various types of deposit accounts are influenced by the rates being offered or paid by its competitors, which themselves are influenced by prevailing interest rates in the economy as impacted from time to time by the actions of the Federal Reserve Board. There typically is a time lag between the Federal Reserve's actions undertaken to influence rates and the actual repricing of deposit liabilities by the Company, but the lag is shorter in duration than the lag for loans and other earning assets. As a result of the eleven rate decreases in 2001 by the Federal Reserve Board and an additional decrease in November 2002, the Company experienced a decrease in the cost of deposits in each of the quarters in 2001 and 2002. The cost of deposits during the fourth quarter of 2002 was at its lowest point in many years.

If, as many believe, the economy will take several months or longer to recover, the Company may continue to experience downward pressures on its net interest spread and net interest margin.

V. TIME DEPOSITS OF $100,000 OR MORE

The maturities of time deposits of $100,000 or more at December 31, 2002 are presented below. (In Thousands)

Maturing in:
Under Three Months		$ 23,616
Three to Six Months		5,222
Six to Twelve Months		9,791
2004		13,039
2005		1,323
2006		1,291
2007 and Beyond		5,813
Total		$ 60,095

D. LIQUIDITY

Liquidity is measured by the ability of the Company to raise cash when it needs it at a reasonable cost. The Company must be capable of meeting expected and unexpected obligations to its customers at any time. Given the uncertain nature of customer demands as well as the need to maximize earnings, the Company must have available reasonably priced sources of funds, on- and off-balance sheet, that can be accessed quickly in time of need.

Securities available-for-sale represent a primary source of balance sheet cash flow. Certain investment securities are selected at purchase as available-for-sale based on their marketability and collateral value, as well as their yield and maturity.

In addition to liquidity arising from balance sheet cash flows, the Company has supplemented liquidity with additional off-balance sheet sources such as credit lines with the Federal Home Loan Bank ("FHLB"). The Company has established overnight and 30 day term lines of credit with the FHLB each in the amount of $56.6 million at December 31, 2002. There were no advances under either line at December 31, 2002. If advanced, such lines of credit are collateralized by mortgage-backed securities, loans and FHLB stock.

In addition, the Company has in place modest borrowing facilities from correspondent banks and also has identified wholesale and retail repurchase agreements and brokered certificates of deposit as appropriate off-balance sheet sources of funding. Also, the Company's lead bank has established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances. At December 31, 2002, the amount available under this facility was $123.2 million. There were no advances outstanding at December 31, 2002. The Company measures and monitors its basic liquidity as a ratio of liquid assets to short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of cash flows from the Company's investment securities portfolio, particularly mortgage-backed securities, and from maturing loans in its portfolio, the Company's stable core deposit base and its significant borrowing capacity, the Company believes that liquidity is sufficient to meet any reasonably likely events or occurrences.

E. CAPITAL RESOURCES AND DIVIDENDS

Shareholders' equity was $101.4 million at December 31, 2002, an increase of $9.9 million, or 10.8%, from the prior year-end. The increase in shareholders' equity during 2002 primarily reflected $11.4 million of retained earnings and an increase of $2.3 million related to net unrealized gains and losses, net of tax, on securities available-for-sale, partially offset by $5.2 million of periodic repurchases of the Company's common stock.

In December 1999, the Company, through a newly-formed subsidiary business trust, privately placed $5 million in capital securities with several institutional investors. The securities, which are listed as "Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures" in the Company's consolidated balance sheet as of December 31, 2002, have certain features that make them an alternative funding vehicle and the proceeds qualify as regulatory capital under the capital adequacy guidelines discussed below.

The maintenance of appropriate capital levels is a management priority. Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. The Company's principal capital planning goal is to provide an adequate return to shareholders while retaining a sufficient base to provide for future expansion and comply with all regulatory standards.

One set of regulatory capital guidelines applicable to the Company and the subsidiary banks are the so-called risk-based capital measures. Under these measures, as established by federal bank regulators, the minimum ratio of "Tier 1" capital to risk-weighted assets is 4.0% and the minimum ratio of total capital to risk-weighted assets is 8.0%. For the Company, Tier 1 capital is comprised of shareholders' equity and capital securities issued by the Company's subsidiary, a statutory business trust (see Note 12 to the consolidated financial statements) less intangible assets. Total capital, for this risk-based capital standard, includes Tier 1 capital plus other qualifying regulatory capital, including a portion of the Company's allowance for loan losses.

In addition to the risk-based capital measures, the federal bank regulatory agencies require banks and bank holding companies to satisfy another capital guideline, the Tier 1 leverage ratio (Tier 1 capital to quarterly average assets less intangible assets). The minimum Tier 1 leverage ratio is 3.0% for the most highly rated institutions. The guidelines provide that other institutions should maintain a Tier 1 leverage ratio that is at least 1.0% to 2.0% higher than the 3.0% minimum level for top-rated institutions.

The table below sets forth the capital ratios of the Company and its subsidiary banks as of December 31, 2002:

Capital Ratios:		Arrow	GFNB	SNB
Risk-Based Tier 1 Ratio		11.6%	12.2%	9.3%
Total Risk-Based Capital Ratio		12.8	13.4	12.8
Tier 1 Leverage Ratio		7.3	7.3	8.3

At December 31, 2002, the Company and both of its subsidiary banks exceeded the minimum capital ratios established by these guidelines, and qualified as "well-capitalized", the highest category, in the capital classification scheme set by federal bank regulatory agencies (see the further discussion under "Supervision and Regulation" in Part I.1.C. of this report).

The principal source of funds for the payment of shareholder dividends by the Company has been dividends declared and paid to the Company by its bank subsidiaries. There are various legal and regulatory limitations applicable to the payment of dividends to the Company by its subsidiaries as well as the payment of dividends by the Company to its shareholders. As of December 31, 2002, under this statutory limitation, the maximum amount that could have been paid by the bank subsidiaries to the Company, without special regulatory approval, was approximately $23.7 million. The ability of the Company and the banks to pay dividends in the future is and will to continue to be influenced by regulatory policies, capital guidelines and applicable laws.

See Part II.5. "Market for the Registrant's Common Equity and Related Stockholder Matters" for a recent history of the Company's cash dividend payments.

F. FOURTH QUARTER RESULTS

The Company reported net income of $4.8 million for the fourth quarter of 2002, an increase of $415 thousand, or 9.5%, from the fourth quarter of 2001. Diluted earnings per common share for the fourth quarter of 2002 was $.59, a $.06 increase, or 11.3%, over the $.53 amount for the fourth quarter of 2001. The increase in earnings was primarily attributable to a $145 thousand increase in net interest income, a $324 thousand reduction in the provision for loan losses, $173 thousand from a recovery related to the Company's former Vermont operations and the discontinuance of goodwill amortization in 2002 (versus $227 thousand of amortization expense in the 2001 quarter). The factors contributing to the quarter-to-quarter increase in net income and changes in financial condition are included with the discussion of the year-to-year changes in this report.

SELECTED FOURTH QUARTER FINANCIAL INFORMATION

(Dollars In Thousands, Except Per Share Amounts)

		For the Quarter Ended December 31,
		2002	2001
Interest and Dividend Income		$18,923	$19,360
Interest Expense		6,269	6,851
Net Interest Income		12,654	12,509
Provision for Loan Losses		443	767
Net Interest Income after Provision for Loan Losses		12,211	11,742
Other Income		2,924	2,624
Other Expense 1		8,105	8,057
Income Before Provision for Income Taxes		7,030	6,309
Provision for Income Taxes		2,254	1,948
Net Income		$ 4,776	$ 4,361
SHARE AND PER SHARE DATA: 2
Weighted Average Number of Shares Outstanding:
Basic		7,929	8,003
Diluted		8,118	8,192
Basic Earnings Per Common Share		$ .60	$ .54
Diluted Earnings Per Common Share		.59	.53
Cash Dividends Per Common Share		.25	.22
AVERAGE BALANCES:
Assets		$1,287,493	$1,155,623
Earning Assets		1,228,619	1,100,543
Loans		800,428	754,268
Deposits		971,144	892,395
Shareholders' Equity		100,645	92,016
SELECTED RATIOS (Annualized):
Return on Average Assets		1.47%	1.50%
Return on Average Equity		18.83%	18.80%
Net Interest Margin 3		4.26%	4.70%
Net Charge-offs to Average Loans		.13%	.15%
Provision for Loan Losses to Average Loans		.22%	.40%

¹ Amortization of goodwill was discontinued effective January 1, 2002 upon the third quarter adoption of SFAS No. 147.

² Share and Per Share amounts have been restated for the November 2002 five percent stock dividend.

³ Net Interest Margin is the ratio of tax-equivalent net interest income to average earning assets.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

In addition to credit risk in the Company's loan portfolio and liquidity risk, discussed earlier, the Company's business activities also generate market risk. Market risk is the possibility that changes in future market rates or prices will make the Company's position less valuable. The ongoing monitoring and management of risk is an important component of the Company's asset/liability management process which is governed by policies that are reviewed and approved annually by the Board of Directors. The Board of Directors delegates responsibility for carrying out asset/liability oversight and control to management's Asset/Liability Committee ("ALCO"). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The Company does not make use of derivatives, such as interest rate swaps, in its risk management process.

Interest rate risk is the most significant market risk affecting the Company. Interest rate risk is the exposure of the Company's net interest income to changes in interest rates. Interest rate risk is directly related to the different maturities and repricing characteristics of interest-bearing assets and liabilities, as well as to prepayment risks for mortgage-related assets, early withdrawal of time deposits, and the fact that the speed and magnitude of responses to interest rate changes varies by product.

The ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one year horizon, assuming no balance sheet growth and a 200 basis point upward and downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. However, due to the low level of interest rates at December 31, 2002, the downward shift was calculated using a 100 basis point shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. Applying the simulation model analysis as of December 31, 2002, a 200 basis point increase in interest rates demonstrated a 1.77% decrease in net interest income, and a 100 basis point decrease in interest rates demonstrated a 0.46% increase in net interest income. These amounts were within the Company's ALCO policy limits. Basically, the inverse relationship between changes in prevailing rates and net interest income reflects the fact that the Company's liabilities and sources of funds generally reprice more quickly than its earning assets.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. As noted elsewhere in this Report, the Federal Reserve Board took certain actions throughout 2001 and again at the end of 2002 to decrease prevailing short-term interest rates, after a 12-18 month period of increasing interest rates. Management believes it likely that rates will begin to rise later in 2003 and in 2004. Management believes that an extended period of flat interest rates will continue to have a negative impact on net interest margin as asset repricing continues downward while deposit repricing abates, and that an increase in prevailing interest rates will have a short-term negative impact on net interest margin and net interest income as well. Management is not able to predict with certainty what the magnitude of these effects would be.

The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, management cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.

Item 8: Financial Statements and Supplementary Data

The following audited financial statements and supplementary data are submitted herewith:

Report of Management

Independent Auditors' Report

Financial Statements:

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

Notes to Consolidated Financial Statements

Supplementary Data: (Unaudited)

Summary of Quarterly Financial Data for the Years Ended December 31, 2002 and 2001

REPORT OF MANAGEMENT

The accompanying consolidated financial statements of Arrow Financial Corporation and subsidiaries are the responsibility of management, and have been prepared in conformity with accounting principles generally accepted in the United States of America. These statements necessarily include some amounts that are based on best judgments and estimates. Other financial information in the annual report is consistent with that in the consolidated financial statements.

Management is responsible for maintaining a system of internal accounting control. The purpose of the system is to provide reasonable assurance that transactions are recorded in accordance with management's authorization, that assets are safeguarded against loss or unauthorized use, and that underlying financial records support the preparation of financial statements. The system includes written policies and procedures, selection of qualified personnel, appropriate segregation of responsibilities, and the ongoing internal audit function.

The independent auditors conduct an annual audit of the Company's consolidated financial statements to enable them to express an opinion as to the fair presentation of the statements. In connection with the audit, the independent auditors consider internal control, to the extent they consider necessary to determine the nature, timing and extent of their auditing procedures. The Company also has an internal auditor who reports directly to the Audit Committee of the Board of Directors, whose members are all non-employee directors. The Audit Committee meets with management, the internal auditor and the independent auditors in conjunction with its review of matters relating to the consolidated financial statements. The independent auditors and the internal auditor meet with and have complete access to the Audit Committee without the presence of management.

/s/ Thomas L. Hoy /s/ John J. Murphy

Thomas L. Hoy John J. Murphy

President and Executive Vice President,

Chief Executive Officer Treasurer and

Chief Financial Officer

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ARROW FINANCIAL CORPORATION:

We have audited the accompanying consolidated balance sheets of Arrow Financial Corporation and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arrow Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Albany, New York

January 21, 2003

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	December 31,
	2002	2001
ASSETS
Cash and Due from Banks	$ 29,141	$ 27,944
Federal Funds Sold	3,000	14,000
Cash and Cash Equivalents	32,141	41,944
Securities Available-for-Sale	326,661	251,694
Securities Held-to-Maturity (Approximate Fair
Value of $79,476 in 2002 and $75,786 in 2001)	74,505	74,956
Loans	811,292	755,124
Allowance for Loan Losses	(11,193)	(9,720)
Net Loans	800,099	745,404
Premises and Equipment, Net	13,715	13,095
Other Real Estate and Repossessed Assets, Net	194	360
Goodwill	9,297	9,297
Other Intangible Assets, Net	418	641
Other Assets	14,391	13,616
Total Assets	$1,271,421	$1,151,007
LIABILITIES
Deposits:
Demand	$ 133,644	$ 124,777
Regular Savings, N.O.W. & Money Market Deposit Accounts	565,545	457,171
Time Deposits of $100,000 or More	60,095	109,023
Other Time Deposits	198,723	194,527
Total Deposits	958,007	885,498
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	44,078	32,310
Other Short-Term Borrowings	4,420	5,335
Federal Home Loan Bank Advances	145,000	115,000
Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures	5,000	5,000
Other Liabilities	13,514	16,360
Total Liabilities	1,170,019	1,059,503
Commitments and Contingent Liabilities (Notes 22 and 23)
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 December 31, 2002 and 9,970,376 Shares Issued at December 31, 2001)	10,469	9,970
Surplus	115,110	99,459
Undivided Profits	13,611	17,268
Unallocated ESOP Shares (97,212 Shares in 2002
and 98,478 Shares in 2001)	(1,822)	(1,941)
Accumulated Other Comprehensive Income	3,253	1,562
Treasury Stock, at Cost (2,440,090 Shares at December 31,
2002 and 2,239,451 Shares at December 31, 2001)	(39,219)	(34,814)
Total Shareholders' Equity	101,402	91,504
Total Liabilities and Shareholders' Equity	$1,271,421	$1,151,007

See Notes to Consolidated Financial Statements.

All share and per share amounts have been adjusted for the 2002 five percent stock dividend.

See Notes to Consolidated Financial Statements.

(In Thousands, Except Share and Per Share Amounts)

						Accumulated
					Unallo-	Other Com-
	Common				cated	prehensive
	Shares	Common		Undivided	ESOP	Income	Treasury
	Issued	Stock	Surplus	Profits	Shares	(Loss)	Stock	Total

Balance at December 31, 1999

9,495,596

$9,496

$85,480

$14,052

$(2,173)

$(4,270)

$(30,298)

$72,287

Comprehensive Income, Net of Tax:
Net Income	---	---	---	13,681	---	---	---	13,681
Decrease in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $4)	---	---	---	---	---	2	---	2
Net Unrealized Securities Holding Gains Arising During the Period, Net of Tax (Pre-tax $6,313)	---	---	---	---	---	3,734	---	3,734
Reclassification Adjustment for Net Securities Losses Included in Net Income, Net of Tax (Pre-tax $595)	---	---	---	---	---	356	---	356
Other Comprehensive Income								4,092
Comprehensive Income								17,773
Cash Dividends Declared,
$.73 per Share	---	---	---	(5,813)	---	---	---	(5,813)
Stock Options Exercised (9,546 Shares)	---	---	(12)	---	---	---	71	59
Shares Issued Under the Directors' Stock Plan (2,036 Shares)	---	---	14	---	---	---	18	32
Shares Issued Under the Employee Stock Purchase Plan (12,650 Shares)	---	---	70	---	---	---	108	178
Tax Benefit for Disposition of Stock Options	---	---	3	---	---	---	---	3
Purchase of Treasury Stock
(196,650 Shares)	---	---	---	---	---	---	(3,529)	(3,529)
Acquisition of Common Stock by ESOP (24,500 Shares)	---	---	---	---	( 464)	---	---	( 464)
Allocation of ESOP Stock
(13,442 Shares)	---	---	(24)	---	279	---	---	255
Balance at December 31, 2000	9,495,596	$9,496	$85,531	$21,920	$(2,358)	$ (178)	$(33,630)	$80,781

Comprehensive Income, Net of Tax:
Net Income	---	---	---	15,816	---	---	---	15,816
Increase in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $50)	---	---	---	---	---	(31)	---	(31)
Net Unrealized Securities Holding Gains Arising During the Period, Net of Tax (Pre-tax $3,139)	---	---	---	---	---	1,886	---	1,886
Reclassification Adjustment for Net Securities Gains Included in Net Income, Net of Tax (Pre-tax $195)	---	---	---	---	---	(115)	---	(115)
Other Comprehensive Income								1,740
Comprehensive Income								17,556
5% Stock Dividend	474,780	474	13,375	(13,849)	---	---	---	---
Cash Dividends Declared,
$.83 per Share	---	---	---	(6,619)	---	---	---	(6,619)
Stock Options Exercised (43,738 Shares)	---	---	122	---	---	---	424	546
Shares Issued Under the Directors' Stock Plan (1,313 Shares)	---	---	23	---	---	---	13	36
Shares Issued Under the Employee Stock Purchase Plan (25,854 Shares)	---	---	285	---	---	---	246	531
Tax Benefit for Disposition of Stock Options	---	---	37	---	---	---	---	37
Purchase of Treasury Stock
(69,446 Shares)	---	---	---	---	---	---	(1,867)	(1,867)
Acquisition of Common Stock by ESOP (6,100 Shares)	---	---	---	---	( 105)	---	---	( 105)
Allocation of ESOP Stock
(25,873 Shares)	---	---	86	---	522	---	---	608
Balance at December 31, 2001	9,970,376	$9,970	$99,459	$17,268	$(1,941)	$ 1,562	$(34,814)	$91,504

(Continued on Next Page)

(In Thousands, Except Share and Per Share Amounts)

						Accumulated
					Unallo-	Other Com-
	Common				cated	prehensive
	Shares	Common		Undivided	ESOP	Income	Treasury
	Issued	Stock	Surplus	Profits	Shares	(Loss)	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	---	---	---	18,894	---	---	---	18,894
Increase in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $1,027)	---	---	---	---	---	(617)	---	(617)
Net Unrealized Securities Holding Gains Arising During the Period, Net of Tax (Pre-tax $3,938)	---	---	---	---	---	2,368	---	2,368
Reclassification Adjustment for Net Securities Gains Included in Net Income, Net of Tax (Pre-tax $100)	---	---	---	---	---	(60)	---	(60)
Other Comprehensive Income								1,691
Comprehensive Income								20,585
5% Stock Dividend	498,519	499	14,516	(15,015)	---	---	---	---
Cash Dividends Declared,
$.95 per Share	---	---	---	(7,536)	---	---	---	(7,536)
Stock Options Exercised (67,670 Shares)	---	---	460	---	---	---	612	1,072
Shares Issued Under the Directors' Stock Plan (1,088 Shares)	---	---	23	---	---	---	10	33
Shares Issued Under the Employee Stock Purchase Plan (20,991 Shares)	---	---	353	---	---	---	194	547
Tax Benefit for Disposition of Stock Options	---	---	237	---	---	---	---	237
Purchase of Treasury Stock
(174,238 Shares)	---	---	---	---	---	---	(5,221)	(5,221)
Allocation of ESOP Stock
(5,895 Shares)	---	---	62	---	119	---	---	181
Balance at December 31, 2002	10,468,895	$10,469	$115,110	$13,611	$(1,822)	$ 3,253	$(39,219)	$101,402

Per share amounts have been adjusted for the 2002 five percent stock dividend.

Included in the shares issued for the stock dividend in 2002 were treasury shares of 116,150 and unallocated ESOP shares of 4,629.

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (In Thousands, Except Per Share Amounts)

Arrow Financial Corporation (the "Company") is a bank holding company organized in 1983 under the laws of New York and registered under the Bank Holding Company Act of 1956. The accounting and reporting policies of Arrow Financial Corporation and its subsidiaries conform to accounting principles generally accepted in the United States of America and general practices within the banking industry in all material respects.

Principles of Consolidation - The financial statements of the Company and its wholly owned subsidiaries are consolidated and all material intercompany transactions have been eliminated. In the "Parent Company Only" financial statements in Note 25, the investment in wholly owned subsidiaries is carried under the equity method of accounting. When necessary, prior years' consolidated financial statements have been reclassified to conform with the current financial statement presentation.

Cash and Cash Equivalents - Cash and cash equivalents in the Consolidated Statements of Cash Flows include the following items: cash at branches, due from bank balances, cash items in the process of collection and federal funds sold.

Securities - Management determines the appropriate classification of securities at the time of purchase. Securities reported as held-to-maturity are those debt securities which the Company has both the positive intent and ability to hold to maturity and are stated at amortized cost. Securities available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income or loss, net of taxes. Realized gains and losses are based upon the amortized cost of the specific security sold. Any unrealized losses on securities which reflect a decline in value which is other than temporary are charged to income. The cost of securities is adjusted for amortization of premium and accretion of discount, which is calculated on an effective interest rate method.

Loans and Allowance for Loan Losses - Interest income on loans is accrued and credited to income based upon the principal amount outstanding. Loan fees and costs directly associated with loan originations, where material, are deferred and amortized as an adjustment to yield over the lives of the loans originated.

Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest (generally 90 days) or a judgment by management that the full repayment of principal and interest is unlikely.

The allowance for loan losses is maintained by charges to operations based upon management's evaluation of the loan portfolio, current economic conditions, past loan losses and other factors. In management's opinion, the balance is sufficient to provide for probable loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company's market area. In addition, various Federal and State regulatory agencies, as an integral part of their examination process, review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance in future periods, based on their judgments about information available to them at the time of their examination which may not be currently available to management.

The Company accounts for impaired loans under Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended, requires that impaired loans, except for large groups of smaller-balance homogeneous loans, be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment reserve is recognized as part of the allowance for loan losses. The Company applies the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250, and to all loans restructured subsequent to the adoption of SFAS No. 114. Allowances for loan losses for the remaining loans are recognized in accordance with SFAS No. 5. Under the provisions of SFAS No. 114, the Company determines impairment for collateralized loans based on fair value of the collateral less estimated costs to sell. For other loans, impairment is determined by comparing the recorded investment in the loan to the present value of the expected cash flows, discounted at the loan's effective interest rate. The Company determines the interest income recognition method on a loan-by-loan basis. Based upon the borrowers' payment histories and cash flow projections, interest recognition methods include full accrual or cash basis.

Other Real Estate Owned and Repossessed Assets - Real estate acquired by foreclosure and assets acquired by repossession are recorded at the lower of the recorded investment in the loan or the fair value of the property less estimated costs to sell. Subsequent declines in fair value, after transfer to other real estate owned and repossessed assets, are recognized through a valuation allowance. Such declines in fair value along with related operating expenses to administer such properties or assets are charged directly to operating expense.

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization included in operating expenses are computed largely on the straight-line method. The provision is based on the estimated useful lives of the assets and, in the case of leasehold improvements, amortization is computed over the terms of the respective leases or their estimated useful lives, whichever is shorter. Gains or losses on disposition are reflected in earnings.

Income Taxes - The Company accounts for income taxes under the asset and liability method required by SFAS No. 109. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. The Company's policy is that deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Goodwill and Other Intangible Assets - The Company adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions," during the quarter ended September 30, 2002. SFAS No. 147 affects the accounting for an unidentifiable intangible asset acquired in the acquisition of a bank or thrift (including acquisitions of branches), where the fair value of the liabilities assumed exceeded the fair value of the assets acquired. Under SFAS No. 147, if such a transaction met the criteria for a business combination, the carrying amount of the unidentifiable intangible asset is reclassified to goodwill (reclassified goodwill) as of the date SFAS No. 142 was applied in its entirety, which for the Company was January 1, 2002. The carrying amounts of any recognized intangible assets that meet the recognition criteria of SFAS No. 141 that have been included in the amount reported as an unidentifiable intangible asset, and for which separate accounting records have been maintained, should be accounted for apart from the unidentifiable intangible asset and should not be reclassified to goodwill. The reclassified goodwill should be accounted for and reported prospectively as goodwill under SFAS No. 142, for which amortization is not required, but which must be evaluated annually for impairment. Prior to the adoption of SFAS No. 147, effective January 1, 2002, the Company's unidentifiable intangible asset was being amortized over 15 years on a straight-line basis.

Management concluded that the acquisition of branches that gave rise to the unidentifiable intangible asset was a business combination under SFAS No. 147, and therefore ceased amortizing the reclassified goodwill retroactive to January 1, 2002. The carrying amount of the unidentifiable intangible asset related to the branch acquisitions and reclassified as goodwill was $9,297 as of January 1, 2002.

The carrying amounts of recognized intangible assets that meet the recognition criteria of SFAS No. 141 and for which separate accounting records have been maintained, primarily core deposit intangibles, have been included in the consolidated balance sheet as Other Intangible Assets, Net. Core deposit intangibles are being amortized on a straight-line basis over a period of 15 years.

SFAS No. 147 required the Company to complete, by December 31, 2002, the transitional impairment testing for the reclassified goodwill as of January 1, 2002, under the guidance provided in SFAS No. 142. Based on the transitional impairment test performed by management, the reclassified goodwill was not impaired as of January 1, 2002.

Pension and Postretirement Benefits - The Company maintains a non-contributory, defined benefit pension plan covering substantially all employees, as well as a supplemental pension plan covering certain executive officers selected by the Board of Directors. The costs of these plans, based on actuarial computations of current and future benefits for employees, are charged to current operating expenses. The Company also provides certain post-retirement medical, dental and life insurance benefits to substantially all employees and retirees. The cost of post-retirement benefits other than pensions is recognized on an accrual basis as employees perform services to earn the benefits.

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation Plans - The Company has two stock-based compensation plans, which are described more fully in Notes 17 and 18. The Company accounts for those 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 is reflected in net income (other than for certain stock appreciation rights granted in 1992 and earlier, all of which have been exercised as of December 31, 2002), as all options granted under those plans have 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. See also Note 14.

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

	Year Ended December 31,
	2002	2001	2000
Net Income, as Reported	$18,894	$15,816	13,681
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	349	345	307
Pro Forma Net Income	$18,545	$15,471	$13,374
Earnings per Share:
Basic - as Reported	$2.37	$1.97	$1.70
Basic - Pro Forma	2.33	1.93	1.67
Diluted - as Reported	2.32	1.94	1.69
Diluted - Pro Forma	2.28	1.90	1.65

The weighted-average fair value of options granted during 2002, 2001 and 2000 was $7.61, $6.32 and $3.56, respectively. 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 2002, 2001 and 2000, respectively: dividend yields of 3.24%, 3.30% and 4.00%; expected volatility of 27.5%, 25.4% and 23.1%; risk free interest rates of 3.13%, 4.50% and 5.43%; and expected lives of 7.0 years for each year. The effects of applying SFAS No. 123 on the pro forma net income may not be representative of the effects on pro forma net income for future years. As reported in Note 17, the Company sponsors an Employee Stock Purchase Plan (ESPP) with a 15% discount. Under SFAS No. 123, the ESPP is considered compensatory and the entire discount is considered to be compensation expense in the pro forma disclosures.

Securities Sold Under Agreements to Repurchase - In securities repurchase agreements, the Company receives cash from a counterparty in exchange for the transfer of securities to a third party custodian's account that explicitly recognizes the Company's interest in the securities. These agreements are accounted for by the Company as secured financing transactions since it maintains effective control over the transferred securities and meets other criteria for such accounting as specified in SFAS No. 140. Accordingly, the cash proceeds are recorded as borrowed funds and the underlying securities continue to be carried in the Company's securities available-for-sale portfolio.

Earnings Per Share ("EPS") - Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company's stock options), computed using the treasury stock method. Unallocated common shares held by the Company's Employee Stock Ownership Plan are not included in the weighted average number of common shares outstanding for either the basic or diluted EPS calculation.

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial Instruments - The Company is a party to certain financial instruments with off-balance sheet risk, such as: commercial lines of credit, construction lines of credit, overdraft protection, home equity lines of credit and standby letters of credit. The Company's policy is to record such instruments when funded. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that contributes net fee income annually. The value of trust department customer relationships is not considered a financial instrument, and therefore this value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred taxes, premises and equipment, the value of low-cost long-term core deposits and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

The carrying amount of the following short-term assets and liabilities is a reasonable estimate of fair value: cash and due from banks, federal funds sold and purchased, securities sold under agreements to repurchase, demand deposits, savings, N.O.W. and money market deposits, other short-term borrowings, accrued interest receivable and accrued interest payable. The fair value estimates of other on- and off-balance sheet financial instruments, as well as the method of arriving at fair value estimates, are included in the related footnotes and summarized in Note 24. As of December 31, 2002 and 2001, and during 2002, 2001 and 2000, the Company had no derivative instruments within the meaning of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended.

Trust Assets and Fiduciary Income - Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the consolidated balance sheets since these assets are not assets of the Company. Income from fiduciary activities is reported on the accrual basis.

Segment Reporting - Management evaluates the operations of the Company based solely on one business segment - commercial banking, which constitutes the Company's only segment for financial reporting purposes. The Company operates primarily in northern New York State in Warren, Washington, Saratoga, Essex and Clinton counties and surrounding areas.

Management's Use of Estimates -The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains appraisals for properties. The allowance for loan losses is management's best estimate of probable loan losses incurred as of the balance sheet date. While management uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

NOTE 2: CASH AND DUE FROM BANKS (In Thousands)

The bank subsidiaries are required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank. The total amount of the required reserve at December 31, 2002 and 2001 was approximately $13,085 and $11,459, respectively.

NOTE 3: SECURITIES (In Thousands)

The fair value of securities, except certain state and municipal securities, is estimated based on published prices or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources, so fair value estimates are based on the discounted contractual cash flows using estimated market discount rates that reflect the credit and interest rate risk inherent in the instrument, or for short-term securities, the carrying amount.

A summary of the amortized costs and the approximate fair values of securities at December 31, 2002 and 2001 is presented below:

Securities Available-for-Sale:

	Amortized Cost	Fair Value	Gross Unrealized Gains	Gross Unrealized Losses
December 31, 2002:
U.S. Treasury and Agency Obligations	$ 58,538	$ 59,319	$ 781	$ ---
State and Municipal Obligations	17,653	17,984	331	---
Collateralized Mortgage Obligations	96,183	96,460	672	395
Other Mortgage-Backed Securities	128,990	133,872	4,883	1
Corporate and Other Debt Securities	8,984	9,316	332	---
Mutual Funds and Equity Securities	9,729	9,710	4	23
Total Securities Available-for-Sale	$320,077	$326,661	$7,003	$ 419
December 31, 2001:
U.S. Treasury and Agency Obligations	$ 6,499	$ 6,754	$ 255	$ ---
State and Municipal Obligations	10,274	10,248	69	95
Collateralized Mortgage Obligations	77,320	77,500	548	368
Other Mortgage-Backed Securities	135,931	137,809	2,061	183
Corporate and Other Debt Securities	10,978	11,432	458	4
Mutual Funds and Equity Securities	7,946	7,951	20	15
Total Securities Available-for-Sale	$248,948	$251,694	$3,411	$ 665

Securities Held-to-Maturity:

		Amortized Cost	Fair Value	Gross Unrealized Gains	Gross Unrealized Losses
December 31, 2002:
State and Municipal Obligations		$74,505	$79,476	$ 4,972	$ 1
December 31, 2001:
State and Municipal Obligations		$74,956	$75,786	$ 1,367	$ 537

NOTE 3: SECURITIES (Continued)

A summary of the maturities of securities as of December 31, 2002 is presented below. Mutual funds and equity securities, which have no stated maturity, are included in the over 10 year category. Collateralized mortgage obligations and other mortgage-backed securities are included in the schedule based on their expected average lives. Actual maturities may differ from the table below because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Securities:		Available-for-Sale		Held-to-Maturity
		Amortized Cost	Fair Value	Amortized Cost	Fair Value
Within One Year:
U.S. Treasury and Agency Obligations		$ 3,000	$ 3,021	$ ---	$ ---
State and Municipal Obligations		5,967	6,019	8,712	8,758
Collateralized Mortgage Obligations		10,212	10,242	---	---
Other Mortgage-Backed Securities		4,964	5,186	---	---
Corporate and Other Debt Securities		---	---	---	---
Total		24,143	24,468	8,712	8,758
From 1 - 5 Years:
U.S. Treasury and Agency Obligations		53,538	54,199	---	---
State and Municipal Obligations		10,183	10,379	25,341	27,376
Collateralized Mortgage Obligations		75,351	75,697	---	---
Other Mortgage-Backed Securities		111,181	115,574	---	---
Corporate and Other Debt Securities		5,989	6,321	---	---
Total		256,242	262,170	25,341	27,376
From 5 - 10 Years:
U.S. Treasury and Agency Obligations		2,000	2,099	---	---
State and Municipal Obligations		260	280	39,215	42,090
Collateralized Mortgage Obligations		10,620	10,521	---	---
Other Mortgage-Backed Securities		11,291	11,469	---	---
Corporate and Other Debt Securities		---	---	---	---
Total		24,171	24,369	39,215	42,090
Over 10 Years:
U.S. Treasury and Agency Obligations		---	---	---	---
State and Municipal Obligations		1,243	1,306	1,237	1,252
Collateralized Mortgage Obligations		---	---	---	---
Other Mortgage-Backed Securities		1,554	1,643	---	---
Corporate and Other Debt Securities		2,995	2,995	---	---
Mutual Funds and Equity Securities		9,729	9,710	---	---
Total		15,521	15,654	1,237	1,252
Total Securities		$320,077	$326,661	$74,505	$79,746