UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number: 0-12507
ARROW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York				22-2448962
(State or other jurisdiction of				(IRS Employer Identification
incorporation or organization)				Number)

250 GLEN STREET, GLENS FALLS, NEW YORK 12801
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (518) 745-1000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, Par Value $1.00
(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days .
	Yes X No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
		Yes X No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity as of June 30, 2004: $297,055,000
Indicate the number of shares outstanding of each of the registrant’s classes of common stock.
Class			Outstanding as of February 28, 2005
Common Stock, par value $1.00 per share			10,183,888

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2005 (Part III)

ARROW FINANCIAL CORPORATION

FORM 10-K – INDEX

	Page
Note on Terminology	3
Forward Looking Statements	3
Use of Non-GAAP Financial Measures	4
PART I
Item 1. Business	5
A. General	5
B. Lending Activities	6
C. Supervision and Regulation	7
D. Recent Legislative Developments	8
E. Critical Accounting Policies	9
F. Statistical Disclosure (Guide 3)	9
G. Competition	10
H. Executive Officers of the Registrant	10
I. Available Information	10
Item 2. Properties	11
Item 3. Legal Proceedings	11
Item 4. Submission of Matters to a Vote of Security Holders	11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6. Selected Financial Data	13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	14
A. Overview	14
B. Results of Operations	17
I. Net Interest Income	17
II. Provision for Loan Losses and Allowance for Loan Losses	23
III. Other Income	26
IV. Other Expense	28
V. Income Taxes	29
C. Financial Condition	30
I. Investment Portfolio	30
II. Loan Portfolio	33
a. Distribution of Loans	33
b. Risk Elements	36
III. Summary of Loan Loss Experience	39
IV. Deposits	40
V. Time Deposits of $100,000 or More	42
D. Liquidity	42
E. Capital Resources and Dividends	43
F. Off-Balance Sheet Arrangements	44
G. Contractual Obligations	44
H. Fourth Quarter Results	45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	46
Item 8. Financial Statements and Supplementary Data	47
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	85
Item 9A. Controls and Procedures	85
Item 9B. Other Information	85
PART III
Item 10. Directors and Executive Officers of the Registrant*	86
Item 11. Executive Compensation*	86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters *	86
Item 13. Certain Relationships and Related Transactions*	87
Item 14. Principal Accounting Fees and Services*	87
PART IV
Item 15. Exhibits and Financial Statement Schedules	87

Signatures	90

*These items are incorporated by reference to the Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2005.

NOTE ON TERMINOLOGY

In this Annual Report on Form 10-K, the terms “Arrow,” “the registrant,” “we,” “us,” and “our” generally refer to Arrow Financial Corporation and its subsidiaries, as a group, except where the context indicates otherwise.

At certain points in this Report, our performance is compared with that of our “peer group” of financial institutions. Peer data has been obtained from the September 2004 Federal Reserve Board’s “Bank Holding Company Performance Report.” Unless otherwise specifically stated, our peer group is comprised of the group of 207 domestic bank holding companies with $1 to $3 billion in total consolidated assets.

FORWARD-LOOKING STATEMENTS

The information contained in this Annual Report on Form 10-K contains statements that are not historical in nature but rather are based on our beliefs, assumptions, expectations, estimates and projections about the future. These statements are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as “expects,” “believes,” “anticipates,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. Some of these statements, such as those included in the interest rate sensitivity analysis in 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. Other forward-looking statements are based on our general perceptions of market conditions and trends in activity, both locally and nationally, as well as current management strategies for future operations and development.

Examples of forward-looking statements in this Report are referenced in the table below:

Topic	Section	Page	Location
Impact of Legislative Developments	Part I, Item 1.F.	8	Last sentence
Impact of Legal Claims	Part I, Item 3	11	2 ^nd paragraph
Pending Branch Acquisition	Part I, Item 1.A.	6	First paragraph
Impact of Changing Interest Rates on Earnings	Part II, Item 7.C.II.a.	33	“Indirect Loans”, last sentence
	Part II, Item 7.C.II.a.	34	Last paragraph
	Part II, Item 7.C.II.a.	35	3 ^rd paragraph
	Part II, Item 7.C.IV.	42	1 ^st paragraph
	Part II, Item 7A.	46	Last two paragraphs
Adequacy of the Allowance for Loan Losses	Part II, Item 7.B.II.	23	Last paragraph
	Part II, Item 7.B.II.	24	1 ^st paragraph
	Part II, Item 7.C.III.	39	2 ^nd paragraph under “ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES”
Liquidity	Part II, Item 7.D.	42	Last paragraph in “D. LIQUIDITY”
Dividend Capacity	Part II, Item 7.E.	43	Next to last paragraph

These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. In the case of all forward-looking statements, actual outcomes and results may differ materially from what the statements predict or forecast.

Factors that could cause or contribute to such differences include, but are not limited to, 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. We undertake no obligation to revise or update these forward-looking statements to reflect the occurrence of unanticipated events.

USE OF NON-GAAP FINANCIAL MEASURES

The Securities and Exchange Commission (SEC) has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making such disclosures must also disclose, along with the non-GAAP financial measures, certain additional information, including a reconciliation of the non-GAAP financial measures to the closest comparable GAAP financial measures and a statement of our reasons for utilizing the non-GAAP financial measures as part of Arrow's financial disclosures. At the same time that the SEC issued Regulation G, it also made amendments to Item 10 of Regulation S-K, requiring companies to make the same types of supplemental disclosures whenever they include non-GAAP financial measures in filings with the SEC. The SEC has exempted from the definition of “non-GAAP financial measures” certain specific types of commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures or SEC filings, supplemental information is not required. The following measures used in this Report may constitute "non-GAAP financial measures" within the meaning of the SEC's new rules, although we are unable to state with certainty that the SEC will so regard them.

Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income will be exempt from taxation (e.g., was received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added back to the net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income (pre-tax) to that of another institution, as each will have a different proportion of tax-exempt items in their portfolios. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution. We follow these practices.

The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of noninterest expense to net interest income and noninterest income. As in the case of net interest income generally, net interest income as utilized in calculating the efficiency ratio is typically expressed on a tax-equivalent basis. Moreover, most financial institutions, in calculating the efficiency ratio, also adjust both noninterest expense and noninterest income to exclude from these items (as calculated under GAAP) certain component elements, such as intangible asset amortization (deducted from noninterest expense) and securities gains or losses (excluded from noninterest income). We follow these practices.

PART I

Item 1. Business

A. GENERAL

Our holding company, Arrow Financial Corporation, 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. Arrow owns two nationally chartered banks in New York, Glens Falls National Bank and Trust Company, Glens Falls, New York (Glens Falls National), and Saratoga National Bank and Trust Company, Saratoga Springs, New York (Saratoga National), as well as seven non-bank subsidiaries, the operations of which are not significant. We own directly or indirectly all voting stock of all our subsidiaries.

	Subsidiary Banks (dollars in thousands)
	Glens Falls National Bank & Trust Co.	Saratoga National Bank & Trust Co.
Total Assets at Year-End	$1,213,605	$172,072
Trust Assets Under Administration and Investment Management at Year-End (Not Included in Total Assets)	$785,322	$16,392
Date Organized	1851	1988
Employees	374	28
Offices	24	3
Counties of Operation	Warren, Washington Saratoga, Essex & Clinton	Saratoga
Main Office	250 Glen Street Glens Falls, NY	171 So. Broadway Saratoga Springs, NY

Arrow’s business consists primarily of the ownership, supervision and control of our banks. The holding company provides various advisory and administrative services and coordinates the general policies and operation of the banks. There were 414 full-time equivalent employees at December 31, 2004.

We offer a full range of commercial and consumer banking and financial products. Our deposit base consists of deposits derived principally from the communities we serve. We target our lending activities to consumers and small and mid-sized companies in our immediate geographic areas. Through our banks' trust operations, we provide retirement planning, trust and estate administration services for individuals, and pension, profit-sharing and employee benefit plan administration for corporations.

In 2000, Arrow formed a subsidiary, North Country Investment Advisers, Inc. (NCIA), 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 our Banks.

In 2001, we 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 and offers these products at most of our full-service branches.

Recent Acquisitions: In November 2004, our lead bank, Glens Falls National, acquired all of the outstanding shares of common stock of Capital Financial Group, Inc. (CFG), an insurance agency headquartered in South Glens Falls, New York, which specializes in group health and life insurance products. The acquisition was structured as a tax-free exchange of Arrow’s common stock for CFG’s common stock. CFG’s president and staff continued with CFG after the acquisition. We recorded the following intangible assets as a result of the acquisition (none of which are deductible for income tax purposes): goodwill ($1.422 million), covenant ($117 thousand) and expirations ($686 thousand). The value of the covenant is being amortized over five years and the value of the expirations is being amortized over twenty years. Under the acquisition agreement, we issued 60,976 shares of Arrow’s common stock at closing. The agreement also provides for annual contingent future payments of Arrow common stock, based upon earnings, over a five-year period. We have concluded that, under criteria established by SFAS No. 141, these payments will be recorded as additional goodwill at the time of payment. The minimum contingent payment is zero and the maximum contingent payment is $3.0 million.

In December 2004, Arrow’s subsidiary banks entered into agreements to acquire from HSBC Bank USA, N.A. (“HSBC”) three bank branches located within the Banks’ service areas. Glens Falls National agreed to acquire two HSBC branches located in Argyle and Salem, New York, and Saratoga National agreed to acquire a branch located in Corinth, New York. The banks will acquire substantially all deposit liabilities, the physical facilities and certain loans related to the branches. The acquisitions are subject to receipt of all required regulatory approvals and satisfaction of certain other terms and conditions, and are expected to be completed in April 2005. Total deposits of the three branches are approximately $66 million and the related loans are approximately $11 million. We expect that the acquisition will result in total intangible assets of approximately $6 million.

B. LENDING ACTIVITIES

Arrow 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. We also maintain an active indirect lending program through our sponsorship of dealer programs, under which we purchase dealer paper from automobile and other dealers meeting pre-established specifications. We have periodically sold a portion of 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. Recent sales were of longer-term residential mortgage loans, with interest rates that were both fixed and historically low.

In addition to sales of loans into the secondary market, we have periodically securitized some of the mortgage loans in our portfolio. We securitized $11.5 million and $30.2 million of residential real estate loans in 2003 and 2001, respectively, with a combined remaining balance of $17.2 million at December 31, 2004. In the transactions, we sold mortgage loans and concurrently purchased an equivalent amount of guaranteed mortgage-backed securities issued by Freddie, with the sold loans representing the underlying collateral for the pooled securities. In addition to interest earned on loans, we receive 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, we continue 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 our 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”). Future cash payments may be applied all to principal, however, income in some cases may be recognized on a cash basis.

We lend primarily to borrowers within our 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. We do 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.

C. SUPERVISION AND REGULATION

The following generally describes the laws and regulations to which we are subject. Bank holding companies, banks and their affiliates 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 our business and prospects.

Arrow 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 (FRB). Additionally, as a “bank holding company” under New York state law, Arrow is subject to regulation by the New York State Banking Department. Our 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 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 Arrow 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 FRB 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. In addition, 48 of the 50 states permit banks headquartered in other states to establish branches in their states, although in some cases such branching may be achieved only by acquiring 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.D., “Recent Legislative Developments.”

An important area of banking regulation is the establishment by federal regulators of minimum capitalization standards for banks and bank holding companies. The FRB has adopted various "capital adequacy guidelines" for its use in the examination and supervision of bank holding companies. The FRB’s 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. Under final rules, issued February 28, 2005 by the FRB, trust preferred securities may also qualify as Tier 1 capital, in an amount not to exceed 25% of Tier 1 capital. The final rule limits restricted core capital elements to a percentage of the sum of core capital elements, net of goodwill less any associated deferred tax liability. We have issued trust preferred securities in each of the last two years. Up to half of total capital may consist of so-called "Tier 2" capital, comprising a limited amount of subordinated debt, preferred stock not qualifying as Tier 1 capital, certain other instruments and a limited amount of the allowance for loan losses. The FRB’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. Our subsidiary banks are subject to similar capital requirements adopted by their primary federal regulator, the OCC.

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. Arrow and each of our subsidiary banks currently qualify as “well capitalized.” The year-end 2004 capital ratios of Arrow and our 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 ratios or fails to meet 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 payment of dividends, our ability to pay dividends to our shareholders, and our subsidiary banks’ ability to pay dividends to our holding company, are also subject to various restrictions under applicable corporate laws, including banking laws (affecting subsidiary banks) and the New York Business Corporation Law (affecting the holding company). The ability of Arrow 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 Arrow nor any of our subsidiaries is now, or has been within the past year, subject to any formal or informal regulatory enforcement action or order.

D. RECENT LEGISLATIVE DEVELOPMENTS

The Sarbanes-Oxley Act (the Act), signed into law on July 30, 2002, adopted a number of measures having a significant impact on all publicly-traded companies, including Arrow. 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 Arrow'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 federal public company accounting oversight board to set auditing standards, inspect registered public accounting firms, and exercise enforcement powers, subject to oversight by the SEC. In the wake of the Sarbanes-Oxley Act, the nation’s stock exchanges, including our exchange, the National Association of Securities Dealers, Inc. (NASD), promulgated a wide array of good governance standards that must be adopted by listed companies. The NASD standards include having a Board of Directors the majority of whose members are independent of management, and having audit, compensation and nomination committees of the Board consisting exclusively of independent directors.

The USA Patriot Act of 2001, as amended (the Patriot Act), has imposed substantial new record-keeping and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money-laundering transactions involving domestic or international customers. The U.S. Treasury Department has issued and will continue to issue regulations clarifying the Patriot Act's requirements. The Patriot Act requires all "financial institutions," as defined, to establish certain anti-money laundering compliance and due diligence programs.

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. For example, under GLBA 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 C., “Supervision and Regulation,” above). We have not as yet elected to become a “financial holding company” but continue to evaluate the opportunities provided by GLBA. Under GLBA, as well as the Fair Credit Reporting Act amendment of 2003, all financial institutions have become subject to more stringent customer privacy regulations.

The FDIC levies a deposit insurance premium on insured banks, such as our banks. Since 1996, the premium paid by the best-rated banks (including our 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 our 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. Beginning in 2000, the BIF and SAIF rates were equalized. The BIF rate for institutions with the lowest risk classification (including our banks) was 1.440 cents per $100 of insured deposits at December 31, 2004.

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

E. CRITICAL ACCOUNTING POLICIES

In order to prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we were 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. We consider the following to be critical accounting policies:

The allowance for loan losses: 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 significant downward trend in the economy, regional or national, may require us to increase the allowance for loan losses resulting in a negative impact on our results of operations and financial condition.

Liabilities for retirement plans: We have 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, our own operations or applicable law may result in material changes to our liability for postretirement expense, with consequent impact on our results of operations and financial condition.

Valuation allowance for deferred tax assets: Statement of Financial Accounting Standards No. 109 requires a reduction in the carrying amount of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. Our analysis of the need for a valuation allowance for deferred tax assets is, in part, based on an estimate of future taxable income.

Goodwill: SFAS No. 142 requires that goodwill be tested for impairment at a level of reporting referred to as a reporting unit. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

Other than temporary decline in the value of debt and equity securities: SFAS No. 115 requires that, for individual securities classified as either available-for-sale or held-to-maturity, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. For example, if it is probable that the investor will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in earnings. A significant economic downturn might result in an other-than-temporary impairment in securities held in our portfolio.

F. 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 10.

G. COMPETITION

Arrow faces intense competition in all markets we serve. 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 the transactional deposit 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 Arrow and our subsidiary banks. As a result of the Gramm-Leach-Bliley Act, such non-banking financial organizations now may be in a position not only to offer comparable products to those offered by us, but actually to establish or acquire their own commercial banks.

H. EXECUTIVE OFFICERS OF THE REGISTRANT

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

Name	Age	Positions Held and Years from Which Held
Thomas L. Hoy	56	President and CEO since January 1, 1997. 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 Arrow since 1974.
John J. Murphy	53	Executive Vice President, Treasurer and CFO since 1993. Mr. Murphy was Senior Vice President, Treasurer and CFO of Arrow back to 1983. Mr. Murphy has been with the Arrow since 1973.
John C. Van Leeuwen	61	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 Arrow since 1985.
Gerard R. Bilodeau	58	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 Arrow since 1969.

I. AVAILABLE INFORMATION

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. We also make available on the internet website various other documents related to corporate operations, including Corporate Governance Guidelines (By-laws) and the charters of principal committees of the Board of Directors, and our Code of Ethics. We have adopted a financial code of ethics that applies to Arrow’s chief executive officer, chief financial officer and principal accounting officer. We have also adopted a business code of ethics that applies to all directors, officers and employees. Both are available on our website: www.arrowfinancial.com .

Item 2. Properties

Our main offices are at 250 Glen Street, Glens Falls, New York. The building is owned by us and serves as the main office for Glens Falls National Bank. We own 22 branch offices, 19 of them belonging to Glens Falls National, and lease four others at market rates.

In the opinion of management, the physical properties of Arrow and our subsidiary banks are suitable and adequate. For more information on our properties, see Notes 1, 6 and 22 to the Consolidated Financial Statements contained in Part II, Item 8 of this Report.

Item 3. Legal Proceedings

We are not the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of our business.

On an ongoing basis, we are the subject of or a party to various legal claims, which arise in the normal course of our 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 2004.

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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. These prices and the cash dividends per share have been restated for our September 2004 three percent stock dividend.

	2004			2003
	Sales Price		Cash Dividends	Sales Price		Cash Dividends
	Low	High	Declared	Low	High	Declared
First Quarter	$26.806	$30.340	$.214	$21.825	$24.194	$.194
Second Quarter	27.427	29.903	.223	21.988	26.058	.202
Third Quarter	25.748	31.544	.223	24.466	27.899	.202
Fourth Quarter	27.990	33.000	.230	25.194	28.883	.214

The payment of dividends by Arrow is at the discretion of its Board of Directors and is dependent upon, among other things, our 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 5,294 holders of record of Arrow’s common stock at December 31, 2004. Arrow has no other class of stock outstanding.

Unregistered Sales of Equity Securities

On November 29, 2004, Arrow issued 60,976 shares of its common stock to the sole shareholder of Capital Financial Group, Inc. (CFG), an insurance agency engaged in the sale of group health and life insurance products, in connection with the acquisition of CFG by our subsidiary bank, Glens Falls National. See “Recent Acquisitions” on page 5 of this Report for more information regarding the transaction. The shares were issued without registration under the Securities Act of 1933, as amended, in reliance upon the exemption for such registration set forth in Section 3(a)(II) of the Act and Rule 147 promulgated by the Securities and Exchange Commission thereunder. In the transaction, structured as a merger of a newly formed subsidiary of Glens Falls National with and into CFG, Glens Falls National acquired 100 percent of the outstanding shares of CFG.

Issuer Purchases of Equity Securities

The following table presents information about purchases by Arrow during the three months ended December 31, 2004 of our own equity securities registered pursuant to section 12 of the Securities Exchange Act of 1934 (i.e., Arrow Financial Corporation’s Common Stock):

Fourth Quarter Calendar Month	Total Number of Shares Purchased ¹	Average Price Paid Per Share ¹	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ²	Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs ²
October	---	---	---	3,728,161
November	9,230	$31.20	---	3,728,161
December	15,218	32.05	---	3,728,161
Total	24,448	31.73	---

¹ The total number of shares purchased and the average price paid per share include shares purchased in open market transactions under the Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the DRIP) by the administrator of the DRIP and shares surrendered to Arrow by holders of options to acquire Arrow common stock in connection with the exercise of such options. In the months indicated, the listed number of shares purchased included the following numbers of shares purchased through such methods: November 2004 – option exercises (9,230 shares); December 2004 – DRIP purchases (14,701 shares), option exercises (517 shares)

² Includes only shares subject to publicly-announced stock repurchase programs. Does not include shares purchased or subject to purchase under the DRIP or any compensatory stock plan.

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 :	2004	2003	2002	2001	2000
Interest and Dividend Income	$68,443	$70,731	$75,145	$78,357	$75,624
Interest Expense	19,206	21,610	25,106	33,172	37,368
Net Interest Income	49,237	49,121	50,039	45,185	38,256
Provision for Loan Losses	1,020	1,460	2,288	2,289	1,471
Net Interest Income After Provision for Loan Losses	48,217	47,661	47,751	42,896	36,785
Other Income ¹	12,830	11,592	11,213	10,324	10,784
Net Gains (Losses) on Securities Transactions	362	755	100	195	(595)
Other Expense ²	32,972	32,485	31,397	30,544	27,582
Income Before Provision for Income Taxes	28,437	27,523	27,667	22,871	19,392
Provision for Income Taxes	8,959	8,606	8,773	7,055	5,711
Net Income	$19,478	$18,917	$18,894	$15,816	$13,681

Earnings Per Common Share: ³
Basic	$ 1.92	$ 1.86	$ 1.84	$ 1.53	$ 1.32
Diluted	1.88	1.82	1.80	1.51	1.31

Per Common Share: ³
Cash Dividends	$.89	$.81	$ .73	$.64	$.56
Book Value	11.58	10.51	9.93	8.87	7.85
Tangible Book Value ⁴	10.43	9.57	8.98	7.90	6.79

Consolidated Year-End Balance Sheet Data:
Total Assets	$1,377,949	$1,373,920	$1,271,421	$1,151,007	$1,081,354
Securities Available-for-Sale	325,248	349,831	326,661	251,694	229,026
Securities Held-to-Maturity	108,117	105,776	74,505	74,956	60,580
Loans	875,311	855,178	811,292	755,124	735,769
Nonperforming Assets	2,245	2,687	2,756	3,798	2,630
Deposits	1,032,280	1,046,616	958,007	885,498	858,925
Federal Home Loan Bank Advances	150,000	150,000	145,000	115,000	85,200
Other Borrowed Funds	63,976	55,936	53,498	42,645	42,697
Shareholders’ Equity	118,034	105,865	101,402	91,504	80,781

Selected Key Ratios:
Return on Average Assets	1.40%	1.42%	1.55%	1.41%	1.30%
Return on Average Equity	17.54	18.34	19.49	18.17	18.60
Dividend Payout	47.34	44.68	41.08	42.58	42.96

¹ Other Income in 2000 included 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 adoption of SFAS No. 147. Goodwill amortization amounted to $888

in 2001 and 2000.

³ Share and per share amounts have been adjusted for subsequent stock splits and dividends, including the most recent September 2004 3% stock

dividend

⁴ Tangible book value excludes intangible assets from total equity .

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

The following discussion and analysis focuses on and reviews our results of operations for each of the years in the three-year period ended December 31, 2004 and our financial condition as of December 31, 2004 and 2003. The discussion below should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein.

A. OVERVIEW

Selected Quarterly Information:

(Dollars In Thousands, Except Per Share Amounts)

Share and per share amounts have been adjusted for subsequent stock splits and dividends, including the most recent September 2004 3% stock dividend.

	Dec 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Net Income	$4,948	$4,968	$4,698	$4,865	$4,787

Transactions Recorded in Net Income (Net of Tax):
Net Securities Gains (Losses)	97	(5)	---	126	1
Net Gains on Sales of Loans	91	43	16	52	1
Recovery Related to Former Vermont Operations	---	---	---	46	---

Period End Shares Outstanding	10,196	10,109	10,120	10,124	10,072
Basic Average Shares Outstanding	10,140	10,108	10,123	10,116	10,105
Diluted Average Shares Outstanding	10,384	10,342	10,358	10,358	10,358
Basic Earnings Per Share	.49	.49	.46	.48	.47
Diluted Earnings Per Share	.48	.48	.45	.47	.46
Cash Dividends Per Share	.23	.22	.22	.21	.21
Stock Dividends/Splits	---	3%	---	---	---

Average Assets	$1,389,030	$1,387,233	$1,396,678	$1,378,752	$1,386,271
Average Equity	115,287	110,619	109,416	108,877	103,955
Return on Average Assets	1.42%	1.42%	1.35%	1.42%	1.37%
Return on Average Equity	17.07	17.87	17.27	17.97	18.27

Average Earning Assets	$1,318,540	$1,317,910	$1,329,145	$1,310,769	$1,319,122
Average Paying Liabilities	1,088,995	1,086,762	1,111,544	1,100,543	1,109,907
Interest Income, Tax-Equivalent ¹	17,672	17,670	17,717	17,938	18,402
Interest Expense	4,721	4,536	4,951	4,998	5,256
Net Interest Income, Tax-Equivalent ¹	12,951	13,134	12,766	12,940	13,146
Tax-Equivalent Adjustment	631	632	655	636	641
Net Interest Margin ¹	3.91%	3.96%	3.86	3.97%	3.95%
Efficiency Ratio Calculation : ¹
Noninterest Expense	$ 8,383	$ 8,290	$ 8,173	$ 8,126	$ 8,207
Less: Intangible Asset Amortization	(14 )	(9 )	(9 )	(9 )	(10 )
Net Noninterest Expense	$ 8,369	$ 8,281	$ 8,164	$ 8,117	$ 8,197
Net Interest Income, Tax-Equivalent ¹	$12,951	$13,134	$12,766	$12,940	$13,146
Noninterest Income	3,568	3,266	3,135	3,224	2,853
Less: Net Securities (Gains) Losses	(161 )	9	---	(210 )	(1 )
Net Gross Income	$16,358	$16,409	$15,901	$15,954	$15,998
Efficiency Ratio ¹	51.16%	50.4	51.34%	50.88%	51.24%
Period-End Capital Information :
Tier 1 Leverage Ratio	9.23%	8.62%	8.40%	8.37%	8.14%
Total Shareholders’ Equity (i.e. Book Value)	$118,034	$113,151	$108,240	$111,389	$105,865
Book Value per Share	11.58	11.19	10.70	11.00	10.51
Intangible Assets	11,736	9,478	9,476	9,479	9,463
Tangible Book Value per Share	10.43	10.26	9.76	10.07	9.57

Selected Quarterly Information, Continued:

	Dec 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Net Loans Charged-off as a Percentage of Average Loans, Annualized	.13%	.06%	.09%	.10%	.08%
Provision for Loan Losses as a Percentage of Average Loans, Annualized	.13	.09	.12	.13	.11
Allowance for Loan Losses as a Percentage of Loans, Period-end	1.38	1.37	1.38	1.39	1.38
Allowance for Loan Losses as a Percentage of Nonperforming Loans, Period-end	571.18	382.73	471.22	550.72	472.37
Nonperforming Loans as a Percentage of Loans, Period-end	.24	.36	.29	.25	.29
Nonperforming Assets as a Percentage of Total Assets, Period-end	.16	.24	.20	.16	.20

¹ See “Use of Non-GAAP Financial Measures” on page 4.

Selected Twelve-Month Information:

(Dollars In Thousands, Except Per Share Amounts)

Share and per share amounts have been adjusted for subsequent stock splits and dividends, including the most recent September 2004 3% stock dividend.

	Dec 2004	Dec 2003	Dec 2002
Net Income	$19,478	$18,917	$18,894

Transactions Recorded in Net Income (Net of Tax):
Net Securities Gains	218	454	60
Net Gains on Sales of Loans	202	294	61
Recovery Related to Former Vermont Operations	47	---	103
Demutualization Benefit from an Employee Group Insurance Trust	---	---	55
Net Gains on the Sale of Other Real Estate Owned	---	7	14

Period End Shares Outstanding	10,196	10,072	10,212
Basic Average Shares Outstanding	10,122	10,148	10,267
Diluted Average Shares Outstanding	10,364	10,382	10,501
Basic Earnings Per Share	1.92	1.86	1.84
Diluted Earnings Per Share	1.88	1.82	1.80
Cash Dividends Per Share	.89	.81	.73

Average Assets	$1,387,925	$1,332,405	$1,216,381
Average Equity	111,060	103,168	96,952
Return on Average Assets	1.40%	1.42%	1.55%
Return on Average Equity	17.54	18.34	19.49

Average Earning Assets	$1,319,087	$1,270,661	$1,158,490
Average Paying Liabilities	1,096,911	1,068,027	970,128
Interest Income, Tax-Equivalent ¹	70,997	73,130	77,285
Interest Expense	19,206	21,610	25,106
Net Interest Income, Tax-Equivalent ¹	51,791	51,520	52,179
Tax-Equivalent Adjustment	2,554	2,399	2,140
Net Interest Margin ¹	3.93%	4.05%	4.50%

Selected Twelve-Month Information, Continued:

	Dec 2004	Dec 2003	Dec 2002
Efficiency Ratio Calculation ¹
Noninterest Expense	$32,972	$32,485	$31,397
Less: Intangible Asset Amortization	(41 )	(37 )	(37 )
Net Noninterest Expense	$32,931	$32,448	$31,360
Net Interest Income, Tax-Equivalent ¹	$51,791	$51,520	$52,179
Noninterest Income	13,192	12,347	11,313
Less: Net Securities Gains	(362 )	(755 )	(100 )
Net Gross Income	$64,621	$63,112	$63,392
Efficiency Ratio ¹	50.96%	51.41%	49.47%
Period-End Capital Information :
Tier 1 Leverage Ratio (period-end)	9.23%	8.14%	7.32%
Total Shareholders’ Equity (i.e. Book Value)	$118,034	$105,865	$101,402
Book Value per Share	11.58	10.51	9.93
Intangible Assets	11,736	9,463	9,715
Tangible Book Value per Share	10.43	9.57	8.98

Net Loans Charged-off as a Percentage of Average Loans	.09%	.10%	.11%
Provision for Loan Losses as a Percentage of Average Loans	.12	.17	.30
Allowance for Loan Losses as a Percentage of Loans, Period-end	1.38	1.38	1.38
Allowance for Loan Losses as a Percentage of Nonperforming Loans, Period-end	571.18	472.37	436.89
Nonperforming Loans as a Percentage of Loans, Period-end	.24	.29	.32
Nonperforming Assets as a Percentage of Total Assets, Period-end	.16	.20	.22

¹ See “Use of Non-GAAP Financial Measures” on page 4.

Summary of 2004 Financial Results

We reported net income of $19.5 million for 2004, an increase of $561 thousand, or 3.0%, compared to 2003. Diluted earnings per share increased $.06, or 3.3%, from 2003. During 2004, the challenge of maintaining high quality earning assets in the face of falling net interest margins placed great pressure on our earnings. For the second consecutive year, our net interest margin decreased, reflecting the industry-wide trend that could effectively be offset only by growth and/or new lines of business. We continued to grow in 2004, albeit at a diminished rate compared to prior years. At year-end, we announced two acquisition transactions, which are expected to add three branches and approximately $66 million in deposits. See “Recent Acquisitions” on page 5.

At December 31, 2004, our tangible book value per share (calculated based on shareholders’ equity reduced by intangible assets including goodwill and other intangible assets) amounted to $10.43, an increase of $.85, or 8.9%, from year-end 2003. The increase was primarily attributable to retained earnings, offset in part, by periodic repurchases of our common stock and an increase in intangible assets resulting from an acquisition of an insurance agency in November 2004. As of the last trading day of 2004, the average of our bid and asked stock price was $31.23, resulting in a trading multiple of 2.99 to tangible book value.

The Board of Directors increased the quarterly cash dividend twice in 2004, to $.23 per share by the fourth quarter. Total cash dividends (as adjusted for stock dividends and stock splits) were $.89 for 2004, compared to $.81 for 2003, an increase of $.08, or 9.9%.

Nonperforming loans amounted to $2.1 million at December 31, 2004, a decrease of $398 thousand, or 15.9%, from the prior year-end. Loans charged-off (net of recoveries) against the allowance for loan losses were $816 thousand for 2004, as compared to a similar amount of $811 thousand for the prior year. At year-end 2004, the allowance for loan losses, at $12.0 million, represented a coverage ratio to total loans of 1.38%, unchanged from the prior year-end.

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 had the greatest impact on our results of operations for 2004 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
				2003 to 2004		2002 to 2003
	2004	2003	2002	Amount	%	Amount	%
Interest and Dividend Income	$70,997	$73,130	$77,285	$(2,133)	(2.9)%	$(4,155)	(5.4)%
Interest Expense	19,206	21,610	25,106	(2,404 )	(11.1)	(3,496 )	(13.9)
Net Interest Income	$51,791	$51,520	$52,179	$ 271	0.5	$ (659 )	(1.3)

On a tax-equivalent basis, net interest income was $51.8 million in 2004, an increase of $271 thousand, or 0.5%, from $51.5 million in 2003. This compared to a $659 thousand, or 1.3%, decrease between 2002 and 2003. Factors contributing to the increase in net interest income are discussed in the following portions of this Section B.I.

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) (Tax-equivalent basis)

	2004 Compared to 2003			2003 Compared to 2002
	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	$ 24	$ 21	$ 45	$ (130)	$ (85)	$ (215)
Securities Available-for-Sale:
Taxable	700	727	1,427	1,367	(3,577)	(2,210)
Non-Taxable	(241)	70	(171)	218	(84)	134
Securities Held-to-Maturity:
Taxable	(3)	---	(3)	(7)	(6)	(13)
Non-Taxable	926	(374)	552	949	(331)	618
Loans	1,146	(5,129 )	(3,983 )	5,139	(7,608 )	(2,469 )
Total Interest and Dividend Income	2,552	(4,685 )	(2,133 )	7,536	(11,691 )	(4,155 )

Interest Expense:
Deposits:
Interest-Bearing NOW Deposits	297	(757)	(460)	622	(885)	(263)
Regular and Money Market Savings	117	(370)	(253)	540	(1,492)	(952)
Time Deposits of $100,000 or More	(90)	(163)	(253)	(221)	(292)	(513)
Other Time Deposits	(486 )	(800 )	(1,286 )	(310 )	(1,646 )	(1,956 )
Total Deposits	(162)	(2,090)	(2,252)	631	(4,315)	(3,684)

Short-Term Borrowings	25	(12)	13	62	(260)	(198)
Long-Term Debt	365	(530 )	(165 )	1,077	(691 )	386
Total Interest Expense	228	(2,632 )	(2,404 )	1,770	(5,266 )	(3,496 )
Net Interest Income	$2,324	$(2,053 )	$ 271	$5,766	$(6,425 )	$ (659 )

The following table reflects the components of our net interest income, setting forth, for years ended December 31, 2004, 2003 and 2002 (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.

Average Consolidated Balance Sheets and Net Interest Income Analysis

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

(Dollars in Thousands)

Year Ended:	2004			2003			2002
		Interest	Rate		Interest	Rate		Interest	Rate
	Average	Income or	Earned	Average	Income or	Earned	Average	Income or	Earned
	Balance	Expense	or Paid	Balance	Expense	or Paid	Balance	Expense	or Paid
Federal Funds Sold	$ 11,068	$ 138	1.25%	$ 9,006	$ 93	1.03%	$ 19,418	$ 308	1.59%
Securities Available-for- Sale:
Taxable	323,684	13,454	4.16	306,371	12,027	3.93	277,657	14,236	5.13
Non-Taxable	10,837	509	4.70	16,089	680	4.23	11,119	547	4.92
Securities Held-to-Maturity:
Taxable	357	17	4.76	419	20	4.77	544	33	6.07
Non-Taxable	106,451	5,923	5.56	90,112	5,371	5.96	74,456	4,753	6.38
Loans	866,690	50,956	5.88	848,664	54,939	6.47	775,296	57,408	7.40
Total Earning Assets	1,319,087	70,997	5.38	1,270,661	73,130	5.76	1,158,490	77,285	6.67
Allowance for Loan Losses	(11,961)			(11,573)			(10,556)
Cash and Due From Banks	35,940			32,765			31,386
Other Assets	44,859			40,552			37,061
Total Assets	$1,387,925			$1,332,405			$1,216,381
Deposits:
Interest-Bearing NOW	$ 350,047	3,708	1.06	$ 325,593	4,168	1.28	$ 282,365	4,431	1.57
Regular and Money Market Savings	290,352	1,965	0.68	275,255	2,218	0.81	230,039	3,170	1.38
Time Deposits of $100,000 Or More	69,431	1,503	2.16	73,307	1,756	2.40	81,770	2,269	2.77
Other Time Deposits	174,887	4,301	2.46	192,682	5,587	2.90	201,253	7,543	3.75
Total Interest- Bearing Deposits	884,717	11,477	1.30	866,837	13,729	1.58	795,427	17,413	2.19
Short-Term Borrowings	47,433	377	0.79	44,272	364	0.82	39,468	562	1.42
Long-Term Debt	164,761	7,352	4.46	156,918	7,517	4.79	135,233 `	7,131	5.27
Total Interest- Bearing Funds	1,096,911	19,206	1.75	1,068,027	21,610	2.02	970,128	25,106	2.59
Demand Deposits	163,029			144,665			132,208
Other Liabilities	16,925			16,545			17,093
Total Liabilities	1,276,865			1,229,237			1,119,429
Shareholders’ Equity	111,060			103,168			96,952
Total Liabilities and Shareholders’ Equity	$1,387,925			$1,332,405			$1,216,381
Net Interest Income (Tax-equivalent Basis)		51,791			51,520			52,179
Reversal of Tax Equivalent Adjustment		(2,554 )			(2,399 )			(2,140 )
Net Interest Income		$49,237			$49,121			$50,039
Net Interest Spread			3.63%			3.74%			4.08%
Net Interest Margin			3.93%			4.05%			4.50%

CHANGES IN NET INTEREST INCOME DUE TO RATE

YIELD ANALYSIS (Tax-equivalent basis)	December 31,
	2004	2003	2002
Yield on Earning Assets	5.38%	5.76%	6.67%
Cost of Interest-Bearing Liabilities	1.75	2.02	2.59
Net Interest Spread	3.63 %	3.74 %	4.08 %
Net Interest Margin	3.93 %	4.05 %	4.50 %

We experienced a slight increase in net interest income of $271 thousand from 2003 to 2004. This reflected on the one hand the positive effect of an increase in average earning assets, which had a $2.3 million positive impact on net interest income, offset, in part, by the negative effect of a decrease in the net interest spread and net interest margin (i.e. changes in rates), which had a negative impact of $2.1 million on net interest income. For the change in net interest income from 2002 to 2003, we experienced a decrease in net interest income of $659 thousand, as the positive impact of an increase in average earning assets (a $5.8 million positive impact on net interest income) was more than offset by the negative impact of changes in the interest rate environment (a $6.4 million negative impact).

The following items have a major impact on changes in net interest income due to rate: general interest rate changes, the ratio of our rate sensitive assets to rate sensitive liabilities (interest rate sensitivity gap) during periods of interest rate changes and the level of nonperforming loans.

Key Interest Rate Changes 1999 – 2005

The Federal Reserve Board attempts to influence prevailing federal funds and prime interest rates, in part by determining where to set the Federal Reserve Bank discount rate. The following chart presents rate changes in recent years:

	Primary Credit	Federal
Date	Discount Rate	Funds Rate	Prime Rate
February 2, 2005	3.50%	2.50%	5.50%
December 14, 2004	3.25	2.25	5.25
November 10, 2004	3.00	2.00	5.00
September 21, 2004	2.75	1.75	4.75
August 10, 2004	2.50	1.50	4.50
June 30, 2004	2.25	1.25	4.25
June 25, 2003	2.00	1.00	4.00
January 9, 2003 (a)	2.25
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
(a) The discount window borrowing rate was discontinued in January 2003 and replaced with two rates, a primary credit rate and a secondary credit rate.

Our net interest margin has traditionally been sensitive to and impacted by changes in prevailing market interest rates. Generally, there has been a negative correlation between changes in prevailing interest rates and our net interest margin in immediately ensuing periods. When prevailing rates have declined, net interest margin generally has increased in immediately ensuing periods, and vice versa. The following analysis of the relationship between prevailing rates and our net interest margin and net interest income covers the period from 1999 to the present. As indicated in the preceding table, prevailing interest rates economy-wide increased in the second half of 1999 and throughout 2000, following a long period of flat or slowly-declining prevailing interest rates. The 1999 rate hikes had a moderately negative impact on our financial results for 1999, as we experienced decreases in net interest spread and net interest margin. However, the full negative impact of rising rates was felt more sharply in 2000, when the decrease in net interest margin due to rising rates was significant.

In the first quarter of 2001, after an extended period of stable interest rates and six months of moderate rate increases, the Federal Reserve Board 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 425 basis points. For the following eleven months there were no rate changes, but the Federal Reserve Board then decreased rates another 50 basis points in November 2002 and followed with an additional 25 basis point decrease in September 2003. As a result of this multi-year decrease in prevailing rates, we experienced a decrease in the cost of deposits in all quarters of 2001, which continued throughout 2002, 2003 and into 2004. We also experienced a decrease in the average yield in our loan portfolio during these years, although the decrease in our loan yield generally trailed, or lagged behind, our cost of deposits by three to six months resulting in higher margins and higher net interest income during the earlier portions of this declining rate period.

During 2003 and 2004, the effect of the Federal Reserve’s rate decreases on our deposit rates began to diminish, because rates on several of our deposit products, such as savings and NOW accounts, were already priced at such low levels that further significant decreases in the rates for such products was not practical or sustainable. Yields on our loan portfolio, however, continued to fall significantly in 2003 and 2004, putting serious pressure on the net interest margin. Thus the decreasing rate environment had a positive impact on net interest income during 2001 and 2002, as net interest margins increased both years, but for 2003 and 2004 the low rate environment had a negative impact on net interest margin.

The net interest margin for the full year of 2003 was 4.05%, a decrease of 45 basis points, or 10.0%, from the prior year. During 2003 the yields on earning assets fell 91 basis points, while the cost of paying liabilities fell only 57 basis points.

First Quarter 2004: The net interest margin for the first quarter of 2004 was 3.97%, an increase of 2 basis points from the net interest margin for the fourth quarter of 2003. However, in the first quarter of 2004, both the yields on average earning assets and the cost of paying liabilities decreased slightly from the fourth quarter of 2003.

Second Quarter 2004: The net interest margin for the second quarter of 2004 was 3.86%, a decrease of 11 basis points from the net interest margin for the first quarter of 2004. Yields on average earning assets decreased 14 basis points from the first quarter, while the cost of paying liabilities only decreased 4 basis points.

Third Quarter 2004: As the above table indicates, the Federal Reserve reversed direction in the second quarter of 2004 and began to increase prevailing rates with five successive 25 basis point increases in the federal funds rate in 2004, and one more, so far, in 2005. This change in direction did not immediately impact either our cost of paying liabilities or our yield on earning assets, both because of normal time-lag in the responsiveness of such rates to Federal Reserve actions and for reasons unique to our portfolios. The change in the mix of our total deposits in the third quarter of 2004, reflecting our decision to de-emphasize certain high cost municipal deposits, had a positive impact on net interest margin for the third quarter, which increased by 10 basis points to 3.96% from the second quarter. The cost of all NOW accounts fell from 1.21% for the second quarter to .80% for the third quarter. The yield on earning assets, meanwhile, only decreased 3 basis points from the prior quarter.

Fourth Quarter 2004: Generally, by the end of the third quarter of 2004, the increases in the target federal funds rate started to have the expected impact on our net interest margin. Rates paid on new time deposits by the end of the quarter were higher than the rates on maturing time deposits. Our net interest margin for the fourth quarter of 2004 was 3.91%, a decrease of 5 basis points from the third quarter. There was very little change in rates paid on average earning assets from the third quarter to the fourth quarter. The decrease in net interest margin was primarily due to the fact that, in the aggregate, the cost of deposits and other borrowed funds was increasing faster than rates on earning assets.

We are not able to predict how long it will be before the recent increase in prevailing rates or any possible future increases may result in an increase in our yield on earning assets, or whether or for how long our net interest margin may continue to decrease, adversely affecting earnings. However, the yield on our average loan balances for the fourth quarter of 2004 was only one basis point below the yield for the third quarter of 2004.

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

A discussion of the impact on net interest income resulting from changes in interest rates vis a vis the repricing patterns of our 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
				2003 to 2004		2002 to 2003
	2004	2003	2002	Amount	%	Amount	%
Earning Assets	$1,319,087	$1,270,661	$1,158,490	$48,426	3.8%	$112,171	9.7%
Interest-Bearing Liabilities	1,096,911	1,068,027	970,128	28,884	2.7	97,899	10.1
Demand Deposits	163,029	144,665	132,208	18,364	12.7	12,457	9.4
Total Assets	1,387,925	1,332,405	1,216,381	55,520	4.2	116,024	9.5
Earning Assets to Total Assets	95.04%	95.37%	95.24%	(.33)%	(0.3)	.13%	0.1

2004 vs. 2003:

In general, an increase in average earning assets has a positive impact on net interest income, assuming a positive spread between the cost paid on interest-bearing liabilities and the yield earned on interest-bearing assets. For 2004, average earning assets increased $48.4 million over 2003, while average paying liabilities only increased $28.9 million. This combination led to a $2.3 million increase in net interest income (offset by the $2.1 million decrease due to changing rates discussed above).

The $48.4 million increase in average earning assets from 2003 to 2004 reflected an increase in average loans of $18.0 million, or 2.12%, and an increase in average investment securities of $28.3 million, or 6.9%. Within the loan portfolio, the average balance of indirect loans (which represented the second largest segment of the loan portfolio) actually decreased by $18.4 million, or 5.7%. Indirect loans are primarily auto loans financed through local dealerships from whom we acquire the dealer paper. This decrease was more than offset by increases in the average balances of commercial and commercial real estate loans ($15.4 million, or 8.7%), residential real estate loans ($20.1 million, or 4.2%) and other consumer loans ($1.0 million, or 11.8%).

The $28.9 million increase in average paying liabilities resulted from a $41.1 increase in interest-bearing nonmaturity deposits and an $11.0 million increase in other borrowed funds, offset in part by a decrease of $23.2 million in time deposits.

The fact that average earning assets grew at a faster pace than average paying liabilities was primarily due to an $18.4 million, or 12.7%, increase in the average balance on non-interest bearing demand deposits.

2003 vs. 2002:

During 2003 average earning assets increased $112.2 million, an increase of 9.7%. Average paying liabilities increased by $97.9 million, or 10.1%. The combined effect of these changes in volume was to increase net interest income by approximately 11.1%, before giving effect to the 12.3% negative impact on net interest income between the two years resulting from the change in interest rates discussed above.

During 2003, we experienced growth in our average earning assets primarily within the loan portfolio (which accounted for approximately 65% of the increase) and secondarily within the investment portfolio (approximately 35%).

In comparing year-to-date average balances, the fastest growing segment of the loan portfolio in 2003 was residential real estate loans. While some of the segment growth represented extensions in connection with refinancing of existing loans, most of the growth was from new mortgage loans in 2003. The average balance of residential mortgage loans increased by over $41 million, or 15.8%. Commercial and commercial real estate lending represented the second largest growth area in the portfolio, expanding by over $20 million, or 14.8%. The average balance of indirect consumer lending increased by over $13 million in 2003, or 4.3%. Changes in the loan portfolio are discussed in more detail in the following section C.II. “Loan Portfolio.”

The $97.9 million increase in average paying liabilities in 2003 was experienced primarily in traditional banking deposit products, which increased by $79.9 million, or 11.2%, from the prior year, and secondarily in Federal Home Loan Bank (FHLB) borrowings, which increased by $17.3 million, or 13.3%. The increase in deposit balances during 2003 was generated by our pre-existing branch network, although Glens Falls National Bank did open its twenty-fourth branch in 2003 (in Queensbury, NY). No other branches were added or acquired in 2003. Changes in the deposit balances are discussed in more detail in the following section C.IV. “Deposits.”

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

We consider our accounting policy relating to the allowance for loan losses to be a critical accounting policy, given the 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 may have on our results of operations. In addition to the following discussion, see Note 1 to the consolidated financial statements, included in Item 8 of this Report, for a description of our 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 the inherent risk of loss in the current portfolio. Actual loan losses are charged against this allowance when loans are deemed uncollectible. In evaluating the adequacy of the allowance for loan losses, we consider 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, recent changes in the mix and volume of loan categories within the loan portfolio and overall changes in the size of the portfolio.

2004 vs. 2003:

At December 31, 2004, the quality of our loan portfolio remained strong and, to date, had not been negatively affected by the loan growth experienced in recent periods. At period-end, our ratio of nonperforming loans (loans 90 days or more past due and accruing interest plus nonaccrual loans) as a percentage of total loans was .24%. The September 30, 2004 ratio for our peer group was .63%. At December 31, 2004, nonperforming loans amounted to $2.1 million, a decrease of $398 thousand, or 15.9%, from the balance at year-end 2003.

While we believe that the 2004 year-end allowance of $12.0 million 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, will not require increased provisions to the allowance or result in a higher incidence of loan charge-offs.

The provision for loan losses was $1.0 million for 2004, a decrease of $440 thousand, or 30.1%, from 2003. The provision was reduced, despite the growth in the loan portfolio, because asset quality indicators improved. During 2004, loan losses charged against the allowance, net of recoveries, were $816 thousand, virtually unchanged from the 2003 amount. The result was a $204 thousand, or 1.7%, increase in the allowance. Because loans increased by a similar percentage during the year, our coverage ratio, (allowance to period-end loans) was the same at year-end 2004 as at year-end 2003 (1.38%). Net charge-offs as a percentage of average loans outstanding was .09% for 2004, down slightly from .10% for 2003. Net charge-offs, on an annualized basis, for our peer group at September 30, 2004 was .16% of average loans. If the current economic conditions should worsen, we anticipate that net charge-offs may exceed the levels experienced in recent years.

2003 vs. 2002:

At period-end 2003, the ratio of our nonperforming loans (loans 90 days or more past due and accruing interest plus nonaccrual loans) to total loans was .29%. The September 30, 2003 ratio for our peer group was .80%. At December 31, 2003, nonperforming loans amounted to $2.5 million, a decrease of $55 thousand, or 2.1%, from the balance at year-end 2002.

The provision for loan losses was $1.5 million for 2003, a decrease of $828 thousand, or 36.2%, from 2002. This reduction in the provision, like the subsequent reduction in 2004, reflected general improvement in the portfolio quality indicators. During 2003, loan losses charged against the allowance, net of recoveries, were $811 thousand, virtually unchanged from the 2002 amount. The result was a $700 thousand, or 6.0%, increase in the allowance. Because loans increased by a similar percentage during the year, our coverage ratio, was the same at year-end 2003 as at year-end 2002 (1.38%). Net charge-offs as a percentage of average loans outstanding was .10% for 2003, down slightly from .11% for 2002. Net charge-offs, on an annualized basis, for our peer group at September 30, 2003 was .22% of average loans.

2002 vs. 2001:

At December 31, 2002, the allowance for loan losses was $11.2 million, or 1.38% of total loans, as compared to $9.7 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 the second quarter of 2001, we 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 our peer group at December 31, 2002 was .30% of average loans, or 172.7% higher than our ratio.

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 in 2002 was primarily attributable to one $749 thousand commercial loan that was designated as nonperforming at year-end 2001, but was paid-off in full during December 2002. While nonperforming loans and net loans charged-off improved in 2002, as compared to 2001, the growth in the loan portfolio between the two years resulted in the 2002 provision for loan losses remaining consistent with 2001.

2001 vs. 2000:

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.

SUMMARY OF THE ALLOWANCE AND PROVISION FOR LOAN LOSSES

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

Years-Ended December 31,	2004	2003	2002	2001	2000
Loans at End of Period	$ 875,311	$ 855,178	$ 811,292	$ 755,124	$ 735,769
Average Loans	866,690	848,664	775,296	748,318	698,059
Total Assets at End of Period	1,377,949	1,373,920	1,271,421	1,151,007	1,081,354

Nonperforming Assets:
Nonaccrual Loans:
Construction	$ ---	$ ---	$ ---	$ ---	$ ---
Commercial Real Estate	512	56	69	87	94
Commercial Loans	7	180	375	1,610	161
Residential Real Estate Loans	603	312	516	469	572
Consumer Loans	981	1,274	1,511	1,034	930
Total Nonaccrual Loans	2,103	1,822	2,471	3,200	1,757

Loans Past Due 90 or More Days and
Still Accruing Interest	6	685	91	238	298
Restructured Loans in Compliance with
Modified Terms	---	---	---	---	---
Total Nonperforming Loans	2,109	2,507	2,562	3,438	2,055
Repossessed Assets	136	180	143	66	150
Other Real Estate Owned	---	---	51	294	425
Total Nonperforming Assets	$ 2,245	$ 2,687	$ 2,756	$ 3,798	$ 2,630

Allowance for Loan Losses:
Balance at Beginning of Period	$ 11,842	$ 11,193	$ 9,720	$ 8,727	$ 7,784
Loans Charged-off:
Commercial, Financial
and Agricultural	(22)	(10)	(24)	(653)	(42)
Real Estate - Commercial	---	(82)	---	---	(20)
Real Estate - Construction	---	---	---	(2)	(2)
Real Estate - Residential	---	(24)	(37)	(103)	(29)
Installment Loans to Individuals	(1,040 )	(1,037 )	(1,060 )	(883 )	(764 )
Total Loans Charged-off	(1,062)	(1,153)	(1,121)	(1,641)	(857)

Recoveries of Loans Previously Charged-off:
Commercial, Financial
and Agricultural	6	8	33	65	34
Real Estate - Commercial	17	22	17	16	15
Real Estate - Construction	---	---	---	---	---
Real Estate - Residential	3	5	3	21	11
Installment Loans to Individuals	220	307	253	243	269
Total Recoveries of Loans Previously Charged-off	246	342	306	345	329
Net Loans Charged-off	(816)	(811)	(815)	(1,296)	(528)
Provision for Loan Losses
Charged to Expense	1,020	1,460	2,288	2,289	1,471

Balance at End of Period	$12,046	$11,842	$11,193	$ 9,720	$ 8,727

Nonperforming Asset Ratio Analysis:
Net Loans Charged-off as a Percentage of Average Loans	.09%	.10%	.11%	.17%	.08%
Provision for Loan Losses as a Percentage of Average Loans	.12	.17	.30	.31	.21
Allowance for Loan Losses as a Percentage of Loans, Period-end	1.38	1.38	1.38	1.29	1.19
Allowance for Loan Losses as a Percentage of Nonperforming Loans	571.18	472.37	436.89	282.72	424.67
Nonperforming Loans as a Percentage of Loans, Period-end	.24	.29	.32	.46	.28
Nonperforming Assets as a Percentage of Total Assets, Period-end	.16	.20	.22	.33	.24

III. OTHER INCOME

The majority of our other (i.e., noninterest) income constitutes fee income from services, principally fees and commissions from fiduciary services, deposit account service charges, computer processing fees 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
				2003 to 2004		2002 to 2003
	2004	2003	2002	Amount	%	Amount	%
Income from Fiduciary Activities	$ 4,226	$ 3,647	$ 3,863	$579	15.9%	$ (216)	(5.6)%
Fees for Other Services to Customers	7,512	6,776	6,189	736	10.9	587	9.5
Net Gains on Securities Transactions	362	755	100	(393)	(52.1)	655	655.0
Other Operating Income	1,092	1,169	1,161	(77 )	(6.6)	8	0.7
Total Other Income	$13,192	$12,347	$11,313	$845	6.8	$1,034	9.1

2004 vs. 2003: Total other income increased $845 thousand, or 6.8%, from 2003 to 2004. Without regard to net securities transactions, total other income increased by $1.2 million, or 10.7%, from 2003 to 2004.

For 2004, income from fiduciary activities increased $579 thousand, or 15.9%, from 2003. At year-end 2004, the market value of assets under trust administration and investment management amounted to $801.7 million, an increase of $53.3 million, or 7.1%, from year-end 2003. This increase reflected the general improvement in the equity markets during 2004 and substantial new accounts attributable to business development efforts.

Income from fiduciary activities includes income from funds under investment management in our proprietary 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 had a market value of $145.5 million and $112.9 million at December 31, 2004 and 2003, respectively. The funds were introduced in March 2001, and are advised by our subsidiary investment advisers, North Country Investment Advisers, Inc. Currently, the funds are owned almost entirely by qualified employee benefit plan accounts. We also offer these funds on a retail basis through our bank branches. Included as an investor in the funds is our pension plan, which owns shares in the funds with a market value of approximately $17.6 million at both December 31, 2004 and 2003.

Fees for other services to customers include deposit account service charges, insurance agency commissions, credit card and debit card merchant processing fees, safe deposit box fees and loan servicing fees. These fees amounted to $7.5 million in 2004, an increase of $736 thousand, or 10.9%, from 2003. The increase was primarily attributable to credit card and debit card merchant processing fees, deposit account service charges and insurance commission income. In November 2004, we acquired a local insurance agency engaged in the sale of group health and life insurance. See “Recent Acquisitions” on page 5 of this Report.

In 2004, total other income included securities gains of $362 thousand on the sale of $73.9 million of securities available-for-sale. The primary purpose of the sales was to extend and restructure the maturities of certain investments with shorter remaining lives. The following table presents sales and purchases within the available-for-sale portfolio during 2004.

2004 Investment Sales and Purchases

(In Thousands)

Available-for-Sale Portfolio	1 ^st Quarter	2 ^nd Quarter	3 ^rd Quarter	4 ^th Quarter	2004
Proceeds from Sales:
Collateralized Mortgage Obligations	$ ---	$ ---	$ 5,159	$ ---	$ 5,159
Other Mortgage-Backed Securities	---	---	4,917	4,170	9,087
U.S. Agency Securities	20,013	---	---	---	20,013
State and Municipal Obligations	---	---	---	---	---
Other	68	146	4,302	562	5,078
Total Sales	$20,081	$146	$14,378	$4,732	$39,337

Purchases:
Collateralized Mortgage Obligations	$ ---	$ ---	$ ---	$ 5,088	$ 5,088
Other Mortgage-Backed Securities	---	30,302	---	---	30,302
U.S. Agency Securities	---	19,892	---	10,067	29,959
State and Municipal Obligations	111	---	---	---	111
Other	102	5,785	1,504	1,032	8,423
Total Purchases	$213	$55,979	$1,504	$16,187	$73,883

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 2004, other operating income decreased $77 thousand, or 6.6%, from 2003, primarily because we sold fewer loans into the secondary market in 2004. During 2004, we sold $15.4 million of newly originated loans (primarily residential real estate loans) to the secondary market. The net gains of $336 thousand were primarily due to the fact that we were able to write loans with yields slightly higher than those required by the secondary market. By comparison, for 2003, we sold $18.5 million of loans for net gains of $489 thousand.

2003 vs. 2002: Total other income increased $1.0 million, or 9.1%, from 2002 to 2003. Without regard to net securities transactions, total other income increased by $379 thousand, or 3.4%, from 2002 to 2003.

For 2003, income from fiduciary activities decreased $216 thousand, or 5.6%, from 2002, even though total assets under administration and management increased. At year-end 2003, the market value of assets under trust administration and investment management amounted to $748.5 million, an increase of $128.1 million, or 20.6%, from year-end 2002. However, most of this increase in market value occurred toward the end of 2003; the average market value of assets under trust administration and investment management did not increase between the two years. Fiduciary account fees, in general, are tied to the value of assets under administration. The increase in the market value of assets under administration reflected the general improvement in the equity markets in the second half of 2003 and substantial new volume attributable to business development efforts. Both the third and fourth quarter income from fiduciary activities for 2003 was above the respective quarters in 2002.

Income from fiduciary activities includes income from funds under investment management in our proprietary mutual funds, the North Country Funds, described in the preceding section. On a combined basis, these funds had a market value of $112.9 million and $84.8 million at December 31, 2003 and 2002, respectively.

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 $6.8 million in 2003, an increase of $587 thousand, or 9.5%, from 2002. The increase was primarily attributable to growth in the number of transaction deposit accounts and the related service charges on those accounts and an increase in merchant credit card processing income.

For 2003, total other income included securities gains of $755 thousand on the sale of $121.7 million of securities available-for-sale. During the second and third quarters of 2003, we experienced above-average amounts of prepayments of mortgage-backed securities and CMO’s in the available-for-sale portfolio, many of which we had purchased in the markets at premiums at times when they had above-market rates. The higher than anticipated prepayment levels had the effect of accelerating amortization of the premiums (an offset against interest income in the portfolio), ultimately reducing the yield on the portfolio below the projected yield. The primary purpose of the 2003 sales in the available-for-sale portfolio was to extend and restructure the maturities of certain investments with shorter remaining lives. The following table presents sales in the available-for-sale portfolio and purchases in the available-for-sale and the held-to-maturity portfolios during 2003. Total purchases in the table below include $11.5 million of asset-backed securities purchased by us and secured by assets (loans) originated by our Banks. Such securities are not, however, included in the total amount listed under “Purchase of Securities Available-for-Sale” in the Consolidated Statement of Cash Flows included in our Consolidated Financial Statements in Part III, Item 8 of this Report, as our securitization of these loans and purchase of the asset-backed securities was a non-cash transaction.

2003 Investment Sales and Purchases

(In Thousands)

Available-for-Sale Portfolio	1 ^st Quarter	2 ^nd Quarter	3 ^rd Quarter	4 ^th Quarter	2003
Proceeds from Sales:
Collateralized Mortgage Obligations	$ ---	$12,810	$19,376	$---	$ 32,186
Other Mortgage-Backed Securities	---	17,581	---	---	17,581
U.S. Agency Securities	53,896	10,120	---	---	64,016
State and Municipal Obligations	---	---	---	---	---
Other	803	1,332	6,441	99	8,675
Total Sales	$54,699	$41,843	$25,817	$99	$122,458

Purchases:
Collateralized Mortgage Obligations	$40,712	$ ---	$65,410	$22,948	$129,070
Other Mortgage-Backed Securities	51,061	37,840	---	16,603	105,504
U.S. Agency Securities	4,992	31,933	---	24,876	61,801
State and Municipal Obligations	418	400	---	371	1,189
Other	43	1,534	6,268	114	7,959
Total Purchases	$97,226	$71,707	$71,678	$64,912	$305,523

For 2003, other operating income increased $8 thousand, or 0.7%, from 2002. During 2003, we sold $18.5 million of newly originated loans (primarily residential real estate loans) to the secondary market. The net gains of $489 thousand were due, in part, to the fact that market interest rates on residential real estate loans kept falling during the period, but also because we were able to write loans with yields slightly higher than those required by the secondary market. In 2002, we recognized $101 thousand in gains on the sale of loans. The 2002 period also included a one-time benefit of $92 thousand from the demutualization of an insurance company for our group employee insurance trust and a $173 thousand recovery related to the former Vermont operations. Credit card processing income decreased by $55 thousand from 2002 to 2003 as we completed our exit from this business in 2003.

IV. OTHER EXPENSE

Other (i.e., noninterest) expense is a means of measuring the delivery cost of services, products and business activities of a 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
				2003 to 2004		2002 to 2003
	2004	2003	2002	Amount	%	Amount	%
Salaries and Employee Benefits	$19,824	$18,967	$18,858	$ 857	4.5%	$ 109	0.6%
Occupancy Expense of Premises, Net	2,695	2,524	2,330	171	6.8	194	8.3
Furniture and Equipment Expense	2,648	2,774	2,440	(126)	(4.5)	334	13.7
Other Operating Expense	7,805	8,220	7,769	(415 )	(5.0)	451	5.8
Total Other Expense	$32,972	$32,485	$31,397	$ 487	1.5	$1,088	3.5

2004 vs. 2003: Other expense for 2004 amounted to $33.0 million, an increase of $487 thousand, or 1.5%, from 2003. 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 2004, the efficiency ratio for Arrow was 51.0%, a slight decrease from the 2003 ratio of 51.4%. Our 2004 ratio, however, compared favorably to the year-to-date ratio for our peer group of 61.1% as of September 30, 2004. For information on the calculation of our efficiency ratios on a quarterly and annual basis, see pages 14 and 16 of this Report. Also see the discussion on page 4 regarding “Use of Non-GAAP Financial Measures.”

Salaries and employee benefits expense increased $857 thousand, or 4.5%, from 2003 to 2004. The increase in salary expense for 2004 was 2.9% over 2003 due primarily to merit increases. The increase in employee benefits from 2003 to 2004 was 8.6%, and was primarily attributable to increases in nonpension postretirement benefit costs, as well as increases in health insurance benefit costs. On an annualized basis, the ratio of total personnel expense (salaries and employee benefits) to average assets was 1.43% for 2004, 19 basis points less than the ratio for our peer group of 1.62% at September 30, 2004.

Occupancy expense increased $171 thousand, or 6.8%, from 2003 to 2004. Most of the increase was attributable to increased costs of lease expense, depreciation and real estate taxes. Furniture and equipment expense actually decreased by $126 thousand, or 4.5%, from 2003 to 2004. The decrease was primarily attributable to a decrease in equipment maintenance costs.

Other operating expense also decreased from 2003 to 2004, by $415 thousand, or 5.0%. The net decrease was distributed among a variety of categories of other operating expense.

2003 vs. 2002: Other expense for 2003 amounted to $32.5 million, an increase of $1.1 million, or 3.5%, from 2002. For 2003, our efficiency ratio was 51.4%, an increase from the 2002 ratio of 49.5%. Our 2003 ratio, however, compared favorably to the ratio for our peer group of 60.4%, annualized as of September 30, 2003.

Salaries and employee benefits expense increased $109 thousand, or 0.6%, from 2002 to 2003. The increase in salary expense for 2003 was 7.9% over 2002 due to merit increases, as well as the hiring of additional employees. This was offset, in part, by decreases in pension expense (due primarily to our 2002 conversion to a cash balance plan) and a decrease in the accrual for incentive compensation. On an annualized basis, the ratio of total personnel expense (salaries and employee benefits) to average assets was 1.42% for 2003, 25 basis points less than the ratio for our peer group of 1.67%, annualized at September 30, 2003.

Occupancy expense increased $194 thousand, or 8.3%, from 2002 to 2003. Most of the increase was attributable to increased costs of insurance, maintenance and real estate taxes. Furniture and equipment expense increased by $334 thousand, or 13.7%, from 2002 to 2003. The increase was spread among all areas, including maintenance contracts, data processing and depreciation expenses.

Other operating expense increased $451 thousand, or 5.8%, from 2002 to 2003. The increase was distributed among all categories of other operating expense.

V. INCOME TAXES

The following table sets forth our 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
				2003 to 2004		2002 to 2003
	2004	2003	2002	Amount	%	Amount	%
Provision for Income Taxes	$8,959	$8,606	$8,773	$353	4.1%	$(167)	(1.9)%
Effective Tax Rate	31.5%	31.3%	31.7%	0.2%	0.6	(0.4)%	(1.3)

The provisions for federal and state income taxes amounted to $9.0 million, $8.6 million and $8.8 million for 2004, 2003 and 2002, respectively. The effective income tax rates for 2004, 2003 and 2002 were 31.5%, 31.3% and 31.7%, respectively.

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 reporting 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, 2004, we held no trading securities. Set forth below is certain information about our securities available-for-sale portfolio and securities held-to-maturity portofolio.

Securities Available-for-Sale :

The following table sets forth the carrying value of our securities available-for-sale portfolio at year-end 2004, 2003 and 2002.

SECURITIES AVAILABLE-FOR-SALE

(In Thousands)

	December 31,
	2004	2003	2002
U.S. Treasury and Agency Obligations	$ 56,329	$ 53,530	$ 59,319
State and Municipal Obligations	8,492	12,951	17,984
Collateralized Mortgage Obligations	121,732	127,522	96,460
Other Mortgage-Backed Securities	116,809	137,072	133,872
Corporate and Other Debt Securities	12,500	9,469	9,316
Mutual Funds and Equity Securities	9,386	9,287	9,710
Total	$325,248	$349,831	$326,661

In all periods, 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. Our practice has been 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. At year-end 2004, approximately $8.4 million, or 88.7%, of the listed amount of mutual funds and equity securities consisted of required holdings of stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York.

The following table sets forth the maturities of our securities available-for-sale portfolio as of December 31, 2004. 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	$ 4,917	$ 51,412	$ ---	$ ---	$ 56,329
State and Municipal Obligations	5,011	1,458	414	1,609	8,492
Collateralized Mortgage Obligations	3,112	118,620	---	---	121,732
Other Mortgage-Backed Securities	779	97,397	17,905	728	116,809
Corporate and Other Debt Securities	33	9,297	---	3,170	12,500
Mutual Funds and Equity Securities	---	---	---	9,386	9,386
Total	$13,852	$278,184	$18,319	$14,893	$325,248

The following table sets forth the tax-equivalent yields of our securities available-for-sale portfolio at December 31, 2004.

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	3.25%	3.23%	---%	---%	3.24%
State and Municipal Obligations	3.33	4.52	6.36	7.34	4.40
Collateralized Mortgage Obligations	3.91	4.41	---	---	4.40
Other Mortgage-Backed Securities	7.55	4.37	4.54	7.09	4.43
Corporate and Other Debt Securities	2.19	4.14	---	6.42	4.69
Mutual Funds and Equity Securities	---	---	---	1.62	1.62
Total	3.27	4.16	4.54	2.91	4.09

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, 2004. 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, 2004 and 2003, the weighted average maturity was 2.4 and 4.3 years, respectively, for debt securities in the available-for-sale portfolio. At December 31, 2004, the net unrealized gain on securities available-for-sale amounted to $1.3 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, 2004 represents a $1.0 million decrease since December 31, 2003 and is primarily attributable to the decreased fair value of the debt securities portfolios resulting from an increase in long-term rates during 2004.

For further information regarding our portfolio of securities available-for-sale, see Note 3 to the Consolidated Financial Statements contained in Part II, Item 8 of this Report.

Securities Held-to-Maturity :

The following table sets forth the carrying value of our portfolio of securities held-to-maturity at December 31 of each of the last three years.

SECURITIES HELD-TO-MATURITY

(In Thousands)

	December 31,
	2004	2003	2002
State and Municipal Obligations	$108,117	$105,776	$74,505

For information regarding the fair value at December 31, 2004, of our portfolio of securities held-to-maturity, see Note 3 to the Consolidated Financial Statements contained in Part II, Item 8 of this Report.

The following table sets forth the maturities of our portfolio of securities held-to-maturity as of December 31, 2004.

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

$21,156

$56,499

$29,810

$652

$108,117

The following table sets forth the tax-equivalent yields of our portfolio of securities held-to-maturity at December 31, 2004.

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

3.33%

5.93%

5.41%

8.08%

5.29%

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, 2004. 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 2004, 2003 and 2002, we sold no securities from the held-to-maturity portfolio. The weighted-average maturity of the held-to-maturity portfolio was 3.9 years and 4.7 years at December 31, 2004 and 2003, 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,
	2004		2003		2002		2001		2000
	Amount	%	Amount	%	Amount	%	Amount	%	Amount	%
Commercial, Financial and Agricultural	$ 76,379	9	$ 82,808	10	$ 75,659	10	$ 74,026	10	$ 60,850	8
Real Estate - Commercial	137,107	15	110,499	13	97,683	12	79,337	11	70,129	10
Real Estate - Construction	7,868	1	8,670	1	10,754	1	8,036	1	5,063	1
Real Estate - Residential	342,957	39	328,673	38	295,265	36	259,883	34	265,325	36
Indirect Loans	300,672	34	311,812	36	317,706	39	315,046	42	314,871	42
Other Installment Loans to Individuals	10,328	1	12,716	2	14,225	2	18,796	2	19,531	3
Total Loans	875,311	100	855,178	100	811,292	100	755,124	100	735,769	100
Allowance for Loan Losses	(12,046 )		(11,842 )		(11,193 )		(9,720 )		(8,727 )
Total Loans, Net	$863,265		$843,336		$800,099		$745,404		$727,042

Indirect Loans : For several years preceding the third quarter of 2001, the indirect consumer loan portfolio (consisting principally of auto loans financed through local dealerships where we acquire the dealer paper) was the fastest growing segment of our loan portfolio, both in terms of absolute dollar amount and as a percentage of the overall portfolio. Over the subsequent quarters, this segment of the portfolio ceased to grow in absolute terms and decreased as a percentage of the overall portfolio. This flattening out of indirect loan totals was largely the result of aggressive campaigns of zero rate and other subsidized financing commenced by the auto manufacturers in the fall of 2001. During the fourth quarter of 2002, and for the first two quarters of 2003, the indirect portfolio experienced a small amount of growth as we became more rate-competitive, but the level of indirect loans was flat for the third quarter of 2003 and decreased by $11.9 million during the fourth quarter of 2003. During 2004, (excluding the third quarter) indirect loan balances continued to decline. However, indirect loans still represent the second largest category of loans (34%) in our portfolio, and it continues to be the case that any developments threatening the indirect loan business generally may be expected to have a negative impact on our financial performance due to our reliance on such loans. If auto manufacturers continue to offer heavily subsidized financing programs, our indirect loan portfolio is likely to continue to experience rate pressure and limited, if any, overall growth.

Residential Real Estate Loans : Residential real estate loans represented the largest segment of our loan portfolio at December 31, 2004, at 39% of loans at year-end. This segment of our portfolio increased $14.3 million from 2003 to 2004, despite the fact that we sold (with servicing retained) $15.4 million of low-rate fixed rate mortgages during the year. The period of strong demand for residential real estate loans, which began when rates started falling in 2001, began to weaken in the third and fourth quarters of 2003, as refinancing activity, no longer driven by falling rates, began to slow down. Residential mortgage demand remained moderate during 2004, as rates stayed near, if not at, their record low levels of prior years.

During 2003 we sold (with servicing retained) $15.8 million of low-rate residential real estate loans. The level of the portfolio was also impacted by the securitization of $11.5 million of mortgage loans discussed earlier in this Report. In effect, the securitized loans were merely transferred to our securities available-for-sale portfolio. We also securitized $30.0 million of mortgage loans in 2001.

Commercial and Commercial Real Estate Loans: We continued to experience strong to moderate demand for commercial loans in 2004, a continuing trend that has persisted for several years, as commercial and commercial real estate loans have grown each year for the past five years, both in dollar amount and as a percentage of the overall loan portfolio.

The following table indicates the changing mix in our loan portfolio by including the quarterly average balances for our significant loan products for the past five quarters. The remaining 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 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Commercial and Commercial Real Estate	$205,016	$202,967	$200,235	$191,592	$187,447
Residential Real Estate	281,939	284,273	280,636	278,785	283,145
Home Equity	44,774	43,041	40,500	38,779	37,403
Indirect Consumer Loans	305,953	305,746	301,972	310,219	320,286
Other Consumer Loans ¹	38,934	37,542	36,559	37,112	36,673
Total Loans	$876,616	$873,569	$859,902	$856,487	$864,954
¹ Other Consumer Loans includes certain home improvement loans secured by mortgages. However, these same loan balances are reported as Real Estate – Residential in the table of period-end balances on the previous page, captioned “DISTRIBUTION OF LOANS.”

Percentage of Total Quarterly Average Loans

	Quarter Ending
	Dec 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Commercial and Commercial Real Estate	23.4%	23.2%	23.3%	22.5%	21.7%
Residential Real Estate	32.2	32.6	32.6	32.5	32.8
Home Equity	5.1	4.9	4.7	4.5	4.3
Indirect Consumer Loans	34.9	35.0	35.1	36.2	37.0
Direct Consumer Loans	4.4	4.3	4.3	4.3	4.2
Total Loans	100.0 %	100.0 %	100.0 %	100.0 %	100.0 %

Quarterly Tax-Equivalent Yield on Loans

	Quarter Ending
	Dec 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Commercial and Commercial Real Estate	6.51%	6.24%	6.14%	6.09%	6.32%
Residential Real Estate	5.93	5.98	6.08	6.18	6.17
Home Equity	4.53	4.33	4.20	4.25	4.40
Indirect Consumer Loans	5.19	5.35	5.57	5.76	5.95
Direct Consumer Loans	7.17	7.42	7.51	7.55	7.90
Total Loans	5.79	5.80	5.90	6.03	6.12

In general, the yield (tax-equivalent interest income divided by average loans) on our loan portfolio and other earning assets has been impacted by changes in prevailing interest rates, as previously discussed on page 20 under the heading "Key Interest Rate Changes 1999 - 2005." We expect that such will continue to be the case; that is, that loan yields will continue to rise and fall with changes in prevailing market rates, although the timing and degree of responsiveness will continue to be influenced by a variety of other factors, including the makeup of the loan portfolio, consumer expectations and preferences and the rate at which the portfolio expands. Many of the loans in the commercial portfolio have variable rates tied to prime, FHLB 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 current yields. As noted in the earlier discussion, during the recently-concluded long period of declining rates (from mid-2001 to the end of June 2004), we experienced a time lag between the impact of declining rates on the deposit portfolio (which was felt relatively quickly) and the impact on the loan portfolio (which occurred more slowly). The consequence of this particular time lag was a positive impact on the net interest margin during the beginning of the rate decline period, followed by a negative impact on the margin in more recent periods as the rate decline ended.

The net interest margin expanded during 2001 and into the first quarter of 2002 as deposit rates decreased rapidly. Our deposit rates began to flatten out in mid-2002, while loan yields continued to decline. As a result, the net interest margin began to contract in the second quarter of 2002. Generally, this pattern persisted through the remainder of 2002, all of 2003 and the first two quarters of 2004, with the cost of deposits decreasing only slightly, if at all, and loan yields decreasing somewhat faster. Thus the yield on our loan portfolio decreased by 13 basis points in the second quarter of 2004, while the cost of our interest-bearing deposits only decreased by 4 basis points for the same period.

On June 30, 2004, the Federal Reserve Board ended an uninterrupted four-year period of falling rates with a 25 basis point increase in prevailing rates, followed by four additional 25 basis point increases in August, September, November and December 2004. Due to the time-lag between rising rates and the repricing of loan balances, the yield on our loan portfolio not only failed to rise, but continued to fall from the second quarter of 2004 to the third quarter of 2004. However, the decrease in the portfolio yield effectively came to a halt in the fourth quarter of 2004 as the yield dropped by only one basis point from the third quarter yield.

If rates continue to increase in forthcoming periods, as many analysts have forecasted, we expect that our cost of deposits will begin to increase, on average, while the yield on the loan portfolio may remain flat or even possibly decrease slightly for a time and then start to increase, with a time lag behind increases in the cost of deposits. If so, we may experience further reductions in net interest margin in forthcoming periods.

The following table indicates the respective maturities and repricing structure of our commercial, financial and agricultural loans and real estate - construction loans at December 31, 2004. 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 we have also 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	$28,264	$36,317	$11,798	$76,379
Real Estate - Construction	---	248	7,620	7,868
Total	$28,264	$36,565	$19,418	$84,247

Fixed Interest Rates	$ 8,339	$25,884	$ 9,972	$44,195
Variable Interest Rates	19,925	10,681	9,446	40,052
Total	$28,264	$36,565	$19,418	$84,247

COMMITMENTS AND LINES OF CREDIT

Stand-by letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the financial statements at a given date because the commitments are not then funded. As of December 31, 2004, our total contingent liability for standby letters of credit amounted to $2.6 million. In addition to these instruments, we also have 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, 2004, we had outstanding unfunded loan commitments in the aggregate amount of approximately $138.3 million.

b. RISK ELEMENTS

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

We designate 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, residential real estate loans and commercial loans are evaluated for charge-off on a loan-by-loan basis when placed on accrual status. We had no material commitments to lend additional funds on outstanding nonaccrual loans at December 31, 2004.

Loans past due 90 days or more and still accruing interest, as identified in the table presented on page 25 under the heading “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. We apply the provisions of SFAS No. 114 to all impaired commercial and commercial real estate loans over $250 thousand, 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, we determine 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. We determine 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.

During 2004 two commercial loans were considered impaired under SFAS No. 114 with an average recorded investment of $236 thousand. By year-end 2004, one of these loans was fully paid-off (with no portion of the loan charged-off) leaving, at year-end 2004, one impaired loan with a balance of $515 thousand and a related reserve of $112 thousand.

At December 31, 2004, nonperforming loans amounted to $2.1 million, a decrease of $398 thousand, or 15.9%, from the balance at year-end 2003. Total nonperforming loans at year-end 2004 represented .24% of period-end loans, a decrease from .29% at year-end 2003. The ratio of nonperforming loans to average loans for our peer group at September 30, 2004 was .63%.

During 2004 income recognized on year-end balances of nonaccrual loans was $115 thousand. Income that would have been recognized during that period on nonaccrual loans if such loans 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 $161 thousand.

During 2003 one commercial loan was considered impaired under SFAS No. 114 with an average recorded investment of $254 thousand. The loan was returned to accrual status before year-end 2003. There were no impaired loans at December 31, 2003.

At December 31, 2003, nonperforming loans amounted to $2.5 million, a decrease of $55 thousand, or 2.1%, from the balance at year-end 2002. Total nonperforming loans at year-end 2003 represented .29% of period-end loans, a decrease from .32% at year-end 2002. The ratio of nonperforming loans to average loans for our peer group at September 30, 2003 was .80%, or 175.9% higher than our ratio at December 31, 2003.

During 2003 income recognized on year-end balances of nonaccrual loans was $107 thousand. Income that would have been recognized during that period on nonaccrual loans if such loans 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 $160 thousand.

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 period-end loans for our peer group at December 31, 2002 was .78%, or 143.8% higher than our 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 loans 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.

POTENTIAL PROBLEM LOANS

On at least a quarterly basis, we apply 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, we normally do not identify any significant number of potential problem loans in our portfolio that do not otherwise meet one of the classifications discussed above (e.g., nonaccrual, troubled debt restructurings). At year-end 2004 and 2003, we had no such additional potential problem loans. At year-end 2002 we had identified only one credit that, although still accruing interest, exhibited such significant weakness as to warrant mention as a potential problem. In 2003 we up-graded the status of that borrower and no longer considered the credit to be classified as a potential problem loan.

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 $4.6 million at December 31, 2004 and represented 0.52% of loans outstanding at that date, as compared to approximately $6.6 million, or 0.78% of loans at December 31, 2003. These non-current loans at December 31, 2004 were composed of approximately $3.7 million of consumer loans, principally indirect motor vehicle loans, $609 thousand of residential real estate loans, $170 thousand of commercial real estate loans and $107 thousand of commercial loans.

The overall level of our performing loans, that 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 our geographic market area was relatively strong in the 1997-2000 period. Although the U.S. experienced a mild recession in 2001, which continued throughout 2002 and into 2003, 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 our principal service areas, unemployment remained below the national average.

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 C.II.a. of this Item 7. 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. We establish allowances for OREO losses, which are established and monitored on a property-by-property basis and reflect our 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,
	2004	2003	2002	2001	2000
Single Family 1 - 4 Units	$ ---	$ ---	$ 51	$294	$425
Commercial Real Estate	---	---	---	---	---
Construction	---	---	---	---	---
Other Real Estate Owned, Net	---	---	51	294	425
Repossessed Assets	136	180	143	66	150
Total Other Real Estate Owned and Repossessed Assets	$136	$180	$194	$360	$575

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)

	2004	2003	2002	2001	2000
Balance at Beginning of Year	$ ---	$ 51	$ 294	$ 425	$ 586
Properties Acquired Through Foreclosure	---	10	114	222	554
Writedown of Properties Previously Foreclosed	---	---	---	(6)	---
Sales	---	(61 )	(357 )	(347 )	(715 )
Balance at End of Year	$ ---	$ ---	$ 51	$ 294	$ 425

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

ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES

(In Thousands)

	2004	2003	2002	2001	2000
Balance at Beginning of Year	$ ---	$ ---	$ 6	$---	$ 24
Writedowns of Properties Previously Foreclosed	---	---	---	6	---
Charge-Offs	---	---	(6 )	---	(24 )
Balance at End of Year	$ ---	$ ---	$ ---	$ 6	$ ---

During 2004, we did not acquire or sell any real estate acquired through foreclosure.

During 2003, we acquired one property for $10 thousand through foreclosure. Also during the year, we sold two properties with a carrying amount of $61 thousand for a net gain of $12 thousand.

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

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

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

III. SUMMARY OF LOAN LOSS EXPERIENCE

We monitor 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 annually, and those under special supervision are reviewed at least quarterly. Additionally, regulatory examiners perform periodic examinations of our loan portfolio and report on these examinations to management. The boards of directors of our 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, we consider 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 our 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 we regard 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, we risk-classify 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)

	2004	2003	2002	2001	2000
Commercial, Financial and Agricultural	$ 1,430	$ 2,554	$ 3,662	$2,922	$2,026
Real Estate-Commercial	2,632	1,381	916	731	507
Real Estate-Construction	---	---	---	---	---
Real Estate-Residential Mortgage	1,411	1,576	1,458	997	1,322
Installment Loans to Individuals	4,392	4,293	4,253	4,012	4,160
Unallocated	2,181	2,038	904	1,058	712
Total	$12,046	$11,842	$11,193	$9,720	$8,727

PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS

	2004	2003	2002	2001	2000
Commercial, Financial and Agricultural	9%	10%	10%	10%	8%
Real Estate-Commercial	16	13	12	11	10
Real Estate-Construction	1	1	1	1	1
Real Estate-Residential Mortgage	39	38	36	34	36
Installment Loans to Individuals	35	38	41	44	45
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)

	2004		2003		2002
	Average Balance	Rate	Average Balance	Rate	Average Balance	Rate
Demand Deposits	$ 163,029	--%	$ 144,665	--%	$132,208	--%
Interest-Bearing Demand Deposits	350,047	1.06	325,593	1.28	282,365	1.57
Regular and Money Market Savings	290,352	0.68	275,255	0.81	230,039	1.38
Time Deposits of $100,000 or More	69,431	2.16	73,307	2.40	81,770	2.77
Other Time Deposits	174,746	2.46	192,682	2.90	201,253	3.75
Total Deposits	$1,047,746	1.10	$1,011,502	1.36	$927,635	1.88

During 2004, average deposit balances increased by $36.2 million, or 3.6%, from 2003. The increase in deposit balances during 2004 was generated from our pre-existing branch network, that is, no branches were added or acquired in 2004.

During 2003, average deposit balances increased by $83.9 million, or 9.0%, from 2002. The increase in deposit balances during 2003 was largely generated from our pre-existing branch network, although we did open a new branch in Queensbury, New York. No other branches were added or acquired in 2003.

During 2002, average deposit balances increased by $62.0 million, or 7.2%, from 2001. Once again, the increase in deposit balances during 2002 was largely generated from our pre-existing branch network, although we opened a second branch in Saratoga Springs at the beginning of the year. No other branches were added or acquired in 2002.

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 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Demand Deposits	$ 166,433	$ 172,793	$ 160,184	$ 152,562	$ 154,537
Interest-Bearing Demand Deposits	348,795	309,544	372,472	369,837	365,995
Regular and Money Market Savings	293,883	298,104	289,340	279,957	278,503
Time Deposits of $100,000 or More	73,775	71,558	65,411	66,911	67,012
Other Time Deposits	170,857	171,166	176,405	181,203	184,791
Total Deposits	$1,053,743	$1,023,165	$1,063,812	$1,050,470	$1,050,838

We typically experience seasonally high deposit balances in the first and last quarters of each year due to the cyclicality of municipal deposits, which generally are included in either interest-bearing demand deposits or time deposits of $100,000 or more (during the period of very low interest rates, these deposits were primarily maintained in interest-bearing demand deposits). As is typical in falling rate environments, many of our depositors placed maturing time deposits in non-maturity deposits, beginning in the third and fourth quarters of 2001 and into 2002, 2003 and 2004 as well, presumably as a temporary investment pending a return to rising rates. This was also true for our municipal depositors who maintained high balances in NOW accounts at both year-end 2003 and 2004.

Our average deposit balances in the fourth quarter of 2004 were little changed from the fourth quarter of 2003, due in part to our decision to take a less aggressive posture in bidding for certain municipal deposits. The renewal of two large, high-cost accounts totaling $30.7 million (reflected in interest-bearing demand deposits in the table above) was not aggressively pursued by us in the beginning of the third quarter of 2004.

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 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Demand Deposits	15.8%	16.9%	15.1%	14.5%	14.7%
Interest-Bearing Demand Deposits	33.1	30.3	35.0	35.2	34.8
Regular and Money Market Savings	27.9	29.1	27.2	26.7	26.5
Time Deposits of $100,000 or More	7.0	7.0	6.1	6.4	6.4
Other Time Deposits	16.2	16.7	16.6	17.2	17.6
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 2004	Sep 2004	Jun 2004	Mar 2004	Dec 2003
Demand Deposits	---%	---%	---%	---%	---%
Interest-Bearing Demand Deposits	0.96	0.80	1.21	1.22	1.21
Regular and Money Market Savings	0.73	0.68	0.65	0.64	0.69
Time Deposits of $100,000 or More	2.25	2.15	2.12	2.13	2.31
Other Time Deposits	2.46	2.34	2.47	2.56	2.72
Total Deposits (Including Non-Interest-Bearing)	1.08	0.98	1.14	1.18	1.23

In general, rates paid by us on various types of deposit accounts are influenced by the rates being offered or paid by our competitors, which in turn 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 our deposit liabilities, although this lag is shorter than the lag between Federal Reserve actions and the repricing of our loans and other earning assets. As a result of the Federal Reserve rate decreases in the 2001 through mid-2004 period, we experienced a decrease in the cost of deposits throughout the period. The cost of deposits during the second quarter of 2004 was at its lowest point in many years.

After the Federal Reserve Board began its recent series of rate increases in June 2004, cited earlier, our cost of deposits continued to fall in the third quarter of 2004 as maturing time deposits were still repricing at lower rates. By the fourth quarter of 2004, the average cost of deposits began to rise. We expect that this trend will continue until the Federal Reserve Board discontinues its current series of interest rate increases, and perhaps slightly beyond that point due to the time lag in repricing deposits.

V. TIME DEPOSITS OF $100,000 OR MORE

The maturities of time deposits of $100,000 or more at December 31, 2004 are presented below. (In Thousands)

Maturing in:
Under Three Months	$46,623
Three to Six Months	10,191
Six to Twelve Months	8,566
2006	5,684
2007	9,054
2008	1,671
2009 and Beyond	4,117
Total	$85,906

D. LIQUIDITY

Liquidity is measured by the ability of Arrow to raise cash when we need it at a reasonable cost. We must be capable of meeting expected and unexpected obligations to our customers at any time. Given the uncertain nature of customer demands as well as the need to maximize earnings, we 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 our 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, we have supplemented liquidity with additional off-balance sheet sources such as credit lines with the Federal Home Loan Bank (“FHLB”). We have established overnight and 30 day term lines of credit with the FHLB each in the amount of $58.9 million at December 31, 2004. There were no advances under either line at December 31, 2004. If advanced, such lines of credit are collateralized by mortgage-backed securities, loans and FHLB stock.

In addition, we have in place modest borrowing facilities from correspondent banks and also have identified wholesale and retail repurchase agreements and brokered certificates of deposit as appropriate off-balance sheet sources of funding accessible in relatively short time periods. Also, our lead bank, Glens Falls National, 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, 2004, the amount available under this facility was $118.7 million, but there were no advances outstanding at December 31, 2004. We measure and monitor our 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 our investment securities portfolio, particularly mortgage-backed securities, and from maturing loans in our portfolio, our stable core deposit base and our significant borrowing capacity, we believe that our liquidity is sufficient to meet any reasonably likely events or occurrences.

E. CAPITAL RESOURCES AND DIVIDENDS

Shareholders' equity was $118.0 million at December 31, 2004, an increase of $12.2 million, or 11.5%, from the prior year-end. The increase in shareholders’ equity during 2004 primarily reflected $10.5 million of retained earnings (after dividends) and $1.9 million of new stock issued in November 2004 to acquire Capital Financial Group, Inc., offset, in part, by $2.5 million of periodic repurchases of Arrow’s common stock.

In 2004 and 2003 we privately placed $10 million each of capital securities issued by a subsidiary Delaware business trust specifically formed for such purpose. These trust preferred securities are reflected as “Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts” on our consolidated balance sheet as of December 31, 2004. These securities have certain features that make them an attractive funding vehicle. Under final rules, issued February 28, 2005 by the FRB, trust preferred securities may also qualify as Tier 1 capital, in an amount not to exceed 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Both of our issues qualify as regulatory capital under capital adequacy guidelines discussed below. See Note 12 to the Consolidated Financial Statements included in Part II, Item 8 for a further description of our trust preferred securities. At December 31, 2004, we redeemed a $5 million issue of trust preferred securities originally issued and sold by us in 1999.

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. Our 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 Arrow and our 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 Arrow, Tier 1 capital is comprised of common shareholders' equity and the trust preferred securities issued by our two unconsolidated subsidiaries (see the second previous paragraph), less intangible assets. Total capital, for this risk-based capital standard, includes Tier 1 capital plus other qualifying regulatory capital, including a portion of our 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 Arrow and our subsidiary banks, Glens Falls National and Saratoga National, as of December 31, 2004:

Capital Ratios :	Arrow	GFNB	SNB
Risk-Based Tier 1 Ratio	14.5%	13.7%	12.5%
Total Risk-Based Capital Ratio	15.8	14.9	15.1
Tier 1 Leverage Ratio	9.2	8.4	10.0

At December 31, 2004 Arrow and both of our subsidiary banks exceeded the minimum capital ratios established by the regulatory 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 Item 1.C. of this Report).

The source of funds for the payment of shareholder dividends by Arrow consists primarily of dividends declared and paid to the holding company by our bank subsidiaries. There are various legal and regulatory limitations applicable to the payment of dividends to Arrow by our bank subsidiaries. As of December 31, 2004, under this statutory limitation, the maximum amount that could have been paid by the bank subsidiaries to the holding company, without special regulatory approval, was approximately $29.6 million. The ability of Arrow and our Banks to pay dividends in the future is and will continue to be influenced by regulatory policies, capital guidelines and applicable laws.

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

F. OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by us for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for funding.

We have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity or capital expenditures.

G. CONTRACTUAL OBLIGATIONS (In Thousands)

	Payments Due by Period
Contractual Obligation	Total	Less Than 1 Year	1-3 Years	3-5 Years	More Than 5 Years
Long-Term Debt Obligations:
Federal Home Loan Bank Advances ¹	$150,000	$75,000	$30,000	$ 5,000	$40,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts ²	20,000	---	---	---	20,000
Capital Lease Obligations	---	---	---	---	---
Operating Lease Obligations ³	2,461	206	418	533	1,304
Purchase Obligations	---	---	---	---	---
Total	$172,461	$75,206	$30,418	$5,533	$61,304

¹ See Note 11 to the Consolidated Financial Statements in Item 8 of this Report for additional information on Federal Home Loan Bank Advances, including call provisions.

² See Note 12 to the Consolidated Financial Statements in Item 8 of this Report for additional information on Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts.

³ See Note 22 to the Consolidated Financial Statements in Item 8 of this Report for additional information on our Operating Lease Obligations.

H. FOURTH QUARTER RESULTS

We reported net income of $4.9 million for the fourth quarter of 2004, an increase of $161 thousand, or 3.4%, from the fourth quarter of 2003. Diluted earnings per common share for the fourth quarter of 2004 was $.48, an increase of $.02, or 4.3%, over the $.46 amount for the fourth quarter of 2003. The change in earnings was primarily attributable to the following: (i) a $195 thousand decrease in net interest income, (ii) a $31 thousand increase in the provision for loan losses, (iii) a $715 thousand increase in other income, (iv) a $176 thousand increase in other expense, and (v) a $162 thousand increase in the provision for income taxes. The factors contributing to these quarter-to-quarter changes in net income and changes in financial condition are included in the discussion of the year-to-year changes elsewhere in this Report.

SELECTED FOURTH QUARTER FINANCIAL INFORMATION

(Dollars In Thousands, Except Per Share Amounts)

	For the Quarter Ended December 31,
	2004	2003
Interest and Dividend Income	$17,041	$17,761
Interest Expense	4,721	5,256
Net Interest Income	12,320	12,505
Provision for Loan Losses	276	245
Net Interest Income after Provision for Loan Losses	12,044	12,260
Other Income	3,568	2,853
Other Expense	8,383	8,207
Income Before Provision for Income Taxes	7,229	6,906
Provision for Income Taxes	2,281	2,119
Net Income	$ 4,948	$ 4,787

SHARE AND PER SHARE DATA: ¹
Weighted Average Number of Shares Outstanding:
Basic	10,140	10,105
Diluted	10,384	10,358
Basic Earnings Per Common Share	$.49	$.47
Diluted Earnings Per Common Share	.48	.46
Cash Dividends Per Common Share	.23	.21

AVERAGE BALANCES:
Assets	$1,389,030	$1,386,271
Earning Assets	1,318,540	1,319,122
Loans	876,616	864,954
Deposits	1,053,743	1,050,838
Shareholders’ Equity	115,287	103,955

SELECTED RATIOS (Annualized):
Return on Average Assets	1.42%	1.37%
Return on Average Equity	17.07%	18.27%
Net Interest Margin ²	3.91%	3.95%

Net Charge-offs to Average Loans	.13%	.08%
Provision for Loan Losses to Average Loans	.13%	.11%

¹ Share and Per Share amounts for the fourth quarter of 2003 have been restated for the September 2004 3% stock dividend.

² Net Interest Margin is the ratio of tax-equivalent net interest income to average earning assets. (See “Use of Non-GAAP Financial

Measures” on page 4).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

In addition to credit risk in our loan portfolio and liquidity risk, discussed earlier, our business activities also generate market risk. Market risk is the possibility that changes in future market rates or prices will make our position less valuable. The ongoing monitoring and management of risk is an important component of our 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 our asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. We have not made use of derivatives, such as interest rate swaps, in our risk management process.

Interest rate risk is the most significant market risk affecting us. Interest rate risk is the exposure of our 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 the risk of prepayment of loans and 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 our 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. Due to the low level of interest rates at December 31, 2004, 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, 2004, a 200 basis point increase in interest rates demonstrated a 2.45% decrease in net interest income, and a 100 basis point decrease in interest rates demonstrated a 0.69% decrease in net interest income. These amounts were within our ALCO policy limits. Historically there has existed an inverse relationship between changes in prevailing rates and net interest income, reflecting the fact that our liabilities and sources of funds generally reprice more quickly than our earning assets. However, during this period of very low interest rates we also may be adversely impacted by continuing declines in prevailing rates since there is very little likelihood that such decreases would be reflected in the short or long run by a comparable downward adjustment of deposit rates.

The preceding sensitivity analysis does not represent a forecast on our part 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 in the second half of 2004 and early in 2005 that resulted in six 25 basis point increases in prevailing rates. We believe that continued increases in prevailing interest rates will have a short to medium-term negative impact on our net interest margin and net interest income as well. We are 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 changes in interest rates 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, we 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 consolidated financial statements and supplementary data are submitted herewith:

Reports of Independent Registered Public Accounting Firm

Financial Statements:

Consolidated Balance Sheets

as of December 31, 2004 and 2003

Consolidated Statements of Income

for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Changes in Shareholders' Equity

for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows

for the Years Ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

Supplementary Data: (Unaudited)

Summary of Quarterly Financial Data for the Years Ended December 31, 2004 and 2003

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

of Arrow Financial Corporation:

We have audited the accompanying consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004. These consolidated financial statements are the responsibility of Arrow’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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Arrow’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 7, 2005, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Albany, New York

March 7, 2005

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

of Arrow Financial Corporation:

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting that Arrow Financial Corporation (Arrow) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Arrow’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of Arrow’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Arrow; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Arrow are being made only in accordance with authorizations of management and directors of Arrow; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Arrow’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Arrow Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Arrow maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated March 7, 2005 expressed an unqualified opinion on those consolidated financial statements .

/s/ KPMG LLP

Albany, New York

March 7, 2005

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	December 31,
	2004	2003
ASSETS
Cash and Due from Banks	$ 29,805	$ 27,526
Federal Funds Sold	7,000	5,800
Cash and Cash Equivalents	36,805	33,326

Securities Available-for-Sale	325,248	349,831
Securities Held-to-Maturity (Approximate Fair
Value of $111,058 in 2004 and $110,341 in 2003)	108,117	105,776

Loans	875,311	855,178
Allowance for Loan Losses	(12,046 )	(11,842 )
Net Loans	863,265	843,336
Premises and Equipment, Net	14,939	14,174
Other Real Estate and Repossessed Assets, Net	136	180
Goodwill	10,717	9,297
Other Intangible Assets, Net	1,019	166
Other Assets	17,703	17,834
Total Assets	$1,377,949	$1,373,920

LIABILITIES
Deposits:
Demand	$ 167,667	$ 151,847
Regular Savings, N.O.W. & Money Market Deposit Accounts	607,820	646,544
Time Deposits of $100,000 or More	85,906	65,585
Other Time Deposits	170,887	182,640
Total Deposits	1,032,280	1,046,616
Short-Term Borrowings:
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	42,256	39,515
Other Short-Term Borrowings	1,720	1,421
Federal Home Loan Bank Advances	150,000	150,000
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts (Junior Subordinated Obligations)	20,000	15,000
Other Liabilities	13,659	15,503
Total Liabilities	1,259,915	1,268,055

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 (13,478,703 Shares Issued at December 31, 2004 and 13,086,119 Shares Issued at December 31, 2003)	13,479	13,086
Surplus	127,312	113,335
Undivided Profits	23,356	24,303
Unallocated ESOP Shares (92,740 Shares in 2004
and 117,964 Shares in 2003)	(1,358)	(1,769)
Accumulated Other Comprehensive Income	429	1,084
Treasury Stock, at Cost (3,189,452 Shares at December 31,
2004 and 3,189,550 Shares at December 31, 2003)	(45,184 )	(44,174 )
Total Shareholders’ Equity	118,034	105,865
Total Liabilities and Shareholders’ Equity	$1,377,949	$1,373,920

See Notes to Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

	Years Ended December 31,
	2004	2003	2002
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	$50,598	$54,571	$57,052
Interest on Federal Funds Sold	138	92	308
Interest and Dividends on Securities Available-for-Sale	13,759	12,439	14,479
Interest on Securities Held-to-Maturity	3,948	3,629	3,306
Total Interest and Dividend Income	68,443	70,731	75,145
INTEREST EXPENSE
Interest on Deposits:
Time Deposits of $100,000 or More	1,504	1,756	2,269
Other Deposits	9,973	11,973	15,144
Interest on Short-Term Borrowings:
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase	369	356	516
Other Short-Term Borrowings	9	7	46
Federal Home Loan Bank Advances	6,207	6,751	6,656
Guaranteed Preferred Beneficial Interests in Corporation’s Junior Subordinated Debentures	1,144	767	475
Total Interest Expense	19,206	21,610	25,106
NET INTEREST INCOME	49,237	49,121	50,039
Provision for Loan Losses	1,020	1,460	2,288
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES	48,217	47,661	47,751
OTHER INCOME
Income from Fiduciary Activities	4,226	3,647	3,863
Fees for Other Services to Customers	7,512	6,776	6,189
Net Gains on Securities Transactions	362	755	100
Other Operating Income	1,092	1,169	1,161
Total Other Income	13,192	12,347	11,313
OTHER EXPENSE
Salaries and Employee Benefits	19,824	18,967	18,858
Occupancy Expense of Premises, Net	2,695	2,524	2,330
Furniture and Equipment Expense	2,648	2,774	2,440
Other Operating Expense	7,805	8,220	7,769
Total Other Expense	32,972	32,485	31,397

INCOME BEFORE PROVISION FOR INCOME TAXES	28,437	27,523	27,667
Provision for Income Taxes	8,959	8,606	8,773
NET INCOME	$19,478	$18,917	$18,894
Average Shares Outstanding:
Basic	10,122	10,148	10,267
Diluted	10,364	10,382	10,501
Earnings Per Common Share:
Basic	$ 1.92	$ 1.86	$ 1.84
Diluted	1.88	1.82	1.80

All share and per share amounts have been adjusted for the 2004 3% stock dividend.

See Notes to Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY , Continued

(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,
$.73 per Share	---	---	---	(7,536)	---	---	---	(7,536)
Stock Options Exercised (87,126 Shares)	---	---	460	---	---	---	612	1,072
Shares Issued Under the Directors’ Stock Plan (1,401 Shares)	---	---	23	---	---	---	10	33
Shares Issued Under the Employee Stock Purchase Plan (27,026 Shares)	---	---	353	---	---	---	194	547
Tax Benefit for Disposition of Stock Options	---	---	237	---	---	---	---	237
Purchase of Treasury Stock (224,332 Shares)	---	---	---	---	---	---	(5,221)	(5,221)
Allocation of ESOP Stock (7,590 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

(Continued on Next Page)

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY , Continued

(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, 2002	10,468,895	$10,469	$115,110	$13,611	$(1,822)	$ 3,253	$(39,219)	$101,402
Comprehensive Income, Net of Tax:
Net Income	---	---	---	18,917	---	---	---	18,917
Decrease in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $726)	---	---	---	---	---	436	---	436
Net Unrealized Securities Holding Losses Arising During the Period, Net of Tax (Pre-tax $3,578)	---	---	---	---	---	(2,151)	---	(2,151)
Reclassification Adjustment for Net Securities Gains Included in Net Income, Net of Tax (Pre-tax $755)	---	---	---	---	---	(454)	---	(454 )
Other Comprehensive Loss								(2,169 )
Comprehensive Income								16,748

Five for Four Stock Split	2,617,224	2,617	(2,617)	---	---	---	---	---
Cash Dividends Declared,
$.81 per Share	---	---	---	(8,225)	---	---	---	(8,225)
Stock Options Exercised (53,544 Shares)	---	---	265	---	---	---	378	643
Shares Issued Under the Directors’ Stock Plan (2,187 Shares)	---	---	41	---	---	---	16	57
Shares Issued Under the Employee Stock Purchase Plan (28,181 Shares)	---	---	389	---	---	---	209	598
Tax Benefit for Disposition of Stock Options	---	---	109	---	---	---	---	109
Purchase of Treasury Stock (227,531 Shares)	---	---	---	---	---	---	(5,558)	(5,558)
Allocation of ESOP Stock (4,130 Shares)	---	---	38	---	53	---	---	91
Balance at December 31, 2003	13,086,119	$13,086	$113,335	$24,303	$(1,769 )	$ 1,084	$(44,174 )	$105,865

(Continued on Next Page)

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY , Continued

(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, 2003	13,086,119	$13,086	$113,335	$24,303	$(1,769)	$ 1,084	$(44,174)	$105,865
Comprehensive Income, Net of Tax:
Net Income	---	---	---	19,478	---	---	---	19,478
Increase in Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-tax $131)	---	---	---	---	---	(79)	---	(79)
Net Unrealized Securities Holding Losses Arising During the Period, Net of Tax (Pre-tax $602)	---	---	---	---	---	(362)	---	(362)
Reclassification Adjustment for Net Securities Gains Included in Net Income, Net of Tax (Pre-tax $362)	---	---	---	---	---	(214)	---	(214 )
Other Comprehensive Loss								(655 )
Comprehensive Income								18,823

3% Stock Dividend	392,584	393	11,032	(11,425)	---	---	---	---
Cash Dividends Declared,
$.89 per Share	---	---	---	(9,000)	---	---	---	(9,000)
Stock Options Exercised (95,247 Shares)	---	---	243	---	---	---	750	993
Shares Issued Under the Directors’ Stock Plan (2,459 Shares)	---	---	56	---	---	---	19	75
Shares Issued Under the Employee Stock Purchase Plan (24,053 Shares)	---	---	405	---	---	---	193	598
Tax Benefit for Disposition of Stock Options	---	---	409	---	---	---	---	409
Purchase of Treasury Stock (86,947 Shares)	---	---	---	---	---	---	(2,453)	(2,453)
Acquisition of Subsidiary (60,976 Shares)	---	---	1,427	---	---	---	481	1,908
Allocation of ESOP Stock (28,762 Shares)	---	---	405	---	411	---	---	816
Balance at December 31, 2004	13,478,703	$13,479	$127,312	$23,356	$(1,358 )	$ 429	$(45,184 )	$118,034

Per share amounts and share data have been adjusted for subsequent stock splits and dividiends, including the most recent 2004 3% stock dividend.

Included in the shares issued for the stock dividend in 2004 were treasury shares of 95,690 and unallocated ESOP shares of 3,538.

See Notes to Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Years Ended December 31,
Operating Activities:	2004	2003	2002
Net Income	$ 19,478	$ 18,917	$ 18,894
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses	1,020	1,460	2,288
Depreciation and Amortization	3,150	4,912	3,145
Compensation Expense for Allocated ESOP Shares	405	91	181
Gains on the Sale of Securities Available-for-Sale	(532)	(988)	(178)
Losses on the Sale of Securities Available-for-Sale	170	233	78
Loans Originated and Held-for-Sale	(17,675)	(18,049)	(7,845)
Proceeds from the Sale of Loans Held-for-Sale	18,078	18,539	7,946
Net Gains on the Sale of Loans, Premises and Equipment and Other Real Estate Owned and Repossessed Assets	(243)	(337)	(5)
Deferred Income Tax Expense	597	2,231	528
Shares Issued Under the Directors’ Stock Plan	75	57	33
Decrease (Increase) in Interest Receivable	87	259	(143)
Decrease in Interest Payable	(127)	(444)	(405)
Increase in Other Assets	(943)	(3,272)	(2,626)
Increase (Decrease) in Other Liabilities	(1,926 )	2,433	(3,166 )
Net Cash Provided By Operating Activities	21,614	26,042	18,725

Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale	39,337	122,458	40,803
Proceeds from the Maturities and Calls of Securities Available-for-Sale	57,168	152,763	91,287
Purchases of Securities Available-for-Sale	(73,883)	(294,011)	(205,007)
Proceeds from the Maturities of Securities Held-to-Maturity	4,851	2,116	1,259
Purchases of Securities Held-to-Maturity	(7,402)	(33,477)	(886)
Net Increase in Loans	(21,944)	(57,198)	(58,227)
Proceeds from the Sales of Premises and Equipment and Other Real Estate Owned and Repossessed Assets	891	874	1,373
Purchase of Premises and Equipment	(1,846 )	(1,531 )	(1,591 )
Net Cash Used In Investing Activities	(2,828 )	(108,006 )	(130,989 )

Financing Activities:
Net Increase in Deposits	(14,336)	88,144	72,509
Net Increase (Decrease) in Short-Term Borrowings	3,040	(7,562)	10,853
Proceeds from Federal Home Loan Bank Advances	79,800	40,000	30,000
Repayments of Federal Home Loan Bank Advances	(79,800)	(35,000)	---
Repayment of Trust Preferred Security	(5,000)	---	---
Proceeds from Issuance of Trust Preferred Securities	10,000	10,000	---
Purchase of Treasury Stock	(2,453)	(5,558)	(5,221)
Exercise of Stock Options and Shares Issued to Employees’ Stock Purchase Plan	1,591	1,241	1,619
Tax Benefit for Disposition of Stock Options	409	109	237
Acquisition of Subsidiary	31	---	---
Common Stock Purchased by ESOP	411	---	---
Cash Dividends Paid	(9,000 )	(8,225 )	(7,536 )
Net Cash (Used In) Provided By Financing Activities	(15,307 )	83,149	102,461
Net Increase (Decrease) in Cash and Cash Equivalents	3,479	1,185	(9,803)
Cash and Cash Equivalents at Beginning of Year	33,326	32,141	41,944
Cash and Cash Equivalents at End of Year	$36,805	$33,326	$32,141
Supplemental Disclosures to Statements of Cash Flow Information:
Cash Paid During the Year for:
Interest on Deposits and Borrowings	$19,332	$22,055	$25,511
Income Taxes	10,228	1,224	12,858
Non-cash Investing Activity:
Transfer of Loans to Other Real Estate Owned and Repossessed Assets	928	990	1,244
Loans Securitized and Transferred to Securities Available-for-Sale	---	11,512	---
Impact of Deconsolidation of Subsidiary Trusts upon Adoption of FIN 46R as Described in Note 1 under “Recent Accounting Pronouncements:”
Decrease in Trust Preferred Securities	---	(15,000)	---
Increase in Junior Subordinated Obligations	---	15,000	---
Increase in Other Assets Representing Investment in Subsidiary Trusts	---	(465)	---
Increase in Deposits Representing Cash Held at Subsidiary Banks by Subsidiary Trusts	---	465	---

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 (Arrow) 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 Arrow and its wholly owned subsidiaries are consolidated and all material inter-company 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-year 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 Arrow 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 our evaluation of the loan portfolio, current economic conditions, past loan losses and other factors. In our 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 Arrow's market area. In addition, various Federal and State regulatory agencies, as an integral part of their examination process, review Arrow's allowance for loan losses. Such agencies may require Arrow 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.

Arrow 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. Arrow 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, Arrow 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. Arrow 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 - Arrow 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. Arrow’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 - Arrow 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 Arrow 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.

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. In November 2004, Arrow acquired all of the outstanding shares of common stock of CFG in a tax-free exchange for Arrow’s common stock (60,976 shares). Arrow recorded the following intangible assets as a result of the acquisition (none of which are deductible for income tax purposes): goodwill ($1,422), covenant ($117) and expirations ($686). The value of the covenant is being amortized over five years and the value of the expirations is being amortized over twenty years. The agreement provides for annual contingent future payments of Company stock, based upon earnings, over a five-year period. Management has concluded that, under criteria established by SFAS No. 141, these payments will be recorded as additional goodwill at the time of payment.

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.

Arrow has sold residential real estate loans (primarily to Freddie Mac) with servicing retained. Arrow accounts for mortgage servicing rights under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Mortgage servicing rights are recognized as an asset when loans are sold with servicing retained, by allocating the cost of an originated mortgage loan between the loan and servicing right based on estimated relative fair values. The cost allocated to the servicing right is capitalized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing income. Capitalized mortgage servicing rights are evaluated for impairment by comparing the asset’s carrying value to its current estimated fair value. Fair values are estimated using a discounted cash flow approach, which considers future servicing income and costs, current market interest rates, and anticipated prepayment, and default rates. Impairment losses are recognized through a valuation allowance for servicing rights having a current fair value that is less than amortized cost. Adjustments to increase (decrease) the valuation allowance are charged (credited) to income as a component of other operating income. There was no allowance for impairment losses at December 31, 2004 or 2003.

NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pension and Postretirement Benefits - Arrow 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. Arrow 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.

Stock-Based Compensation Plans - Arrow has two stock option plans, which are described more fully in Notes 17 and 18. Arrow 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. As described more fully in Note 17, Arrow sponsors an Employee Stock Purchase Plan (ESPP) with a 15% discount, which is not considered compensatory under APB Opinion No. 25. Under SFAS No. 123, the ESPP is considered compensatory and the entire discount is considered to be compensation expense in the pro forma disclosures below.

The following table illustrates the effect on net income and earnings per share if Arrow 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,
	2004	2003	2002
Net Income, as Reported	$19,478	$18,917	$18,894
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	553	426	349
Pro Forma Net Income	$18,925	$18,491	$18,545
Earnings per Share:
Basic - as Reported	$1.92	$1.86	$1.84
Basic - Pro Forma	1.87	1.82	1.81
Diluted - as Reported	1.88	1.82	1.80
Diluted - Pro Forma	1.83	1.78	1.77

The weighted-average fair value of options granted during 2004, 2003 and 2002 was $8.25, $6.49 and $6.09, 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 2004, 2003 and 2002, respectively: dividend yields of 2.88%, 3.28% and 3.24%; expected volatility of 28.4%, 27.2% and 27.5%; risk free interest rates of 3.78%, 3.76% and 3.13%; 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 of future grants on pro forma net income for future years.

NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities Sold Under Agreements to Repurchase - In securities repurchase agreements, Arrow receives cash from a counterparty in exchange for the transfer of securities to a third party custodian’s account that explicitly recognizes Arrow’s interest in the securities. These agreements are accounted for by Arrow 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 Arrow’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 Arrow’s stock options), computed using the treasury stock method. Unallocated common shares held by Arrow’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.

Financial Instruments - Arrow 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. Arrow'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 Arrow's entire holdings of a particular financial instrument. Because no market exists for a significant portion of Arrow'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, Arrow 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, 2004 and 2003, and during 2004, 2003 and 2002, Arrow 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 Arrow in a fiduciary or agency capacity for its customers are not included in the consolidated balance sheets since these assets are not assets of Arrow. Income from fiduciary activities is reported on the accrual basis.

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

NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 our 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 Arrow’s allowance for loan losses. Such agencies may require Arrow 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.

Recent Accounting Pronouncements – In December 2004, the FASB issued a revised Statement of Financial Accounting Standards No. 123 (SFAS No. 123R), “Share-Based Payment.” For Arrow, SFAS No. 123R requires that, beginning with the third quarter of 2005, the cost of employee services received in exchange for an award of equity instruments be measured on the grant date at the fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e. the vesting period), which is typically four years for Arrow.

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, 2004 and 2003 was approximately $15,043 and $14,174 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. For short-term securities the estimated fair value is the carrying amount.

A summary of the amortized costs and the approximate fair values of securities at December 31, 2004 and 2003 is presented below:

Securities Available-for-Sale :

	Amortized Cost	Fair Value	Gross Unrealized Gains	Gross Unrealized Losses
December 31, 2004:
U.S. Treasury and Agency Obligations	$ 56,918	$ 56,329	$ 4	$ 93
State and Municipal Obligations	8,340	8,492	152	---
Collateralized Mortgage Obligations	120,697	121,732	1,085	50
Other Mortgage-Backed Securities	116,334	116,809	1,465	990
Corporate and Other Debt Securities	12,333	12,500	235	68
Mutual Funds and Equity Securities	9,328	9,386	61	3
Total Securities Available-for-Sale	$323,950	$325,248	$3,002	$1,704

December 31, 2003:
U.S. Treasury and Agency Obligations	$ 53,771	$ 53,530	$ 46	$ 287
State and Municipal Obligations	12,655	12,951	296	---
Collateralized Mortgage Obligations	126,989	127,522	954	422
Other Mortgage-Backed Securities	135,734	137,072	2,484	1,145
Corporate and Other Debt Securities	9,191	9,469	278	---
Mutual Funds and Equity Securities	9,238	9,287	49	---
Total Securities Available-for-Sale	$347,578	$349,831	$4,107	$1,854

Securities Held-to-Maturity :

	Amortized Cost	Fair Value	Gross Unrealized Gains	Gross Unrealized Losses
December 31, 2004:
State and Municipal Obligations	$108,117	$111,058	$ 3,352	$ 410

December 31, 2003:
State and Municipal Obligations	$105,776	$110,341	$ 5,068	$ 503

NOTE 3:

SECURITIES (Continued)

A summary of the maturities of securities as of December 31, 2004 is presented below. Mutual funds and equity securities, which have no stated maturity, are included in the over ten-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	$ 5,000	$ 4,917	$ ---	$ ---
State and Municipal Obligations	5,005	5,012	21,157	21,183
Collateralized Mortgage Obligations	3,110	3,112	---	---
Other Mortgage-Backed Securities	758	779	---	---
Corporate and Other Debt Securities	33	33	---	---
Total	13,906	13,853	21,157	21,183

From 1 - 5 Years:
U.S. Treasury and Agency Obligations	51,918	51,412	---	---
State and Municipal Obligations	1,432	1,457	56,499	58,686
Collateralized Mortgage Obligations	117,587	118,620	---	---
Other Mortgage-Backed Securities	97,010	97,397	---	---
Corporate and Other Debt Securities	9,304	9,297	---	---
Total	277,251	278,183	56,499	58,686

From 5 - 10 Years :
State and Municipal Obligations	391	414	29,809	30,517
Other Mortgage-Backed Securities	17,882	17,905	---	---
Total	18,273	18,319	29,809	30,517

Over 10 Years:
State and Municipal Obligations	1,512	1,609	652	672
Other Mortgage-Backed Securities	684	728	---	---
Corporate and Other Debt Securities	2,996	3,170	---	---
Mutual Funds and Equity Securities	9,328	9,386	---	---
Total	14,520	14,893	652	672
Total Securities	$323,950	$325,248	$108,117	$111,058

The fair value of securities pledged to secure repurchase agreements amounted to $42,256 and $39,515 at December 31, 2004 and 2003, respectively. The fair value of securities pledged to secure public and trust deposits and for other purposes totaled $282,290 and 300,386 at December 31, 2004 and 2003, respectively. Other mortgage-backed securities at December 31, 2004 and 2003 included $17,213 and $25,614, respectively, of loans securitized by Arrow which it continues to service.

NOTE 3:

SECURITIES (Continued)

Information on temporarily impaired securities at December 31, 2004, segregated according to the length of time such securities had been in a continuous unrealized loss position, is summarized as follows:

	Less than 12 Months		12 Months or Longer		Total
Available-for-Sale Portfolio:	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
U.S. Treasury and Agency Obligations	$19,665	$259	$21,609	$ 334	$ 41,274	$ 593
State & Municipal Obligations	577	1	---	---	577	1
Collateralized Mortgage Obligations	4,997	18	4,947	32	9,944	50
Other Mortgage-Backed Securities	21,710	231	46,704	759	68,414	990
Corporate & Other Debt Securities	5,049	68	---	---	5,049	68
Mutual Funds and Equity Securities	82	2	---	---	82	2
Total Securities Available-for-Sale	$52,081	$580	$73,260	$1,124	$125,341	$1,704

The above table represents 44 securities where the current fair value is less than the related amortized cost. These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing entities. Except for one unrated municipal obligation, no debt security has a current rating that is below investment grade, and most of the securities are rated “AAA.” The unrealized losses on these temporarily impaired securities are primarily the result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and/or changes in the level of prepayments for mortgage related securities.

NOTE 4:

LOANS (In Thousands)

Loans at December 31, 2004 and 2003 consisted of the following:

	2004	2003
Commercial, Financial and Agricultural	$ 76,379	$ 82,808
Real Estate - Commercial	137,107	110,499
Real Estate - Residential	342,957	328,673
Real Estate - Construction	7,868	8,670
Indirect Consumer Loans	300,672	311,812
Other Loans to Individuals	10,328	12,716
Total Loans	$875,311	$855,178

The carrying amount of net loans at December 31, 2004 and 2003 was $863,265 and $843,336, respectively. The estimated fair value of net loans at December 31, 2004 and 2003 was $869,252 and $867,600, respectively.

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect and other consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for nonperforming loans is generally based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

Certain executive officers and directors, including their immediate families and organizations in which they are principals of Arrow or affiliates, have various loan, deposit and other transactions with Arrow. Such transactions are on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The amount of such related party loans was $7,054 at December 31, 2004 and $8,553 at December 31, 2003. During 2004, the amount of new loans and renewals extended to such related parties was $14,261 and the total of loan repayments was $15,760.

Arrow has pledged certain loans secured by one-to-four family residential mortgages under a blanket collateral agreement to secure borrowings from the Federal Home Loan Bank (see Note 11). As of December 31, 2004, the amount of such pledged loans amounted to $226,503.

Arrow designates certain loans as nonaccrual and suspends the accrual of interest and the amortization of net deferred fees or costs when payment of interest and/or principal is due and unpaid for a period of, generally, ninety days or the likelihood of repayment is uncertain in the opinion of management. The following table presents information concerning nonperforming loans at December 31:

	2004	2003	2002
Nonaccrual Loans	$2,103	$1,822	$2,471
Loans Past Due 90 or More Days and Still Accruing Interest	6	685	91
Restructured Loans	---	---	---
Total Nonperforming Loans	$2,109	$2,507	$2,562

Arrow has no material commitments to make additional advances to borrowers with nonperforming loans. The following table presents information with respect to interest on the nonaccrual loans shown in the table above for the years ended December 31:

	2004	2003	2002
Gross Interest That Would Have Been Earned Under Original Terms	$161	$160	$215
Interest Included in Income	115	107	110

NOTE 5:

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (In Thousands)

The following summarizes the changes in the allowance for loan losses during the years ended December 31:

	2004	2003	2002
Balance at Beginning of Year	$11,842	$11,193	$ 9,720
Provision for Loan Losses	1,020	1,460	2,288
Recoveries	246	342	306
Charge-Offs	(1,062 )	(1,153 )	(1,121 )
Balance at End of Year	$12,046	$11,842	$11,193

The balance of impaired loans, within the scope of SFAS No. 114, was $515 and $0 at December 31, 2004 and 2003, respectively. The allowance for loan losses included $112 and $0 allocated to impaired loans at the same respective dates. The average recorded investment in impaired loans for 2004, 2003 and 2002 was $236, $254 and $1,422, respectively. For all years, no interest income was recorded on such loans during the period of impairment.

NOTE 6:

PREMISES AND EQUIPMENT (In Thousands)

A summary of premises and equipment at December 31, 2003 and 2002 is presented below:

	2004	2003
Land and Bank Premises	$18,269	$17,219
Equipment, Furniture and Fixtures	13,119	12,304
Leasehold Improvements	461	353
Total Cost	31,849	29,876
Accumulated Depreciation and Amortization	(16,910 )	(15,702 )
Net Premises and Equipment	$14,939	$14,174

Amounts charged to expense for depreciation and amortization totaled $1,208, $1,046 and $956 in 2004, 2003 and 2002, respectively.

NOTE 7:

OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS (In Thousands)

There was no other real estate owned at December 31, 2004 or 2003, and accordingly, no allowance for other real estate owned losses. Repossessed assets totaled $136 and $180 at December 31, 2004 and 2003, respectively, and consisted solely of motor vehicles repossessed in satisfaction of loans.

NOTE 8:

INTANGIBLE ASSETS OTHER THAN GOODWILL (In Thousands)

The following table presents information on Arrow’s intangible assets (other than goodwill) as of December 31, 2004, 2003 and 2002:

	Depositor Intangibles ¹	Mortgage Servicing Rights ²	Covenants ³	Expirations ⁴	Pension Intangible Asset ⁵	Total
Gross Carrying Amount, December 31, 2004	$ 560	$236	$117	$686	---	$1,599
Accumulated Amortization	(538 )	(38 )	(2)	(2 )	---	(580 )
Net Carrying Amount, December 31, 2004	$ 22	$198	$115	$684	---	$1.019

Gross Carrying Amount, December 31, 2003	$ 560	$118	---	---	---	$ 678
Accumulated Amortization	(501 )	(11 )	---	---	---	(512 )
Net Carrying Amount, December 31, 2003	$ 59	$107	---	---	---	$ 166

Gross Carrying Amount, December 31, 2002	$ 560	---	---	---	$322	$ 882
Accumulated Amortization	(464 )	---	---	---	---	(464 )
Net Carrying Amount, December 31, 2002	$ 96	---	---	---	$322	$ 418

Amortization Expense:
2004	$37	$27	$ 2	$ 2	$ ---	$68
2003	$37	$11	---	---	$ ---	$48
2002	37	---	---	---	---	$37
Estimated Annual Amortization Expense: ^1,2
2005	22	39	24	34	---	119
2006	---	39	24	34	---	97
2007	---	39	23	34	---	96
2008	---	39	23	34	---	96
2009	---	28	21	34	---	83
Later Years	---	12		514	---	526

¹ Amortization of Depositor Intangibles is reported in the income statement as a component of other operating expense.

² Amortization of Mortgage Servicing Rights is reported in the income statement as a reduction of servicing fee income.

³ Amortization of Covenants is reported in the income statement as a component of other operating expense.

⁴ Amortization of Expirations is reported in the income statement as a component of other operating expense.

⁵ Changes in the Pension Intangible Asset are offset to a corresponding liability account, and are not a component of periodic income or expense.

During 2004, Arrow acquired all the common stock of an insurance agency and at the date of acquisition recorded intangible assets for a non-compete covenant of $117 and for the value of the existing customer base of $686. There were no branch acquisitions during 2004 and no impairment losses were recognized with respect to Arrow’s existing goodwill or intangible assets.

NOTE 9:

TIME DEPOSITS (In Thousands)

The following summarizes the contractual maturities of time deposits during years subsequent to December 31, 2004:

	Time Deposits of $100,000 or More	Other Time Deposits
2005	$65,380	$86,650
2006	5,684	34,278
2007	9,054	25,938
2008	1,671	7,408
2009	3,419	13,073
2010 and Beyond	698	3,540
Total	$85,906	$170,887

The carrying value of time deposits at December 31, 2004 and 2003 was $256,793 and $248,225 respectively. The estimated fair value of time deposits at December 31, 2004 and 2003 was $256,404 and $251,153, respectively. The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rates are estimated using the FHLB yield curve, which is considered representative of Arrow’s time deposit rates.

NOTE 10:

SHORT-TERM BORROWINGS (Dollars in Thousands)

A summary of short-term borrowings is presented below:

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase:	2004	2003	2002
Balance at December 31	$42,256	$39,515	$44,078
Maximum Month-End Balance	58,555	52,988	44,369
Average Balance During the Year	46,597	43,501	36,379
Average Rate During the Year	0.79%	0.82%	1.42%
Rate at December 31	0.83%	0.50%	1.23%

Other Short-Term Borrowings:
Balance at December 31	$1,720	$1,421	$4,420
Maximum Month-End Balance	3,021	3,234	5,336
Average Balance During the Year	836	770	3,089
Average Rate During the Year	1.06%	0.86%	1.49%
Rate at December 31	2.03%	0.73%	0.99%

Average Aggregate Short-Term Borrowing Rate During the Year	0.80%	0.82%	1.44%

Securities sold under agreements to repurchase generally mature within ninety days. Arrow maintains effective control over the securities underlying the agreements. Federal funds purchased represent overnight transactions.

Other short-term borrowings primarily include demand notes issued to the U.S. Treasury. In addition, Arrow has in place borrowing facilities from correspondent banks, the Federal Home Loan Bank of New York (“FHLB”) and the Federal Reserve Bank of New York.

NOTE 11:

FHLB ADVANCES (Dollars in Thousands)

Arrow has established overnight and 30 day term lines of credit with the FHLB each in the amount of $58,922. If advanced, such lines of credit will be collateralized by mortgage-backed securities, loans and FHLB stock. Participation in the FHLB program requires an investment in FHLB stock. The investment in FHLB stock, included in Securities Available-for-Sale on the Consolidated Balance Sheets, amounted to $7,613 and $7,500 at December 31, 2004 and 2003, respectively. Arrow also borrows longer-term funds from the FHLB. Certain borrowings are in the form of “convertible advances.” These advances have a set final maturity, but are callable by the FHLB at certain dates beginning no earlier than one year from the issuance date. If the advances are called, Arrow may elect to have the funds replaced by the FHLB at the then prevailing market rate of interest. The borrowings are secured by mortgage loans and/or mortgage-backed securities and/or FHLB stock held by Arrow. The total amount of assets pledged to the FHLB for borrowing arrangements at December 31, 2004 and 2003 amounted to $226,503 and $233,786, respectively. The table below presents information applicable to FHLB advances as of December 31, 2004 and 2003:

2004 Amount	2003 Amount	Effective Rate	First Call Date	Call Frequency	Maturity Date
$ 5,000	$ 5,000	5.85%	February 22, 2001	Quarterly	November 22, 2005
5,000	5,000	5.43%	March 11, 2001	Quarterly	March 11, 2008
5,000	5,000	5.90%	May 22, 2001	Quarterly	November 22, 2005
20,000	20,000	5.93%	November 2, 2001	Quarterly	November 2, 2005
5,000	5,000	5.98%	November 22, 2001	Quarterly	November 22, 2005
10,000	10,000	4.80%			March 1, 2006
10,000	10,000	5.12%			February 14, 2011
10,000	10,000	5.18%			February 23, 2011
---	2,500	4.90%			June 15, 2004
---	7,500	5.00%			August 1, 2004
10,000	10,000	4.01%	June 3, 2005	One Time	June 4, 2012
10,000	10,000	3.02%	August 22, 2005	One Time	August 7, 2007
10,000	10,000	4.44%	June 3, 2006	One Time	June 4, 2012
---	10,000	1.28%			March 6, 2005
10,000	10,000	1.91%			April 28, 2005
10,000	10,000	2.89%			November 17, 2006
10,000	10,000	2.26%			November 17, 2005
10,000	---	2.55%			January 31, 2005
10,000	---	2.58%			February 15, 2005
$150,000	$150,000

The estimated fair value of FHLB advances was $152,675 and $156,504 at December 31, 2004 and 2003, respectively. The fair value of FHLB advances is estimated based on the discounted value of contractual cash flows. The discount rate is estimated using current rates on FHLB advances with similar maturities and call features. The table below presents the amounts of FHLB advances maturing in the next five years and beyond:

Final Maturity	Amount
2005	$ 75,000
2006	20,000
2007	10,000
2008	5,000
2009	---
Beyond	40,000
Total FHLB Advances	$150,000

NOTE 12:

GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION’S JUNIOR SUBORDINATED

DEBENTURES (In Thousands)

At various times during 2004, there were outstanding three classes of financial instruments issued by three separate subsidiary business trusts of Arrow. At year end, two such classes of trust-issued instruments were outstanding, having an aggregate amount of $20,000.

The first of the two classes of trust-issued instruments outstanding at year-end was issued by Arrow Capital Statutory Trust II ("ACST II"), a Delaware business trust established on July 16, 2003, upon the filing of a certificate of trust with the Delaware Secretary of State. In July 2003, ACST II issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST II trust preferred securities") in the aggregate amount of $10,000. The ACST II trust preferred securities bear a rate of 6.53% until September 30, 2008. After that date, the rate will become a variable rate adjusted quarterly to the 3-month LIBOR plus 3.15%. ACST II used the proceeds of the sale of its trust preferred securities to purchase an identical amount ($10,000) of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST II trust preferred securities.

The second of the two classes of trust-issued instruments outstanding at year-end was issued by Arrow Capital Statutory Trust III ("ACST III"), a Delaware business trust established on December 23, 2004, upon the filing of a certificate of trust with the Delaware Secretary of State. On December 28, 2004, the ACST III issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST III trust preferred securities") in the aggregate amount of $10,000. The rate on the ACST III trust preferred securities is a variable rate, adjusted quarterly, equal to the 3-month LIBOR plus 2.00%. ACST III used the proceeds of the sale its trust preferred securities to purchase an identical amount ($10,000) of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST III trust preferred securities.

On December 31, 2004, a third outstanding class of instruments previously issued by a subsidiary trust of Arrow was redeemed by that trust at a redemption price equal to the aggregate liquidation amount of the instruments, or $5,000. The trust in question, Arrow Capital Trust I ("ACT I"), was established as a Delaware business trust in November 1999. In December 1999, ACT I issued and sold to several unaffiliated purchasers 30-year guaranteed preferred beneficial interests in the trust's assets ("ACT I trust preferred securities") in the aggregate amount of $5,000 at a fixed rate of 9.50%. ACT I used the proceeds from the sale of the ACT I trust preferred securities to acquire an identical amount ($5,000) of junior subordinated debentures issued by Arrow bearing an identical interest rate (9.50%). On December 31, 2004, at the same time that ACT I redeemed all outstanding ACT I trust preferred securities, Arrow redeemed all $5,000 in aggregate principal amount of its junior subordinated debentures held by ACT I.

The primary assets of the two subsidiary trusts having trust preferred securities outstanding at year-end, ACST II and ACST III (the “Trusts”), are Arrow's junior subordinated debentures discussed above, and the sole revenues of the Trusts are payments received by them from Arrow with respect to the junior subordinated debentures. The trust preferred securities issued by the Trusts are non-voting. All common voting securities of the Trusts are owned by Arrow. Arrow used the net proceeds from its sale of junior subordinated debentures to the Trusts, facilitated by the Trust’s sale of their trust preferred securities to the purchasers thereof, for general corporate purposes. The trust preferred securities and underlying junior subordinated debentures, with associated expense that is tax deductible, qualify as Tier I capital under regulatory definitions.

Arrow's primary source of funds to pay interest on the debentures held by the Trusts are current dividends received by Arrow from its subsidiary banks. Accordingly, Arrow's ability to make payments on the debentures, and the ability of the Trusts to make payments on their trust preferred securities, are dependent upon the continuing ability of Arrow's subsidiary banks to pay dividends to Arrow. Since the trust preferred securities issued by the subsidiary trusts and the underlying junior subordinated debentures issued by Arrow at December 31, 2004 and 2003, respectively, are classified as debt for financial statement purposes, the expense associated with these securities is recorded as interest expense in the consolidated statements of income.

NOTE 12:

GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION’S JUNIOR SUBORDINATED

DEBENTURES (Continued)

The estimated fair value of the outstanding trust preferred securities and underlying junior subordinated debentures was $20,651 and $16,796 at December 31, 2004 and 2003, respectively. The fair value of these securities was estimated based on the discounted value of contractual cash flows. The discount rate utilized in the estimate was the published yield on seasoned BAA corporate debt securities on the date of valuation.

As of December 31, 2003, Arrow deconsolidated these subsidiary trusts, which had issued trust preferred securities, and replaced the presentation of such instruments in its consolidated financial statements with Arrow’s junior subordinated debentures issued to the subsidiary trusts. Such presentation reflects the adoption of FASB Interpretation No. 46 (FIN 46R) issued in December 2003.

NOTE 13:

ACCUMULATED OTHER COMPREHENSIVE INCOME (In Thousands)

The following table presents the components, net of tax, of accumulated other comprehensive income as of December 31:

	2004	2003
Excess of Additional Pension Liability Over Unrecognized Prior Service Cost	$(351)	$ (270)
Net Unrealized Securities Holding Gains	780	1,354
Total Accumulated Other Comprehensive Income	$ 429	$1,084

NOTE 14:

EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for each of the years in the three-year period ended December 31, 2004. All share and per share amounts have been adjusted for the 2004 3% stock dividend.

		Net Income (Numerator )	Weighted-Average Shares (Denominator )	Per Share Amount
For the Year Ended December 31, 2004:
Basic EPS		$19,478	10,122	$1.92
Dilutive Effect of Stock Options		---	242
Diluted EPS		$19,478	10,364	$1.88
For the Year Ended December 31, 2003:
Basic EPS		$18,917	10,148	$1.86
Dilutive Effect of Stock Options		---	234
Diluted EPS		$18,917	10,382	$1.82
For the Year Ended December 31, 2002:
Basic EPS	$18,894		10,267	$1.84
Dilutive Effect of Stock Options	---		248
Diluted EPS	$18,894		10,515	$1.80

During a portion of 2004 options to purchase 64 shares of common stock at an average price of $32.02 per share were outstanding but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares during that period. Antidilutive shares for 2003 and 2002 were 139 at an average price of $26.66 per share and 75 at an average price of $26.35, for the respective years.

NOTE 15:

REGULATORY MATTERS (Dollars in Thousands)

In the normal course of business, Arrow and its subsidiaries operate under certain regulatory restrictions, such as the extent and structure of covered intercompany borrowings and maintenance of reserve requirement balances.

The principal source of the funds for the payment of shareholder dividends by Arrow has been from dividends declared and paid to Arrow by its bank subsidiaries. As of December 31, 2004, the maximum amount that could have been paid by subsidiary banks to Arrow, without prior regulatory approval, was approximately $29,579.

Under current Federal Reserve regulations, Arrow is prohibited from borrowing from the subsidiary banks unless such borrowings are secured by specific obligations. Additionally, the maximum of any such borrowing is limited to 10% of an affiliate’s capital and surplus.

Arrow and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on an institution’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Arrow and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Arrow and its subsidiary banks to maintain minimum capital amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004 and 2003, that Arrow and both subsidiary banks meet all capital adequacy requirements to which they are subject.

As of December 31, 2004, Arrow and both subsidiary banks qualified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as “Well Capitalized,” Arrow and its subsidiary banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events that management believes have changed Arrow’s or its subsidiary banks’ categories.

Arrow’s and its subsidiary banks’, Glens Falls National Bank and Trust Company (“Glens Falls National”) and Saratoga National Bank and Trust Company (“Saratoga National”), actual capital amounts and ratios are presented in the table below as of December 31, 2004 and 2003:

	Actual		Minimum Amounts For Capital Adequacy Purposes		Minimum Amounts To Be Well Capitalized
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2004:
Total Capital (to Risk Weighted Assets):
Arrow	$138,085	15.8%	$70,049	8.0%	$87,562	10.0%
Glens Falls National	110,739	14.9%	59,338	8.0%	74,172	10.0%
Saratoga National	20,771	15.1%	11,026	8.0%	13,783	10.0%
Tier I Capital (to Risk Weighted Assets):
Arrow	127,086	14.5%	35,010	4.0%	52,515	6.0%
Glens Falls National	101,443	13.7%	29,662	4.0%	44,493	6.0%
Saratoga National	17,245	12.5%	5,514	4.0%	8,271	6.0%
Tier I Capital (to Average Assets):
Arrow	127,086	9.2%	55,075	4 0%	55,075	4.0%
Glens Falls National	101,443	8.4%	48,421	4.0%	60,527	5.0%
Saratoga National	17,245	10.0%	6,919	4.0%	8,648	5.0%

NOTE 15:

REGULATORY MATTERS (Continued)

	Actual		Minimum Amounts For Capital Adequacy Purposes		Minimum Amounts To Be Well Capitalized
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2003:
Total Capital (to Risk Weighted Assets):
Arrow	$121,606	14.2%	$68,510	8.0%	$85,638	10.0%
Glens Falls National	98,977	13.8%	56,965	8.0%	71,206	10.0%
Saratoga National	19,267	13.4%	11,503	8.0%	14,378	10.0%
Tier I Capital (to Risk Weighted Assets):
Arrow	110,887	13.0%	34,119	4.0%	51,179	6.0%
Glens Falls National	90,031	12.6%	28,581	4.0%	42,872	6.0%
Saratoga National	15,067	10.5%	5,740	4.0%	8,610	6.0%
Tier I Capital (to Average Assets):
Arrow	110,887	8.1%	54,759	4 0%	54,759	4.0%
Glens Falls National	90,031	7.5%	48,017	4.0%	60,021	5.0%
Saratoga National	15,067	8.5%	7,090	4.0%	8,863	5.0%

Currently, banking regulators allow Trust Preferred Securities as a component of Tier 1 capital, but that position is being evaluated due to FIN 46. Arrow cannot predict whether Trust Preferred Securities will continue to be allowed as a component of Tier 1 capital in future periods.

NOTE 16:

RETIREMENT PLANS (Dollars in Thousands)

Arrow sponsors qualified and nonqualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate. The service credits under the cash balance plan are equal to 6.0% for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from 6.0% to 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under ERISA. Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.

Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. The health care plan provides for automatic increases of Company contributions each year based on the increase in inflation, up to a maximum of 5%. Arrow’s policy is to fund the cost of postretirement benefits in amounts determined at the discretion of management.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States. The Act introduced a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D under the Act. The measures of the accumulated non-pension postretirement benefit obligation and net periodic non-pension postretirement benefit cost, in the following tables, do not reflect any amount associated with the subsidy because Arrow, at December 31, 2004, was unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.

NOTE 16:

RETIREMENT PLANS (Continued)

The following tables provide a reconciliation of the changes in the plans’ benefit obligations (projected benefit obligation for pension benefits and accumulated benefit obligation for postretirement benefits) and fair value of the plans’ assets during the years ended December 31, 2004 and 2003, and a reconciliation of the funded status to the net amount recognized in the consolidated balance sheets as of December 31 of both years:

	Pension Benefits		Postretirement Benefits
	2004	2003	2004	2003
Change in Benefit Obligation :
Benefit Obligation at January 1	$23,627	$21,268	$6,645	$5,896
Service Cost	1,011	738	199	153
Interest Cost	1,389	1,344	491	384
Plan Participants’ Contributions	---	---	154	167
Amendments	285	(77)	---	---
Actuarial Loss	1,074	1,951	1,968	574
Benefits Paid	(1,837 )	(1,597 )	(501 )	(529 )
Benefit Obligation at December 31 ¹	$25,549	$23,627	$8,956	$6,645

Change in Plan Assets :
Fair Value of Plan Assets at January 1	$23,810	$16,552	$ ---	$ ---
Actual Return on Plan Assets	2,105	3,359	---	---
Employer Contributions	345	5,496	347	362
Plan Participants’ Contributions	---	---	154	167
Benefits Paid	(1,837 )	(1,597 )	(501 )	(529 )
Fair Value of Plan Assets at December 31	$24,423	$23,810	$ ---	$ ---

Funded Status	$(1,127)	$ 183	$(8,956)	$(6,645)
Unrecognized Transition Obligation	---	---	790	262
Unrecognized Prior Service Benefit	(1,280)	(1,689)	(244)	(373)
Unrecognized Net Loss	7,913	7,177	3,576	2,532
Net Amount Recognized	$ 5,506	$ 5,671	$(4,834 )	$(4,224 )
¹ Represents the projected benefit obligation for pension benefits and the accumulated benefit obligations for postretirement benefits.

At December 31, 2004 and 2003, the accumulated benefit obligation (the actuarial present value of benefits, vested and non-vested, earned by employees based on current and past compensation levels) for Arrow’s qualified defined benefit pension plan totaled $21,689 and $19,778, respectively, which compared with total plan assets of $24,423 and $23,810, respectively. At December 31, 2004 and 2003, the accumulated benefit obligation for Arrow’s non-qualified defined benefit pension plan was $2,607 and $2,555, respectively, which compared with total plan assets of $0 at December 31, 2004 and 2003.

NOTE 16:

RETIREMENT PLANS (Continued)

The following table provides the amounts recognized in the consolidated balance sheets as of December 31 of both years:

	Pension Benefits Qualified Plan		Pension Benefits Non-Qualified Plan		Postretirement Benefits
	2004	2003	2004	2003	2004	2003
Prepaid Benefit Cost	$7,531	$7,776	$ ---	$ ---	$ ---	$ ---
Accrued Benefit Cost	---	---	(2,607)	(2,554)	(4,834)	(4,224)
Intangible Assets	---	---	---	---	---	---
Excess of Additional Pension Liability Over Unrecognized Prior Service Cost (Pre-Tax Charge)	---	---	582	449	---	---
Net Amount Recognized	$7,531	$7,776	$(2,025 )	$(2,105 )	$(4,834 )	$(4,224 )

The following table provides the components of net periodic benefit costs for the plans for the years ended December 31:

	Pension Benefits			Postretirement Benefits
	2004	2003	2002	2004	2003	2002
Service Cost	$1,011	$ 738	$1,044	$199	$153	$143
Interest Cost	1,389	1,344	1,465	491	384	367
Expected Return on Plan Assets	(2,093)	(1,623)	(1,434)	---	---	---
Amortization of Prior Service Cost (Credit)	(123)	(118)	109	(24)	(69)	(69)
Amortization of Transition (Asset) Obligation	---	---	(47)	111	40	39
Amortization of Net Loss	326	356	109	180	175	130
Net Periodic Benefit Cost	$ 510	$ 697	$1,246	$957	$683	$610

The prior service costs or credits are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of assets are amortized over the average remaining service period of active participants.

NOTE 16:

RETIREMENT PLANS (Continued)

Additional Information:	Pension Benefits			Postretirement Benefits
	2004	2003	2002	2004	2003	2002
Decrease (Increase) in Minimum Liability Included In Other Comprehensive Income or Loss	$131	$726	$(1,027)	---	---	---
Weighted-Average Assumptions Used To Determine Benefit Obligation at December 31:
Discount Rate	5.75%	6.00%	6.50%	5.75%	6.00%	6.50%
Rate of Compensation Increase	3.50%	3.50%	3.50%	---	---	---
Interest Rate Credit for Determining Projected Cash Balance Account	5.25%	5.25%	5.00%	---	---	---
Interest Rate to Annuitize Cash Balance Account	5.25%	5.25%	5.00%	---	---	---
Weighted-Average Assumptions Used To Determine Net Periodic Benefit Cost for Years Ended December 31:
Discount Rate	6.00%	6.50%	7.00%	6.00%	6.50%	7.00%
Expected Long-Term Return on Plan Assets	9.00%	9.00%	9.00%	---	---	---
Rate of Compensation Increase	3.50%	3.50%	4.00%	---	---	---
Interest Rate Credit for Determining Projected Cash Balance Account	5.25%	5.00%	---	---	---	---
Interest Rate to Annuitize Cash Balance Account	5.25%	5.00%	---	---	---	---

Arrow’s overall expected long-term rate of return on assets is 9.00%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based principally on Arrow’s ten-year time-weighted historical returns of 11.1%, with an adjustment for expected returns.

The following table presents management’s estimated benefit payments for the next ten years:

Estimated Future Benefit Payments
Payment Period	Qualified Pension Plans	Non-Qualified Pension Plan	Post Retirement Plan
2005	$ 843	$ 286	$ 447
2006	871	282	457
2007	962	254	474
2008	1,054	243	488
2009	1,164	226	512
2010-2014	7,573	1,304	2,736

NOTE 16:

RETIREMENT PLANS (Continued)

Assumed Health Care Cost Trend Rates at December 31
	Health Care		Drug Benefits		Dental Care
	2004	2003	2004	2003	2004	2003
Health Care Cost Trend Rate Assumed for Next Year	7.50%	8.50%	12.00%	12.00%	6.25%	6.25%
Rate to which the Cost Trend Rate is Assumed to Decline (the Ultimate Trend Rate)	5.00%	5.00%	5.00%	5.00%	5.50%	5.50%
Year that the Rate Reaches the Ultimate Trend Rate	2010	2010	2010	2010	2005	2005

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

1-Percentage-

Point Increase

1-Percentage-

Point Decrease

Effect on Total Service and Interest Cost Components of Net Periodic

Postretirement Benefit Cost For the Year Ended December 31, 2004

$ 19

$(76)

Effect on the Accumulated Postretirement Benefit Obligation as of

December 31, 2004

251

(779)

Arrow’s pension plan weighted-average asset allocations at December 31, 2004, and 2003, by asset category are as follows:

	Plan Assets At December 31,
	2004	2003
Asset Category:
Cash	0.6%	1.1%
Mortgages	0.5	1.0
Debt Securities	1.0	1.1
Company Stock	5.8	5.0
Mutual Funds – Equity	72.4	70.9
Mutual Funds – Fixed Income	19.7	20.9
Total	100.0 %	100.0 %

At December 31, 2004 and 2003, plan assets included shares of mutual funds advised by Arrow’s subsidiary, North Country Investment Advisers, Inc., with a market value of $17,676 and $17,626, respectively. At December 31, 2004 and 2003, plan assets also included 46 and 44 shares, respectively, of Arrow Financial Corporation common stock with a market value of $1,457 and $1,185, respectively. During the respective years, the plan received $40 and $55 from cash dividends on Arrow’s common stock. In accordance with ERISA guidelines, the Board authorized the purchase of Arrow Financial Corp. common stock up to 10% of the fair market value of the plan's assets at the time of acquisition.

NOTE 16:

RETIREMENT PLANS (Continued)

Pension Plan Investment Policies and Strategies:

Return Requirements:

The portfolio should achieve an inflation-protected rate of return at least equal to the actuarial assumption of 9%.

Risk Tolerance:

The Plan has the flexibility to accept an average to above-average degree of risk. Key factors to consider in reaching conclusions regarding risk tolerance are: (i) the pension plan must meet ERISA prudence requirements, which apply to the entire portfolio, not just its individual component securities, (ii) the Plan’s two key actuarial assumptions with regard to expected long-term return on plan assets and salary progression are 9% and 3.5% respectively. The expected long-term return on plan assets is reasonable relative to historic results over the last ten years of 11.1%. The salary progression rate is in line with past results,(iii) the plan is valued annually, (iv) Arrow’s average employee age is reasonably low (43.2), and the time horizon is long, and (v) the Plan’s operating results have been relatively strong and consistent.

Asset Allocation:

The Plan’s limited liquidity requirements permit a low level of short-term reserves, which in any event do not meet the plan’s 9% return requirement. All of the constraints suggest that moderate emphasis on common stocks is appropriate. With historically low interest rates, a lower weighting in bonds is appropriate. A separate asset allocation policy is reviewed by the Board on a regular basis and documented.

Investment Strategy:

The equity portion of the plan will be invested in a diversified portfolio of equity securities of companies with small, mid, and large capitalizations. Both domestic and international equities are allowed. While the plan is allowed to invest in the common stock of Arrow Financial up to 10% of the fair market value of plan assets at purchase, the plan assets will not be concentrated in any particular industry. Both growth and value styles will be employed to increase the diversification and offer varying opportunities for appreciation.

The fixed income portion of the plan will be invested in U.S. dollar denominated investment grade bonds or debt securities. Portfolio securities shall be rated within the top four ratings categories by nationally recognized ratings agencies such as Moody’s and Standard & Poor’s. The bond portfolio will maintain a dollar-weighted average quality of “A” or better and an average dollar-weighted maturity between 1 and 10 years. The bond portion will be invested without regard to industry or sector based on analysis of each target security’s structural and repayment features, current pricing and trading opportunities as well as credit quality of the issuer. Bonds with ratings that fall below the portfolio’s rating requirements will be sold only when it is in the best interests of the plan.

Cash Flows

Based on the funded status at December 31, 2004, Arrow does not expect to make a contribution to the qualified defined benefit pension plan during 2005. Arrow makes contributions for its postretirement benefits in an amount equal to actual expenses for the year. That amount is estimated to be $375 for 2005.

NOTE 17:

OTHER EMPLOYEE BENEFIT PLANS (In Thousands)

Arrow maintains an employee stock ownership plan (ESOP). Substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The ESOP borrowed $105 and $464 in 2001 and 2000, respectively, from one of Arrow’s subsidiary banks to purchase outstanding shares of Arrow’s common stock. The notes require Arrow to contribute at least an amount necessary for the ESOP to discharge its current obligations which include principal and interest payments on the notes. Arrow’s ESOP expense amounted to $500, $450 and $700 in 2004, 2003 and 2002, respectively. In 2004, 2003 and 2002 Arrow made contributions to the ESOP in excess of the debt service requirements. As the debt is repaid, shares are released from collateral based on the proportion of debt paid to total debt outstanding for the year and allocated to active employees.

Shares pledged as collateral are reported as unallocated ESOP shares in shareholders’ equity. As shares are released from collateral, Arrow reports compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings per share computations. The ESOP shares as of December 31, 2004 were as follows:

Allocated Shares	712
Shares Released for Allocation During 2004	29
Unallocated Shares	93
Total ESOP Shares	834

Market Value of Unallocated Shares	$2,904

Under the employee stock purchase plan (ESPP), employees may purchase shares of Arrow’s common stock, up to $24 annually, at a discount to the prevailing market price (currently a 15% discount). Under the ESPP, shares are issued by Arrow without a charge to earnings in accordance with APB Opinion No. 25. Substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements.

Arrow also sponsors a Short-Term Incentive Award Plan for senior management and a Profit Sharing Plan for substantially all employees. The combined cost of these plans was $667, $525 and $630 for 2004, 2003 and 2002, respectively.

NOTE 18:

STOCK OPTION PLANS

Arrow has established fixed Incentive Stock Option and Non-qualified Stock Option Plans. At December 31, 2004, approximately 213,676 shares remained available for grant under these plans. Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. The options usually vest over a four-year period.

A summary of the status of Arrow’s stock option plans as of December 31, 2004, 2003 and 2002 and changes during the years then ended is presented below (all share and per share data have been adjusted for stock splits and dividends, including the September 2004 3% stock dividend).

	2004		2003		2002
Options:	Shares	Weighted- Average Exercise Price	Shares	Weighted- Average Exercise Price	Shares	Weighted- Average Exercise Price
Outstanding at January 1	650,209	$16.31	639,410	$14.87	672,240	$12.99
Granted	64,000	32.02	64,478	27.03	74,997	26.35
Exercised	(95,217)	10.11	(53,541)	12.01	(102,588)	10.83
Forfeited	(400 )	26.70	(138 )	20.93	(5,240 )	16.24
Outstanding at December 31	618,592	18.89	650,209	16.31	639,410	14.88
Exercisable at December 31	449,994	15.45	470,406	13.36	445,895	12.29

The following table summarizes information about Arrow’s stock options at December 31, 2004:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding At 12/31/04	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price	Number Exercisable at 12/31/04	Weighted- Average Exercise Price
$6.00-$9.60	74,252	0.9	$ 7.82	74,128	$ 7.80
$9.61-$12.81	47,515	1.9	11.68	47,475	11.68
$12.82-$16.01	160,490	4.8	14.09	160,940	14.09
$16.02-$19.21	60,673	2.9	16.81	60,673	16.81
$19.22-$22.41	74,275	7.0	21.00	54,966	21.00
$22.42-$28.82	136,937	8.4	26.66	51,812	26.56
$28.83-$32.02	64,000	10.0	32.02	---	---
	618,592	5.5	18.89	449,994	15.45

NOTE 19:

SHAREHOLDER RIGHTS PLAN

In 1997, the Board of Directors of Arrow adopted a shareholder rights plan. The plan provides for the distribution of one preferred stock purchase right for each outstanding share of common stock of Arrow. Each right entitles the holder, following the occurrence of certain events, to purchase a unit consisting of one-hundredth of a share of Series 1 Junior Participating Preferred Stock, at a purchase price of $36.58 (adjusted for stock dividends and stock splits) per unit, subject to adjustment. The rights will not be exercisable or transferable apart from the common stock except under certain circumstances in which a person or group of affiliated persons acquires, or commences a tender offer to acquire, 20% or more of Arrow’s common stock. Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances a right may become a right to purchase common stock or assets of Arrow or common stock of an acquiring corporation at a substantial discount. Under certain circumstances, Arrow may redeem the rights at $.01 per right. The rights will expire in April 2007 unless earlier redeemed or exchanged by Arrow.

NOTE 20:

OTHER OPERATING EXPENSE (In Thousands)

Other operating expenses included in the consolidated statements of income are as follows:

	2004	2003	2002
Computer Services	$1,365	$1,234	$1,167
Legal and Other Professional Fees	1,225	1,229	1,308
Postage	1,090	1,097	1,027
Stationery and Printing	864	933	888
Telephone and Communications	716	750	700
Advertising and Promotion	639	672	627
FDIC and Other Insurance	356	344	303
Charitable Contributions	170	160	124
Intangible Asset Amortization (see Notes 1 and 8)	42	37	37
All Other	1,338	1,764	1,588
Total Other Operating Expense	$7,805	$8,220	$7,769

NOTE 21:

INCOME TAXES (In Thousands)

The provision for income taxes is summarized below:

Current Tax Expense:	2004	2003	2002
Federal	$7,433	$5,940	$7,526
State	929	435	719
Total Current Tax Expense	8,362	6,375	8,245
Deferred Tax Expense
Federal	531	1,817	398
State	66	414	130
Total Deferred Tax Expense	597	2,231	528
Total Provision for Income Taxes	$8,959	$8,606	$8,773

The provisions for income taxes differed from the amounts computed by applying the U.S. Federal Income Tax Rate of 35% for 2004, 2003 and 2002 to pre-tax income as a result of the following:

	2004	2003	2002
Computed Tax Expense at Statutory Rate	$9,953	$9,633	$9,684
Increase (Decrease) in Income Taxes Resulting From:
Tax-Exempt Income	(1,747)	(1,685)	(1,530)
Nondeductible Interest Expense	119	130	140
State Taxes, Net of Federal Income Tax Benefit	647	552	552
Other Items, Net	(13 )	(24 )	(73 )
Total Provision for Income Taxes	$8,959	$8,606	$8,773

NOTE 21:

INCOME TAXES (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below:

Deferred Tax Assets:	2004	2003
Allowance for Loan Losses	$4,678	$4,916
Pension and Deferred Compensation Plans	3,061	3,009
Minimum Pension Liability	232	179
Other	235	470
Total Gross Deferred Tax Assets	8,215	8,574

Deferred Tax Liabilities:
Pension Plans	3,003	3,305
Depreciation	818	796
Deferred Income	2,398	2,123
Net Unrealized Gains on Securities Available-for-Sale	517	899
Goodwill	1,352	752
Other	26	129
Total Gross Deferred Tax Liabilities	8,114	8,004
Net Deferred Tax Assets	$ 101	$ 570

Management believes that the realization of the recognized net deferred tax assets at December 31, 2004 and 2003 is more likely than not, based on existing loss carryback ability, available tax planning strategies and expectations as to future taxable income. Accordingly, there was no valuation allowance for deferred tax assets as of December 31, 2004 and 2003.

NOTE 22:

LEASE COMMITMENTS (In Thousands)

At December 31, 2004, Arrow was obligated under a number of noncancellable operating leases for buildings and equipment. Certain of these leases provide for escalation clauses and contain renewal options calling for increased rentals if the lease is renewed.

Future minimum lease payments on operating leases at December 31, 2004 were as follows:

	Operating Leases
2005	$ 206
2006	206
2007	213
2008	211
2009	161
Later Years	1,465
Total Minimum Lease Payments	$2,461

NOTE 23:

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONTINGENT LIABILITIES

(In Thousands)

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

NOTE 23:

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONTINGENT LIABILITIES

(Continued)

Commitments to extend credit were $138,338 and $137,714 at December 31, 2004 and 2003, respectively. These commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." FIN No. 45 requires certain new disclosures and potential liability-recognition for the fair value at issuance of guarantees that fall within its scope. Under FIN No. 45, Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.

Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $2,630 and $2,890 at December 31, 2004 and 2003, respectively, and represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Company policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from 1% to 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at December 31, 2004 and 2003 were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

Under SFAS No. 107 the fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.

In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal. At present, there are no legal proceedings pending or threatened which, in the opinion of management and counsel, would result in a material loss to Arrow.

NOTE 24:

FAIR VALUE OF FINANCIAL INSTRUMENTS (In Thousands)

The following table presents a summary at December 31 of the carrying amount and fair value of Arrow’s financial instruments not carried at fair value or an amount approximating fair value:

	2004		2003
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
Securities Held-to-Maturity (Note 3)	$108,117	$111,058	$105,776	$110,341
Net Loans (Note 4)	863,265	869,252	843,336	867,600
Time Deposits (Note 9)	256,793	256,404	248,225	251,153
FHLB Advances (Note 11)	150,000	152,675	150,000	156,504
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts (Note 12)	20,000	20,651	15,000	16,796

NOTE 25:

PARENT ONLY FINANCIAL INFORMATION (In Thousands)

Condensed financial information for Arrow Financial Corporation is as follows:

BALANCE SHEETS	December 31,
ASSETS	2004		2003
Interest-Bearing Deposits with Subsidiary Banks	$ 9,293		$ 6,635
Securities Available-for-Sale	453		391
Investment in Subsidiaries at Equity	130,443		115,203
Other Assets	3,745		4,937
Total Assets	$143,934		$127,166

LIABILITIES
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts		$ 20,000	$ 15,000
Other Liabilities		5,900	6,301
Total Liabilities		25,900	21,301
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity		118,034	105,865
Total Liabilities and Shareholders’ Equity		$143,934	$127,166

STATEMENTS OF INCOME	Years Ended December 31,
Income:	2004	2003	2002
Dividends from Bank Subsidiaries	$ 6,975	$ 9,726	$12,641
Interest and Dividends on Securities Available-for-Sale	41	7	8
Other Income (Including Management Fees)	758	753	660
Net (Losses) Gains on the Sale of Securities Available-for-Sale	11	13	(41 )
Total Income	7,785	10,499	13,268

Expense:
Interest Expense	1,208	842	564
Salaries and Benefits	202	199	584
Occupancy and Equipment	4	1	2
Other Expense	763	669	443
Total Expense	2,177	1,711	1,593
Income Before Income Tax Benefit and Equity
in Undistributed Net Income of Subsidiaries	5,608	8,788	11,675
Income Tax Benefit	579	410	450
Income Before Equity in Undistributed
Net Income of Subsidiaries	6,187	9,198	12,125
Equity in Undistributed Net Income of Subsidiaries	13,291	9,719	6,769
Net Income	$19,478	$18,917	$18,894

NOTE 25:

PARENT ONLY FINANCIAL INFORMATION (Continued)

STATEMENTS OF CASH FLOWS	Years Ended December 31,
	2004	2003	2002
Operating Activities:
Net Income	$19,478	$18,917	$18,894
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Undistributed Net Income of Subsidiaries	(13,291)	(9,719)	(6,769)
Net Losses (Gains) on the Sale of Securities Available-for-Sale	(11)	(13)	41
Shares Issued Under the Directors’ Stock Plan	75	57	33
Compensation Expense for Allocated ESOP Shares	405	91	181
Changes in Other Assets and Other Liabilities	497	(1,328 )	(625 )
Net Cash Provided by Operating Activities	7,153	8,005	11,755
Investing Activities:
Proceeds from the Sale of Securities Available-for-Sale	160	331	203
Purchases of Securities Available-for-Sale	(202 )	(346 )	(231 )
Net Cash Used in Investing Activities	(42 )	(15 )	(28 )
Financing Activities:
Exercise of Stock Options and Shares Issued to the Employees’ Stock Purchase Plan	1,591	1,241	1,619
Proceeds from Issuance of Trust Preferred Securities	10,000	10,000	---
Repayment of Trust Preferred Security	(5,000)	---	---
Tax Benefit for Disposition of Stock Options	409	109	237
Purchase of Treasury Stock	(2,453)	(5,557)	(5,221)
Cash Dividends Paid	(9,000 )	(8,225 )	(7,536 )
Net Cash Used in Financing Activities	(4,453 )	(2,432 )	(10,901 )
Net Increase in Cash and Cash Equivalents	2,658	5,558	826
Cash and Cash Equivalents at Beginning of the Year	6,635	1,077	251
Cash and Cash Equivalents at End of the Year	$ 9,293	$ 6,635	$ 1,077

Supplemental Disclosures to Statements of Cash Flow Information:
Interest Paid	$ 1,208	$ 842	$ 564
Impact of Deconsolidation of Subsidiary Trusts upon Adoption of FIN 46R as Described in Note 1:
Increase in Junior Subordinated Obligations	---	15,000	---
Decrease in Trust Preferred Securities	---	(15,000)	---
Increase in Other Assets Representing Investment in Unconsolidated Trusts	---	(465)	---

NOTE 26:

CONCENTRATIONS OF CREDIT RISK

Most of Arrow's loans are with customers in northern New York. Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the northern New York economy. The commitments to extend credit are fairly consistent with the distribution of loans presented in Note 4. Generally, the loans are secured by assets and are expected to be repaid from cash flow or the sale of selected assets of the borrowers. Arrow evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based upon management's credit evaluation of the counterparty. The nature of the collateral varies with the type of loan and may include: residential real estate, cash and securities, inventory, accounts receivable, property, plant and equipment, income producing commercial properties and automobiles.

SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)

The following quarterly financial information for 2004 and 2003 is unaudited, but, in the opinion of management, fairly presents the results of Arrow. Earnings per share amounts have been adjusted for the 2004 3% stock dividend.

SELECTED QUARTERLY FINANCIAL DATA

(In Thousands, Except Per Share Amounts)

	2004
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Total Interest and Dividend Income	$17,302	$17,062	$17,038	$17,041
Net Interest Income	12,304	12,111	12,502	12,320
Provision for Loan Losses	285	254	205	276
Net Securities Gains	210	---	(9)	161
Income Before Provision for Income Taxes	7,117	6,819	7,273	7,229
Net Income	4,865	4,698	4,968	4,948

Basic Earnings Per Common Share	.48	.46	.49	.49
Diluted Earnings Per Common Share	.46	.45	.48	.48

	2003
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Total Interest and Dividend Income	$18,095	$17,711	$17,164	$17,761
Net Interest Income	12,469	12,199	11,948	12,505
Provision for Loan Losses	405	405	405	245
Net Securities Gains (Losses)	368	141	245	1
Income Before Provision for Income Taxes	7,080	6,987	6,550	6,906
Net Income	4,806	4,755	4,569	4,787

Basic Earnings Per Common Share	.47	.47	.45	.47
Diluted Earnings Per Common Share	.46	.46	.44	.46

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None.

Item 9A. Controls and Procedures

Senior management maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods provided in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, senior management has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and therefore has been required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13(a)-16(e) under the Exchange Act) as of December 31, 2004. Based upon that evaluation, senior management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective on that date. There were no changes made in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the evaluation performed by the Chief Executive Officer and Chief Financial Officer.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting. Our evaluation is based on the framework set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment , our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included herein on page 48.

Item 9B . Other Information – None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item is set forth under the captions “Nominees For Director and Directors Continuing in Office” and “Section 16(a) Beneficial Ownership Reporting Compliance” of Arrow’s Proxy Statement for its Annual Meeting of Shareholders to be held April 27, 2005 (the “2005 Proxy Statement”), which sections are incorporated herein by reference. Certain required information regarding our Executive Officers is contained in Part I, Item 1.G., of this Report, “Executive Officers of the Registrant.”

Item 11. Executive Compensation

The information required by this item is set forth under the captions “Executive Compensation,” “Summary Compensation Table,” “Stock Options Plans,” “Pension Plan,” “Compensation of Directors,” “Employment Contracts” and “Compensation Committee Interlocks and Insider Participation” of the 2005 Proxy Statement, which sections are incorporated herein by reference.

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

Certain information required by this item is set forth under the captions “Principal Shareholders of Arrow” and ”Nominees for Director and Directors Continuing in Office” of the 2005 Proxy Statement, which sections are incorporated herein by reference.

The following table sets forth certain information regarding Arrow's equity compensation plans as of December 31, 2004. These equity compensation plans were the 1993 Long Term Incentive Plan ("1993 Stock Plan"), the 1998 Long Term Incentive Plan ("1998 Stock Plan"), the Director, Officer and Employee Stock Purchase Plan ("ESPP") and the Directors' Stock Plan ("Directors' Plan"). The 1993 Stock Plan and the 1998 Stock Plan were approved by Arrow's shareholders, the ESPP and the Directors' Plan were not.

Equity Compensation Plan Information
Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Equity Compensation Plans Approved by Security Holders	(1) 618,592	$18.89	(2) 213,676
Equity Compensation Plans Not Approved by Security Holders	0	0	(3) 591,969
Total	618,592	$18.89	805,645

(1) Represents 287,450 shares of Arrow’s common stock (Common Stock) issuable pursuant to outstanding stock options granted under the 1998 Stock Plan and 331,142 shares of Common Stock issuable pursuant to outstanding stock options granted under the 1993 Stock Plan.

(2) Includes 219,500 shares of Common Stock available at such date for future grants of awards under the 1998 Stock Plan and 0 shares of Common Stock available at such date for future grants of awards under the 1993 Stock Plan (awards of Common Stock under these plans may take the form of stock options or shares of restricted stock).

(3) Includes 17,129 shares of Common Stock available for future issuance under the Directors’ Plan and 574,840 shares of Common Stock available for future issuance under the ESPP.

Description of Non-Shareholder Approved Plans.

Directors' Stock Plan . The Directors' Stock Plan was originally adopted by the Board of Directors in 1999, and amended in 2003 to authorize additional shares. It provides for the issuance of shares of Common Stock to directors of Arrow and our Banks. The shares constitute part of their compensation for service as directors. Each year, the dollar value of shares to be granted to each eligible director is fixed in advance by vote of the full Board of Directors. The total number of shares authorized for issuance under the Plan, as adjusted through December 31, 2004, is 29,959 shares.

Director, Officer and Employee Stock Purchase Plan . The Director, Officer and Employee Stock Purchase Plan was adopted by the Board of Directors in 2000. It provides for purchase by directors, advisers, officers, employees and certain retirees of shares of Common Stock from Arrow at a discount from the market value of the stock on date of purchase. Participants purchase shares through automatic withholding by us from their paychecks or, in the case of directors or retirees, automatic deduction from their bank deposit accounts. The discount on shares acquired under the Plan during 2004 was 15%, with the discount level to be set from time to time by the full Board. On February 1, 2005, the Board set the discount level at 5%. The maximum and minimum participation levels are $2,000 and $5, respectively, per participant per month. The discounted price only applies to the first $1,000 of a participant's monthly contribution; after that threshold is reached, shares are purchased at 100% of market price. The total number of shares authorized to be sold under the Plan, as adjusted through December 31, 2004, is 709,734 shares.

Item 13. Certain Relationships and Related Transactions

The information required by this item is set forth under the caption “Transactions With Directors, Officers and Associates” of the 2005 Proxy Statement, which section is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information required by this item is set forth under the captions “Independent Auditors” and “Independent Auditors’ Fees” of the 2005 Proxy Statement, which sections are incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

1. Financial Statements

The following financial statements, the notes thereto, and the independent auditors’ report thereon are filed in Part II, Item 8 of this report. See the index to such financial statements at the beginning of Item 8.

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and 2003

Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Changes in Shareholders’

Equity for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

2. Schedules

All schedules are omitted as the required information is either not applicable or not required or is contained in the respective financial statements or in the notes thereto.

3. Exhibits :

The following exhibits are incorporated by reference herein.

Exhibit Number	Exhibit
3.(i)	Certificate of Incorporation of the Registrant, as amended, incorporated herein by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1990, Exhibit 3.(a).
3.(ii)	By-laws of the Registrant, as amended, incorporated herein by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 3.(ii).
4.1	Shareholder Protection Rights Agreement dated as of May 1, 1997, between Arrow Financial Corporation and Glens Falls National Bank and Trust Company, as Rights Agent, incorporated herein by reference from the Registrant’s Statement on Form 8-A, dated May 16, 1997, Exhibit 4.
4.2	Amended and Restated Declaration of the Trust by and among U.S. Bank National Association, as Institutional Trustee, Arrow Financial Corporation, as Sponsor and certain Administrators named therein, dated as of July 23, 2003, relating to Arrow Capital Statutory Trust II, incorporated herein by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 4.1.
4.3	Indenture between Arrow Financial Corporation, as Issuer, and U.S. Bank National Association, as Trustee, dated as of July 23, 2003, incorporated herein by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 4.2.
4.4	Placement Agreement by and among Arrow Financial Corporation, Arrow Capital Statutory Trust II and SunTrust Capital Markets, Inc., dated July 23, 2003, incorporated herein by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 4.3.
4.5	Guarantee Agreement by and between Arrow Financial Corporation and U.S. Bank National Association, dated as of July 23, 2003, incorporated herein by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 4.4.
10.1	Short-term Incentive Award Plan of the Registrant, incorporated herein by reference from Registrant’s 1933 Act Registration Statement on Form S-2 (file number 33-10109; filed December 16, 1986). *
10.2	Select Executive Retirement Plan of the Registrant effective January 1, 1992 incorporated herein by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 1992, Exhibit 10(m). *
10.3	1993 Long Term Incentive Plan of the Registrant, incorporated herein by reference from Registrant’s 1933 Act Registration Statement on Form S-8, Exhibit 4.1 (File number 33-66192; filed July 19, 1993). *
10.4	1998 Long Term Incentive Plan of the Registrant, incorporated herein by reference from Registrant’s 1933 Act Registration Statement on Form S-8, Exhibit 4.1 (File number 333-62719; filed September 2, 1998). *
10.5	Directors Deferred Compensation Plan of Registrant, incorporated herein by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10(n).*
10.6	Senior Officers Deferred Compensation Plan of the Registrant, incorporated herein by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 1993, Exhibit 10(o).*
10.7	Directors Stock Plan of the Registrant, as amended, incorporated herein by reference from Registrant’s 1933 Act Registration Statement on Form S-8 (file number 333-110445, filed November 13, 2003).*
10.8	2000 Employee Stock Purchase Plan of the Registrant, incorporated herein by reference from Registrant's 1933 Act Registration Statement on Form S-3 (File number 333-47912; filed on October 11, 2000).*
10.9	Award under Schedule A of Select Executive Retirement Plan to Thomas L. Hoy, dated May 2, 2001, incorporated herein by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, Exhibit 10.15.*
10.10	Award under Schedule A of Select Executive Retirement Plan to John J. Murphy, dated May 2, 2001, incorporated herein by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001, Exhibit 10.16.*
10.11	Prototype of a change of control agreement between the Registrant and certain officers (excluding senior officers) of the Registrant or its subsidiaries, as entered into from time to time, incorporated herein by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit 10.11.*
14	Financial Code of Ethics, incorporated herein by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, Exhibit 14.

	* Management contracts or compensation plans required to be filed as an exhibit.

The following exhibits are submitted herewith:

Exhibit Number	Exhibit
4.6	Amended and Restated Trust Agreement by and among Wilmington Trust Company, as Institutional Trustee, Arrow Financial Corporation, as Sponsor and certain Administrators named therein, dated as of December 28, 2004, relating to Arrow Capital Statutory Trust III.
4.7	Junior Subordinated Indenture between Arrow Financial Corporation, as Issuer, and Wilmington Trust Company, as Trustee, dated as of December 28, 2004.
4.8	Placement Agreement by and among Arrow Financial Corporation, Arrow Capital Statutory Trust III and SunTrust Capital Markets, Inc., dated December 28, 2004.
4.9	Guarantee Agreement by and between Arrow Financial Corporation and Wilmington Trust Company, dated as of December 28, 2004
10.12	Employment Agreement among the Registrant, its subsidiary bank, Glens Falls National Bank and Trust Company, and Thomas L. Hoy dated January 1, 2005. *
10.13	Employment Agreement among the Registrant, its subsidiary bank, Glens Falls National Bank and Trust Company and John J. Murphy dated January 1, 2005. *
10.14	Agreement and Plan of Reorganization by and among Glens Falls National Bank and Trust Company, Arrow Financial Corporation, 429 Saratoga Road Corporation, Capital Financial Group, Inc. and John Weber dated November 22, 2004.
10.15	Post-Closing Payment Agreement by and among Glens Falls National Bank and Trust Company, Arrow Financial Corporation, 429 Saratoga Road Corporation, Capital Financial Group, Inc. and John Weber dated November 22, 2004.
10.16	Employment Agreement between Arrow Financial Corporation, Glens Falls national Bank and Trust Company, Capital Financial Group, Inc. and John Weber dated November 29, 2004.*
21	Subsidiaries of Arrow
23	Consent of Independent Auditors
31.1	Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a)
32	Certification of Chief Executive Officer under 18 U.S.C. Section 1350 and Certification of Chief Financial Officer under 18 U.S.C. Section 1350

	* Management contracts or compensation plans required to be filed as an exhibit.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ARROW FINANCIAL CORPORATION

Date: March 11, 2005

By /s/ Thomas L. Hoy

Thomas L. Hoy

President and Chief Executive Officer

Date: March 11, 2005

By: /s/ John J. Murphy

John J. Murphy

Executive Vice President, Treasurer and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 11, 2005 by the following persons in the capacities indicated.

/s/ Jan-Eric O. Bergstedt

Jan-Eric O. Bergstedt

Director

/s/ David G. Kruczlnicki

David G. Kruczlnicki

Director

/s/ John J. Carusone, Jr.

John J. Carusone, Jr.

Director

/s/ Elizabeth O’C. Little

Elizabeth O’C. Little

Director

/s/ Gary C. Dake

Gary C. Dake

Director

/s/ Michael F. Massiano

Michael F. Massiano

Director

/s/ Mary Elizabeth T. FitzGerald

Mary Elizabeth T. FitzGerald

Director

/s/ David L. Moynehan

David L. Moynehan

Director

/s/ Kenneth C. Hopper, M.D.

Kenneth C. Hopper, M.D.

Director and Vice Chairman

/s/ Richard J. Reisman, D.M.D.

Richard J. Reisman, D.M.D.

Director

/s/ Thomas L. Hoy

Thomas L. Hoy

Director, Chairman and President

AMENDED AND RESTATED TRUST AGREEMENT

among

ARROW FINANCIAL CORPORATION,

as Depositor

WILMINGTON TRUST COMPANY,

as Property Trustee

WILMINGTON TRUST COMPANY,

as Delaware Trustee

and

THE ADMINISTRATIVE TRUSTEES NAMED HEREIN

as Administrative Trustees

________________

Dated as of December 28, 2004

ARROW CAPITAL STATUTORY TRUST III

::ODMA\PCDOCS\ATL\824306\2

TABLE OF CONTENTS

Page

ARTICLE I. Defined Terms

SECTION 1.1.

Definitions.

ARTICLE II. The Trust

SECTION 2.1.

Name.

SECTION 2.2.

Office of the Delaware Trustee; Principal Place of Business.

SECTION 2.3.

Initial Contribution of Trust Property; Fees, Costs and Expenses.

SECTION 2.4.

Purposes of Trust.

SECTION 2.5.

Authorization to Enter into Certain Transactions.

SECTION 2.6.

Assets of Trust.

SECTION 2.7.

Title to Trust Property.

ARTICLE III. Payment Account; Paying Agents

SECTION 3.1.

Payment Account.

SECTION 3.2.

Appointment of Paying Agents.

ARTICLE IV. Distributions; Redemption

SECTION 4.1.

Distributions.

SECTION 4.2.

Redemption.

SECTION 4.3.

Subordination of Common Securities.

SECTION 4.4.

Payment Procedures.

SECTION 4.5.

Withholding Tax.

SECTION 4.6.

Tax Returns and Other Reports.

SECTION 4.7.

Payment of Taxes, Duties, Etc. of the Trust.

SECTION 4.8.

Payments under Indenture or Pursuant to Direct Actions.

SECTION 4.9.

Exchanges.

SECTION 4.10.

Calculation Agent.

SECTION 4.11.

Certain Accounting Matters.

ARTICLE V. Securities

SECTION 5.1.

Initial Ownership.

SECTION 5.2.

Authorized Trust Securities.

SECTION 5.3.

Issuance of the Common Securities; Subscription and Purchase of Notes.

SECTION 5.4.

The Securities Certificates.

SECTION 5.5.

Rights of Holders.

SECTION 5.6.

Book-Entry Preferred Securities.

SECTION 5.7.

Registration of Transfer and Exchange of Preferred Securities Certificates.

SECTION 5.8.

Mutilated, Destroyed, Lost or Stolen Securities Certificates.

SECTION 5.9.

Persons Deemed Holders.

SECTION 5.10.

Cancellation.

SECTION 5.11.

Ownership of Common Securities by Depositor.

SECTION 5.12.

Restricted Legends .

SECTION 5.13.

Form of Certificate of Authentication.

ARTICLE VI. Meetings; Voting; Acts of Holders

SECTION 6.1.

Notice of Meetings.

SECTION 6.2.

Meetings of Holders of the Preferred Securities.

SECTION 6.3.

Voting Rights.

SECTION 6.4.

Proxies, Etc.

SECTION 6.5.

Holder Action by Written Consent.

SECTION 6.6.

Record Date for Voting and Other Purposes.

SECTION 6.7.

Acts of Holders.

SECTION 6.8.

Inspection of Records.

SECTION 6.9.

Limitations on Voting Rights.

SECTION 6.10.

Acceleration of Maturity; Rescission of Annulment; Waivers of Past Defaults.

ARTICLE VII. Representations and Warranties

SECTION 7.1.

Representations and Warranties of the Property Trustee and the Delaware Trustee.

SECTION 7.2.

Representations and Warranties of Depositor.

ARTICLE VIII. The Trustees

SECTION 8.1.

Number of Trustees.

SECTION 8.2.

Property Trustee Required.

SECTION 8.3.

Delaware Trustee Required.

SECTION 8.4.

Appointment of Administrative Trustees.

SECTION 8.5.

Duties and Responsibilities of the Trustees.

SECTION 8.6.

Notices of Defaults and Extensions.

SECTION 8.7.

Certain Rights of Property Trustee.

SECTION 8.8.

Delegation of Power.

SECTION 8.9.

May Hold Securities.

SECTION 8.10.

Compensation; Reimbursement; Indemnity.

SECTION 8.11.

Resignation and Removal; Appointment of Successor.

SECTION 8.12.

Acceptance of Appointment by Successor.

SECTION 8.13.

Merger, Conversion, Consolidation or Succession to Business.

SECTION 8.14.

Not Responsible for Recitals or Issuance of Securities.

SECTION 8.15.

Property Trustee May File Proofs of Claim.

SECTION 8.16.

Reports to and from the Property Trustee.

ARTICLE IX. Termination, Liquidation and Merger

SECTION 9.1.

Dissolution Upon Expiration Date.

SECTION 9.2.

Early Termination.

SECTION 9.3.

Termination.

SECTION 9.4.

Liquidation.

SECTION 9.5.

Mergers, Consolidations, Amalgamations or Replacements of Trust.

ARTICLE X. Information to Purchaser

SECTION 10.1.

Depositor Obligations to Purchaser.

SECTION 10.2.

Trustee’s Obligations to Purchaser.

ARTICLE XI. Miscellaneous Provisions

SECTION 11.1.

Limitation of Rights of Holders.

SECTION 11.2.

Agreed Tax Treatment of Trust and Trust Securities.

SECTION 11.3.

Amendment.

SECTION 11.4.

Separability.

SECTION 11.5.

Governing Law.

SECTION 11.6.

Successors.

SECTION 11.7.

Headings.

SECTION 11.8.

Reports, Notices and Demands.

SECTION 11.9.

Agreement Not to Petition.

Exhibit A

Certificate of Trust of Arrow Capital Statutory Trust III

Exhibit B

Form of Common Securities Certificate

Exhibit C

Form of Preferred Securities Certificate

Exhibit D

Junior Subordinated Indenture

Exhibit E

Form of Transferee Certificate to be Executed by Transferees other than QIBs

Exhibit F

Form of Transferee Certificate to be Executed by QIBs

Exhibit G

Form of Officer’s Certificate

Schedule A

Calculation of LIBOR

AMENDED AND RESTATED TRUST AGREEMENT, dated as of December 28, 2004, among (i) Arrow Financial Corporation, a New York corporation (including any successors or permitted assigns, the “Depositor”), (ii) Wilmington Trust Company, a Delaware banking corporation, as property trustee (in such capacity, the “Property Trustee”), (iii) Wilmington Trust Company, a Delaware banking corporation, as Delaware trustee (in such capacity, the “Delaware Trustee”), (iv) Thomas L. Hoy, an individual, John J. Murphy, an individual, and Jeffrey S. Spaulding, an individual, each of whose address is c/o Arrow Financial Corporation, 250 Glen Street, Glens Falls, New York 12801 as administrative trustees (in such capacities, each an “Administrative Trustee” and, collectively, the “Administrative Trustees” and, together with the Property Trustee and the Delaware Trustee, the “Trustees”) and (v) the several Holders, as hereinafter defined.

Witnesseth

Whereas, the Depositor, the Property Trustee and the Delaware Trustee have heretofore created a Delaware statutory trust pursuant to the Delaware Statutory Trust Act, as hereinafter defined, by entering into a Trust Agreement, dated as of December 23, 2004 (the “Original Trust Agreement”), and by executing and filing with the Secretary of State of the State of Delaware the Certificate of Trust, substantially in the form attached as Exhibit A ; and

Whereas, the Depositor and the Trustees desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities by the Trust to the Depositor, (ii) the issuance and sale of the Preferred Securities by the Trust pursuant to the Subscription Agreement and (iii) the acquisition by the Trust from the Depositor of all of the right, title and interest in and to the Notes (as defined herein);

Now, Therefore, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each party, for the benefit of the other parties and for the benefit of the Holders (as defined herein), hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows:

ARTICLE I.

Defined Terms

SECTION 1.1.

Definitions.

For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a)

the terms defined in this Article I have the meanings assigned to them in this Article I;

(b)

the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;

(c)

all accounting terms used but not defined herein have the meanings assigned to them in accordance with United States generally accepted accounting principles;

(d)

unless the context otherwise requires, any reference to an “Article”, a “Section”, a “Schedule” or an “Exhibit” refers to an Article, a Section, a Schedule or an Exhibit, as the case may be, of or to this Trust Agreement;

(e)

the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision;

(f)

a reference to the singular includes the plural and vice versa; and

(g)

the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders.

“Act” has the meaning specified in Section 6.7 .

“Additional Interest” has the meaning specified in Section 1.1 of the Indenture.

“Additional Interest Amount” means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of Additional Interest paid by the Depositor on a Like Amount of Notes for such period.

“Additional Taxes” has the meaning specified in Section 1.1 of the Indenture.

“Additional Tax Sums” has the meaning specified in Section 10.5 of the Indenture.

“Administrative Trustee” means each of the Persons identified as an “Administrative Trustee” in the preamble to this Trust Agreement, solely in each such Person’s capacity as Administrative Trustee of the Trust and not in such Person’s individual capacity, or any successor Administrative Trustee appointed as herein provided.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Applicable Depositary Procedures” means, with respect to any transfer or transaction involving a Book-Entry Preferred Security, the rules and procedures of the Depositary for such Book-Entry Preferred Security, in each case to the extent applicable to such transaction and as in effect from time to time.

“Bankruptcy Event” means, with respect to any Person:

(a) the entry of a decree or order by a court having jurisdiction in the premises (i) judging such Person a bankrupt or insolvent, (ii) approving as properly filed a petition seeking reorganization, arrangement, adjudication or composition of or in respect of such Person under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, (iii) appointing a custodian, receiver, conservator, liquidator, assignee, trustee, sequestrator or other similar official of such Person or of any substantial part of its property or (iv) ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or

(b) the institution by such Person of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of any such petition or to the appointment of a custodian, receiver, conservator, liquidator, assignee, trustee, sequestrator or similar official of such Person or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt or insolvent, or the taking of corporate action by such Person in furtherance of any such action.

“Bankruptcy Laws” means all Federal and state bankruptcy, insolvency, reorganization and other similar laws, including the United States Bankruptcy Code.

“Book-Entry Preferred Security” means a Preferred Security, the ownership and transfers of which shall be made through book entries by a Depositary.

“Business Day” means a day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or (c) a day on which the Corporate Trust Office is closed for business.

“Calculation Agent” has the meaning specified in Section 4.10 .

“Capital Disqualification Event” has the meaning specified in Section 1.1 of the Indenture.

“Closing Date” has the meaning specified in the Placement Agreement.

“Code” means the United States Internal Revenue Code of 1986, as amended.

“Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this Trust Agreement such Commission is not existing and performing the duties assigned to it, then the body performing such duties at such time.

“Common Securities Certificate” means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit B .

“Common Security” means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the rights provided therefor in this Trust Agreement.

“Corporate Trust Office” means the principal office of the Property Trustee at which any particular time its corporate trust business shall be administered, which office at the date of this Trust Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration.

“Definitive Preferred Securities Certificates” means Preferred Securities issued in certificated, fully registered form that are not Global Preferred Securities.

“Delaware Statutory Trust Act” means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code § 3801 et seq., or any successor statute thereto, in each case as amended from time to time.

“Delaware Trustee” means the Person identified as the “Delaware Trustee” in the preamble to this Trust Agreement, solely in its capacity as Delaware Trustee of the Trust and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as herein provided.

“Depositary” means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Depositor or any successor thereto. DTC will be the initial Depositary.

“Depositary Participant” means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Depositary effects book-entry transfers and pledges of securities deposited with the Depositary.

“Depositor” has the meaning specified in the preamble to this Trust Agreement and any successors and permitted assigns.

“Depositor Affiliate” has the meaning specified in Section 4.9 .

“Distribution Date” has the meaning specified in Section 4.1(a)(i) .

“Distributions” means amounts payable in respect of the Trust Securities as provided in Section 4.1 .

“DTC” means The Depository Trust Company or any successor thereto.

“Early Termination Event” has the meaning specified in Section 9.2 .

“Event of Default” means any one of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a) the occurrence of a Note Event of Default; or

(b) default by the Trust in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of thirty (30) days; or

(c) default by the Trust in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or

(d) default in the performance, or breach, in any material respect of any covenant or warranty of the Trustees in this Trust Agreement (other than those specified in clause (b) or (c) above) and continuation of such default or breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Trustees and to the Depositor by the Holders of at least twenty five percent (25%) in aggregate Liquidation Amount of the Outstanding Preferred Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(e) the occurrence of a Bankruptcy Event with respect to the Property Trustee if a successor Property Trustee has not been appointed within ninety (90) days thereof.

“Exchange Act” means the Securities Exchange Act of 1934, and any successor statute thereto, in each case as amended from time to time.

“Expiration Date” has the meaning specified in Section 9.1 .

“Extension Period” has the meaning specified in Section 4.1(a)(ii) .

“Federal Reserve” means the Board of Governors of the Federal Reserve System, the staff thereof, or a Federal Reserve Bank, acting through delegated authority, in each case under the rules, regulations and policies of the Federal Reserve System, or if at any time after the execution of this Trust Agreement any such entity is not existing and performing the duties now assigned to it , any successor body performing similar duties or functions.

“Fiscal Year” shall be the fiscal year of the Trust, which shall be the calendar year, or such other period as is required by the Code.

“Global Preferred Security” means a Preferred Securities Certificate evidencing ownership of Book-Entry Preferred Securities.

“Guarantee Agreement” means the Guarantee Agreement executed and delivered by the Depositor and Wilmington Trust Company, as guarantee trustee, contemporaneously with the execution and delivery of this Trust Agreement for the benefit of the holders of the Preferred Securities, as amended from time to time.

“Holder” means a Person in whose name a Trust Security or Trust Securities are registered in the Securities Register; any such Person shall be a beneficial owner within the meaning of the Delaware Statutory Trust Act.

“Indemnified Person” has the meaning specified in Section 8.10(c) .

“Indenture” means the Junior Subordinated Indenture executed and delivered by the Depositor and the Note Trustee contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the holders of the Notes, a copy of which is attached hereto as Exhibit D , as amended or supplemented from time to time.

“Indenture Redemption Price” has the meaning specified in Section 4.2(c) .

“Interest Payment Date” has the meaning specified in Section 1.1 of the Indenture.

“Investment Company Act” means the Investment Company Act of 1940, or any successor statute thereto, in each case as amended from time to time.

“Investment Company Event” has the meaning specified in Section 1.1 of the Indenture.

“LIBOR” has the meaning specified in Schedule A .

“LIBOR Business Day” has the meaning specified in Schedule A .

“LIBOR Determination Date” has the meaning specified in Schedule A .

“Lien” means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever.

“Like Amount” means (a) with respect to a redemption of any Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Notes to be contemporaneously redeemed or paid at maturity in accordance with the Indenture, the proceeds of which will be used to pay the Redemption Price of such Trust Securities, (b) with respect to a distribution of Notes to Holders of Trust Securities in connection with a dissolution of the Trust, Notes having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Notes are distributed and (c) with respect to any distribution of Additional Interest Amounts to Holders of Trust Securities, Notes having a principal amount equal to the Liquidation Amount of the Trust Securities in respect of which such distribution is made.

“Liquidation Amount” means the stated amount of $1,000 per Trust Security.

“Liquidation Date” means the date on which assets are to be distributed to Holders in accordance with Section 9.4(a) hereunder following dissolution of the Trust.

“Liquidation Distribution” has the meaning specified in Section 9.4(d) .

“Majority in Liquidation Amount of the Preferred Securities” means Preferred Securities representing more than fifty percent (50%) of the aggregate Liquidation Amount of all (or a specified group of) then Outstanding Preferred Securities.

“Note Event of Default” means any “Event of Default” specified in Section 5.1 of the Indenture.

“Note Redemption Date” means, with respect to any Notes to be redeemed under the Indenture, the date fixed for redemption of such Notes under the Indenture.

“Note Trustee” means the Person identified as the “Trustee” in the Indenture, solely in its capacity as Trustee pursuant to the Indenture and not in its individual capacity, or its successor in interest in such capacity, or any successor Trustee appointed as provided in the Indenture.

“Notes” means the Depositor’s Floating Rate Junior Subordinated Notes issued pursuant to the Indenture.

“Office of Thrift Supervision” means the Office of Thrift Supervision, as from time to time constituted or, if at any time after the execution of this Trust Agreement such Office is not existing and performing the duties now assigned to it, then the body performing such duties at such time.

“Officers’ Certificate” means a certificate signed by the Chief Executive Officer, the President or an Executive Vice President, and by the Chief Financial Officer, Treasurer or an Assistant Treasurer, of the Depositor, and delivered to the Trustees. Any Officers’ Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement (other than the Officers’ Certificate provided pursuant to Section 8.16(a) ) shall include:

(a) a statement by each officer signing the Officers’ Certificate that such officer has read the covenant or condition and the definitions relating thereto;

(b) a brief statement of the nature and scope of the examination or investigation undertaken by such officer in rendering the Officers’ Certificate;

(c) a statement that such officer has made such examination or investigation as, in such officer’s opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(d) a statement as to whether, in the opinion of such officer, such condition or covenant has been complied with.

“Operative Documents” means the Placement Agreement, the Indenture, the Trust Agreement, the Guarantee Agreement, the Subscription Agreement, the Notes and the Trust Securities.

“Opinion of Counsel” means a written opinion of counsel, who may be counsel for, or an employee of, the Depositor or any Affiliate of the Depositor.

“Original Issue Date” means the date of original issuance of the Trust Securities.

“Original Trust Agreement” has the meaning specified in the recitals to this Trust Agreement.

“Outstanding”, when used with respect to any Trust Securities, means, as of the date of determination, all Trust Securities theretofore executed and delivered under this Trust Agreement, except:

(a) Trust Securities theretofore canceled by the Property Trustee or delivered to the Property Trustee for cancellation;

(b) Trust Securities for which payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent in trust for the Holders of such Trust Securities; provided, that if such Trust Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and

(c) Trust Securities that have been paid or in exchange for or in lieu of which other Trust Securities have been executed and delivered pursuant to the provisions of this Trust Agreement, unless proof satisfactory to the Property Trustee is presented that any such Trust Securities are held by Holders in whose hands such Trust Securities are valid, legal and binding obligations of the Trust;

provided, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Preferred Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or of any Trustee shall be disregarded and deemed not to be Outstanding, except that (i) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Preferred Securities that such Trustee knows to be so owned shall be so disregarded and (ii) the foregoing shall not apply at any time when all of the Outstanding Preferred Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Preferred Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee’s right so to act with respect to such Preferred Securities and that the pledgee is not the Depositor, any Trustee or any Affiliate of the Depositor or of any Trustee.

“Owner” means each Person who is the beneficial owner of Book-Entry Preferred Securities as reflected in the records of the Depositary or, if a Depositary Participant is not the beneficial owner, then the beneficial owner as reflected in the records of the Depositary Participant.

“Paying Agent” means any Person authorized by the Administrative Trustees to pay Distributions or other amounts in respect of any Trust Securities on behalf of the Trust.

“Payment Account” means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee for the benefit of the Holders in which all amounts paid in respect of the Notes will be held and from which the Property Trustee, through the Paying Agent, shall make payments to the Holders in accordance with Sections 3.1 , 4.1 and 4.2 .

“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, company, limited liability company, trust, unincorporated association or government, or any agency or political subdivision thereof, or any other entity of whatever nature.

“Placement Agent” means SunTrust Capital Markets, Inc., as Placement Agent pursuant to the Placement Agreement, whose address is 303 Peachtree Street, 24th Floor, Mail Code 3950, Atlanta, Georgia 30308.

“Placement Agreement” means the Placement Agreement, dated as of December 28, 2004, executed and delivered by the Trust, the Depositor and SunTrust Capital Markets, Inc., as placement agent.

“Preferred Security” means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the rights provided therefor in this Trust Agreement.

“Preferred Securities Certificate” means a certificate evidencing ownership of Preferred Securities, substantially in the form attached as Exhibit C .

“Property Trustee” means the Person identified as the “Property Trustee” in the preamble to this Trust Agreement, solely in its capacity as Property Trustee of the Trust and not in its individual capacity, or its successor in interest in such capacity, or any successor Property Trustee appointed as herein provided.

“Purchaser” means STI Investment Management, Inc., as purchaser of the Preferred Securities pursuant to the Subscription Agreement, whose address is 2202 Polly Drummond Office Park, Newark, Delaware 19711.

“QIB” means a “qualified institutional buyer” as defined in Rule 144A under the Securities Act.

“Redemption Date” means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided, that each Note Redemption Date and the stated maturity (or any date of principal repayment upon early maturity) of the Notes shall be a Redemption Date for a Like Amount of Trust Securities.

“Redemption Price” means, with respect to any Trust Security, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to the Redemption Date, plus the related amount of the premium, if any, paid by the Depositor upon the concurrent redemption or payment at maturity of a Like Amount of Notes.

“Reference Banks” has the meaning specified in Schedule A .

“Responsible Officer” means, with respect to the Property Trustee, any Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Financial Services Officer or Assistant Financial Services Officer or any other officer of the Corporate Trust Department of the Property Trustee and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer’s knowledge of and familiarity with the particular subject.

“Securities Act” means the Securities Act of 1933, and any successor statute thereto, in each case as amended from time to time.

“Securities Certificate” means any one of the Common Securities Certificates or the Preferred Securities Certificates.

“Securities Register” and “Securities Registrar” have the respective meanings specified in Section 5.7 .

“Special Event Redemption Price” has the meaning specified in Section 11.2 of the Indenture.

“Subscription Agreement” means the Preferred Securities Subscription Agreement, dated as of December 28, 2004, by and among the Company, the Trust, the Purchaser and SunTrust Capital Markets, Inc. (as to certain provisions thereof).

“Successor Securities” has the meaning specified in Section 9.5(a) .

“Tax Event” has the meaning specified in Section 1.1 of the Indenture.

“Trust” means the Delaware statutory trust known as “Arrow Capital Statutory Trust III,” which was created on December 23, 2004, under the Delaware Statutory Trust Act pursuant to the Original Trust Agreement and the filing of the Certificate of Trust, and continued pursuant to this Trust Agreement.

“Trust Agreement” means this Amended and Restated Trust Agreement, including all Schedules and Exhibits, as the same may be modified, amended or supplemented from time to time in accordance with the applicable provisions hereof.

“Trustees” means the Administrative Trustees, the Property Trustee and the Delaware Trustee, each as defined in this Article I .

“Trust Property” means (a) the Notes, (b) any cash on deposit in, or owing to, the Payment Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to the trusts of this Trust Agreement.

“Trust Security” means any one of the Common Securities or the Preferred Securities.

ARTICLE II.

The Trust

SECTION 2.1.

Name.

The trust continued hereby shall be known as “Arrow Capital Statutory Trust III,” as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trustees may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued.

SECTION 2.2.

Office of the Delaware Trustee; Principal Place of Business.

The address of the Delaware Trustee in the State of Delaware is Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Holders, the Depositor, the Property Trustee and the Administrative Trustees. The principal executive office of the Trust is c/o Arrow Financial Corporation 250 Glen Street, Glens Falls, NY 12801, Attention: Chief Financial Officer, as such address may be changed from time to time by the Administrative Trustees following written notice to the Holders and the other Trustees.

SECTION 2.3.

Initial Contribution of Trust Property; Fees, Costs and Expenses.

The Property Trustee acknowledges receipt from the Depositor in connection with the Original Trust Agreement of the sum of ten dollars ($10), which constituted the initial Trust Property. To the extent that the fees, costs and expenses of the Trustee are not payable by other parties under other arrangements, the Depositor shall pay all fees, costs and expenses of the Trust (except with respect to the Trust Securities) as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such fees, costs and expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such fees, costs or expenses.

SECTION 2.4.

Purposes of Trust.

(a)

The exclusive purposes and functions of the Trust are to (i) issue and sell Trust Securities and use the proceeds from such sale to acquire the Notes and (ii) engage in only those activities necessary or incidental thereto. The Delaware Trustee, the Property Trustee and the Administrative Trustees are trustees of the Trust, and have all the rights, powers and duties to the extent set forth herein. The Trustees hereby acknowledge that they are trustees of the Trust.

(b)

So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trust (or the Trustees acting on behalf of the Trust) shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Holders, except as expressly provided herein, (iii) incur any indebtedness for borrowed money or issue any other debt, (iv) take or consent to any action that would result in the placement of a Lien on any of the Trust Property, (v) take or consent to any action that would reasonably be expected to cause the Trust to become taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes, (vi) take or consent to any action that would cause the Notes to be treated as other than indebtedness of the Depositor for United States federal income tax purposes or (vii) take or consent to any action that would cause the Trust to be deemed to be an “investment company” required to be registered under the Investment Company Act.

SECTION 2.5.

Authorization to Enter into Certain Transactions.

(a)

The Trustees shall conduct the affairs of the Trust in accordance with and subject to the terms of this Trust Agreement. In accordance with the following provisions (i) and (ii), the Trustees shall have the authority to enter into all transactions and agreements determined by the Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees, under this Trust Agreement, and to perform all acts in furtherance thereof, including the following:

(i)

As among the Trustees, each Administrative Trustee shall severally have the power and authority to act on behalf of the Trust with respect to the following matters:

(A)

the issuance and sale of the Trust Securities;

(B)

to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, such agreements as may be necessary or desirable in connection with the purposes and function of the Trust, including, without limitation, a common securities subscription agreement and a junior subordinated note subscription agreement and to cause the Trust to perform in accordance with the Placement Agreement and the Subscription Agreement;

(C)

assisting in the sale of the Preferred Securities in one or more transactions exempt from registration under the Securities Act, and in compliance with applicable state securities or blue sky laws;

(D)

assisting in the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Notes to the Holders in accordance with this Trust Agreement;

(E)

the appointment of a Paying Agent and Securities Registrar in accordance with this Trust Agreement;

(F)

execution of the Trust Securities on behalf of the Trust in accordance with this Trust Agreement;

(G)

execution and delivery of closing certificates, if any, pursuant to the Placement Agreement and application for a taxpayer identification number for the Trust;

(H)

preparation and filing of all applicable tax returns and tax information reports that are required to be filed on behalf of the Trust;

(I)

establishing a record date with respect to all actions to be taken hereunder that require a record date to be established, except as provided in Section 6.10(a) ;

(J)

unless otherwise required by the Delaware Statutory Trust Act to execute on behalf of the Trust (either acting alone or together with the other Administrative Trustees) any documents that such Administrative Trustee has the power to execute pursuant to this Trust Agreement; and

(K)

the taking of any action incidental to the foregoing as such Administrative Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement.

(ii)

As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters:

(A)

the receipt and holding of legal title of the Notes;

(B)

the establishment of the Payment Account;

(C)

the collection of interest, principal and any other payments made in respect of the Notes and the holding of such amounts in the Payment Account;

(D)

the distribution through the Paying Agent of amounts distributable to the Holders in respect of the Trust Securities;

(E)

the exercise of all of the rights, powers and privileges of a holder of the Notes in accordance with the terms of this Trust Agreement;

(F)

the sending of notices of default and other information regarding the Trust Securities and the Notes to the Holders in accordance with this Trust Agreement;

(G)

the distribution of the Trust Property in accordance with the terms of this Trust Agreement;

(H)

to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation of the Trust with the Secretary of State of the State of Delaware; and

(I)

the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder).

(b)

In connection with the issue and sale of the Preferred Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects):

(i)

the negotiation of the terms of, and the execution and delivery of, the Placement Agreement and the Subscription Agreement providing for the sale of the Preferred Securities in one or more transactions exempt from registration under the Securities Act, and in compliance with applicable state securities or blue sky laws; and

(ii)

the taking of any other actions necessary or desirable to carry out any of the foregoing activities.

(c)

Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes, so that the Notes will be treated as indebtedness of the Depositor for United States federal income tax purposes and so that the Trust will not be deemed to be an “investment company” required to be registered under the Investment Company Act. In this connection, each Administrative Trustee is authorized to take any action, not inconsistent with applicable law, the Certificate of Trust or this Trust Agreement, that such Administrative Trustee determines in his or her discretion to be necessary or desirable for such purposes, as long as such action does not adversely affect in any material respect the interests of the Holders of the Outstanding Preferred Securities. In no event shall the Administrative Trustees be liable to the Trust or the Holders for any failure to comply with this Section 2.5 to the extent that such failure results solely from a change in law or regulation or in the interpretation thereof.

(d)

Any action taken by a Trustee in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with any Trustee acting on behalf of the Trust, no Person shall be required to inquire into the authority of such Trustee to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of any Trustee as set forth in this Trust Agreement.

SECTION 2.6.

Assets of Trust.

The assets of the Trust shall consist of the Trust Property.

SECTION 2.7.

Title to Trust Property.

(a)

Legal title to all Trust Property shall be vested at all times in the Property Trustee and shall be held and administered by the Property Trustee in trust for the benefit of the Trust and the Holders in accordance with this Trust Agreement.

(b)

The Holders shall not have any right or title to the Trust Property other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and in this Trust Agreement.

ARTICLE III.

Payment Account; Paying Agents

SECTION 3.1.

Payment Account.

(a)

On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and the Paying Agent shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits in and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Holders and for Distribution as herein provided.

(b)

The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest on, and any other payments with respect to, the Notes. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof.

SECTION 3.2.

Appointment of Paying Agents.

The Paying Agent shall initially be the Property Trustee. The Paying Agent shall make Distributions to Holders from the Payment Account and shall report the amounts of such Distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account solely for the purpose of making the Distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent in their sole discretion. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon thirty (30) days’ written notice to the Administrative Trustees and the Property Trustee. If the Property Trustee shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor (which shall be a bank or trust company) to act as Paying Agent. Such successor Paying Agent appointed by the Administrative Trustees shall execute and deliver to the Trustees an instrument in which such successor Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent will hold all sums, if any, held by it for payment to the Holders in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Article VIII shall apply to the Property Trustee also in its role as Paying Agent, for so long as the Property Trustee shall act as Paying Agent and, to the extent applicable, to any other Paying Agent appointed hereunder. Any reference in this Trust Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise.

ARTICLE IV.

Distributions; Redemption

SECTION 4.1.

Distributions.

(a)

The Trust Securities represent undivided beneficial interests in the Trust Property, and Distributions (including any Additional Interest Amounts) will be made on the Trust Securities at the rate and on the dates that payments of interest (including any Additional Interest) are made on the Notes. Accordingly:

(i)

Distributions on the Trust Securities shall be cumulative, and shall accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accumulate from December 28, 2004, and, except as provided in clause (ii) below, shall be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2005. If any date on which a Distribution is otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after each such date until the next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date (each date on which Distributions are payable in accordance with this Section 4.1(a)(i), a “Distribution Date”);

(ii)

in the event (and to the extent) that the Depositor exercises its right under the Indenture to defer the payment of interest on the Notes, Distributions on the Trust Securities shall be deferred. Under the Indenture, so long as no Note Event of Default pursuant to paragraphs (c), (e) or (f) of Section 5.1 of the Indenture has occurred and is continuing, the Depositor shall have the right, at any time and from time to time during the term of the Notes, to defer the payment of interest on the Notes for a period of up to twenty (20) consecutive quarterly interest payment periods (each such extended interest payment period, an “Extension Period”). No interest on the Notes shall be due and payable during an Extension Period (except any Additional Tax Sums that may be due and payable), except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00%, compounded quarterly, from the dates on which amounts would otherwise have been due and payable until paid or until funds for the payment thereof have been made available for payment. If Distributions are deferred, the deferred Distributions (including Additional Interest Amounts) shall be paid on the date that the related Extension Period terminates, to Holders of the Trust Securities as they appear on the books and records of the Trust on the record date immediately preceding such termination date.

(iii)

Distributions shall accumulate and be payable in respect of the Trust Securities at an annual rate equal to 4.54875% beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2005 and at an annual rate for each successive period beginning on (and including) March 31, 2005, and each successive Distribution Date, and ending on (but excluding) the next succeeding Distribution Date at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00% of the Liquidation Amount of the Trust Securities, such rate being the rate of interest payable on the Notes. LIBOR shall be determined by the Calculation Agent in accordance with Schedule A . The amount of Distributions payable for any period less than a full Distribution period shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. The amount of Distributions payable for any period shall include any Additional Interest Amounts in respect of such period; and

(iv)

Distributions on the Trust Securities shall be made by the Paying Agent from the Payment Account and shall be payable on each Distribution Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Distributions.

(b)

Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities at the close of business on the relevant record date, which shall be at the close of business on the fifteenth day (whether or not a Business Day) preceding the relevant Distribution Date. Distributions payable on any Trust Securities that are not punctually paid on any Distribution Date as a result of the Depositor having failed to make an interest payment under the Notes will cease to be payable to the Person in whose name such Trust Securities are registered on the relevant record date, and such defaulted Distributions and any Additional Interest Amounts will instead be payable to the Person in whose name such Trust Securities are registered on the special record date, or other specified date for determining Holders entitled to such defaulted Distribution and Additional Interest Amount, established in the same manner, and on the same date, as such is established with respect to the Notes under the Indenture.

SECTION 4.2.

Redemption.

(a)

On each Note Redemption Date and on the stated maturity (or any date of principal repayment upon early maturity) of the Notes and on each other date on (or in respect of) which any principal on the Notes is repaid, the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price.

(b)

Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder’s address appearing in the Securities Register. All notices of redemption shall state:

(i)

the Redemption Date;

(ii)

the Redemption Price or, if the Redemption Price cannot be calculated prior to the time the notice is required to be sent, the estimate of the Redemption Price provided pursuant to the Indenture, as calculated by the Depositor, together with a statement that it is an estimate and that the actual Redemption Price will be calculated by the Calculation Agent on the fifth Business Day prior to the Redemption Date (and if an estimate is provided, a further notice shall be sent of the actual Redemption Price on the date that such Redemption Price is calculated);

(iii)

if less than all the Outstanding Trust Securities are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) and Liquidation Amounts of the particular Trust Securities to be redeemed;

(iv)

that on the Redemption Date, the Redemption Price will become due and payable upon each such Trust Security, or portion thereof, to be redeemed and that Distributions thereon will cease to accumulate on such Trust Security or such portion, as the case may be, on and after said date, except as provided in Section 4.2(d) ;

(v)

the place or places where the Trust Securities are to be surrendered for the payment of the Redemption Price; and

(vi)

such other provisions as the Property Trustee deems relevant.

(c)

The Trust Securities (or portion thereof) redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption or payment at maturity of Notes. Redemptions of the Trust Securities (or portion thereof) shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Redemption Price. Under the Indenture, the Notes may be redeemed by the Depositor on any Interest Payment Date, at the Depositor’s option, on or after March 31, 2010, in whole or in part, from time to time at a redemption price equal to one hundred percent (100%) of the principal amount thereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption (the “Indenture Redemption Price”); provided, that the Depositor shall have received the prior approval of the Federal Reserve, if then required. The Notes may also be redeemed by the Depositor, at its option, in whole but not in part, upon the occurrence of a Capital Disqualification Event, an Investment Company Event or a Tax Event at the Special Event Redemption Price (as set forth in the Indenture).

(d)

If the Property Trustee gives a notice of redemption in respect of any Preferred Securities, then by 10:00 A.M., New York City time, on the Redemption Date, the Depositor shall deposit sufficient funds with the Property Trustee to pay the Redemption Price. If such deposit has been made by such time, then by 12:00 noon, New York City time, on the Redemption Date, the Property Trustee will, with respect to Book-Entry Preferred Securities, irrevocably deposit with the Depositary for such Book-Entry Preferred Securities, to the extent available therefor, funds sufficient to pay the applicable Redemption Price and will give such Depositary irrevocable instructions and authority to pay the Redemption Price to the Holders of the Preferred Securities. With respect to Preferred Securities that are not Book-Entry Preferred Securities, the Property Trustee will irrevocably deposit with the Paying Agent, to the extent available therefor, funds sufficient to pay the applicable Redemption Price and will give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders of the Preferred Securities upon surrender of their Preferred Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities (or portion thereof) called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Securities Register on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Holders holding Trust Securities (or portion thereof) so called for redemption will cease, except the right of such Holders to receive the Redemption Price and any Distribution payable in respect of the Trust Securities on or prior to the Redemption Date, but without interest, and, in the case of a partial redemption, the right of such Holders to receive a new Trust Security or Securities of authorized denominations, in aggregate Liquidation Amount equal to the unredeemed portion of such Trust Security or Securities, and such Securities (or portion thereof) called for redemption will cease to be Outstanding. In the event that any date on which any Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after each such date until the next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities (or portion thereof) called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee Agreement, Distributions on such Trust Securities(or portion thereof) will continue to accumulate, as set forth in Section 4.1 , from the Redemption Date originally established by the Trust for such Trust Securities(or portion thereof) to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price.

(e)

Subject to Section 4.3 (a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated pro rata to the Common Securities and the Preferred Securities based upon the relative aggregate Liquidation Amounts of the Common Securities and the Preferred Securities. The Preferred Securities to be redeemed shall be redeemed on a pro rata basis based upon their respective Liquidation Amounts not more than sixty (60) days prior to the Redemption Date by the Property Trustee from the Outstanding Preferred Securities not previously called for redemption; provided, however, that with respect to Holders that would be required to hold less than one hundred (100) but more than zero (0) Trust Securities as a result of such redemption, the Trust shall redeem Trust Securities of each such Holder so that after such redemption such Holder shall hold either one hundred (100) Trust Securities or such Holder no longer holds any Trust Securities, and shall use such method (including, without limitation, by lot) as the Trust shall deem fair and appropriate; and provided, further, that so long as the Preferred Securities are Book-Entry Preferred Securities, such selection shall be made in accordance with the Applicable Depositary Procedures for the Preferred Securities by such Depositary. The Property Trustee shall promptly notify the Securities Registrar in writing of the Preferred Securities (or portion thereof) selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Securities redeemed or to be redeemed only in part, to the portion of the aggregate Liquidation Amount of Preferred Securities that has been or is to be redeemed.

(f)

The Trust in issuing the Trust Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Property Trustee shall indicate the “CUSIP” numbers of the Trust Securities in notices of redemption and related materials as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Trust Securities or as contained in any notice of redemption and related materials.

SECTION 4.3.

Subordination of Common Securities.

(a)

Payment of Distributions (including any Additional Interest Amounts) on, the Redemption Price of and the Liquidation Distribution in respect of, the Trust Securities, as applicable, shall be made, pro rata among the Common Securities and the Preferred Securities based on the Liquidation Amount of the respective Trust Securities; provided, that if on any Distribution Date, Redemption Date or Liquidation Date an Event of Default shall have occurred and be continuing, no payment of any Distribution (including any Additional Interest Amounts) on, Redemption Price of or Liquidation Distribution in respect of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including any Additional Interest Amounts) on all Outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Preferred Securities then called for redemption, or in the case of payment of the Liquidation Distribution the full amount of such Liquidation Distribution on all Outstanding Preferred Securities, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including any Additional Interest Amounts) on, or the Redemption Price of or the Liquidation Distribution in respect of, the Preferred Securities then due and payable.

(b)

In the case of the occurrence of any Event of Default, the Holders of the Common Securities shall have no right to act with respect to any such Event of Default under this Trust Agreement until all such Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until all such Events of Default under this Trust Agreement with respect to the Preferred Securities have been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Holders of the Preferred Securities and not on behalf of the Holders of the Common Securities, and only the Holders of all the Preferred Securities will have the right to direct the Property Trustee to act on their behalf.

SECTION 4.4.

Payment Procedures.

Payments of Distributions (including any Additional Interest Amounts), the Redemption Price, Liquidation Amount or any other amounts in respect of the Preferred Securities shall be made by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Securities Register. If any Preferred Securities are held by a Depositary, such Distributions thereon shall be made to the Depositary in immediately available funds. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Holder of all the Common Securities.

SECTION 4.5.

Withholding Tax.

The Trust and the Administrative Trustees shall comply with all withholding and backup withholding tax requirements under United States federal, state and local law. The Administrative Trustees on behalf of the Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding and backup withholding tax with respect to each Holder and any representations and forms as shall reasonably be requested by the Administrative Trustees on behalf of the Trust to assist it in determining the extent of, and in fulfilling, its withholding and backup withholding tax obligations. The Administrative Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding and backup withholding tax is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any jurisdiction with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claimed overwithholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Administrative Trustees on behalf of the Trust may reduce subsequent Distributions by the amount of such required withholding.

SECTION 4.6.

Tax Returns and Other Reports.

(a)

The Administrative Trustees shall prepare (or cause to be prepared) at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, at the Depositor’s expense, and file, all United States federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. The Administrative Trustees shall prepare at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, and furnish (or cause to be prepared and furnished), by January 31 in each taxable year of the Trust to each Holder all Internal Revenue Service forms and returns required to be provided by the Trust. The Administrative Trustees shall provide the Depositor and the Property Trustee with a copy of all such returns and reports promptly after such filing or furnishing.

(b)

So long as the Property Trustee is the holder of the Notes, the Administrative Trustees will cause the Depositor’s reports on Form FR Y-9C, FR Y-9LP and FR Y-6 to be delivered to the Property Trustee promptly following their filing with the Federal Reserve.

SECTION 4.7.

Payment of Taxes, Duties, Etc. of the Trust.

Upon receipt under the Notes of Additional Tax Sums and upon the written direction of the Administrative Trustees, the Property Trustee shall promptly pay, solely out of monies on deposit pursuant to this Trust Agreement, any Additional Taxes imposed on the Trust by the United States or any other taxing authority.

SECTION 4.8.

Payments under Indenture or Pursuant to Direct Actions.

Any amount payable hereunder to any Holder of Preferred Securities shall be reduced by the amount of any corresponding payment such Holder (or any Owner with respect thereto) has directly received pursuant to Section 5.8 of the Indenture or Section 6.10(b) of this Trust Agreement.

SECTION 4.9.

Exchanges.

(a)

If at any time the Depositor or any of its Affiliates (in either case, a “Depositor Affiliate”) is the Owner or Holder of any Preferred Securities, such Depositor Affiliate shall have the right to deliver to the Property Trustee all or such portion of its Preferred Securities as it elects and receive, in exchange therefor, a Like Amount of Notes. Such election (i) shall be exercisable effective on any Distribution Date by such Depositor Affiliate delivering to the Property Trustee a written notice of such election specifying the Liquidation Amount of Preferred Securities with respect to which such election is being made and the Distribution Date on which such exchange shall occur, which Distribution Date shall be not less than ten (10) Business Days after the date of receipt by the Property Trustee of such election notice and (ii) shall be conditioned upon such Depositor Affiliate having delivered or caused to be delivered to the Property Trustee or its designee the Preferred Securities that are the subject of such election by 10:00 A.M. New York time, on the Distribution Date on which such exchange is to occur. After the exchange, such Preferred Securities will be canceled and will no longer be deemed to be Outstanding and all rights of the Depositor Affiliate with respect to such Preferred Securities will cease.

(b)

In the case of an exchange described in Section 4.9(a) , the Property Trustee on behalf of the Trust will, on the date of such exchange, exchange Notes having a principal amount equal to a proportional amount of the aggregate Liquidation Amount of the Outstanding Common Securities, based on the ratio of the aggregate Liquidation Amount of the Preferred Securities exchanged pursuant to Section 4.9(a) divided by the aggregate Liquidation Amount of the Preferred Securities Outstanding immediately prior to such exchange, for such proportional amount of Common Securities held by the Depositor (which contemporaneously shall be canceled and no longer be deemed to be Outstanding); provided, that the Depositor delivers or causes to be delivered to the Property Trustee or its designee the required amount of Common Securities to be exchanged by 10:00 A.M. New York time, on the Distribution Date on which such exchange is to occur.

SECTION 4.10.

Calculation Agent.

(a)

The Property Trustee shall initially, and for so long as it holds any of the Notes, be the Calculation Agent for purposes of determining LIBOR for each Distribution Date. The Calculation Agent may be removed by the Administrative Trustees at any time. If the Calculation Agent is unable or unwilling to act as such or is removed by the Administrative Trustees, the Administrative Trustees will promptly appoint as a replacement Calculation Agent the London office of a leading bank which is engaged in transactions in three-month Eurodollar deposits in the international Eurodollar market and which does not control or is not controlled by or under common control with the Administrative Trustee or its Affiliates. The Calculation Agent may not resign its duties without a successor having been duly appointed.

(b)

The Calculation Agent shall be required to agree that, as soon as possible after 11:00 a.m. (London time) on each LIBOR Determination Date, but in no event later than 11:00 a.m. (London time) on the Business Day immediately following each LIBOR Determination Date, the Calculation Agent will calculate the interest rate (rounded to the nearest cent, with half a cent being rounded upwards) for the related Distribution Date, and will communicate such rate and amount to the Depositor, Trustee, each Paying Agent and the Depositary. The Calculation Agent will also specify to the Administrative Trustee the quotations upon which the foregoing rates and amounts are based and, in any event, the Calculation Agent shall notify the Administrative Trustee before 5:00 p.m. (London time) on each LIBOR Determination Date that either: (i) it has determined or is in the process of determining the foregoing rates and amounts or (ii) it has not determined and is not in the process of determining the foregoing rates and amounts, together with its reasons therefor. The Calculation Agent’s determination of the foregoing rates and amounts for any Distribution Date will (in the absence of manifest error) be final and binding upon all parties. For the sole purpose of calculating the interest rate for the Trust Securities, “Business Day” shall be defined as any day on which dealings in deposits in Dollars are transacted in the London interbank market.

SECTION 4.11.

Certain Accounting Matters.

(a)

At all times during the existence of the Trust, the Administrative Trustees shall keep, or cause to be kept at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, full books of account, records and supporting documents, which shall reflect in reasonable detail each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied.

(b)

The Administrative Trustees shall either (i), if the Depositor is then subject to such reporting requirements, cause each Form 10-K and Form 10-Q prepared by the Depositor and filed with the Commission in accordance with the Exchange Act to be delivered to each Holder, with a copy to the Property Trustee, within thirty (30) days after the filing thereof or (ii) cause to be prepared at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, and delivered to each of the Holders, with a copy to the Property Trustee, within ninety (90) days after the end of each Fiscal Year, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss.

(c)

The Trust shall maintain one or more bank accounts in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, in the name and for the sole benefit of the Trust; provided , however , that all payments of funds in respect of the Notes held by the Property Trustee shall be made directly to the Payment Account and no other funds of the Trust shall be deposited in the Payment Account. The sole signatories for such accounts (including the Payment Account) shall be designated by the Property Trustee.

ARTICLE V.

Securities

SECTION 5.1.

Initial Ownership.

Upon the creation of the Trust and the contribution by the Depositor referred to in Section 2.3 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are Outstanding, the Depositor shall be the sole beneficial owner of the Trust.

SECTION 5.2.

Authorized Trust Securities.

The Trust shall be authorized to issue one series of Preferred Securities having an aggregate Liquidation Amount of $10,000,000 and one series of Common Securities having an aggregate Liquidation Amount of $310,000.

SECTION 5.3.

Issuance of the Common Securities; Subscription and Purchase of Notes.

On the Closing Date, an Administrative Trustee, on behalf of the Trust, shall execute and deliver to the Depositor Common Securities Certificates, registered in the name of the Depositor, evidencing an aggregate of 310 Common Securities having an aggregate Liquidation Amount of $310,000, against receipt by the Trust of the aggregate purchase price of such Common Securities of $310,000. Contemporaneously therewith and with the sale by the Trust to the Holders of an aggregate of 10,000 Preferred Securities having an aggregate Liquidation Amount of $10,000,000, an Administrative Trustee, on behalf of the Trust, shall subscribe for and purchase from the Depositor Notes, to be registered in the name of the Property Trustee on behalf of the Trust and having an aggregate principal amount equal to $10,310,000, and, in satisfaction of the purchase price for such Notes, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $10,310,000 (being the aggregate amount paid by the Holders for the Preferred Securities and the amount paid by the Depositor for the Common Securities).

SECTION 5.4.

The Securities Certificates.

(a)

The Preferred Securities Certificates shall be issued in minimum denominations of $100,000 Liquidation Amount and integral multiples of $1,000 in excess thereof, and the Common Securities Certificates shall be issued in minimum denominations of $10,000 Liquidation Amount and integral multiples of $1,000 in excess thereof. The Securities Certificates shall be executed on behalf of the Trust by manual or facsimile signature of at least one Administrative Trustee. Securities Certificates bearing the signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign such Securities Certificates on behalf of the Trust shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Securities Certificates or did not have such authority at the date of delivery of such Securities Certificates.

(b)

On the Closing Date, upon the written order of an authorized officer of the Depositor, the Administrative Trustees shall cause Securities Certificates to be executed on behalf of the Trust and delivered, without further corporate action by the Depositor, in authorized denominations.

(c)

The Preferred Securities issued to QIBs shall be, except as provided in Section 5.6 , Book-Entry Preferred Securities issued in the form of one or more Global Preferred Securities registered in the name of the Depositary, or its nominee and deposited with the Depositary or a custodian for the Depositary for credit by the Depositary to the respective accounts of the Depositary Participants thereof (or such other accounts as they may direct). The Preferred Securities issued to a Person other than a QIB shall be issued in the form of Definitive Preferred Securities Certificate.

(d)

A Preferred Security shall not be valid until authenticated by the manual signature of an Authorized Officer of the Property Trustee. Such signature shall be conclusive evidence that the Preferred Security has been authenticated under this Trust Agreement. Upon written order of the Trust signed by one Administrative Trustee, the Property Trustee shall authenticate the Preferred Securities for original issue. The Property Trustee may appoint an authenticating agent that is a U.S. Person acceptable to the Trust to authenticate the Preferred Securities. A Common Security need not be so authenticated and shall be valid upon execution by one or more Administrative Trustees. The form of this certificate of authentication can be found in Section 5.13 .

SECTION 5.5.

Rights of Holders.

The Trust Securities shall have no preemptive or similar rights and when issued and delivered to Holders against payment of the purchase price therefor will be fully paid and non-assessable by the Trust. Except as provided in Section 5.11(b) , the Holders of the Trust Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware.

SECTION 5.6.

Book-Entry Preferred Securities.

(a)

A Global Preferred Security may be exchanged, in whole or in part, for Definitive Preferred Securities Certificates registered in the names of the Owners only if such exchange complies with Section 5.7 and (i) the Depositary advises the Administrative Trustees and the Property Trustee in writing that the Depositary is no longer willing or able properly to discharge its responsibilities with respect to the Global Preferred Security, and no qualified successor is appointed by the Administrative Trustees within ninety (90) days of receipt of such notice, (ii) the Depositary ceases to be a clearing agency registered under the Exchange Act and the Administrative Trustees fail to appoint a qualified successor within ninety (90) days of obtaining knowledge of such event, (iii) the Administrative Trustees at their option advise the Property Trustee in writing that the Trust elects to terminate the book-entry system through the Depositary or (iv) a Note Event of Default has occurred and is continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Administrative Trustees shall notify the Depositary and instruct the Depositary to notify all Owners of Book-Entry Preferred Securities, the Delaware Trustee and the Property Trustee of the occurrence of such event and of the availability of the Definitive Preferred Securities Certificates to Owners of the Preferred Securities requesting the same. Upon the issuance of Definitive Preferred Securities Certificates, the Trustees shall recognize the Holders of the Definitive Preferred Securities Certificates as Holders. Notwithstanding the foregoing, if an Owner of a beneficial interest in a Global Preferred Security wishes at any time to transfer an interest in such Global Preferred Security to a Person other than a QIB, such transfer shall be effected, subject to the Applicable Depositary Procedures, in accordance with the provisions of this Section 5.6 and Section 5.7 , and the transferee shall receive a Definitive Preferred Securities Certificate in connection with such transfer. A holder of a Definitive Preferred Securities Certificate that is a QIB may, upon request, and in accordance with the provisions of this Section 5.6 and Section 5.7 , exchange such Definitive Preferred Securities Certificate for a beneficial interest in a Global Preferred Security.

(b)

If any Global Preferred Security is to be exchanged for Definitive Preferred Securities Certificates or canceled in part, or if any Definitive Preferred Securities Certificate is to be exchanged in whole or in part for any Global Preferred Security, then either (i) such Global Preferred Security shall be so surrendered for exchange or cancellation as provided in this Article V or (ii) the aggregate Liquidation Amount represented by such Global Preferred Security shall be reduced, subject to Section 5.4 , or increased by an amount equal to the Liquidation Amount represented by that portion of the Global Preferred Security to be so exchanged or canceled, or equal to the Liquidation Amount represented by such Definitive Preferred Securities Certificates to be so exchanged for any Global Preferred Security, as the case may be, by means of an appropriate adjustment made on the records of the Securities Registrar, whereupon the Property Trustee, in accordance with the Applicable Depositary Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender to the Administrative Trustees or the Securities Registrar of any Global Preferred Security or Securities by the Depositary, accompanied by registration instructions, the Administrative Trustees, or any one of them, shall execute the Definitive Preferred Securities Certificates in accordance with the instructions of the Depositary. None of the Securities Registrar or the Trustees shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions.

(c)

Every Securities Certificate executed and delivered upon registration or transfer of, or in exchange for or in lieu of, a Global Preferred Security or any portion thereof shall be executed and delivered in the form of, and shall be, a Global Preferred Security, unless such Securities Certificate is registered in the name of a Person other than the Depositary for such Global Preferred Security or a nominee thereof.

(d)

The Depositary or its nominee, as registered owner of a Global Preferred Security, shall be the Holder of such Global Preferred Security for all purposes under this Trust Agreement and the Global Preferred Security, and Owners with respect to a Global Preferred Security shall hold such interests pursuant to the Applicable Depositary Procedures. The Securities Registrar and the Trustees shall be entitled to deal with the Depositary for all purposes of this Trust Agreement relating to the Global Preferred Securities (including the payment of the Liquidation Amount of and Distributions on the Book-Entry Preferred Securities represented thereby and the giving of instructions or directions by Owners of Book-Entry Preferred Securities represented thereby and the giving of notices) as the sole Holder of the Book-Entry Preferred Securities represented thereby and shall have no obligations to the Owners thereof. None of the Trustees nor the Securities Registrar shall have any liability in respect of any transfers effected by the Depositary.

(e)

The rights of the Owners of the Book-Entry Preferred Securities shall be exercised only through the Depositary and shall be limited to those established by law, the Applicable Depositary Procedures and agreements between such Owners and the Depositary and/or the Depositary Participants; provided, solely for the purpose of determining whether the Holders of the requisite amount of Preferred Securities have voted on any matter provided for in this Trust Agreement, to the extent that Preferred Securities are represented by a Global Preferred Security, the Trustees may conclusively rely on, and shall be fully protected in relying on, any written instrument (including a proxy) delivered to the Property Trustee by the Depositary setting forth the Owners’ votes or assigning the right to vote on any matter to any other Persons either in whole or in part. To the extent that Preferred Securities are represented by a Global Preferred Security, the initial Depositary will make book-entry transfers among the Depositary Participants and receive and transmit payments on the Preferred Securities that are represented by a Global Preferred Security to such Depositary Participants, and none of the Depositor or the Trustees shall have any responsibility or obligation with respect thereto.

(f)

To the extent that a notice or other communication to the Holders is required under this Trust Agreement, for so long as Preferred Securities are represented by a Global Preferred Security, the Trustees shall give all such notices and communications to the Depositary, and shall have no obligations to the Owners.

SECTION 5.7.

Registration of Transfer and Exchange of Preferred Securities Certificates.

(a)

The Property Trustee shall keep or cause to be kept, at the Corporate Trust Office, a register or registers (the “Securities Register”) in which the registrar and transfer agent with respect to the Trust Securities (the “Securities Registrar”), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Preferred Securities Certificates and Common Securities Certificates and registration of transfers and exchanges of Preferred Securities Certificates as herein provided. The Person acting as the Property Trustee shall at all times also be the Securities Registrar. The provisions of Article VIII shall apply to the Property Trustee in its role as Securities Registrar.

(b)

Upon surrender for registration of transfer of any Preferred Securities Certificate at the office or agency maintained pursuant to Section 5.7(f) , the Administrative Trustees or any one of them shall execute by manual or facsimile signature and deliver to the Property Trustee, and the Property Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Preferred Securities Certificates in authorized denominations of a like aggregate Liquidation Amount as may be required by this Trust Agreement dated the date of execution by such Administrative Trustee or Trustees. At the option of a Holder, Preferred Securities Certificates may be exchanged for other Preferred Securities Certificates in authorized denominations and of a like aggregate Liquidation Amount upon surrender of the Preferred Securities Certificate to be exchanged at the office or agency maintained pursuant to Section 5.7(f) . Whenever any Preferred Securities Certificates are so surrendered for exchange, the Administrative Trustees or any one of them shall execute by manual or facsimile signature and deliver to the Property Trustee, and the Property Trustee shall authenticate and deliver, the Preferred Securities Certificates that the Holder making the exchange is entitled to receive.

(c)

The Securities Registrar shall not be required, (i) to issue, register the transfer of or exchange any Preferred Security during a period beginning at the opening of business fifteen (15) days before the day of selection for redemption of such Preferred Securities pursuant to Article IV and ending at the close of business on the day of mailing of the notice of redemption or (ii) to register the transfer of or exchange any Preferred Security so selected for redemption in whole or in part, except, in the case of any such Preferred Security to be redeemed in part, any portion thereof not to be redeemed.

(d)

Every Preferred Securities Certificate presented or surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Securities Registrar duly executed by the Holder or such Holder’s attorney duly authorized in writing and (i) if such Preferred Securities Certificate is being transferred otherwise than to a QIB, accompanied by a certificate of the transferee substantially in the form set forth as Exhibit E hereto or (ii) if such Preferred Securities Certificate is being transferred to a QIB, accompanied by a certificate of the transferor substantially in the form set forth as Exhibit F hereto.

(e)

No service charge shall be made for any registration of transfer or exchange of Preferred Securities Certificates, but the Property Trustee on behalf of the Trust may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Preferred Securities Certificates.

(f)

The Administrative Trustees shall designate an office or offices or agency or agencies where Preferred Securities Certificates may be surrendered for registration of transfer or exchange, and initially designate the Corporate Trust Office as its office and agency for such purposes. The Administrative Trustees shall give prompt written notice to the Depositor, the Property Trustee and to the Holders of any change in the location of any such office or agency.

SECTION 5.8.

Mutilated, Destroyed, Lost or Stolen Securities Certificates.

(a)

If any mutilated Securities Certificate shall be surrendered to the Securities Registrar together with such security or indemnity as may be required by the Securities Registrar and the Administrative Trustees to save each of them harmless, the Administrative Trustees, or any one of them, on behalf of the Trust, shall execute and make available for delivery in exchange therefor a new Securities Certificate of like class, tenor and denomination.

(b)

If the Securities Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Securities Certificate and there shall be delivered to the Securities Registrar and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Securities Certificate shall have been acquired by a protected purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust, shall execute and make available for delivery, and, with respect to Preferred Securities, the Property Trustee shall authenticate, in exchange for or in lieu of any such destroyed, lost or stolen Securities Certificate, a new Securities Certificate of like class, tenor and denomination.

(c)

In connection with the issuance of any new Securities Certificate under this Section 5.8 , the Administrative Trustees or the Securities Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

(d)

Any duplicate Securities Certificate issued pursuant to this Section 5.8 shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust corresponding to that evidenced by the mutilated, lost, stolen or destroyed Securities Certificate, as if originally issued, whether or not the lost, stolen or destroyed Securities Certificate shall be found at any time.

(e)

If any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Depositor in its discretion may, instead of issuing a new Security, pay such Security.

(f)

The provisions of this Section 5.8 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, destroyed, lost or stolen Securities Certificates.

SECTION 5.9.

Persons Deemed Holders.

The Trustees and the Securities Registrar shall each treat the Person in whose name any Securities Certificate shall be registered in the Securities Register as the owner of such Securities Certificate for the purpose of receiving Distributions and for all other purposes whatsoever, and none of the Trustees and the Securities Registrar shall be bound by any notice to the contrary.

SECTION 5.10.

Cancellation.

All Preferred Securities Certificates surrendered for registration of transfer or exchange or for payment shall, if surrendered to any Person other than the Property Trustee, be delivered to the Property Trustee, and any such Preferred Securities Certificates and Preferred Securities Certificates surrendered directly to the Property Trustee for any such purpose shall be promptly canceled by it. The Administrative Trustees may at any time deliver to the Property Trustee for cancellation any Preferred Securities Certificates previously delivered hereunder that the Administrative Trustees may have acquired in any manner whatsoever, and all Preferred Securities Certificates so delivered shall be promptly canceled by the Property Trustee. No Preferred Securities Certificates shall be executed and delivered in lieu of or in exchange for any Preferred Securities Certificates canceled as provided in this Section 5.10 , except as expressly permitted by this Trust Agreement. All canceled Preferred Securities Certificates shall be disposed of by the Property Trustee in accordance with its customary practices and the Property Trustee shall deliver to the Administrative Trustees a certificate of such disposition.

SECTION 5.11.

Ownership of Common Securities by Depositor.

(a)

On the Closing Date, the Depositor shall acquire, and thereafter shall retain, beneficial and record ownership of the Common Securities. Neither the Depositor nor any successor Holder of the Common Securities may transfer less than all the Common Securities, and the Depositor or any such successor Holder may transfer the Common Securities only (i) in connection with a consolidation or merger of the Depositor into another Person, or any conveyance, transfer or lease by the Depositor of its properties and assets substantially as an entirety to any Person (in which event such Common Securities will be transferred to such surviving entity, transferee or lessee, as the case may be), pursuant to Section 8.1 of the Indenture or (ii) to the Depositor or an Affiliate of the Depositor, in each such case in compliance with applicable law (including the Securities Act, and applicable state securities and blue sky laws). To the fullest extent permitted by law, any attempted transfer of the Common Securities other than as set forth in the immediately preceding sentence shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating substantially “THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH APPLICABLE LAW AND SECTION 5.11 OF THE TRUST AGREEMENT.”

(b)

Any Holder of the Common Securities shall be liable for the debts and obligations of the Trust in the manner and to the extent set forth with respect to the Depositor and agrees that it shall be subject to all liabilities to which the Depositor may be subject and, prior to becoming such a Holder, shall deliver to the Administrative Trustees an instrument of assumption satisfactory to such Trustees.

SECTION 5.12.

Restricted Legends .

(a)

Each Preferred Security Certificate shall bear a legend in substantially the following form:

“THIS PREFERRED SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE TRUST AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (“DTC”) OR A NOMINEE OF DTC. THIS PREFERRED SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE TRUST AGREEMENT, AND NO TRANSFER OF THIS PREFERRED SECURITY (OTHER THAN A TRANSFER OF THIS PREFERRED SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS PREFERRED SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO ARROW CAPITAL STATUTORY TRUST III OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY PREFERRED SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

THE PREFERRED SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH PREFERRED SECURITIES OR ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY PREFERRED SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE PREFERRED SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.

THE HOLDER OF THE PREFERRED SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE TRUST AND THE DEPOSITOR THAT (A) SUCH PREFERRED SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE TRUST, (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (III) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN “ACCREDITED INVESTOR,” FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (V) PURSUANT TO AN EXEMPTION FROM THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND, IN THE CASE OF (III) OR (V), SUBJECT TO THE RIGHT OF THE TRUST AND THE DEPOSITOR TO REQUIRE AN OPINION OF COUNSEL AND OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY PREFERRED SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.

THE PREFERRED SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE LIQUIDATION AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF PREFERRED SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE LIQUIDATION AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH PREFERRED SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF LIQUIDATION AMOUNT OF OR DISTRIBUTIONS ON SUCH PREFERRED SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH PREFERRED SECURITIES.

THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS PREFERRED SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY, OR ANY INTEREST THEREIN, IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE PREFERRED SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE “FDIC”).”

(b)

The above legend shall not be removed from any of the Preferred Securities Certificates unless there is delivered to the Property Trustee and the Depositor satisfactory evidence, which may include an opinion of counsel, as may be reasonably required to ensure that any future transfers thereof may be made without restriction under the provisions of the Securities Act and other applicable law. Upon provision of such satisfactory evidence, one or more of the Administrative Trustees on behalf of the Trust shall execute and deliver to the Property Trustee, and the Property Trustee shall deliver, at the written direction of the Administrative Trustees and the Depositor, Preferred Securities Certificates that do not bear the legend.

SECTION 5.13.

Form of Certificate of Authentication.

The Property Trustee’s certificate of authentication shall be in substantially the following form:

This is one of the Preferred Securities referred to in the within-mentioned Trust Agreement.

Dated:

WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Property Trustee

By:

________________________________

Authorized officer

ARTICLE VI.

Meetings; Voting; Acts of Holders

SECTION 6.1.

Notice of Meetings.

Notice of all meetings of the Holders of the Preferred Securities, stating the time, place and purpose of the meeting, shall be given by the Property Trustee pursuant to Section 11.8 to each Holder of Preferred Securities, at such Holder’s registered address, at least fifteen (15) days and not more than ninety (90) days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice.

SECTION 6.2.

Meetings of Holders of the Preferred Securities.

(a)

No annual meeting of Holders is required to be held. The Property Trustee, however, shall call a meeting of the Holders of the Preferred Securities to vote on any matter upon the written request of the Holders of at least twenty five percent (25%) in aggregate Liquidation Amount of the Outstanding Preferred Securities and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of the Holders of the Preferred Securities to vote on any matters as to which such Holders are entitled to vote.

(b)

The Holders of at least a Majority in Liquidation Amount of the Preferred Securities, present in person or by proxy, shall constitute a quorum at any meeting of the Holders of the Preferred Securities.

(c)

If a quorum is present at a meeting, an affirmative vote by the Holders present, in person or by proxy, holding Preferred Securities representing at least a Majority in Liquidation Amount of the Preferred Securities held by the Holders present, either in person or by proxy, at such meeting shall constitute the action of the Holders of the Preferred Securities, unless this Trust Agreement requires a lesser or greater number of affirmative votes.

SECTION 6.3.

Voting Rights.

Holders shall be entitled to one vote for each $10,000 of Liquidation Amount represented by their Outstanding Trust Securities in respect of any matter as to which such Holders are entitled to vote.

SECTION 6.4.

Proxies.

At any meeting of Holders, any Holder entitled to vote thereat may vote by proxy, provided, that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of the Property Trustee, proxies may be solicited in the name of the Property Trustee or one or more officers of the Property Trustee. Only Holders of record shall be entitled to vote. When Trust Securities are held jointly by several Persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Holder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution.

SECTION 6.5.

Holder Action by Written Consent.

Any action that may be taken by Holders at a meeting may be taken without a meeting and without prior notice if Holders holding at least a Majority in Liquidation Amount of all Preferred Securities entitled to vote in respect of such action (or such lesser or greater proportion thereof as shall be required by any other provision of this Trust Agreement) shall consent to the action in writing; provided, that notice of such action is promptly provided to the Holders of Preferred Securities that did not consent to such action. Any action that may be taken by the Holders of all the Common Securities may be taken without a meeting and without prior notice if such Holders shall consent to the action in writing.

SECTION 6.6.

Record Date for Voting and Other Purposes.

Except as provided in Section 6.10(a) , for the purposes of determining the Holders who are entitled to notice of and to vote at any meeting or to act by written consent, or to participate in any distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees may from time to time fix a date, not more than ninety (90) days prior to the date of any meeting of Holders or the payment of a Distribution or other action, as the case may be, as a record date for the determination of the identity of the Holders of record for such purposes.

SECTION 6.7.

Acts of Holders.

(a)

Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent thereof duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and conclusive in favor of the Trustees, if made in the manner provided in this Section 6.7 .

(b)

The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than such signer’s individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer’s authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that any Trustee receiving the same deems sufficient.

(c)

The ownership of Trust Securities shall be proved by the Securities Register.

(d)

Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Trust Security shall bind every future Holder of the same Trust Security and the Holder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees, the Administrative Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security.

(e)

Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such Liquidation Amount.

(f)

If any dispute shall arise among the Holders or the Trustees with respect to the authenticity, validity or binding nature of any request, demand, authorization, direction, notice, consent, waiver or other Act of such Holder or Trustee under this Article VI , then the determination of such matter by the Property Trustee shall be conclusive with respect to such matter.

SECTION 6.8.

Inspection of Records.

Upon reasonable written notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by any Holder during normal business hours for any purpose reasonably related to such Holder’s interest as a Holder.

SECTION 6.9.

Limitations on Voting Rights.

(a)

Except as expressly provided in this Trust Agreement and in the Indenture and as otherwise required by law, no Holder of Preferred Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Securities Certificates, be construed so as to constitute the Holders from time to time as partners or members of an association.

(b)

So long as any Notes are held by the Property Trustee on behalf of the Trust, the Property Trustee shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Note Trustee, or exercise any trust or power conferred on the Property Trustee with respect to the Notes, (ii) waive any past default that may be waived under Section 5.13 of the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Notes shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Notes, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities; provided, that where a consent under the Indenture would require the consent of each holder of Notes (or each Holder of Preferred Securities) affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Holder of Preferred Securities. The Property Trustee shall not revoke any action previously authorized or approved by a vote of the Holders of the Preferred Securities, except by a subsequent vote of the Holders of the Preferred Securities. In addition to obtaining the foregoing approvals of the Holders of the Preferred Securities, prior to taking any of the foregoing actions, the Property Trustee shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that such action shall not cause the Trust to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes.

(c)

If any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect in any material respect the powers, preferences or special rights of the Preferred Securities, whether by way of amendment to the Trust Agreement or otherwise or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Preferred Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities. Notwithstanding any other provision of this Trust Agreement, no amendment to this Trust Agreement may be made if, as a result of such amendment, it would cause the Trust to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes.

SECTION 6.10.

Acceleration of Maturity; Rescission of Annulment; Waivers of Past Defaults.

(a)

For so long as any Preferred Securities remain Outstanding, if, upon a Note Event of Default pursuant to paragraphs (c), (e) or (f) of Section 5.1 of the Indenture, the Note Trustee fails or the holders of not less than twenty five percent (25%) in principal amount of the outstanding Notes fail to declare the principal of all of the Notes to be immediately due and payable, the Holders of at least twenty-five percent (25%) in Liquidation Amount of the Preferred Securities then Outstanding shall have the right to make such declaration by a notice in writing to the Property Trustee, the Depositor and the Note Trustee. At any time after a declaration of acceleration with respect to the Notes has been made and before a judgment or decree for payment of the money due has been obtained by the Note Trustee as provided in the Indenture, the Holders of at least a Majority in Liquidation Amount of the Preferred Securities, by written notice to the Property Trustee, the Depositor and the Note Trustee, may rescind and annul such declaration and its consequences if:

(i)

the Depositor has paid or deposited with the Note Trustee a sum sufficient to pay:

(A)

all overdue installments of interest on all of the Notes;

(B)

any accrued Additional Interest on all of the Notes;

(C)

the principal of and any premium on any Notes that have become due otherwise than by such declaration of acceleration and interest and Additional Interest thereon at the rate borne by the Notes; and

(D)

all sums paid or advanced by the Note Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Note Trustee, the Property Trustee and their agents and counsel; and

(ii)

all Note Events of Default, other than the non-payment of the principal of the Notes that has become due solely by such acceleration, have been cured or waived as provided in Section 5.13 of the Indenture.

Upon receipt by the Property Trustee of written notice requesting such an acceleration, or rescission and annulment thereof, by Holders of any part of the Preferred Securities, a record date shall be established for determining Holders of Outstanding Preferred Securities entitled to join in such notice, which record date shall be at the close of business on the day the Property Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that is ninety (90) days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such ninety (90)-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 6.10(a) .

(b)

For so long as any Preferred Securities remain Outstanding, to the fullest extent permitted by law and subject to the terms of this Trust Agreement and the Indenture, upon a Note Event of Default specified in paragraph (a), (b) or (c) of Section 5.1 of the Indenture, any Holder of Preferred Securities shall have the right to institute a proceeding directly against the Depositor, pursuant to Section 5.8 of the Indenture, for enforcement of payment to such Holder of any amounts payable in respect of Notes having an aggregate principal amount equal to the aggregate Liquidation Amount of the Preferred Securities of such Holder. Except as set forth in Section 6.10(a) and this Section 6.10(b) , the Holders of Preferred Securities shall have no right to exercise directly any right or remedy available to the holders of, or in respect of, the Notes.

(c)

Notwithstanding paragraphs (a) and (b) of this Section 6.10 , the Holders of at least a Majority in Liquidation Amount of the Preferred Securities may, on behalf of the Holders of all the Preferred Securities, waive any Note Event of Default, except any Note Event of Default arising from the failure to pay any principal of or any premium or interest on (including any Additional Interest) the Notes (unless such Note Event of Default has been cured and a sum sufficient to pay all matured installments of interest and all principal and premium on all Notes due otherwise than by acceleration has been deposited with the Note Trustee) or a Note Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Note. Upon any such waiver, such Note Event of Default shall cease to exist and any Note Event of Default arising therefrom shall be deemed to have been cured for every purpose of the Indenture; but no such waiver shall affect any subsequent Note Event of Default or impair any right consequent thereon.

(d)

Notwithstanding paragraphs (a) and (b) of this Section 6.10 , the Holders of at least a Majority in Liquidation Amount of the Preferred Securities may, on behalf of the Holders of all the Preferred Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Trust Agreement, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.

(e)

The Holders of a Majority in Liquidation Amount of the Preferred Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee in respect of this Trust Agreement or the Notes or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; provided, that, subject to Sections 8.5 and 8.7 , the Property Trustee shall have the right to decline to follow any such direction if the Property Trustee being advised by counsel determines that the action so directed may not lawfully be taken, or if the Property Trustee in good faith shall, by an officer or officers of the Property Trustee, determine that the proceedings so directed would be illegal or involve it in personal liability or be unduly prejudicial to the rights of Holders not party to such direction, and provided, further, that nothing in this Trust Agreement shall impair the right of the Property Trustee to take any action deemed proper by the Property Trustee and which is not inconsistent with such direction.

ARTICLE VII.

Representations and Warranties

SECTION 7.1.

Representations and Warranties of the Property Trustee and the Delaware Trustee.

The Property Trustee and the Delaware Trustee, each severally on behalf of and as to itself, hereby represents and warrants for the benefit of the Depositor and the Holders that:

(a)

the Property Trustee is a Delaware banking corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware;

(b)

the Property Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement;

(c)

the Delaware Trustee is a Delaware banking corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware;

(d)

the Delaware Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement;

(e)

this Trust Agreement has been duly authorized, executed and delivered by the Property Trustee and the Delaware Trustee and constitutes the legal, valid and binding agreement of each of the Property Trustee and the Delaware Trustee enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity;

(f)

the execution, delivery and performance of this Trust Agreement have been duly authorized by all necessary corporate or other action on the part of the Property Trustee and the Delaware Trustee and do not require any approval of stockholders of the Property Trustee and the Delaware Trustee and such execution, delivery and performance will not (i) violate the Certificate of Incorporation or By-laws of the Property Trustee or the Delaware Trustee or (ii) violate any applicable law, governmental rule or regulation of the United States or the State of Delaware, as the case may be, governing the banking, trust or general powers of the Property Trustee or the Delaware Trustee or any order, judgment or decree applicable to the Property Trustee or the Delaware Trustee;

(g)

neither the authorization, execution or delivery by the Property Trustee or the Delaware Trustee of this Trust Agreement nor the consummation of any of the transactions by the Property Trustee or the Delaware Trustee contemplated herein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing law of the United States or the State of Delaware governing the banking, trust or general powers of the Property Trustee or the Delaware Trustee, as the case may be; and

(h)

to the best of each of the Property Trustee’s and the Delaware Trustee’s knowledge, there are no proceedings pending or threatened against or affecting the Property Trustee or the Delaware Trustee in any court or before any governmental authority, agency or arbitration board or tribunal that, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Property Trustee or the Delaware Trustee, as the case may be, to enter into or perform its obligations as one of the Trustees under this Trust Agreement.

SECTION 7.2.

Representations and Warranties of Depositor.

The Depositor hereby represents and warrants for the benefit of the Holders that:

(a)

the Depositor is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation;

(b)

the Depositor has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement;

(c)

this Trust Agreement has been duly authorized, executed and delivered by the Depositor and constitutes the legal, valid and binding agreement of the Depositor enforceable against the Depositor in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity;

(d)

the Securities Certificates issued at the Closing Date on behalf of the Trust have been duly authorized and will have been duly and validly executed, issued and delivered by the applicable Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Holders will be, as of such date, entitled to the benefits of this Trust Agreement;

(e)

the execution, delivery and performance of this Trust Agreement have been duly authorized by all necessary corporate or other action on the part of the Depositor and do not require any approval of stockholders of the Depositor and such execution, delivery and performance will not (i) violate the articles or certificate of incorporation or by-laws (or other organizational documents) of the Depositor or (ii) violate any applicable law, governmental rule or regulation governing the Depositor or any material portion of its property or any order, judgment or decree applicable to the Depositor or any material portion of its property;

(f)

neither the authorization, execution or delivery by the Depositor of this Trust Agreement nor the consummation of any of the transactions by the Depositor contemplated herein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing law governing the Depositor or any material portion of its property; and

(g)

there are no proceedings pending or, to the best of the Depositor’s knowledge, threatened against or affecting the Depositor or any material portion of its property in any court or before any governmental authority, agency or arbitration board or tribunal that, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Depositor, as the case may be, to enter into or perform its obligations under this Trust Agreement.

ARTICLE VIII.

The Trustees

SECTION 8.1.

Number of Trustees.

The number of Trustees shall be five (5), provided, that the Property Trustee and the Delaware Trustee may be the same Person, in which case the number of Trustees shall be four (4). The number of Trustees may be increased or decreased by Act of the Holder of the Common Securities subject to Sections 8.2 , 8.3 , and 8.4 . The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of an Trustee shall not operate to annul, dissolve or terminate the Trust.

SECTION 8.2.

Property Trustee Required.

There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a corporation organized and doing business under the laws of the United States or of any state thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least fifty million dollars ($50,000,000), subject to supervision or examination by federal or state authority and having an office within the United States. If any such Person publishes reports of condition at least annually pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section 8.2 , the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee shall cease to be eligible in accordance with the provisions of this Section 8.2 , it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII .

SECTION 8.3.

Delaware Trustee Required.

(a)

If required by the Delaware Statutory Trust Act, there shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware or (ii) a legal entity that has its principal place of business in the State of Delaware, otherwise meets the requirements of applicable Delaware law and shall act through one or more persons authorized to bind such entity. If at any time the Delaware Trustee shall cease to be eligible in accordance with the provisions of this Section 8.3 , it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII .

(b)

The Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. The Delaware Trustee shall be one of the trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Statutory Trust Act and for taking such actions as are required to be taken by a Delaware trustee under the Delaware Statutory Trust Act. The duties (including fiduciary duties), liabilities and obligations of the Delaware Trustee shall be limited to (a) accepting legal process served on the Trust in the State of Delaware and (b) the execution of any certificates required to be filed with the Secretary of State of the State of Delaware that the Delaware Trustee is required to execute under Section 3811 of the Delaware Statutory Trust Act and there shall be no other duties (including fiduciary duties) or obligations, express or implied, at law or in equity, of the Delaware Trustee.

SECTION 8.4.

Appointment of Administrative Trustees.

(a)

There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. Each of the individuals identified as an “Administrative Trustee” in the preamble of this Trust Agreement hereby accepts his or her appointment as such.

(b)

Except where a requirement for action by a specific number of Administrative Trustees is expressly set forth in this Trust Agreement, any act required or permitted to be taken by, and any power of the Administrative Trustees may be exercised by, or with the consent of, any one such Administrative Trustee. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 8.11 , the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Trust Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement.

SECTION 8.5.

Duties and Responsibilities of the Trustees.

(a)

The rights, immunities, duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and there shall be no other duties (including fiduciary duties) or obligations, express or implied, at law or in equity, of the Trustees; provided, however, that if an Event of Default known to the Property Trustee has occurred and is continuing, the Property Trustee shall, prior to the receipt of directions, if any, from the Holders of at least a Majority in Liquidation Amount of the Preferred Securities, exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs. Notwithstanding the foregoing, no provision of this Trust Agreement shall require any of the Trustees to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its or their rights or powers, if it or they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not herein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section 8.5 . To the extent that, at law or in equity, a Trustee has duties and liabilities relating to the Trust or to the Holders, such Trustee shall not be liable to the Trust or to any Holder for such Trustee’s good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Trustees otherwise existing at law or in equity, are agreed by the Depositor and the Holders to replace such other duties and liabilities of the Trustees.

(b)

All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Holder, by its acceptance of a Trust Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 8.5(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement.

(c)

No provisions of this Trust Agreement shall be construed to relieve the Property Trustee from liability with respect to matters that are within the authority of the Property Trustee under this Trust Agreement for its own negligent action, negligent failure to act or willful misconduct, except that:

(i)

the Property Trustee shall not be liable for any error or judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts;

(ii)

the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee hereunder or under the Indenture, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement;

(iii)

the Property Trustee’s sole duty with respect to the custody, safe keeping and physical preservation of the Notes and the Payment Account shall be to deal with such Property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement;

(iv)

the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree with the Depositor; and money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 3.1 and except to the extent otherwise required by law; and

(v)

the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Depositor with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the default or misconduct of any other Trustee or the Depositor.

SECTION 8.6.

Notices of Defaults and Extensions.

(a)

Within ninety (90) days after the occurrence of a default actually known to the Property Trustee, the Property Trustee shall transmit notice of such default to the Holders, the Administrative Trustees and the Depositor, unless such default shall have been cured or waived; provided, that, except in the case of a default in the payment of the principal of or any premium or interest (including any Additional Interest) on any Trust Security, the Property Trustee shall be fully protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Property Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Trust Securities. For the purpose of this Section 8.6 , the term “default” means any event that is, or after notice or lapse of time or both would become, an Event of Default.

(b)

Within three (3) Business Days after the receipt of notice of the Depositor’s exercise of its right to defer the payment of interest on the Notes pursuant to the Indenture, the Property Trustee shall transmit, in the manner and to the extent provided in Section 11.8 , notice of such exercise to the Holders and the Administrative Trustees, unless such exercise shall have been revoked.

(c)

The Property Trustee shall not be deemed to have knowledge of any Event of Default unless the Property Trustee shall have received written notice thereof from the Depositor, any Administrative Trustee or any Holder or unless an officer of the Property Trustee charged with the administration of this Trust Agreement shall have obtained actual knowledge of such Event of Default.

(d)

The Property Trustee shall notify all Holders of the Preferred Securities of any notice of default received with respect to the Notes.

SECTION 8.7.

Certain Rights of Property Trustee.

Subject to the provisions of Section 8.5 :

(a)

the Property Trustee may conclusively rely and shall be protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, Opinion of Counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b)

if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Trust Agreement the Property Trustee finds a provision ambiguous or inconsistent with any other provisions contained herein or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Holders of the Preferred Securities are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to the Depositor requesting the Depositor’s written instruction as to the course of action to be taken and the Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, that if the Property Trustee does not receive such instructions of the Depositor within ten (10) Business Days after it has delivered such notice or such reasonably shorter period of time set forth in such notice, the Property Trustee may, but shall be under no duty to, take such action, or refrain from taking such action, as the Property Trustee shall deem advisable and in the best interests of the Holders, in which event the Property Trustee shall have no liability except for its own negligence, bad faith or willful misconduct;

(c)

any direction or act of the Depositor contemplated by this Trust Agreement shall be sufficiently evidenced by an Officers’ Certificate unless otherwise expressly provided herein;

(d)

any direction or act of an Administrative Trustee contemplated by this Trust Agreement shall be sufficiently evidenced by a certificate executed by such Administrative Trustee and setting forth such direction or act;

(e)

the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any re-recording, re-filing or re-registration thereof;

(f)

the Property Trustee may consult with counsel (which counsel may be counsel to the Property Trustee, the Depositor or any of its Affiliates, and may include any of its employees) and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice; the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction;

(g)

the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Holders pursuant to this Trust Agreement, unless such Holders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction, including reasonable advances as may be requested by the Property Trustee;

(h)

the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Holders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Property Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Depositor, personally or by agent or attorney;

(i)

the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents, attorneys, custodians or nominees and the Property Trustee shall not be responsible for any negligence or misconduct on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;

(j)

whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right hereunder, the Property Trustee (i) may request instructions from the Holders (which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under this Trust Agreement in respect of such remedy, right or action), (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (iii) shall be protected in acting in accordance with such instructions;

(k)

except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement;

(l)

without prejudice to any other rights available to the Property Trustee under applicable law, when the Property Trustee incurs expenses or renders services in connection with a Bankruptcy Event, such expenses (including legal fees and expenses of its agents and counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally; and

(m)

whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, request and rely on an Officers’ Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor.

No provision of this Trust Agreement shall be deemed to impose any duty or obligation on any Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which such Person shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation.

SECTION 8.8.

Delegation of Power.

Any Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 its, his or her power for the purpose of executing any documents contemplated in Section 2.5 . The Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Trust Agreement.

SECTION 8.9.

May Hold Securities.

Any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and except as provided in the definition of the term “Outstanding” in Article I , may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent.

SECTION 8.10.

Compensation; Reimbursement; Indemnity.

The Depositor agrees:

(a)

to the extent that such fees are not payable by other parties under other arrangements, to pay to the Trustees from time to time such reasonable compensation for all services rendered by them hereunder as may be agreed by the Depositor and the Trustees from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(b)

to the extent that such fees are not payable by other parties under other arrangements, to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of their agents and counsel), except any such expense, disbursement or advance as may be attributable to their negligence, bad faith or willful misconduct; and

(c)

to the fullest extent permitted by applicable law, to indemnify and hold harmless (i) each Trustee, (ii) any Affiliate of any Trustee, (iii) any officer, director, shareholder, employee, representative or agent of any Trustee or any Affiliate of any Trustee and (iv) any employee or agent of the Trust (referred to herein as an “Indemnified Person”) from and against any loss, damage, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to Section 8.10(a) or (b) hereof), penalty, expense, suit or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of the Trust hereunder, including the advancement of funds to cover the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

The Trust shall have no payment, reimbursement or indemnity obligations to the Trustees under this Section 8.10 . The provisions of this Section 8.10 shall survive the termination of this Trust Agreement and the earlier removal or resignation of any Trustee.

No Trustee may claim any Lien on any Trust Property whether before or after termination of the Trust as a result of any amount due pursuant to this Section 8.10 .

To the fullest extent permitted by law, in no event shall the Property Trustee and the Delaware Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.

In no event shall the Property Trustee and the Delaware Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (whether declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Trust Agreement.

SECTION 8.11.

Resignation and Removal; Appointment of Successor.

(a)

No resignation or removal of any Trustee and no appointment of a successor Trustee pursuant to this Article VIII shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 8.12 .

(b)

A Trustee may resign at any time by giving written notice thereof to the Depositor and, in the case of the Property Trustee and the Delaware Trustee, to the Holders.

(c)

Unless an Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed (with or without cause) at any time by Act of the Holder of Common Securities. If an Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed (with or without cause) at such time by Act of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities, delivered to the removed Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed (with or without cause) only by Act of the Holder of the Common Securities at any time.

(d)

If any Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of any Trustee for any reason, at a time when no Event of Default shall have occurred and be continuing, the Holder of the Common Securities, by Act of the Holder of the Common Securities, shall promptly appoint a successor Trustee or Trustees, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 8.12 . If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when an Event of Default shall have occurred and be continuing, the Holders of the Preferred Securities, by Act of the Holders of a Majority in Liquidation Amount of the Preferred Securities, shall promptly appoint a successor Property Trustee or Delaware Trustee, and such successor Property Trustee or Delaware Trustee and the retiring Property Trustee or Delaware Trustee shall comply with the applicable requirements of Section 8.12 . If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when an Event of Default shall have occurred and be continuing, the Holder of the Common Securities by Act of the Holder of Common Securities shall promptly appoint a successor Administrative Trustee and such successor Administrative Trustee and the retiring Administrative Trustee shall comply with the applicable requirements of Section 8.12 . If no successor Trustee shall have been so appointed by the Holder of the Common Securities or Holders of the Preferred Securities, as the case may be, and accepted appointment in the manner required by Section 8.12 within thirty (30) days after the giving of a notice of resignation by a Trustee, the removal of a Trustee, or a Trustee becoming incapable of acting as such Trustee, any Holder who has been a Holder of Preferred Securities for at least six (6) months may, on behalf of himself and all others similarly situated, and any resigning Trustee may, in each case, at the expense of the Depositor, petition any court of competent jurisdiction for the appointment of a successor Trustee.

(e)

The Depositor shall give notice of each resignation and each removal of the Property Trustee or the Delaware Trustee and each appointment of a successor Property Trustee or Delaware Trustee to all Holders in the manner provided in Section 11.8 . Each notice shall include the name of the successor Property Trustee or Delaware Trustee and the address of its Corporate Trust Office if it is the Property Trustee.

(f)

Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Holder of Common Securities, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (i) the unanimous act of the remaining Administrative Trustees if there are at least two of them or (ii) otherwise by the Holder of the Common Securities (with the successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees or Delaware Trustee, as the case may be, set forth in Sections 8.3 and 8.4 ).

(g)

Upon the appointment of a successor Delaware Trustee, such successor Delaware Trustee shall file a Certificate of Amendment to the Certificate of Trust in accordance with Section 3810 of the Delaware Statutory Trust Act.

SECTION 8.12.

Acceptance of Appointment by Successor.

(a)

In case of the appointment hereunder of a successor Trustee, each successor Trustee shall execute and deliver to the Depositor and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Trust or any successor Trustee such retiring Trustee shall, upon payment of its charges, duly assign, transfer and deliver to such successor Trustee all Trust Property, all proceeds thereof and money held by such retiring Trustee hereunder with respect to the Trust Securities and the Trust.

(b)

Upon request of any such successor Trustee, the Trust (or the retiring Trustee if requested by the Depositor) shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the preceding paragraph.

(c)

No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VIII .

SECTION 8.13.

Merger, Conversion, Consolidation or Succession to Business.

Any Person into which the Property Trustee or the Delaware Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of such Trustee, shall be the successor of such Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided, that such Person shall be otherwise qualified and eligible under this Article VIII .

SECTION 8.14.

Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities Certificates shall be taken as the statements of the Trust and the Depositor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the title to, or value or condition of, the property of the Trust or any part thereof, nor as to the validity or sufficiency of this Trust Agreement, the Notes or the Trust Securities. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Notes.

SECTION 8.15.

Property Trustee May File Proofs of Claim.

(a)

In case of any Bankruptcy Event (or event that with the passage of time would become a Bankruptcy Event) relative to the Trust or any other obligor upon the Trust Securities or the property of the Trust or of such other obligor or their creditors, the Property Trustee (irrespective of whether any Distributions on the Trust Securities shall then be due and payable and irrespective of whether the Property Trustee shall have made any demand on the Trust for the payment of any past due Distributions) shall be entitled and empowered, to the fullest extent permitted by law, by intervention in such proceeding or otherwise:

(i)

to file and prove a claim for the whole amount of any Distributions owing and unpaid in respect of the Trust Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Property Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding; and

(ii)

to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such proceeding is hereby authorized by each Holder to make such payments to the Property Trustee and, in the event the Property Trustee shall consent to the making of such payments directly to the Holders, to pay to the Property Trustee first any amount due it for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel, and any other amounts due the Property Trustee.

(b)

Nothing herein contained shall be deemed to authorize the Property Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or compensation affecting the Trust Securities or the rights of any Holder thereof or to authorize the Property Trustee to vote in respect of the claim of any Holder in any such proceeding.

SECTION 8.16.

Reports to and from the Property Trustee.

(a)

The Depositor and the Administrative Trustees shall deliver to the Property Trustee, not later than forty five (45) days after the end of each of the first three fiscal quarters of the Depositor and not later than ninety (90) days after the end of each fiscal year of the Depositor ending after the date of this Trust Agreement, an Officers’ Certificate covering the preceding fiscal period, stating whether or not to the knowledge of the signers thereof the Depositor and the Trust are in default in the performance or observance of any of the terms, provisions and conditions of this Trust Agreement (without regard to any period of grace or requirement of notice provided hereunder) and, if the Depositor or the Trust shall be in default, specifying all such defaults and the nature and status thereof of which they have knowledge.

(b)

The Depositor shall furnish to (i) the Property Trustee, (ii) the Purchaser, (iii) any Owner of the Preferred Securities reasonably identified to the Depositor or the Trust (which identification may be made either by such Owner or by the Placement Agent or Purchaser), and (iv) any designee of (i), (ii) or (iii) above, a duly completed and executed certificate in the form attached hereto as Exhibit G, including the financial statements referenced in such Exhibit, which certificate and financial statements shall be so furnished by the Depositor not later than forty five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Depositor and not later than ninety (90) days after the end of each fiscal year of the Depositor, provided , however , that the Depositor shall not be required to furnish a completed and executed certificate in the form attached hereto as Exhibit G so long as the Depositor is subject to Section 15(d) of the Exchange Act. The Depositor shall furnish all financial statements referenced in the certificate attached hereto as Exhibit G, notwithstanding the fact that the certificate may not be required to be furnished under this Section 8.16.

(c)

The Property Trustee shall obtain all reports, certificates and information, which it is entitled to receive under each of the Operative Documents, and deliver to (i) the Purchaser, (ii) the Placement Agent and (iii) a designee of (i) or (ii) above, all such reports, certificates or information promptly upon receipt thereof.

ARTICLE IX.

Termination, Liquidation and Merger

SECTION 9.1.

Dissolution Upon Expiration Date.

Unless earlier dissolved, the Trust shall automatically dissolve on March 31, 2040 (the “Expiration Date”), and the Trust Property shall be liquidated in accordance with Section 9.4 .

SECTION 9.2.

Early Termination.

The first to occur of any of the following events is an “Early Termination Event”, upon the occurrence of which the Trust shall be dissolved:

(a)

the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor, in its capacity as the Holder of the Common Securities, unless the Depositor shall have transferred the Common Securities as provided by Section 5.11 , in which case this provision shall refer instead to any such successor Holder of the Common Securities;

(b)

the written direction to the Property Trustee from the Holder of the Common Securities at any time to dissolve the Trust and, after satisfaction of any liabilities of the Trust as required by applicable law, to distribute the Notes to Holders in exchange for the Preferred Securities (which direction is optional and wholly within the discretion of the Holder of the Common Securities), provided, that the Holder of the Common Securities shall have received the prior approval of the Federal Reserve, if then required;

(c)

the redemption of all of the Preferred Securities in connection with the payment at maturity or redemption of all the Notes; and

(d)

the entry of an order for dissolution of the Trust by a court of competent jurisdiction.

SECTION 9.3.

Termination.

The respective obligations and responsibilities of the Trustees and the Trust shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Holders of all amounts required to be distributed hereunder upon the liquidation of the Trust pursuant to Section 9.4 , or upon the redemption of all of the Trust Securities pursuant to Section 4.2 ; (b) the satisfaction of any expenses owed by the Trust; and (c) the discharge of all administrative duties of the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Holders.

SECTION 9.4.

Liquidation.

(a)

If an Early Termination Event specified in Section 9.2(a) , (b) or (d) occurs or upon the Expiration Date, the Trust shall be liquidated by the Property Trustee as expeditiously as the Property Trustee shall determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to each Holder a Like Amount of Notes, subject to Section 9.4(d) . Notice of liquidation shall be given by the Property Trustee not less than thirty (30) nor more than sixty (60) days prior to the Liquidation Date to each Holder of Trust Securities at such Holder’s address appearing in the Securities Register. All such notices of liquidation shall:

(i)

state the Liquidation Date;

(ii)

state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be Outstanding and (subject to Section 9.4(d) ) any Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Notes; and

(iii)

provide such information with respect to the mechanics by which Holders may exchange Securities Certificates for Notes, or if Section 9.4(d) applies, receive a Liquidation Distribution, as the Property Trustee shall deem appropriate.

(b)

Except where Section 9.2(c) or 9.4(d) applies, in order to effect the liquidation of the Trust and distribution of the Notes to Holders, the Property Trustee, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish a record date for such distribution (which shall not be more than forty-five (45) days prior to the Liquidation Date nor prior to the date on which notice of such liquidation is given to the Holders) and establish such procedures as it shall deem appropriate to effect the distribution of Notes in exchange for the Outstanding Securities Certificates.

(c)

Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii) certificates representing a Like Amount of Notes will be issued to Holders of Securities Certificates, upon surrender of such Securities Certificates to the exchange agent for exchange, (iii) the Depositor shall use its best efforts to have the Notes listed on the New York Stock Exchange or on such other exchange, interdealer quotation system or self-regulatory organization on which the Preferred Securities are then listed, if any, (iv) Securities Certificates not so surrendered for exchange will be deemed to represent a Like Amount of Notes bearing accrued and unpaid interest in an amount equal to the accumulated and unpaid Distributions on such Securities Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal will be made to Holders of Securities Certificates with respect to such Notes) and (v) all rights of Holders holding Trust Securities will cease, except the right of such Holders to receive Notes upon surrender of Securities Certificates.

(d)

Notwithstanding the other provisions of this Section 9.4 , if distribution of the Notes in the manner provided herein is determined by the Property Trustee not to be permitted or practical, the Trust Property shall be liquidated, and the Trust shall be wound up by the Property Trustee in such manner as the Property Trustee determines. In such event, Holders will be entitled to receive out of the assets of the Trust available for distribution to Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the “Liquidation Distribution”). If, upon any such winding up the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such winding up pro rata (based upon Liquidation Amounts) with Holders of all Trust Securities, except that, if an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities as provided in Section 4.3 .

SECTION 9.5.

Mergers, Consolidations, Amalgamations or Replacements of Trust.

The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any Person except pursuant to this Article IX . At the request of the Holders of the Common Securities, without the consent of the Holders of the Preferred Securities, the Trust may merge with or into, consolidate, amalgamate, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided, that:

(a)

such successor entity either (i) expressly assumes all of the obligations of the Trust under this Trust Agreement with respect to the Preferred Securities or (ii) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (such other Securities, the “Successor Securities”) so long as the Successor Securities have the same priority as the Preferred Securities with respect to distributions and payments upon liquidation, redemption and otherwise;

(b)

a trustee of such successor entity possessing substantially the same powers and duties as the Property Trustee is appointed to hold the Notes;

(c)

if the Preferred Securities or the Notes are rated, such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Preferred Securities or the Notes (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization that then assigns a rating to the Preferred Securities or the Notes;

(d)

the Preferred Securities are listed, or any Successor Securities will be listed upon notice of issuance, on any national securities exchange or interdealer quotation system on which the Preferred Securities are then listed, if any;

(e)

such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect;

(f)

such successor entity has a purpose substantially identical to that of the Trust;

(g)

prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an Opinion of Counsel to the effect that (i) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect; (ii) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an “investment company” under the Investment Company Act and (iii) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust (or the successor entity) will continue to be classified as a grantor trust for U.S. federal income tax purposes; and

(h)

the Depositor or its permitted transferee owns all of the common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee Agreement.

Notwithstanding the foregoing, the Trust shall not, except with the consent of Holders of all of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other Person or permit any other entity to consolidate, amalgamate, merge with or into, or replace, the Trust if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes or cause the Notes to be treated as other than indebtedness of the Depositor for United States federal income tax purposes.

ARTICLE X.

Information to Purchaser

SECTION 10.1.

Depositor Obligations to Purchaser.

Notwithstanding any other provision herein, the Depositor shall furnish to (a) the Purchaser, (b) any Owner of the Preferred Securities reasonably identified to the Depositor or the Trust (which identification may be made either by such Owner or by the Placement Agent or Purchaser) and (c) any designee of (a) or (b) above, copies of all correspondence, notices, forms, filings, reports and other documents required to be provided by the Depositor, whether acting through an Administrative Trustee or otherwise, to the Property Trustee or Delaware, Trustee under this Trust Agreement.

SECTION 10.2.

Trustee’s Obligations to Purchaser.

Notwithstanding any other provision herein, the Property Trustee shall furnish to (a) the Purchaser, (b) the Placement Agent and (c) a designee of (a) or (b) above, copies of all (i) correspondence, notices, forms, filings, reports and other documents required to be provided to the Property Trustee or Delaware Trustee by the Depositor, whether acting through an Administrative Trustee or otherwise, under this Trust Agreement, and (ii) all correspondence, notices, forms, filings, reports and other documents required to be provided to the Depositor or a Holder by the Property Trustee or Delaware Trustee under this Trust Agreement.

ARTICLE XI.

Miscellaneous Provisions

SECTION 11.1.

Limitation of Rights of Holders.

Except as set forth in Section 9.2 , the death, bankruptcy, termination, dissolution or incapacity of any Person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor annul, dissolve or terminate the Trust nor entitle the legal representatives or heirs of such Person or any Holder for such Person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them.

SECTION 11.2.

Agreed Tax Treatment of Trust and Trust Securities.

The parties hereto and, by its acceptance or acquisition of a Trust Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, such Trust Security intend and agree to treat the Trust as a grantor trust for United States federal, state and local tax purposes, and to treat the Trust Securities (including all payments and proceeds with respect to such Trust Securities) as undivided beneficial ownership interests in the Trust Property (and payments and proceeds therefrom, respectively) for United States federal, state and local tax purposes. The provisions of this Trust Agreement shall be interpreted to further this intention and agreement of the parties.

SECTION 11.3.

Amendment.

(a)

This Trust Agreement may be amended from time to time by the Property Trustee, the Administrative Trustees and the Holder of all the Common Securities, without the consent of any Holder of the Preferred Securities, (i) to cure any ambiguity, correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, which shall not be inconsistent with the other provisions of this Trust Agreement, (ii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will neither be taxable as a corporation nor be classified as other than a grantor trust for United States federal income tax purposes at all times that any Trust Securities are Outstanding or to ensure that the Notes are treated as indebtedness of the Depositor for United States federal income tax purposes, or to ensure that the Trust will not be required to register as an “investment company” under the Investment Company Act or (iii) to add to the covenants, restrictions or obligations of the Depositor; provided, that in the case of clauses (i), (ii) or (iii), such action shall not adversely affect in any material respect the interests of any Holder.

(b)

Except as provided in Section 11.3(c) , any provision of this Trust Agreement may be amended by the Property Trustee, the Administrative Trustees and the Holder of all of the Common Securities and with (i) the consent of Holders of at least a Majority in Liquidation Amount of the Preferred Securities and (ii) receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not cause the Trust to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes or affect the treatment of the Notes as indebtedness of the Depositor for United States federal income tax purposes or affect the Trust’s exemption from status (or from any requirement to register) as an “investment company” under the Investment Company Act.

(c)

Notwithstanding any other provision of this Trust Agreement, without the consent of each Holder, this Trust Agreement may not be amended to (i) change the accrual rate, amount, currency or timing of any Distribution on or the redemption price of the Trust Securities or otherwise adversely affect the amount of any Distribution or other payment required to be made in respect of the Trust Securities as of a specified date, (ii) restrict or impair the right of a Holder to institute suit for the enforcement of any such payment on or after such date, (iii) reduce the percentage of aggregate Liquidation Amount of Outstanding Preferred Securities, the consent of whose Holders is required for any such amendment, or the consent of whose Holders is required for any waiver of compliance with any provision of this Trust Agreement or of defaults hereunder and their consequences provided for in this Trust Agreement; (iv) impair or adversely affect the rights and interests of the Holders in the Trust Property, or permit the creation of any Lien on any portion of the Trust Property; or (v) modify the definition of “Outstanding,” this Section 11.3(c) , Sections 4.1 , 4.2 , 4.3 , 6.10(e) or Article IX .

(d)

Notwithstanding any other provision of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement that would cause the Trust to be taxable as a corporation or to be classified as other than a grantor trust for United States federal income tax purposes or that would cause the Notes to fail or cease to be treated as indebtedness of the Depositor for United States federal income tax purposes or that would cause the Trust to fail or cease to qualify for the exemption from status (or from any requirement to register) as an “investment company” under the Investment Company Act.

(e)

If any amendment to this Trust Agreement is made, the Administrative Trustees or the Property Trustee shall promptly provide to the Depositor a copy of such amendment.

(f)

No Trustee shall be required to enter into any amendment to this Trust Agreement that affects its own rights, duties or immunities under this Trust Agreement. The Trustees shall be entitled to receive an Opinion of Counsel and an Officers’ Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement and all conditions precedent herein provided for relating to such action have been met.

(g)

No amendment or modification to this Trust Agreement that adversely affects in any material respect the rights, duties, liabilities, indemnities or immunities of the Delaware Trustee hereunder shall be permitted without the prior written consent of the Delaware Trustee.

SECTION 11.4.

Separability.

If any provision in this Trust Agreement or in the Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

SECTION 11.5.

Governing Law.

THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE HOLDERS, THE TRUST, THE DEPOSITOR AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PROVISIONS.

SECTION 11.6.

Successors.

This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust and any Trustee, including any successor by operation of law. Except in connection with a transaction involving the Depositor that is permitted under Article VIII of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor’s obligations hereunder, the Depositor shall not assign its obligations hereunder.

SECTION 11.7.

Headings.

The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement.

SECTION 11.8.

Reports, Notices and Demands.

(a)

Any report, notice, demand or other communication that by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Holder or the Depositor may be given or served in writing delivered in person, or by reputable, overnight courier, by telecopy or by deposit thereof, first-class postage prepaid, in the United States mail, addressed, (a) in the case of a Holder of Preferred Securities, to such Holder as such Holder’s name and address may appear on the Securities Register; and (b) in the case of the Holder of all the Common Securities or the Depositor, to Arrow Financial Corporation 250 Glen Street, Glens Falls, New York 12801, Attention: Chief Financial Officer, or to such other address as may be specified in a written notice by the Holder of all the Common Securities or the Depositor, as the case may be, to the Property Trustee. Such report, notice, demand or other communication to or upon a Holder or the Depositor shall be deemed to have been given when received in person, within one (1) Business Day following delivery by overnight courier, when telecopied with receipt confirmed, or within three (3) Business Days following delivery by mail, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.

(b)

Any notice, demand or other communication that by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Property Trustee, the Delaware Trustee, the Administrative Trustees, the Trust, the Placement Agent, or the Purchaser shall be given in writing by deposit thereof, first-class postage prepaid, in the U.S. mail, personal delivery or facsimile transmission, addressed to such Person as follows: (a) with respect to the Property Trustee to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration, facsimile no. (302) 636-4140; (b) with respect to the Delaware Trustee, to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration, facsimile no. (302) 636-4140; (c) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked “Attention: Administrative Trustees of Arrow Capital Statutory Trust III,” (d) with respect to the Trust, to its principal executive office specified in Section 2.2 , with a copy to the Property Trustee, (e) with respect to the Placement Agent, to SunTrust Capital Markets, Inc., 303 Peachtree Street, N.E., 24 ^th Floor, Mail Code 3950, Atlanta, Georgia 30308, facsimile no. (404) 813-5000, and (f) with respect to the Purchaser, to STI Investment Management, Inc., 2202 Polly Drummond Office Park, Newark, Delaware 19711, facsimile no. (302) 737-3425. Such notice, demand or other communication to or upon the Trust, the Property Trustee or the Administrative Trustees shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust, the Property Trustee or the Administrative Trustees.

SECTION 11.9.

Agreement Not to Petition.

Each of the Trustees and the Depositor agree for the benefit of the Holders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX , they shall not file, or join in the filing of, a petition against the Trust under any Bankruptcy Law or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. If the Depositor takes action in violation of this Section 11.9 , the Property Trustee agrees, for the benefit of Holders, that at the expense of the Depositor, it shall file an answer with the applicable bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be estopped and precluded therefrom and such other defenses, if any, as counsel for the Property Trustee or the Trust may assert.

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

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[TPW: NYLEGAL:165066.1] 19983-00000 08/06/2003 3:07 PM

IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Trust Agreement as of the day and year first above written.

Arrow Financial Corporation,

as Depositor

By:

Name:

Title:

Wilmington Trust Company, as Property Trustee

By:

Name:

Title:

Wilmington Trust Company, as Delaware Trustee

By:

Name:

Title:

Name:

Administrative Trustee

Name:

Administrative Trustee

Name:

Administrative Trustee

A-1

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Exhibit A

CERTIFICATE OF TRUST

ARROW CAPITAL STATUTORY TRUST III

This Certificate of Trust of Arrow Capital Statutory Trust III (the “Trust”) is being duly executed and filed on behalf of the Trust by the undersigned, as trustees, to form a statutory trust under the Delaware Statutory Trust Act (12 Del . C. §3801 et seq .) (the “Act”).

Name . The name of the statutory trust formed by this Certificate of Trust is: Arrow Capital Statutory Trust III.

Trustee . The name and business address of the trustee of the Trust with its principal place of business in the State of Delaware are Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration.

Effective Date . This Certificate of Trust shall be effective upon its filing with the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, the undersigned have duly executed this Certificate of Trust in accordance with Section 3811(a)(1) of the Act.

Wilmington Trust Company, not in its individual capacity, but solely as trustee

By:

Name:

Title:

B-1

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Exhibit B

[FORM OF COMMON SECURITIES CERTIFICATE]

THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION. THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH APPLICABLE LAW AND SECTION 5.11 OF THE TRUST AGREEMENT

Certificate Number

C-

310 Common Securities

Certificate Evidencing Common Securities

Arrow Capital Statutory Trust III

Floating Rate Common Securities

(liquidation amount $1,000 per Common Security)

Arrow Capital Statutory Trust III, a statutory trust created under the laws of the State of Delaware (the “Trust”), hereby certifies that Arrow Financial Corporation, a New York corporation (the “Holder”) is the registered owner of 310 common securities of the Trust representing undivided common beneficial interests in the assets of the Trust and designated the Arrow Capital Statutory Trust III Floating Rate Common Securities (liquidation amount $1,000 per Common Security) (the “Common Securities”). Except in accordance with Section 5.11 of the Trust Agreement (as defined below), the Common Securities are not transferable and, to the fullest extent permitted by law, any attempted transfer hereof other than in accordance therewith shall be void. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities are set forth in, and this certificate and the Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust, dated as of December 28, 2004, as the same may be amended from time to time (the “Trust Agreement”), among Arrow Financial Corporation, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, the Administrative Trustees named therein and the Holders, from time to time, of Trust Securities. The Trust will furnish a copy of the Trust Agreement to the Holder without charge upon written request to the Trust at its principal place of business or registered office.

Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder.

This Common Securities Certificate shall be governed by and construed in accordance with the laws of the State of Delaware.

Terms used but not defined herein have the meanings set forth in the Trust Agreement.

In Witness Whereof, one of the Administrative Trustees of the Trust has executed on behalf of the Trust this certificate this 28 ^th day of December, 2004.

Arrow Capital Statutory Trust III

By:

Name:

Administrative Trustee

C-1

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Exhibit C

[FORM OF PREFERRED SECURITIES CERTIFICATE]

“THIS PREFERRED SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE TRUST AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (“DTC”) OR A NOMINEE OF DTC. THIS PREFERRED SECURITY IS EXCHANGEABLE FOR PREFERRED SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE TRUST AGREEMENT, AND NO TRANSFER OF THIS PREFERRED SECURITY (OTHER THAN A TRANSFER OF THIS PREFERRED SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

THE PREFERRED SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH PREFERRED SECURITIES OR ANY INTEREST THEREIN MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY PREFERRED SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE PREFERRED SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.

THE PREFERRED SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE LIQUIDATION AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF PREFERRED SECURITIES OR ANY INTEREST THEREIN IN A BLOCK HAVING AN AGGREGATE LIQUIDATION AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH PREFERRED SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF LIQUIDATION AMOUNT OF OR DISTRIBUTIONS ON SUCH PREFERRED SECURITIES OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH PREFERRED SECURITIES.

THE HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS PREFERRED SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR ANY INTEREST THEREIN IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE PREFERRED SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE “FDIC”).

C-2

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Certificate Number

10,000 Preferred Securities

$10,000,000 Aggregate Liquidation Amount

CUSIP NO.

_______________

Certificate Evidencing Preferred Securities

Arrow Capital Statutory Trust III

Floating Rate Preferred Securities
(liquidation amount $1,000 per Preferred Security)

Arrow Capital Statutory Trust III, a statutory trust created under the laws of the State of Delaware (the “Trust”), hereby certifies that ___________________ (the “Holder”) is the registered owner of ___________ Preferred Securities, or such other number of Preferred Securities represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Trust Agreement (as defined below), of the Trust representing an undivided preferred beneficial interest in the assets of the Trust and designated the Arrow Capital Statutory Trust III Floating Rate Preferred Securities (liquidation amount $1,000 per Preferred Security) (the “Preferred Securities”). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in Section 5.7 of the Trust Agreement (as defined below). The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities are set forth in, and this certificate and the Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust, dated as of December 28, 2004, as the same may be amended from time to time (the “Trust Agreement”), among Arrow Financial Corporation, a New York corporation, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, the Administrative Trustees named therein and the Holders, from time to time, of Trust Securities. The Holder is entitled to the benefits of the Guarantee Agreement entered into by Arrow Financial Corporation and Wilmington Trust Company, as Guarantee Trustee, dated as of December 28, 2004, as the same may be amended from time to time (the “Guarantee Agreement”), to the extent provided therein. The Trust will furnish a copy of each of the Trust Agreement and the Guarantee Agreement to the Holder without charge upon written request to the Property Trustee at its principal place of business or registered office.

Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder.

This Preferred Securities Certificate shall be governed by and construed in accordance with the laws of the State of Delaware.

All capitalized terms used but not defined in this Preferred Securities Certificate are used with the meanings specified in the Trust Agreement, including the Schedules and Exhibits thereto.

In Witness Whereof, one of the Administrative Trustees of the Trust has executed on behalf of the Trust this certificate this 28 ^th day of December, 2004.

Arrow Capital Statutory Trust III

By:

Name:

Administrative Trustee

This is one of the Preferred Securities referred to in the within-mentioned Trust Agreement.

Dated:

Wilmington Trust Company, not in its individual capacity, but solely as Property Trustee

By:

____________________________

Authorized officer

C-3

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[FORM OF REVERSE OF SECURITY]

The Trust promises to pay Distributions from December 28, 2004, or from the most recent Distribution Date to which Distributions have been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2005, at an annual rate equal to 4.54875% beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2005 and for each successive period beginning on (and including) March 31, 2005, and each successive Distribution Date, at a variable rate per annum, reset quarterly, and ending on (but excluding) the next succeeding Distribution Date equal to LIBOR plus 2.00% of the Liquidation Amount of the Preferred Securities represented by this Preferred Securities Certificate, together with any Additional Interest Amounts, in respect to such period.

In the event (and to the extent) that the Depositor exercises its right under the Indenture to defer the payment of interest on the Notes, Distributions on the Preferred Securities shall be deferred.

Under the Indenture, so long as no Note Event of Default pursuant to paragraphs (c), (e) or (f) of Section 5.1 of the Indenture has occurred and is continuing, the Depositor shall have the right, at any time and from time to time during the term of the Notes, to defer the payment of interest on the Notes for a period of up to twenty (20) consecutive quarterly interest payment periods (each such extended interest payment period, an “Extension Period”), during which Extension Period no interest shall be due and payable (except any Additional Tax Sums that may be due and payable). No interest on the Notes shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00%, compounded quarterly, from the dates on which amounts would have otherwise been due and payable until paid or until funds for the payment thereof have been made available for payment. If Distributions are deferred, the deferred Distributions (including Additional Interest Amounts) shall be paid on the date that the related Extension Period terminates to Holders (as defined in the Trust Agreement) of the Trust Securities as they appear on the books and records of the Trust on the record date immediately preceding such termination date.

Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such Distributions in the Payment Account of the Trust. The Trust’s funds available for Distribution to the Holders of the Preferred Securities will be limited to payments received from the Depositor. The payment of Distributions out of moneys held by the Trust is guaranteed by the Depositor pursuant to the Guarantee Agreement.

During any such Extension Period, the Depositor shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Depositor’s capital stock or (ii) make any payment of principal of or any interest or premium on or repay, repurchase or redeem any debt securities of the Depositor that rank pari passu in all respects with or junior in interest to the Notes (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Depositor in connection with (1) any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, (2) a dividend reinvestment or stockholder stock purchase plan or (3) the issuance of capital stock of the Depositor (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of an exchange or conversion of any class or series of the Depositor’s capital stock (or any capital stock of a Subsidiary (as defined in the Indenture) of the Depositor) for any class or series of the Depositor’s capital stock or of any class or series of the Depositor’s indebtedness for any class or series of the Depositor’s capital stock, (c) the purchase of fractional interests in shares of the Depositor’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any Rights Plan (as defined in the Indenture), the issuance of rights, stock or other property under any Rights Plan, or the redemption or repurchase of rights pursuant thereto or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).

On each Note Redemption Date, on the stated maturity (or any date of principal repayment upon early maturity) of the Notes and on each other date on (or in respect of) which any principal on the Notes is repaid, the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price. Under the Indenture, the Notes may be redeemed by the Depositor on any Interest Payment Date, at the Depositor’s option, on or after March 31, 2010 in whole or in part from time to time at a redemption price equal to one hundred percent (100%) of the principal amount thereof or the redeemed portion thereof, as applicable, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption; provided, that the Depositor shall have received the prior approval of the Federal Reserve, if then required. The Notes may also be redeemed by the Depositor, at its option, at any time, in whole but not in part, upon the occurrence of a Capital Disqualification Event, an Investment Company Event or a Tax Event at the Special Event Redemption Price.

The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption or payment at maturity of Notes. Redemptions of the Trust Securities (or portion thereof) shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Redemption Price.

Payments of Distributions (including any Additional Interest Amounts), the Redemption Price, Liquidation Amount or any other amounts in respect of the Preferred Securities shall be made by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. If any Preferred Securities are held by a Depositary, such Distributions shall be made to the Depositary in immediately available funds.

The indebtedness evidenced by the Notes is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt (as defined in the Indenture), and this Security is issued subject to the provisions of the Indenture with respect thereto.

C-4

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ASSIGNMENT

For Value Received, the undersigned assigns and transfers this Preferred Securities Certificate to:

(Insert assignee’s social security or tax identification number)

(Insert address and zip code of assignee)

and irrevocably appoints

agent to transfer this Preferred Securities Certificate on the books of the Trust. The agent may substitute another to act for him or her.

Date:

Signature:

(Sign exactly as your name appears on the other side of this Preferred Securities Certificate)

The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15.

D-1

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Exhibit D

Junior Subordinated Indenture

E-1

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Exhibit E

FORM OF TRANSFEREE CERTIFICATE
TO BE EXECUTED BY TRANSFEREES OTHER THAN QIBS

Arrow Financial Corporation

Arrow Capital Statutory Trust III

250 Glen Street

Glens Falls, New York 12801

Re:

Purchase of $1,000 stated liquidation amount of Floating Rate Preferred

Securities (the “Preferred Securities”) of Arrow Capital Statutory Trust III

Ladies and Gentlemen:

In connection with our purchase of the Preferred Securities we confirm that:

We understand that the Floating Rate Preferred Securities (the “Preferred Securities”) of Arrow Capital Statutory Trust III (the “Trust”) (including the guarantee (the “Guarantee”) of Arrow Financial Corporation (the “Company”) executed in connection therewith) and the Floating Rate Junior Subordinated Notes due 2035 of the Company (the “Subordinated Notes”) (the Preferred Securities, the Guarantee and the Subordinated Notes together being referred to herein as the “Offered Securities”), have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Offered Securities that, if we decide to offer, sell or otherwise transfer any such Offered Securities, (i) such offer, sale or transfer will be made only (a) to the Trust, (b) to a person we reasonably believe is a “qualified institutional buyer” (a “QIB”) (as defined in Rule 144 under the Securities Act) in a transaction meeting the requirements of Rule 144A, (c) to an institutional “accredited investor” within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring Offered Securities for its own account, or for the account of such an “accredited investor,” for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act, (d) pursuant to an effective registration statement under the Securities Act, or (e) pursuant to an exemption from the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction and, in the case of (c) or (e), subject to the right of the Trust and the depositor to require an opinion of counsel and other information satisfactory to each of them. The foregoing restrictions on resale will not apply subsequent to the date on which, in the written opinion of counsel, the Preferred Securities are not “restricted securities” within the meaning of Rule 144 under the Securities Act. If any resale or other transfer of the Offered Securities is proposed to be made pursuant to clause (c) or (e) above, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Property Trustee as Transfer Agent, which shall provide as applicable, among other things, that the transferee is an “accredited investor” within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. We acknowledge on our behalf and on behalf of any investor account for which we are purchasing Securities that the Trust and the Company reserve the right prior to any offer, sale or other transfer pursuant to clause (c) or (e) to require the delivery of any opinion of counsel, certifications and/or other information satisfactory to the Trust and the Company. We understand that the certificates for any Offered Security that we receive will bear a legend substantially to the effect of the foregoing.

We are an “accredited investor” within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act purchasing for our own account or for the account of such an “accredited investor,” and we are acquiring the Offered Securities for investment purposes and not with view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Offered Securities, and we and any account for which we are acting are each able to bear the economic risks of our or its investment.

We are acquiring the Offered Securities purchased by us for our own account (or for one or more accounts as to each of which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Offered Securities, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control.

In the event that we purchase any Preferred Securities or any Subordinated Notes, we will acquire such Preferred Securities having an aggregate stated liquidation amount of not less than $100,000 or such Subordinated Notes having an aggregate principal amount not less than $100,000, for our own account and for each separate account for which we are acting.

We acknowledge that we either (A) are not a fiduciary of a employee benefit, individual retirement account or other plan or arrangement subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) (each a “Plan”), or an entity whose underlying assets include “plan assets” by reason of any Plan’s investment in the entity, and are not purchasing the Offered Securities on behalf of or with “plan assets” by reason of any Plan’s investment in the entity, (B) are eligible for the exemptive relief available under one or more of the following prohibited transaction class exemptions (“PTCEs”) issued by the U.S. Department of Labor: PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable exemption, or (C) our purchase and holding of this security, or any interest therein, is not prohibited by Section 406 of ERISA or Section 4975 of the Code with respect to such purchase or holding.

We acknowledge that the Trust and the Company and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agree that if any of the acknowledgments, representations, warranties and agreements deemed to have been made by our purchase of the Offered Securities are no longer accurate, we shall promptly notify the Company. If we are acquiring any Offered Securities as a fiduciary or agent for one or more investor accounts, we represent that we have sole discretion with respect to each such investor account and that we have full power to make the foregoing acknowledgments, representations and agreement on behalf of each such investor account.

(Name of Purchaser)

By:

Date:

Upon transfer, the Offered Securities would be registered in the name of the new beneficial owner as follows.

Name:

Address:

Taxpayer ID Number:

F-1

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Exhibit F

FORM OF TRANSFEROR CERTIFICATE
TO BE EXECUTED FOR QIBs

__________, [ ]

Arrow Financial Corporation

Arrow Capital Statutory Trust III

250 Glen Street

Glens Falls, New York 12801

Re:

Purchase of $1,000 stated liquidation amount of Floating Rate

Preferred Securities (the “Preferred Securities”) of Arrow Capital

Statutory Trust III

Reference is hereby made to the Amended and Restated Trust Agreement of Arrow Capital Statutory Trust III, dated as of December 28, 2004 (the “Trust Agreement”), among Thomas L. Hoy, John J. Murphy and Jeffrey S. Spaulding, as Administrative Trustees, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Property Trustee, Arrow Financial Corporation, as Depositor, and the holders from time to time of undivided beneficial interests in the assets of Arrow Capital Statutory Trust III. Capitalized terms used but not defined herein shall have the meanings given them in the Trust Agreement.

This letter relates to $________________________ aggregate liquidation amount of Preferred Securities which are held in the name of _____________ (the “Transferor”).

In accordance with Article V of the Trust Agreement, the Transferor hereby certifies that such Preferred Securities are being transferred in accordance with (i) the transfer restrictions set forth in the Preferred Securities and (ii) Rule 144A under the Securities Act (“Rule 144A”), to a transferee that the Transferor reasonably believes is purchasing the Preferred Securities for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a “qualified institutional buyer” within the meaning of Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with applicable securities laws of any state of the United States or any other jurisdiction.

You are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby.

(Name of Transferor)

By:

Name:

Title:

Date:

G-1

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Exhibit G

Officer’s Certificate

The undersigned, the [Chief Financial Officer] [Treasurer] [Executive Vice President] hereby certifies, pursuant to Section 8.16(b) of the Amended and Restated Trust Agreement, dated as of [date], among [Company] (the “Company”), Wilmington Trust Company, as property trustee, Wilmington Trust Company, as Delaware trustee and the administrative trustees named therein, that, as of [date], [20__], the Company had the following ratios and balances:

BANK HOLDING COMPANY As of [Quarterly Financial Dates]
Tier 1 Risk Weighted Assets	_________ %
Ratio of Double Leverage	_________ %
Non-Performing Assets to Loans and OREO	_________ %
Tangible Common Equity as a Percentage of Tangible Assets	_________ %
Ratio of Reserves to Non-Performing Loans	_________ %
Ratio of Net Charge-Offs to Loans	_________ %
Return on Average Assets (annualized)	_________ %
Net Interest Margin (annualized)	_________ %
Efficiency Ratio	_________ %
Ratio of Loans to Assets	_________ %
Ratio of Loans to Deposits	_________ %
Total Assets	$
Year to Date Income	$

* A table describing the quarterly report calculation procedures is provided on page __

[ FOR FISCAL YEAR END: Attached hereto are the audited consolidated financial statements (including the balance sheet, income statement and statement of cash flows, and notes thereto, together with the report of the independent accountants thereon) of the Company and its consolidated subsidiaries for the three years ended _______, 20___.]

[ FOR FISCAL QUARTER END: Attached hereto are the unaudited consolidated and consolidating financial statements (including the balance sheet and income statement) of the Company and its consolidated subsidiaries for the fiscal quarter] ended [date], 20__.

The financial statements fairly present in all material respects, in accordance with U.S. generally accepted accounting principles (“GAAP”), the financial position of the Company and its consolidated subsidiaries, and the results of operations and changes in financial condition as of the date, and for the [___ quarter interim] [annual] period ended [date], 20__, and such financial statements have been prepared in accordance with GAAP consistently applied throughout the period involved (expect as otherwise noted therein).

IN WITNESS WHEREOF, the undersigned has executed this Officer’s Certificate as of this 28 ^th day of December, 2004.

Name:

Title:

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

(518) 745-1000

G-2

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Financial Definitions

Report Item	Corresponding FRY-9C or LP Line Items with Line Item corresponding Schedules	Description of Calculation
Tier 1 Risk Weighted Assets	BHCK7206 Schedule HC-R	Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets
Ratio of Double Leverage	(BHCP0365)/(BCHCP3210) Schedule PC in the LP	Total equity investments in subsidiaries divided by the total equity capital. This field is calculated at the parent company level. “Subsidiaries” include bank, bank holding company, and non-bank subsidiaries.
Non-Performing Assets to Loans and OREO	(BHCK5525-BHCK3506+BHCK5526-BHCK3507+BHCK2744)/(BHCK2122+BHCK2744) Schedules HC-C, HC-M & HC-N	Total Nonperforming Assets (NPLs+Foreclosed Real Estate+Other Nonaccrual & Repossessed Assets)/Total Loans+Foreclosed Real Estate
Tangible Common Equity as a Percentage of Tangible Assets	(BHDM3210-BHCK3163)/(BHCK2170-BHCK3163) Schedule HC	(Equity Capital – Goodwill)/(Total Assets – Goodwill)
Ratio of Reserves to Non-Performing Loans	(BHCK3123+BHCK3128)/(BHCK5525-BHCK3506+BHCK5526-BHCK3507) Schedules HC & HC-N & HC-R	Total Loan Loss and Allocated Transfer Risk Reserves/ Total Nonperforming Loans (Nonaccrual + Restructured)
Ratio of Net Charge-Offs to Loans	(BHCK4635-BHCK4605)/(BHCK3516) Schedules HC-B & HC-K	Net charge offs for the period as a percentage of average loans.
Return on Average Assets (annualized)	(BHCK4340/BHCK3368) Schedules HI & HC-K	Net Income as a percentage of Assets.
Net Interest Margin (annualized)	(BHCK4519)/(BHCK3515+BHCK3365+BHCK3516+BHCK3401+BHCKB985) Schedules HI Memorandum and HC-K	(Net Interest Income Fully Taxable Equivalent, if available/Average Earning Assets)
Efficiency Ratio	(BHCK4093)/(BHCK4519+BHCK4079) Schedule HI	(Non-interest Expense)/(Net Interest Income Fully Taxable Equivalent, if available, plus Non-interest Income)
Ratio of Loans to Assets	(BHCKB528+BHCK5369)/(BHCK2170) Schedule HC	Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/Total Assets
Ratio of Loans to Deposits	(BHCKB528+BHCK5369)/(BHDM6631+BHDM6636+BHFN6631+BHFN6636) Schedule HC	Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/Total Deposits (Includes Domestic and Foreign Deposits)
Total Assets	(BHCK2170) Schedule HC	The sum of total assets. Includes cash and balances due from depository institutions; securities; federal funds sold and securities purchased under agreements to resell; loans and lease financing receivables; trading assets; premises and fixed assets; other real estate owned; investments in unconsolidated subsidiaries and associated companies; customer’s liability on acceptances outstanding; intangible assets; and other assets.
Net Income	(BHCK4300) Schedule HI	The sum of income (loss)before extraordinary items and other adjustments and extraordinary items; and other adjustments, net of income taxes.

G-3

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Financial Definitions

THRIFT HOLDING COMPANY

Report Item	Corresponding TFR	Description of Calculation
Tier I Risk Weighted Assets	Schedule CCR – Consolidated Capital Requirement CCR 830	Tier 1 Risk Ratio: Core Capital (Tier 1)/Risk-adjusted assets
Ratio of Double Leverage	Not applicable	Not applicable
Non-performing assets to loans and OREO	Schedule PD – Consolidated Past Due and Nonaccrual Schedule SC – Consolidated Statement of Condition PD30/(SC23+SC30+SC34+SC40)	Total Non-performing assets (NPLs + Foreclosed Real Estate+Other Non-accrual & Repossessed assets+Foreclosed Real Estate)
Tangible Common Equity as a Percentage of Total Assets	Schedule CCR CCR 840	(Equity Capital-Goodwill) / (Total assets – Goodwill)
Ratio of Reserves to Non-performing loans	SC283/PD30	Total loan loss reserves / Total Non-performing loans
Ratio of Net Charge-offs to Loans	Schedule VA – Consolidated Valuation Allowances and Related Data (VA155-VA135)/(SC23+SC30+SC34)	Net charge offs for the period as a percentage of average loans
Return on Assets (annualized)	Schedule SO – Consolidated Statements of Operations SO91/SC60	Net income as a percentage of assets
Net interest margin (annualized)	SO311/((SC10-SC110)+SC20+SC23+SC30+SC34)	Net interest income / Average earning assets
Efficiency Ratio	(SO51/(SO311+SO40))	(Non-interest expense) / (Net interest income + Non-interest income)
Ratio of Loans to Assets	(SC23+SC30+SC34)/(SC60)	Total Loan & Leases / Total assets
Ratio of Loans to Deposits	(SC23+SC30+SC34)/(SC710)	Total Loans & Leases / Total Deposits
Total Assets	Schedule SC SC60	The sum of total assets.
Net Income	Schedule SO SO91	The sum of income (loss).

Schedule A-1

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Schedule A

With respect to the Trust Securities, the London interbank offered rate (“LIBOR”) shall be determined by the Calculation Agent in accordance with the following provisions (in each case rounded to the nearest .000001%):

(1)

On the second LIBOR Business Day (as defined below) prior to a Distribution Date (except, with respect to the first distribution payment period, on December 27, 2004) (each such day, a “LIBOR Determination Date”), LIBOR for any given security shall, for the following distribution period, equal the rate, as obtained by the Calculation Agent from Bloomberg Financial Markets Commodities News, for three-month U.S. Dollar deposits in Europe, which appears on Dow Jones Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions), or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date.

(2)

If, on any LIBOR Determination Date, such rate does not appear on Dow Jones Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for three-month U.S. Dollar deposits in Europe in an amount determined by the Calculation Agent by reference to requests for quotations as of approximately 11:00 a.m. (London time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal such arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that leading banks in the City of New York selected by the Calculation Agent are quoting on the relevant LIBOR Determination Date for three-month U.S. Dollar deposits in Europe in an amount determined by the Calculation Agent by reference to the principal London offices of leading banks in the London interbank market; provided, that if the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR as determined on the previous LIBOR Determination Date.

(3)

As used herein: “Reference Banks” means four major banks in the London interbank market selected by the Calculation Agent; and “LIBOR Business Day” means a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in London.

Schedule A-2

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JUNIOR SUBORDINATED INDENTURE

between

ARROW FINANCIAL CORPORATION

and

WILMINGTON TRUST COMPANY,
as Trustee

_____________________

Dated as of December 28, 2004

_____________________

-i-

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TABLE OF CONTENTS

Page

ARTICLE I Definitions and Other Provisions of General Application

SECTION 1.1. Definitions.

SECTION 1.2. Compliance Certificate and Opinions.

SECTION 1.3. Forms of Documents Delivered to Trustee.

SECTION 1.4. Acts of Holders.

SECTION 1.5. Notices, Etc. to Trustee and Company.

SECTION 1.6. Notice to Holders; Waiver.

SECTION 1.7. Effect of Headings and Table of Contents.

SECTION 1.8. Successors and Assigns.

SECTION 1.9. Separability Clause.

SECTION 1.10. Benefits of Indenture.

SECTION 1.11. Governing Law.

SECTION 1.12. Submission to Jurisdiction.

SECTION 1.13. Non-Business Days.

ARTICLE II Security Forms

SECTION 2.1. Form of Security.

SECTION 2.2. Restricted Legend.

SECTION 2.3. Form of Trustee’s Certificate of Authentication.

SECTION 2.4. Temporary Securities.

SECTION 2.5. Definitive Securities.

ARTICLE III The Securities

SECTION 3.1. Payment of Principal and Interest.

SECTION 3.2. Denominations.

SECTION 3.3. Execution, Authentication, Delivery and Dating.

SECTION 3.4. Global Securities.

SECTION 3.5. Registration, Transfer and Exchange Generally.

SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities.

SECTION 3.7. Persons Deemed Owners.

SECTION 3.8. Cancellation.

SECTION 3.9. Deferrals of Interest Payment Dates.

SECTION 3.10. Right of Set-Off.

SECTION 3.11. Agreed Tax Treatment.

SECTION 3.12. CUSIP Numbers.

ARTICLE IV Satisfaction and Discharge

SECTION 4.1. Satisfaction and Discharge of Indenture.

SECTION 4.2. Application of Trust Money.

ARTICLE V Remedies

SECTION 5.1. Events of Default.

SECTION 5.2. Acceleration of Maturity; Rescission and Annulment.

SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee.

SECTION 5.4. Trustee May File Proofs of Claim.

SECTION 5.5. Trustee May Enforce Claim Without Possession of Securities.

SECTION 5.6. Application of Money Collected.

SECTION 5.7. Limitation on Suits.

SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest; Direct Action by Holders of Preferred Securities.

SECTION 5.9. Restoration of Rights and Remedies.

SECTION 5.10. Rights and Remedies Cumulative.

SECTION 5.11. Delay or Omission Not Waiver.

SECTION 5.12. Control by Holders.

SECTION 5.13. Waiver of Past Defaults.

SECTION 5.14. Undertaking for Costs.

SECTION 5.15. Waiver of Usury, Stay or Extension Laws.

ARTICLE VI The Trustee

SECTION 6.1. Corporate Trustee Required.

SECTION 6.2. Certain Duties and Responsibilities.

SECTION 6.3. Notice of Defaults.

SECTION 6.4. Certain Rights of Trustee.

SECTION 6.5. May Hold Securities.

SECTION 6.6. Compensation; Reimbursement; Indemnity.

SECTION 6.7. Resignation and Removal; Appointment of Successor.

SECTION 6.8. Acceptance of Appointment by Successor.

SECTION 6.9. Merger, Conversion, Consolidation or Succession to Business.

SECTION 6.10. Not Responsible for Recitals or Issuance of Securities.

SECTION 6.11. Appointment of Authenticating Agent.

ARTICLE VII Holder’s Lists and Reports by Trustee and Company

SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders.

SECTION 7.2. Preservation of Information, Communications to Holders.

SECTION 7.3. Reports by Company and Trustee.

ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease

SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms.

SECTION 8.2. Successor Company Substituted.

ARTICLE IX Supplemental Indentures

SECTION 9.1. Supplemental Indentures without Consent of Holders.

SECTION 9.2. Supplemental Indentures with Consent of Holders.

SECTION 9.3. Execution of Supplemental Indentures.

SECTION 9.4. Effect of Supplemental Indentures.

SECTION 9.5. Reference in Securities to Supplemental Indentures.

ARTICLE X Covenants

SECTION 10.1. Payment of Principal, Premium and Interest.

SECTION 10.2. Money for Security Payments to be Held in Trust.

SECTION 10.3. Statement as to Compliance.

SECTION 10.4. Calculation Agent.

SECTION 10.5. Additional Tax Sums.

SECTION 10.6. Additional Covenants.

SECTION 10.7. Waiver of Covenants.

SECTION 10.8. Treatment of Securities.

ARTICLE XI Redemption of Securities

SECTION 11.1. Optional Redemption.

SECTION 11.2. Special Event Redemption.

SECTION 11.3. Election to Redeem; Notice to Trustee.

SECTION 11.4. Selection of Securities to be Redeemed.

SECTION 11.5. Notice of Redemption.

SECTION 11.6. Deposit of Redemption Price.

SECTION 11.7. Payment of Securities Called for Redemption.

ARTICLE XII Subordination of Securities

SECTION 12.1. Securities Subordinate to Senior Debt.

SECTION 12.2. No Payment When Senior Debt in Default; Payment Over of Proceeds Upon Dissolution, Etc.

SECTION 12.3. Payment Permitted If No Default.

SECTION 12.4. Subrogation to Rights of Holders of Senior Debt.

SECTION 12.5. Provisions Solely to Define Relative Rights.

SECTION 12.6. Trustee to Effectuate Subordination.

SECTION 12.7. No Waiver of Subordination Provisions.

SECTION 12.8. Notice to Trustee.

SECTION 12.9. Reliance on Judicial Order or Certificate of Liquidating Agent.

SECTION 12.10. Trustee Not Fiduciary for Holders of Senior Debt.

SECTION 12.11. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee’s Rights.

SECTION 12.12. Article Applicable to Paying Agents.

SCHEDULES

Schedule A

Determination of LIBOR

Exhibit A

Form of Officer’s Certificate

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Junior Subordinated Indenture, dated as of December 28, 2004, between Arrow Financial Corporation, a New York corporation (the “ Company ”), and Wilmington Trust Company, a Delaware banking corporation, as Trustee (in such capacity, the “ Trustee ”).

Recitals of the Company

Whereas, the Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its unsecured junior subordinated deferrable interest notes (the “ Securities ”) issued to evidence loans made to the Company of the proceeds from the issuance by Arrow Capital Statutory Trust III, a Delaware statutory trust (the “ Trust ”), of undivided preferred beneficial interests in the assets of the Trust (the “ Preferred Securities ”) and undivided common beneficial interests in the assets of the Trust (the “ Common Securities ” and, collectively with the Preferred Securities, the “ Trust Securities ”), and to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered; and

Whereas, all things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.

Now, therefore, this Indenture Witnesseth:

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows:

ARTICLE I

Definitions and Other Provisions of General Application

SECTION 1.1. Definitions.

For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

(a)

the terms defined in this Article I have the meanings assigned to them in this Article I ;

(b)

the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;

(c)

all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP;

(d)

unless the context otherwise requires, any reference to an “Article” or a “Section” refers to an Article or a Section, as the case may be, of this Indenture;

(e)

the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;

(f)

a reference to the singular includes the plural and vice versa; and

(g)

the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders.

“ Act ” when used with respect to any Holder, has the meaning specified in Section 1.4 .

“ Administrative Trustee ” means, with respect to the Trust, a Person identified as an “Administrative Trustee” in the Trust Agreement, solely in its capacity as Administrative Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Administrative Trustee appointed as therein provided.

“ Additional Interest ” means the interest, if any, that shall accrue on any amounts payable on the Securities, the payment of which has not been made on the applicable Interest Payment Date and which shall accrue at the rate per annum specified or determined as specified in such Security.

“ Additional Tax Sums ” has the meaning specified in Section 10.5 .

“ Additional Taxes ” means taxes, duties or other governmental charges imposed on the Trust as a result of a Tax Event (which, for the sake of clarity, does not include amounts required to be deducted or withheld by the Trust from payments made by the Trust to or for the benefit of the Holder of, or any Person that acquires a beneficial interest in, the Securities).

“ Affiliate ” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“ Applicable Depository Procedures ” means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time.

“ Authenticating Agent ” means any Person authorized by the Trustee pursuant to Section 6.11 to act on behalf of the Trustee to authenticate the Securities.

“ Bankruptcy Code ” means Title 11 of the United States Code or any successor statute thereto, in each case as amended from time to time.

“ Board of Directors ” means the board of directors of the Company or any duly authorized committee of that board.

“ Board Resolution ” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification.

“ Business Day ” means any day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or (iii) a day on which the Corporate Trust Office of the Trustee is closed for business.

“ Calculation Agent ” has the meaning specified in Section 10.4 .

“ Capital Disqualification Event ” means the receipt by the Company of an Opinion of Counsel experienced in such matters that, as a result of an amendment to or a change in law or regulation (including any announced prospective change) or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than insubstantial risk that within ninety (90) days of the date of such opinion, the aggregate liquidation amount of the Preferred Securities will not be eligible to be treated by the Company as “Tier 1 Capital” (or the then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve or other “appropriate Federal banking agency” as such term is defined in 12 U.S.C. 1813(q), which amendment, change or prospective change becomes effective or would become effective, as the case may be, on or after the date of issuance of the Securities; provided, however, that the inability of the Company to treat all or any portion of the liquidation amount of the Preferred Securities as Tier 1 Capital shall not constitute the basis for a Capital Disqualification Event if such inability results from the Company having such Preferred Securities outstanding in an amount that for any reason is in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines. By way of example, the inability of the Company to treat all or any portion of the liquidation amount of the Preferred Securities as Tier 1 Capital as a result of the adoption as a final rule of any of the proposals set forth in the Notice of Proposed Rulemaking on Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital, issued on May 6, 2004, by the Federal Reserve, shall not constitute the basis for a Capital Disqualification Event.

“ Common Securities ” has the meaning specified in the first recital of this Indenture.

“ Common Stock ” means the common stock, par value $1.00

per share, of the Company.

“ Company ” means the Person named as the “ Company ” in the first paragraph of this Indenture until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “ Company ” shall mean such successor corporation.

“ Company Request ” and “ Company Order ” mean, respectively, the written request or order signed in the name of the Company by its Chairman of the Board of Directors, its Vice Chairman of the Board of Directors, its Chief Executive Officer, President or a Vice President, and by its Chief Financial Officer, Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee.

“ Corporate Trust Office ” means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of this Indenture is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration.

“ Debt ” means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person, whether currently existing or hereafter incurred and whether or not contingent and without duplication, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or other accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; (vi) all indebtedness of such Person, whether incurred on or prior to the date of this Indenture or thereafter incurred, for claims in respect of derivative products, including interest rate, foreign exchange rate and commodity forward contracts, options and swaps and similar arrangements; (vii) every obligation of the type referred to in clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise; and (viii) any renewals, extensions, refundings, amendments or modifications of any obligation of the type referred to in clauses (i) through (vii).

“ Defaulted Interest ” has the meaning specified in Section 3.1 .

“ Delaware Trustee ” means, with respect to the Trust, the Person identified as the “Delaware Trustee” in the Trust Agreement, solely in its capacity as Delaware Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as therein provided.

“ Depositary ” means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Company or any successor thereto. DTC will be the initial Depositary.

“ Depository Participant ” means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Depositary effects book-entry transfers and pledges of securities deposited with the Depositary.

“ Distributions ” means amounts payable in respect of the Trust Securities as provided in the Trust Agreement and referred to therein as “Distributions.”

“ Dollar ” or “$” means the currency of the United States of America that, as at the time of payment, is legal tender for the payment of public and private debts.

“ DTC ” means The Depository Trust Company, a New York corporation.

“ Event of Default ” has the meaning specified in Section 5.1 .

“ Exchange Act ” means the Securities Exchange Act of 1934 or any statute successor thereto, in each case as amended from time to time.

“ Expiration Date ” has the meaning specified in Section 1.4 .

“ Extension Period ” has the meaning specified in Section 3.9 .

“ Federal Reserve ” means the Board of Governors of the Federal Reserve System, the staff thereof, or a Federal Reserve Bank, acting through delegated authority, in each case under the rules, regulations and policies of the Federal Reserve System, or if at any time after the execution of this Indenture any such entity is not existing and performing the duties now assigned to it , any successor body performing similar duties or functions.

“ GAAP ” means United States generally accepted accounting principles, consistently applied, from time to time in effect.

“ Global Security ” means a Security that evidences all or part of the Securities, the ownership and transfers of which shall be made through book entries by a Depositary.

“ Government Obligation ” means (a) any security that is (i) a direct obligation of the United States of America of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (b) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any Government Obligation that is specified in clause (a) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any Government Obligation that is so specified and held, provided , that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt.

“ Guarantee Agreement ” means the Guarantee Agreement executed by the Company and Wilmington Trust Company, as Guarantee Trustee, contemporaneously with the execution and delivery of this Indenture, for the benefit of the holders of the Preferred Securities, as modified, amended or supplemented from time to time.

“ Holder ” means a Person in whose name a Security is registered in the Securities Register.

“ Indenture ” means this instrument as originally executed or as it may from time to time be amended or supplemented by one or more amendments or indentures supplemental hereto entered into pursuant to the applicable provisions hereof.

“ Interest Payment Date ” means March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2005, during the term of this Indenture.

“ Investment Company Act ” means the Investment Company Act of 1940 or any successor statute thereto, in each case as amended from time to time.

“ Investment Company Event ” means the receipt by the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation (including any announced prospective change) or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within ninety (90) days of the date of such opinion will be, considered an “investment company” that is required to be registered under the Investment Company Act, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Securities.

“ LIBOR ” has the meaning specified in Schedule A .

“ LIBOR Business Day ” has the meaning specified in Schedule A .

“ LIBOR Determination Date ” has the meaning specified in Schedule A .

“ Maturity ,” when used with respect to any Security, means the date on which the principal of such Security or any installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.

“ Notice of Default ” means a written notice of the kind specified in Section 5.1(d) .

“ Office of Thrift Supervision ” means the Office of Thrift Supervision, as from time to time constituted or, if at any time after the execution of this Indenture such Office is not existing and performing the duties now assigned to it, then the body performing such duties at such time.

“ Officers’ Certificate ” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, President or a Vice President, and by the Chief Financial Officer, Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company and delivered to the Trustee.

“ Opinion of Counsel ” means a written opinion of counsel, who may be counsel for or an employee of the Company or any Affiliate of the Company.

“ Original Issue Date ” means the date of original issuance of each Security.

“ Outstanding ” means, when used in reference to any Securities, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

(i)

Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation;

(ii)

Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided , that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and

(iii)

Securities that have been paid, or in substitution for or in lieu of which other Securities have been authenticated and delivered pursuant to the provisions of this Indenture, unless proof satisfactory to the Trustee is presented that any such Securities are held by Holders in whose hands such Securities are valid, binding and legal obligations of the Company;

provided , that, in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. Notwithstanding anything herein to the contrary, Securities initially issued to the Trust that are owned by the Trust shall be deemed to be Outstanding notwithstanding the ownership by the Company or an Affiliate of any beneficial interest in the Trust.

“ Paying Agent ” means the Trustee or any Person authorized by the Company to pay the principal of or any premium or interest on, or other amounts in respect of, any Securities on behalf of the Company.

“ Person ” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof, or any other entity of whatever nature.

“ Place of Payment ” means, with respect to the Securities, the Corporate Trust Office of the Trustee.

“ Placement Agent ” has the meaning specified in the Trust Agreement.

“ Preferred Securities ” has the meaning specified in the first recital of this Indenture.

“ Predecessor Security ” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security. For the purposes of this definition, any security authenticated and delivered under Section 3.6 in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.

“ Proceeding ” has the meaning specified in Section 12.2 .

“ Property Trustee ” means the Person identified as the “Property Trustee” in the Trust Agreement, solely in its capacity as Property Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Property Trustee appointed as therein provided.

“ Purchaser ” means STI Investment Management, Inc., as purchaser of the Preferred Securities pursuant to the Subscription Agreement.

“ Redemption Date ” means, when used with respect to any Security to be redeemed, the date fixed for such redemption by or pursuant to this Indenture.

“ Redemption Price ” means, when used with respect to any Security to be redeemed, in whole or in part, the price at which such security or portion thereof is to be redeemed as fixed by or pursuant to this Indenture.

“ Reference Banks ” has the meaning specified in Schedule A .

“ Regular Record Date ” for the interest payable on any Interest Payment Date with respect to the Securities means the date that is fifteen (15) days preceding such Interest Payment Date (whether or not a Business Day).

“ Responsible Officer ” means, with respect to the Trustee, any Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Financial Services Officer or Assistant Financial Services Officer, or any other officer of the Corporate Trust Department of the Trustee and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer’s knowledge of and familiarity with the particular subject.

“ Rights Plan ” means a plan of the Company providing for the issuance by the Company to all holders of its Common Stock of rights entitling the holders thereof to subscribe for or purchase shares of any class or series of capital stock of the Company which rights (i) are deemed to be transferred with such shares of such Common Stock and (ii) are also issued in respect of future issuances of such Common Stock, in each case until the occurrence of a specified event or events.

“ Securities ” or “ Security ” means any debt securities or debt security, as the case may be, authenticated and delivered under this Indenture.

“ Securities Act ” means the Securities Act of 1933 or any successor statute thereto, in each case as amended from time to time.

“ Securities Register ” and “ Securities Registrar ” have the respective meanings specified in Section 3.5 .

“ Senior Debt ” means the principal of and any premium and interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, whether or not such claim for post-petition interest is allowed in such proceeding) all Debt of the Company, whether incurred on or prior to the date of this Indenture or thereafter incurred, unless it is provided in the instrument creating or evidencing the same or pursuant to which the same is outstanding, that such obligations are not superior in right of payment to the Securities; provided, however, that if the Company is subject to the regulation and supervision of an "appropriate Federal banking agency" within the meaning of 12 U.S.C. 1813(q), the Company shall have received the approval of such appropriate Federal banking agency prior to issuing any such obligation if not otherwise generally approved; provided further, that Senior Debt shall not include any other debt securities, and guarantees in respect of such debt securities, issued to any trust other than the Trust (or a trustee of such trust), partnership or other entity affiliated with the Company that is a financing vehicle of the Company (a “financing entity”), in connection with the issuance by such financing entity of equity securities or other securities that are treated as equity capital for regulatory capital purposes guaranteed by the Company pursuant to an instrument that ranks pari passu with or junior in right of payment to the Indenture, including, without limitation, the debt securities of the Company issued under the Indenture, dated July 23, 2003, between the Company and U.S. Bank National Association, as trustee.

“ Special Event ” means the occurrence of a Capital Disqualification Event, an Investment Company Event or a Tax Event.

“ Special Event Redemption Price ” has the meaning specified in Section 11.2 .

“ Special Record Date ” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.1 .

“ Stated Maturity ” means March 31, 2035.

“ Subscription Agreement ” means the Preferred Securities Subscription Agreement, dated as of December 28, 2004, by and among the Company, the Trust, the Purchaser and SunTrust Capital Markets, Inc. (as to certain provisions thereof).

“ Subsidiary ” means a Person more than fifty percent (50%) of the outstanding voting stock or other voting interests of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, “voting stock” means stock that ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.

“ Tax Event ” means the receipt by the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of (a) any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein or (b) any judicial decision or any official administrative pronouncement (including any private letter ruling, technical advice memorandum or field service advice) or regulatory procedure, including any notice or announcement of intent to adopt any such pronouncement or procedure (an “Administrative Action”), regardless of whether such judicial decision or Administrative Action is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, change, judicial decision or Administrative Action is enacted, promulgated or announced, in each case, on or after the date of issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within ninety (90) days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within ninety (90) days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within ninety (90) days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.

“ Trust ” has the meaning specified in the first recital of this Indenture.

“ Trust Agreement ” means the Amended and Restated Trust Agreement executed and delivered by the Company, the Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees named therein, contemporaneously with the execution and delivery of this Indenture, for the benefit of the holders of the Trust Securities, as amended or supplemented from time to time.

“ Trustee ” means the Person named as the “ Trustee ” in the first paragraph of this instrument, solely in its capacity as such and not in its individual capacity, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and, thereafter, “ Trustee ” shall mean or include each Person who is then a Trustee hereunder.

“ Trust Indenture Act ” means the Trust Indenture Act of 1939, as amended and as in effect on the date as of this Indenture.

“ Trust Securities ” has the meaning specified in the first recital of this Indenture.

SECTION 1.2. Compliance Certificate and Opinions.

(a)

Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that all conditions precedent (including covenants compliance with which constitutes a condition precedent), if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent (including covenants compliance with which constitutes a condition precedent), if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

(b)

Every certificate with respect to compliance with a condition or covenant provided for in this Indenture (other than the certificate provided pursuant to Section 10.3 ) shall include:

(i)

a statement by each individual signing such certificate or opinion that such individual has read such covenant or condition and the definitions herein relating thereto;

(ii)

a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions of such individual contained in such certificate or opinion are based;

(iii)

a statement that, in the opinion of such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(iv)

a statement as to whether, in the opinion of such individual, such condition or covenant has been complied with.

SECTION 1.3. Forms of Documents Delivered to Trustee.

(a)

In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

(b)

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or after reasonable inquiry should know, that the certificate or opinion or representations with respect to matters upon which his or her certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or after reasonable inquiry should know, that the certificate or opinion or representations with respect to such matters are erroneous.

(c)

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

(d)

Whenever, subsequent to the receipt by the Trustee of any Board Resolution, Officers’ Certificate, Opinion of Counsel or other document or instrument, a clerical, typographical or other inadvertent or unintentional error or omission shall be discovered therein, a new document or instrument may be substituted therefor in corrected form with the same force and effect as if originally received in the corrected form and, irrespective of the date or dates of the actual execution and/or delivery thereof, such substitute document or instrument shall be deemed to have been executed and/or delivered as of the date or dates required with respect to the document or instrument for which it is substituted. Without limiting the generality of the foregoing, any Securities issued under the authority of such defective document or instrument shall nevertheless be the valid obligations of the Company entitled to the benefits of this Indenture equally and ratably with all other Outstanding Securities.

SECTION 1.4. Acts of Holders.

(a)

Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given to or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent thereof duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments (including any appointment of an agent) is or are delivered to the Trustee, and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “ Act ” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 1.4 .

(b)

The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a Person acting in other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution by any Person of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient and in accordance with such reasonable rules as the Trustee may determine.

(c)

The ownership of Securities shall be proved by the Securities Register.

(d)

Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

(e)

Without limiting the foregoing, a Holder entitled to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount.

(f)

Except as set forth in paragraph (g) of this Section 1.4 , the Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided , that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date (as defined below) by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect). Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.6 .

(g)

The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration or rescission or annulment thereof referred to in Section 5.2 , (iii) any request to institute proceedings referred to in Section 5.7(b) or (iv) any direction referred to in Section 5.12 . If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided , that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect). Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company’s expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 1.6 .

(h)

With respect to any record date set pursuant to paragraph (f) or (g) of this Section 1.4 , the party hereto that sets such record date may designate any day as the “ Expiration Date ” and from time to time may change the Expiration Date to any earlier or later day; provided , that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 1.6 , on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section 1.4 , the party hereto that set such record date shall be deemed to have initially designated the ninetieth (90 ^th ) day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the one hundred and eightieth (180 ^th ) day after the applicable record date.

SECTION 1.5. Notices, Etc.

Any request, demand, authorization, direction, notice, consent, waiver, Act of Holders, or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with:

(a)

the Trustee by any Holder, any holder of Preferred Securities or the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office,

(b)

the Company by the Trustee, any Holder or any holder of Preferred Securities shall be sufficient for every purpose hereunder if in writing and mailed, first class, postage prepaid, to the Company addressed to it at Arrow Financial Corporation 250 Glen Street, Glens Falls, NY 12801, Attn: Chief Financial Officer, or at any other address previously furnished in writing to the Trustee by the Company,

(c)

the Placement Agent by the Trustee, the Company, any Holder or any holder or beneficial owner of the Preferred Securities, shall be sufficient for every purpose hereunder if in writing and mailed, first-class postage prepaid to the Placement Agent at 303 Peachtree Street, N.E., 24 ^th Floor, Mail Code 3950, Atlanta, Georgia 30308 or any other address previously furnished by the Placement Agent, or

(d)

the Purchaser by the Trustee, the Company, any Holder or any holder or beneficial owner of the Preferred Securities, shall be sufficient for every purpose hereunder if in writing and mailed first-class postage prepaid to the Purchaser at 2202 Polly Drummond Office Park, Newark, Delaware 19711, or any other address previously furnished by the Purchaser.

SECTION 1.6. Notice to Holders; Waiver.

Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first class, postage prepaid, to each Holder affected by such event to the address of such Holder as it appears in the Securities Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. If, by reason of the suspension of or irregularities in regular mail service or for any other reason, it shall be impossible or impracticable to mail notice of any event to Holders when said notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

SECTION 1.7. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction of this Indenture.

SECTION 1.8. Successors and Assigns.

This Indenture shall be binding upon and shall inure to the benefit of any successor to the Company and the Trustee, including any successor by operation of law. Except in connection with a transaction involving the Company that is permitted under Article VIII and pursuant to which the assignee agrees in writing to perform the Company’s obligations hereunder, the Company shall not assign its obligations hereunder.

SECTION 1.9. Separability Clause.

If any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

SECTION 1.10. Benefits of Indenture.

Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors and assigns, the holders of Senior Debt, the Holders of the Securities and, to the extent expressly provided in Sections 5.2 , 5.8 , 5.9 , 5.11 , 5.13 , 9.2 and 10.7 , the holders of Preferred Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.

SECTION 1.11. Governing Law.

This Indenture and the rights and obligations of each of the Holders, the Company and the Trustee shall be construed and enforced in accordance with and governed by the laws of the State of New York without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).

SECTION 1.12. Submission to Jurisdiction.

ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS INDENTURE MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS INDENTURE, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS INDENTURE.

SECTION 1.13. Non-Business Days.

If any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or the Securities) payment of interest, premium or principal or other amounts in respect of such Security shall not be made on such date, but shall be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, until such next succeeding Business Day) except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Stated Maturity.

ARTICLE II

Security Forms

SECTION 2.1. Form of Security.

Any Security issued hereunder shall be in substantially the following form:

ARROW FINANCIAL CORPORATION

Floating Rate Junior Subordinated Note due 2035

No. _____________

$10,310,000

Arrow Financial Corporation, a corporation organized and existing under the laws of New York (hereinafter called the “ Company ,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Property Trustee for Arrow Capital Statutory Trust III, a Delaware statutory trust (the “Holder”), or registered assigns, the principal sum of TEN MILLION THREE HUNDRED TEN THOUSAND ($10,310,000) Dollars or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture on March 31, 2035. The Company further promises to pay interest on said principal sum from December 28, 2004, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2005, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at an annual rate equal to 4.54875% beginning on (and including) the Original Issue Date and ending on (but excluding) March 31, 2005 and at an annual rate for each successive period beginning on (and including) March 31, 2005, and each successive Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date equal to LIBOR plus 2.00%, together with Additional Tax Sums, if any, as provided in Section 10.5 of the Indenture, until the principal hereof is paid or duly provided for or made available for payment; provided , further , that any overdue principal, premium or Additional Tax Sums and any overdue installment of interest shall bear Additional Interest (to the extent that the payment of such interest shall be legally enforceable) at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00%, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.

The amount of interest payable shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. The amount of interest payable for any full interest period shall be computed by dividing the applicable rate per annum by four. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.

So long as no Event of Default pursuant to Sections 5.1(c), (e) or (f) of the Indenture has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of this Security, to defer the payment of interest on this Security for a period of up to twenty (20) consecutive quarterly interest payment periods (each such period, an “ Extension Period ”), during which Extension Period(s), no interest shall be due and payable (except any Additional Tax Sums that may be due and payable). No Extension Period shall end on a date other than an Interest Payment Date, and no Extension Period shall extend beyond the Stated Maturity of the principal of this Security. No interest shall be due and payable during an Extension Period (except any Additional Tax Sums that may be due and payable), except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00%, compounded quarterly, from the dates on which amounts would have otherwise been due and payable until paid or made available for payment. At the end of any such Extension Period, the Company shall pay all interest then accrued and unpaid on this Security, together with such Additional Interest. Prior to the termination of any such Extension Period, the Company may further defer the payment of interest; provided , that (i) all such previous and further extensions comprising such Extension Period do not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of this Security. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due on any Interest Payment Date, the Company may elect to begin a new Extension Period; provided , that (i) such Extension Period does not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of this Security. The Company shall give (i) the Holder of this Security, (ii) the Trustee, (iii) the Property Trustee and (iv) any beneficial owner of the Preferred Securities reasonably identified to the Company (which identification may be made either by such beneficial owner or by the Placement Agent or the Purchaser) written notice of its election to begin any such Extension Period at least five (5) Business Days prior to the next succeeding Interest Payment Date on which interest on this Security would be payable but for such deferral.

During any such Extension Period, the Company shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company’s capital stock or (ii) make any payment of principal of or any interest or premium on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to this Security (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with (1) any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, (2) a dividend reinvestment or stockholder stock purchase plan or (3) the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of an exchange or conversion of any class or series of the Company’s capital stock (or any capital stock of a Subsidiary of the Company) for any class or series of the Company’s capital stock or of any class or series of the Company’s indebtedness for any class or series of the Company’s capital stock, (c) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any Rights Plan, the issuance of rights, stock or other property under any Rights Plan, or the redemption or repurchase of rights pursuant thereto or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).

Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the office or agency of the Company maintained for that purpose in the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest (including any overdue installment of interest and Additional Tax Sums, if any) on this Security will be made at such place and to such account as may be designated by the Property Trustee.

The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.

Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

This Security is one of a duly authorized issue of securities of the Company (the “ Securities ”) issued under the Junior Subordinated Indenture, dated as of December 28, 2004 (the “ Indenture ”), between the Company and Wilmington Trust Company, as Trustee (in such capacity, the “ Trustee ,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Debt and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered.

All terms used in this Security that are defined in the Indenture or in the Amended and Restated Trust Agreement, dated as of December 28, 2004 (as modified, amended or supplemented from time to time, the “ Trust Agreement ”), relating to Arrow Capital Statutory Trust III (the “ Trust ”), among the Company, as Depositor, the Trustees named therein and the Holders from time to time of the Trust Securities issued pursuant thereto, shall have the meanings assigned to them in the Indenture or the Trust Agreement, as the case may be.

The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or after March 31, 2010 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption; provided , that the Company shall have received the prior approval of the Federal Reserve, if then required.

In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of Article XI of the Indenture at the Special Event Redemption Price; provided , that the Company shall have received the prior approval of the Federal Reserve, if then required.

In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.

The Indenture permits, with certain exceptions as therein provided, the Company and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company and of the Holders of the Securities, with the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest, including any Additional Interest, on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

The Company and, by its acceptance of this Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.

This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

ARROW FINANCIAL CORPORATION

By:

Name:
Title:

SECTION 2.2. Restrictive Legend.

(a)

Any Security issued hereunder shall bear a legend in substantially the following form:

“THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (“DTC”) OR A NOMINEE OF DTC. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.

THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY, (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (III) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN “ACCREDITED INVESTOR,” FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (V) PURSUANT TO AN EXEMPTION FROM THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND, IN THE CASE OF (III) OR (V), SUBJECT TO THE RIGHT OF THE COMPANY TO REQUIRE AN OPINION OF COUNSEL AND OTHER INFORMATION SATISFACTORY TO IT AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.

THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.

THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ ERISA ”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “ CODE ”) (EACH A “ PLAN ”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY, OR ANY INTEREST THEREIN, IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE “ FDIC ”).”

(b)

The above legend shall not be removed from any Security unless there is delivered to the Company satisfactory evidence, which may include an opinion of counsel, as may be reasonably required to ensure that any future transfers thereof may be made without restriction under the provisions of the Securities Act and other applicable law. Upon provision of such satisfactory evidence, the Company shall execute and deliver to the Trustee, and the Trustee shall deliver, at the written direction of the Company, a Security that does not bear the legend.

SECTION 2.3. Form of Trustee’s Certificate of Authentication.

The Trustee’s certificates of authentication shall be in substantially the following form:

This is one of the Securities designated therein referred to in the within-mentioned Indenture.

Dated:

WILMINGTON TRUST COMPANY, as Trustee

By:

Authorized officer

SECTION 2.4. Temporary Securities.

(a)

Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise produced, in any denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

(b)

If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for that purpose without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of any authorized denominations having the same Original Issue Date and Stated Maturity and having the same terms as such temporary Securities. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities.

SECTION 2.5. Definitive Securities.

The Securities issued on the Original Issue Date shall be in definitive form. The definitive Securities shall be printed, lithographed or engraved, or produced by any combination of these methods, if required by any securities exchange on which the Securities may be listed, on a steel engraved border or steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.

ARTICLE III

The Securities

SECTION 3.1. Payment of Principal and Interest.

(a)

The unpaid principal amount of the Securities shall bear interest at an annual rate equal to 4.54875% beginning on (and including) the Original Issue Date and ending on (but excluding) March 31, 2005 and at an annual rate for each successive period beginning on (and including) March 31, 2005, and each successive Interest Payment Date, at a variable rate, reset quarterly, and ending on (but excluding) the next succeeding Interest Payment Date equal to LIBOR plus 2.00%, and any overdue principal, premium or Additional Tax Sums and any overdue installment of interest shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00%, from the dates such amounts are due until they are paid or funds for the payment thereof are made available for payment.

(b)

Interest and Additional Interest on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, except that interest and any Additional Interest payable on the Stated Maturity (or any date of principal repayment upon early maturity) of the principal of a Security or on a Redemption Date shall be paid to the Person to whom principal is paid. The initial payment of interest on any Security that is issued between a Regular Record Date and the related Interest Payment Date shall be payable as provided in such Security.

(c)

Any interest on any Security that is due and payable, but is not timely paid or duly provided for, on any Interest Payment Date for Securities (herein called “ Defaulted Interest ”) shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in paragraph (i) or (ii) below:

(i)

The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest (a “ Special Record Date ”), which shall be fixed in the following manner. At least thirty (30) days prior to the date of the proposed payment, the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest, which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first class, postage prepaid, to each Holder of a Security at the address of such Holder as it appears in the Securities Register not less than ten (10) days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date; or

(ii)

The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed and, upon such notice as may be required by such exchange (or by the Trustee if the Securities are not listed), if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such payment shall be deemed practicable by the Trustee.

(d)

Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. Interest payments for the Securities shall be computed and paid on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. The amount of interest payable for any full interest period shall be computed by dividing the applicable rate per annum by four.

(e)

Payment of principal of, premium, if any, and interest on the Securities shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of such Securities shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent and payments of interest shall be made subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of the Security is the Property Trustee, the payment of the principal of (and premium if any) and interest (including any overdue installment of interest and Additional Tax Sums, if any) on the Security will be made at such place and to such account as may be designated by the Property Trustee.

(f)

Subject to the foregoing provisions of this Section 3.1 , each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security.

SECTION 3.2. Denominations.

The Securities shall be in registered form without coupons and shall be issuable in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof.

SECTION 3.3. Execution, Authentication, Delivery and Dating.

(a)

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities in an aggregate principal amount (including all then Outstanding Securities) not in excess of $10,310,000 executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and shall be fully protected in relying upon:

(i)

a copy of any Board Resolution relating thereto; and

(ii)

an Opinion of Counsel stating that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

(b)

The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

(c)

No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by the manual signature of one of its authorized officers, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 3.8 , for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

(d)

Each Security shall be dated the date of its authentication.

SECTION 3.4. Global Securities.

(a)

Upon the election of the Holder after the Original Issue Date, which election need not be in writing, the Securities owned by such Holder shall be issued in the form of one or more Global Securities registered in the name of the Depositary or its nominee. Each Global Security issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture.

(b)

Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Security, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company Order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Security of the occurrence of such event and of the availability of Securities to such owners of beneficial interests requesting the same. Upon the issuance of such Securities and the registration in the Securities Register of such Securities in the names of the Holders of the beneficial interests therein, the Trustees shall recognize such holders of beneficial interests as Holders.

(c)

If any Global Security is to be exchanged for other Securities or canceled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article III or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Securities Registrar, whereupon the Trustee, in accordance with the Applicable Depository Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions.

(d)

Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof.

(e)

Securities distributed to holders of Book-Entry Preferred Securities (as defined in the applicable Trust Agreement) upon the dissolution of the Trust shall be distributed in the form of one or more Global Securities registered in the name of a Depositary or its nominee, and deposited with the Securities Registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Securities distributed to holders of Preferred Securities other than Book-Entry Preferred Securities upon the dissolution of the Trust shall not be issued in the form of a Global Security or any other form intended to facilitate book-entry trading in beneficial interests in such Securities.

(f)

The Depositary or its nominee, as the registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under this Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Depository Procedures. Accordingly, any such owner’s beneficial interest in a Global Security shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Securities Registrar and the Trustee shall be entitled to deal with the Depositary for all purposes of this Indenture relating to a Global Security (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole Holder of the Security and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Securities Registrar shall have any liability in respect of any transfers effected by the Depositary.

(g)

The rights of owners of beneficial interests in a Global Security shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants.

(h)

No holder of any beneficial interest in any Global Security held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Security, and such Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such Global Security for all purposes whatsoever. None of the Company, the Trustee nor any agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Security or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as Holder of any Security.

SECTION 3.5. Registration, Transfer and Exchange Generally.

(a)

The Trustee shall cause to be kept at the Corporate Trust Office a register (the “ Securities Register ”) in which the registrar and transfer agent with respect to the Securities (the “ Securities Registrar ”), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee shall at all times also be the Securities Registrar. The provisions of Article VI shall apply to the Trustee in its role as Securities Registrar.

(b)

Upon surrender for registration of transfer of any Security at the offices or agencies of the Company designated for that purpose the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations of like tenor and aggregate principal amount.

(c)

At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations, of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive.

(d)

All Securities issued upon any transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange.

(e)

Every Security presented or surrendered for transfer or exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar, duly executed by the Holder thereof or such Holder’s attorney duly authorized in writing.

(f)

No service charge shall be made to a Holder for any transfer or exchange of Securities, but the Company and the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Securities.

(g)

Neither the Company nor the Trustee shall be required pursuant to the provisions of this Section 3.5 , (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business fifteen (15) days before the day of selection for redemption of Securities pursuant to Article XI and ending at the close of business on the day of mailing of the notice of redemption or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except, in the case of any such Security to be redeemed in part, any portion thereof not to be redeemed.

(h)

The Company shall designate an office or offices or agency or agencies where Securities may be surrendered for registration or transfer or exchange. The Company initially designates the Corporate Trust Office as its office and agency for such purposes. The Company shall give prompt written notice to the Trustee and to the Holders of any change in the location of any such office or agency.

SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities.

(a)

If any mutilated Security is surrendered to the Trustee together with such security or indemnity as may be required by the Company or the Trustee to save each of them harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and aggregate principal amount and bearing a number not contemporaneously outstanding.

(b)

If there shall be delivered to the Company and to the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and aggregate principal amount as such destroyed, lost or stolen Security, and bearing a number not contemporaneously outstanding.

(c)

If any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.

(d)

Upon the issuance of any new Security under this Section 3.6 , the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

(e)

Every new Security issued pursuant to this Section 3.6 in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder.

(f)

The provisions of this Section 3.6 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 3.7. Persons Deemed Owners.

The Company, the Trustee and any agent of the Company or the Trustee shall treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any interest on such Security and for all other purposes whatsoever, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

SECTION 3.8. Cancellation.

All Securities surrendered for payment, redemption, transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities and Securities surrendered directly to the Trustee for any such purpose shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder that the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 3.8 , except as expressly permitted by this Indenture. All canceled Securities shall be disposed of by the Trustee in accordance with its customary practices and the Trustee shall deliver to the Company a certificate of such disposition.

SECTION 3.9. Deferrals of Interest Payment Dates.

(a)

So long as no Event of Default pursuant to Sections 5.1(c), (e) or (f) has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Security, to defer the payment of interest on the Securities for a period of up to twenty (20) consecutive quarterly interest payment periods (each such period, an “ Extension Period ”), during which Extension Period(s), the Company shall have the right to make no payments or partial payments of interest on any Interest Payment Date (except any Additional Tax Sums that otherwise may be due and payable). No Extension Period shall end on a date other than an Interest Payment Date and no Extension Period shall extend beyond the Stated Maturity of the principal of the Securities. No interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a variable rate per annum, reset quarterly, equal to LIBOR plus 2.00%, compounded quarterly, from the dates on which amounts would have otherwise been due and payable until paid or until funds for the payment thereof have been made available for payment. At the end of any such Extension Period, the Company shall pay all interest then accrued and unpaid on the Securities together with such Additional Interest. Prior to the termination of any such Extension Period, the Company may extend such Extension Period and further defer the payment of interest; provided , that (i) all such previous and further extensions comprising such Extension Period do not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of the Securities. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due on any Interest Payment Date, the Company may elect to begin a new Extension Period; provided , that (i) such Extension Period does not exceed twenty (20) quarterly interest payment periods, (ii) no Extension Period shall end on a date other than an Interest Payment Date and (iii) no Extension Period shall extend beyond the Stated Maturity of the principal of the Securities. The Company shall give (i) the Holders of the Securities, (ii) the Trustee, (iii) the Property Trustee and (iv) any beneficial owner of the Preferred Securities reasonably identified to the Company (which identification may be made either by such beneficial owner or by the Placement Agent or the Purchaser) written notice of its election to begin any such Extension Period at least five (5) Business Days prior to the next succeeding Interest Payment Date on which interest on the Securities would be payable but for such deferral.

(b)

In connection with any such Extension Period, the Company shall be subject to the restrictions set forth in Section 10.6(a) .

SECTION 3.10. Right of Set-Off.

Notwithstanding anything to the contrary herein, the Company shall have the right to set off any payment it is otherwise required to make in respect of any Security to the extent the Company has theretofore made, or is concurrently on the date of such payment making, a payment under the Guarantee Agreement relating to such Security or to a holder of Preferred Securities pursuant to an action undertaken under Section 5.8 of this Indenture.

SECTION 3.11. Agreed Tax Treatment.

Each Security issued hereunder shall provide that the Company and, by its acceptance or acquisition of a Security or a beneficial interest therein, the Holder of, and any Person that acquires a direct or indirect beneficial interest in, such Security, intend and agree to treat such Security as indebtedness of the Company for United States Federal, state and local tax purposes and to treat the Preferred Securities (including but not limited to all payments and proceeds with respect to the Preferred Securities) as an undivided beneficial ownership interest in the Securities (and payments and proceeds therefrom, respectively) for United States Federal, state and local tax purposes. The provisions of this Indenture shall be interpreted to further this intention and agreement of the parties.

SECTION 3.12. CUSIP Numbers.

The Company in issuing the Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use “CUSIP” numbers in notices of redemption and other similar or related materials as a convenience to Holders; provided , that any such notice or other materials may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or other materials and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers.

ARTICLE IV

Satisfaction and Discharge

SECTION 4.1. Satisfaction and Discharge of Indenture.

This Indenture shall, upon Company Request, cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for and as otherwise provided in this Section 4.1 ) and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when

(a)

either

(i)

all Securities theretofore authenticated and delivered (other than (A) Securities that have been mutilated, destroyed, lost or stolen and that have been replaced or paid as provided in Section 3.6 and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided in Section 10.2) have been delivered to the Trustee for cancellation; or

(ii)

all such Securities not theretofore delivered to the Trustee for cancellation

(A)

have become due and payable, or

(B)

will become due and payable at their Stated Maturity within one year of the date of deposit, or

(C)

are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

and the Company, in the case of subclause (ii)(A), (B) or (C) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose (x) an amount in the currency or currencies in which the Securities are payable, (y) Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than the due date of any payment, money in an amount or (z) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest (including any Additional Interest) to the date of such deposit (in the case of Securities that have become due and payable) or to the Stated Maturity (or any date of principal repayment upon early maturity) or Redemption Date, as the case may be;

(b)

the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(c)

the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.6 , the obligations of the Company to any Authenticating Agent under Section 6.11 and, if money shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this Section 4.1 , the obligations of the Trustee under Section 4.2 and Section 10.2(e) shall survive.

SECTION 4.2. Application of Trust Money.

Subject to the provisions of Section 10.2(e) , all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment in accordance with Section 3.1 , either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest (including any Additional Interest) for the payment of which such money or obligations have been deposited with or received by the Trustee. Moneys held by the Trustee under this Section 4.2 shall not be subject to the claims of holders of Senior Debt under Article XII .

ARTICLE V

Remedies

SECTION 5.1. Events of Default.

“ Event of Default ” means, wherever used herein with respect to the Securities, any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a)

default in the payment of any interest upon any Security, including any Additional Interest in respect thereof, when it becomes due and payable, and continuance of such default for a period of thirty (30) days (subject to the deferral of any due date in the case of an Extension Period); or

(b)

default in the payment of the principal of or any premium on any Security at its Maturity; or

(c)

default in the payment of any interest upon any Security, including any Additional Interest in respect thereof, following the nonpayment of any such interest for twenty (20) or more consecutive quarterly interest payment periods; or

(d)

default in the performance, or breach, of any covenant or warranty of the Company in this Indenture and continuance of such default or breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least twenty five percent (25%) in aggregate principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(e)

the entry by a court having jurisdiction in the premises of a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of sixty (60) consecutive days; or

(f)

the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by the Company to the institution of bankruptcy or insolvency proceedings against it, or the filing by the Company of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt or insolvent, or the taking of corporate action by the Company in furtherance of any such action; or

(g)

the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence, except in connection with (1) the distribution of the Securities to holders of the Preferred Securities in liquidation of their interests in the Trust, (2) the redemption of all of the outstanding Preferred Securities or (3) certain mergers, consolidations or amalgamations, each as and to the extent permitted by the Trust Agreement.

SECTION 5.2. Acceleration of Maturity; Rescission and Annulment.

(a)

If an Event of Default pursuant to Sections 5.1(c), (e) or (f) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than twenty five percent (25%) in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), provided, that if, upon an Event of Default pursuant to Sections 5.1(c), (e) or (f) , the Trustee or the Holders of not less than twenty five percent (25%) in principal amount of the Outstanding Securities fail to declare the principal of all the Outstanding Securities to be immediately due and payable, the holders of at least twenty five percent (25%) in aggregate Liquidation Amount (as defined in the Trust Agreement) of the Preferred Securities then outstanding shall have the right to make such declaration by a notice in writing to the Property Trustee, the Company and the Trustee; and upon any such declaration the principal amount of and the accrued interest (including any Additional Interest) on all the Securities shall become immediately due and payable.

(b)

At any time after such a declaration of acceleration with respect to Securities has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article V , the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Indenture Trustee, or the Holders of a majority in aggregate liquidation amount of the Preferred Securities, by written notice to the Property Trustee, the Company and the Trustee, may rescind and annul such declaration and its consequences if:

(i)

the Company has paid or deposited with the Trustee a sum sufficient to pay:

(A)

all overdue installments of interest on all Securities,

(B)

any accrued Additional Interest on all Securities,

(C)

the principal of and any premium on any Securities that have become due otherwise than by such declaration of acceleration and interest (including any Additional Interest) thereon at the rate borne by the Securities, and

(D)

all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, the Property Trustee and their agents and counsel; and

(ii)

all Events of Default with respect to Securities, other than the non-payment of the principal of Securities that has become due solely by such acceleration, have been cured or waived as provided in Section 5.13 ;

provided , that if the Holders of such Securities fail to annul such declaration and waive such default, the holders of not less than a majority in aggregate Liquidation Amount (as defined in the Trust Agreement) of the Preferred Securities then outstanding shall also have the right to rescind and annul such declaration and its consequences by written notice to the Property Trustee, the Company and the Trustee, subject to the satisfaction of the conditions set forth in paragraph (b) of this Section 5.2 . No such rescission shall affect any subsequent default or impair any right consequent thereon.

SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee.

(a)

The Company covenants that if:

(i)

default is made in the payment of any installment of interest (including any Additional Interest) on any Security when such interest becomes due and payable and such default continues for a period of thirty (30) days, or

(ii)

default is made in the payment of the principal of and any premium on any Security at the Maturity thereof,

the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest (including any Additional Interest) and, in addition thereto, all amounts owing the Trustee under Section 6.6 .

(b)

If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated.

(c)

If an Event of Default with respect to Securities occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

SECTION 5.4. Trustee May File Proofs of Claim.

In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or similar judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized hereunder in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to first pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts owing the Trustee, any predecessor Trustee and other Persons under Section 6.6 .

SECTION 5.5. Trustee May Enforce Claim Without Possession of Securities.

All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, subject to Article XII and after provision for the payment of all the amounts owing the Trustee, any predecessor Trustee and other Persons under Section 6.6 , be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

SECTION 5.6. Application of Money Collected.

Any money or property collected or to be applied by the Trustee with respect to the Securities pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money or property on account of principal or any premium or interest (including any Additional Interest), upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee, any predecessor Trustee and other Persons under Section 6.6 ;

SECOND: To the payment of all Senior Debt of the Company if and to the extent required by Article XII .

THIRD: Subject to Article XII , to the payment of the amounts then due and unpaid upon the Securities for principal and any premium and interest (including any Additional Interest) in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and any premium and interest (including any Additional Interest), respectively; and

FOURTH: The balance, if any, to the Person or Persons entitled thereto.

SECTION 5.7. Limitation on Suits.

Subject to Section 5.8 , no Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) or for any other remedy hereunder, unless:

(a)

such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities;

(b)

the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(c)

such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;

(d)

the Trustee after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding for sixty (60) days; and

(e)

no direction inconsistent with such written request has been given to the Trustee during such sixty (60)-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities;

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing itself of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Securities, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders.

SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest; Direct Action by Holders of Preferred Securities.

Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium on such Security at its Maturity and payment of interest (including any Additional Interest) on such Security when due and payable and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. Any registered holder of the Preferred Securities shall have the right, upon the occurrence of an Event of Default described in Section 5.1(a) , Section 5.1(b) or Section 5.1(c) , to institute a suit directly against the Company for enforcement of payment to such holder of principal of and any premium and interest (including any Additional Interest) on the Securities having a principal amount equal to the aggregate Liquidation Amount (as defined in the Trust Agreement) of the Preferred Securities held by such holder.

SECTION 5.9. Restoration of Rights and Remedies.

If the Trustee, any Holder or any holder of Preferred Securities has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee, such Holder or such holder of Preferred Securities, then and in every such case the Company, the Trustee, such Holders and such holder of Preferred Securities shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee, such Holder and such holder of Preferred Securities shall continue as though no such proceeding had been instituted.

SECTION 5.10. Rights and Remedies Cumulative.

Except as otherwise provided in Section 3.6(f) , no right or remedy herein conferred upon or reserved to the Trustee or the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

SECTION 5.11. Delay or Omission Not Waiver.

No delay or omission of the Trustee, any Holder of any Securities or any holder of any Preferred Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders and the right and remedy given to the holders of Preferred Securities by Section 5.8 may be exercised from time to time, and as often as may be deemed expedient, by the Trustee, the Holders or the holders of Preferred Securities, as the case may be.

SECTION 5.12. Control by Holders.

The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided , that:

(a)

such direction shall not be in conflict with any rule of law or with this Indenture,

(b)

the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction, and

(c)

subject to the provisions of Section 6.2 , the Trustee shall have the right to decline to follow such direction if a Responsible Officer or Officers of the Trustee shall, in good faith, reasonably determine that the proceeding so directed would be unjustly prejudicial to the Holders not joining in any such direction or would involve the Trustee in personal liability.

SECTION 5.13. Waiver of Past Defaults.

(a)

The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities and the holders of a majority in aggregate Liquidation Amount (as defined in the Trust Agreement) of the Preferred Securities may waive any past Event of Default hereunder and its consequences except an Event of Default:

(i)

in the payment of the principal of or any premium or interest (including any Additional Interest) on any Security (unless such Event of Default has been cured and the Company has paid to or deposited with the Trustee a sum sufficient to pay all installments of interest (including any Additional Interest) due and past due and all principal of and any premium on all Securities due otherwise than by acceleration), or

(ii)

in respect of a covenant or provision hereof that under Article IX cannot be modified or amended without the consent of each Holder of any Outstanding Security.

(b)

Any such waiver shall be deemed to be on behalf of the Holders of all the Securities or, in the case of a waiver by holders of Preferred Securities issued by such Trust, by all holders of Preferred Securities.

(c)

Upon any such waiver, such Event of Default shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.

SECTION 5.14. Undertaking for Costs.

All parties to this Indenture agree, and each Holder of any Security by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.14 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than ten percent (10%) in aggregate principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or any premium on the Security after the Stated Maturity or any interest (including any Additional Interest) on any Security after it is due and payable.

SECTION 5.15. Waiver of Usury, Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

ARTICLE VI

The Trustee

SECTION 6.1. Corporate Trustee Required.

There shall at all times be a Trustee hereunder with respect to the Securities. The Trustee shall be a corporation organized and doing business under the laws of the United States or of any state thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or state authority and having an office within the United States. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of such supervising or examining authority, then, for the purposes of this Section 6.1 , the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.1 , it shall resign immediately in the manner and with the effect hereinafter specified in this Article VI .

SECTION 6.2. Certain Duties and Responsibilities.

(a)

Except during the continuance of an Event of Default:

(i)

the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

(ii)

in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided , that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they substantially conform on their face to the requirements of this Indenture.

(b)

If an Event of Default known to the Trustee has occurred and is continuing, the Trustee shall, prior to the receipt of directions, if any, from the Holders of at least a majority in aggregate principal amount of the Outstanding Securities, exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.

(c)

Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.2 . To the extent that, at law or in equity, the Trustee has duties and liabilities relating to the Holders, the Trustee shall not be liable to any Holder for the Trustee’s good faith reliance on the provisions of this Indenture. The provisions of this Indenture, to the extent that they restrict the duties and liabilities of the Trustee otherwise existing at law or in equity, are agreed by the Company and the Holders to replace such other duties and liabilities of the Trustee.

(d)

No provisions of this Indenture shall be construed to relieve the Trustee from liability with respect to matters that are within the authority of the Trustee under this Indenture for its own negligent action, negligent failure to act or willful misconduct, except that:

(i)

the Trustee shall not be liable for any error or judgment made in good faith by an authorized officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;

(ii)

the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of at least a majority in aggregate principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee under this Indenture; and

(iii)

the Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company and money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law.

SECTION 6.3. Notice of Defaults.

Within ninety (90) days after the occurrence of any default actually known to the Trustee, the Trustee shall give the Holders notice of such default unless such default shall have been cured or waived; provided , that except in the case of a default in the payment of the principal of or any premium or interest on any Securities, the Trustee shall be fully protected in withholding the notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that withholding the notice is in the interest of holders of Securities; and provided , that in the case of any default of the character specified in Section 5.1(d) , no such notice to Holders shall be given until at least thirty (30) days after the occurrence thereof. For the purpose of this Section 6.3 , the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default.

SECTION 6.4. Certain Rights of Trustee.

Subject to the provisions of Section 6.2 :

(a)

the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b)

if (i) in performing its duties under this Indenture the Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Indenture the Trustee finds ambiguous or inconsistent with any other provisions contained herein or (iii) the Trustee is unsure of the application of any provision of this Indenture, then, except as to any matter as to which the Holders are entitled to decide under the terms of this Indenture, the Trustee shall deliver a notice to the Company requesting the Company’s written instruction as to the course of action to be taken and the Trustee shall take such action, or refrain from taking such action, as the Trustee shall be instructed in writing to take, or to refrain from taking, by the Company; provided , that if the Trustee does not receive such instructions from the Company within ten Business Days after it has delivered such notice or such reasonably shorter period of time set forth in such notice the Trustee may, but shall be under no duty to, take such action, or refrain from taking such action, as the Trustee shall deem advisable and in the best interests of the Holders, in which event the Trustee shall have no liability except for its own negligence, bad faith or willful misconduct;

(c)

any request or direction of the Company shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;

(d)

the Trustee may consult with counsel (which counsel may be counsel to the Trustee, the Company or any of its Affiliates, and may include any of its employees) and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(e)

the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction, including reasonable advances as may be requested by the Trustee;

(f)

the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, indenture, note or other paper or document, but the Trustee in its discretion may make such inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;

(g)

the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;

(h)

whenever in the administration of this Indenture the Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action with respect to enforcing any remedy or right hereunder, the Trustees (i) may request instructions from the Holders (which instructions may only be given by the Holders of the same aggregate principal amount of Outstanding Securities as would be entitled to direct the Trustee under this Indenture in respect of such remedy, right or action), (ii) may refrain from enforcing such remedy or right or taking such action until such instructions are received and (iii) shall be protected in acting in accordance with such instructions;

(i)

except as otherwise expressly provided by this Indenture, the Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Indenture;

(j)

without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with any bankruptcy, insolvency or other proceeding referred to in clauses (d) or (e) of the definition of Event of Default, such expenses (including legal fees and expenses of its agents and counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy laws or law relating to creditors rights generally;

(k)

whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers’ Certificate addressing such matter, which, upon receipt of such request, shall be promptly delivered by the Company;

(l)

the Trustee shall not be charged with knowledge of any Event of Default unless either (i) a Responsible Officer of the Trustee shall have actual knowledge or (ii) the Trustee shall have received notice thereof from the Company or a Holder; and

(m)

in the event that the Trustee is also acting as Paying Agent, Authenticating Agent or Securities Registrar hereunder, the rights and protections afforded to the Trustee pursuant to this Article VI shall also be afforded such Paying Agent, Authenticating Agent, or Securities Registrar.

SECTION 6.5. May Hold Securities.

The Trustee, any Authenticating Agent, any Paying Agent, any Securities Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Securities Registrar or such other agent.

SECTION 6.6. Compensation; Reimbursement; Indemnity.

(a)

The Company agrees,

(i)

to the extent that such fees are not payable by other parties under other arrangements, to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder in such amounts as the Company and the Trustee shall agree from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(ii)

to the extent that such fees are not payable by other parties under other arrangements, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence, bad faith or willful misconduct; and

(iii)

to the fullest extent permitted by applicable law, to indemnify the Trustee and its Affiliates, and their officers, directors, shareholders, agents, representatives and employees for, and to hold them harmless against, any loss, damage, action, suit, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to (i) or (ii) hereof), penalty, expense or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part arising out of or in connection with the acceptance or administration of this trust or the performance of the Trustee’s duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

(b)

To secure the Company’s payment obligations in this Section 6.6, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee. Such lien shall survive the satisfaction and discharge of this Indenture or the resignation or removal of the Trustee.

(c)

The obligations of the Company under this Section 6.6 shall survive the satisfaction and discharge of this Indenture and the earlier resignation or removal of the Trustee.

(d)

In no event shall the Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.

(e)

In no event shall the Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (whether declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Indenture.

SECTION 6.7. Resignation and Removal; Appointment of Successor.

(a)

No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article VI shall become effective until the acceptance of appointment by the successor Trustee under Section 6.8 .

(b)

The Trustee may resign at any time by giving written notice thereof to the Company.

(c)

Unless an Event of Default shall have occurred and be continuing, the Trustee may be removed at any time by the Company by a Board Resolution. If an Event of Default shall have occurred and be continuing, the Trustee may be removed by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company.

(d)

If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, at a time when no Event of Default shall have occurred and be continuing, the Company, by a Board Resolution, shall promptly appoint a successor Trustee, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 6.8 . If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, at a time when an Event of Default shall have occurred and be continuing, the Holders, by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities, shall promptly appoint a successor Trustee, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 6.8 . If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment within sixty (60) days after the giving of a notice of resignation by the Trustee or the removal of the Trustee in the manner required by Section 6.8 , any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of such Holder and all others similarly situated, and any resigning Trustee may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor Trustee.

(e)

The Company shall give notice to all Holders in the manner provided in Section 1.6 of each resignation and each removal of the Trustee and each appointment of a successor Trustee. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office.

SECTION 6.8. Acceptance of Appointment by Successor.

(a)

In case of the appointment hereunder of a successor Trustee, each successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

(b)

Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all rights, powers and trusts referred to in paragraph (a) of this Section 6.8 .

(c)

No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VI .

SECTION 6.9. Merger, Conversion, Consolidation or Succession to Business.

Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided , that such Person shall be otherwise qualified and eligible under this Article VI . In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation or as otherwise provided above in this Section 6.9 to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated, and in case any Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor Trustee or in the name of such successor Trustee, and in all cases the certificate of authentication shall have the full force which it is provided anywhere in the Securities or in this Indenture that the certificate of the Trustee shall have.

SECTION 6.10. Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of the Securities or the proceeds thereof.

SECTION 6.11. Appointment of Authenticating Agent.

(a)

The Trustee may appoint an Authenticating Agent or Agents with respect to the Securities, which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.6 , and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, or of any State or Territory thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or state authority. If such Authenticating Agent publishes reports of condition at least annually pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 6.11 the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.11 , such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.11 .

(b)

Any Person into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of an Authenticating Agent shall be the successor Authenticating Agent hereunder, provided such Person shall be otherwise eligible under this Section 6.11 , without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.

(c)

An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.11 , the Trustee may appoint a successor Authenticating Agent eligible under the provisions of this Section 6.11 , which shall be acceptable to the Company, and shall give notice of such appointment to all Holders. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent.

(d)

The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section 6.11 in such amounts as the Company and the Authenticating Agent shall agree from time to time.

(e)

If an appointment of an Authenticating Agent is made pursuant to this Section 6.11 , the Securities may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

This is one of the Securities designated therein referred to in the within mentioned Indenture.

Dated:

WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Trustee

Authenticating Agent

By:

Authorized Officer

ARTICLE VII

Holder’s Lists and Reports by Trustee and Company

SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders.

The Company will furnish or cause to be furnished to the Trustee:

(a)

semi-annually, on or before June 30 and December 31 of each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of a date not more than fifteen (15) days prior to the delivery thereof, and

(b)

at such other times as the Trustee may request in writing, within thirty (30) days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen (15) days prior to the time such list is furnished, in each case to the extent such information is in the possession or control of the Company and has not otherwise been received by the Trustee in its capacity as Securities Registrar.

SECTION 7.2. Preservation of Information, Communications to Holders.

(a)

The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Securities Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.1 upon receipt of a new list so furnished.

(b)

The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided in the Trust Indenture Act.

(c)

Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders made pursuant to the Trust Indenture Act.

SECTION 7.3. Reports by Company and Trustee.

(a)

The Company shall furnish to the Holders and to prospective purchasers of Securities, upon their request, the information required to be furnished pursuant to Rule 144A(d)(4) under the Securities Act. The Company shall furnish to the Trustee and, so long as the Property Trustee holds any of the Securities, the Company shall furnish to the Property Trustee, reports on Form FR Y-9C, FR Y-9LP and FR Y-6 promptly following their filing with the Federal Reserve.

(b)

The Company shall furnish to (i) the Holders and to subsequent holders of Securities, (ii) the Purchaser, (iii) any beneficial owner of the Securities reasonably identified to the Company (which identification may be made either by such beneficial owner or by the Placement Agent or the Purchaser) and (iv) any designee of (i), (ii) or (iii) above, a duly completed and executed certificate in the form attached hereto as Exhibit A, including the financial statements referenced in such Exhibit, which certificate and financial statements shall be so furnished by the Company not later than forty five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Company and not later than ninety (90) days after the end of each fiscal year of the Company, provided , however , that the Company shall not be required to furnish a completed and executed certificate in the form attached hereto as Exhibit A so long as the Company is subject to Section 15(d) of the Exchange Act. The Company shall furnish all financial statements referenced in the certificate attached hereto as Exhibit A, notwithstanding the fact that the certificate may not be required to be furnished under this Section 7.3.

(c)

The Trustee shall obtain all reports, certificates and information which it is entitled to receive under each of the Operative Documents (as defined in the Trust Agreement), and deliver to (i) the Purchaser, (ii) the Placement Agent and (iii) a designee of (i) or (ii) above, all such reports, certificates or information promptly upon receipt thereof.

ARTICLE VIII

Consolidation, Merger, Conveyance, Transfer or Lease

SECTION 8.1. Company May Consolidate, Etc., Only on Certain Terms.

The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:

(a)

if the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the entity formed by such consolidation or into which the Company is merged or the Person that acquires by conveyance or transfer, or that leases, the properties and assets of the Company substantially as an entirety shall be an entity organized and existing under the laws of the United States of America or any State or Territory thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest (including any Additional Interest) on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed;

(b)

immediately after giving effect to such transaction, no Event of Default, and no event that, after notice or lapse of time, or both, would constitute an Event of Default, shall have happened and be continuing; and

(c)

the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, any such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with; and the Trustee may rely upon such Officers’ Certificate and Opinion of Counsel as conclusive evidence that such transaction complies with this Section 8.1 .

SECTION 8.2. Successor Company Substituted.

(a)

Upon any consolidation or merger by the Company with or into any other Person, or any conveyance, transfer or lease by the Company of its properties and assets substantially as an entirety to any Person in accordance with Section 8.1 and the execution and delivery to the Trustee of the supplemental indenture described in Section 8.1(a) , the successor entity formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; and in the event of any such conveyance or transfer, following the execution and delivery of such supplemental indenture, the Company shall be discharged from all obligations and covenants under the Indenture and the Securities.

(b)

Such successor Person may cause to be executed, and may issue either in its own name or in the name of the Company, any or all of the Securities issuable hereunder that theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor Person instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities that previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities that such successor Person thereafter shall cause to be executed and delivered to the Trustee on its behalf. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture.

(c)

In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form may be made in the Securities thereafter to be issued as may be appropriate to reflect such occurrence.

ARTICLE IX

Supplemental Indentures

SECTION 9.1. Supplemental Indentures without Consent of Holders.

Without the consent of any Holders, the Company, when authorized by a Board Resolution, any Person acquiring or leasing the Company’s properties and assets substantially as an entirety, if applicable, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes:

(a)

to evidence the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities; or

(b)

to cure any ambiguity, to correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, which shall not be inconsistent with the other provisions of this Indenture, provided , that such action pursuant to this clause (b) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or

(c)

to add to the covenants, restrictions or obligations of the Company or to add to the Events of Default, provided , that such action pursuant to this clause (c) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or

(d)

to modify, eliminate or add to any provisions of the Indenture or the Securities to such extent as shall be necessary to ensure that the Securities are treated as indebtedness of the Company for United States Federal income tax purposes, provided , that such action pursuant to this clause (d) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities.

SECTION 9.2. Supplemental Indentures with Consent of Holders.

(a)

With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; provided , that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security,

(i)

change the Stated Maturity of the principal or any premium of any Security or change the date of payment of any installment of interest (including any Additional Interest) on any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof or change the place of payment where, or the coin or currency in which, any Security or interest thereon is payable, or restrict or impair the right to institute suit for the enforcement of any such payment on or after such date, or

(ii)

reduce the percentage in aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with any provision of this Indenture or of defaults hereunder and their consequences provided for in this Indenture, or

(iii)

modify any of the provisions of this Section 9.2 , Section 5.13 or Section 10.7 , except to increase any percentage in aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any reason, or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security;

provided, further, that, so long as any Preferred Securities remain outstanding, no amendment under this Section 9.2 shall be effective until the holders of a majority in Liquidation Amount (as defined in the Trust Agreement) of the Trust Securities shall have consented to such amendment; provided, further, that if the consent of the holder of each Outstanding Security is required for any amendment under this Indenture, such amendment shall not be effective until the holder of each Outstanding Trust Security shall have consented to such amendment.

(b)

It shall not be necessary for any Act of Holders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

SECTION 9.3. Execution of Supplemental Indentures.

In executing or accepting the additional trusts created by any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in conclusively relying upon, an Officers’ Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, and that all conditions precedent herein provided for relating to such action have been complied with. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Trustee’s own rights, duties, indemnities or immunities under this Indenture or otherwise. Copies of the final form of each supplemental indenture shall be delivered by the Trustee at the expense of the Company to each Holder, and, if the Trustee is the Property Trustee, to each holder of Preferred Securities, promptly after the execution thereof.

SECTION 9.4. Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this Article IX , this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

SECTION 9.5. Reference in Securities to Supplemental Indentures.

Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and shall if required by the Company, bear a notation in form approved by the Company as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities.

ARTICLE X

Covenants

SECTION 10.1. Payment of Principal, Premium and Interest.

The Company covenants and agrees for the benefit of the Securities that it will duly and punctually pay the principal of and any premium and interest (including any Additional Interest) on the Securities in accordance with the terms of the Securities and this Indenture.

SECTION 10.2. Money for Security Payments to be Held in Trust.

(a)

If the Company shall at any time act as its own Paying Agent with respect to the Securities, it will, on or before each due date of the principal of and any premium or interest (including any Additional Interest) on the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium or interest (including Additional Interest) so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee in writing of its failure so to act.

(b)

Whenever the Company shall have one or more Paying Agents, it will, prior to 10:00 a.m., New York City time, on each due date of the principal of or any premium or interest (including any Additional Interest) on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided in the Trust Indenture Act and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act.

(c)

The Company will cause each Paying Agent for the Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 10.2 , that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities.

(d)

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.

(e)

Any money deposited with the Trustee or any Paying Agent, or then held by the Company in trust for the payment of the principal of and any premium or interest (including any Additional Interest) on any Security and remaining unclaimed for two years after such principal and any premium or interest has become due and payable shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be paid on Company Request to the Company, or (if then held by the Company) shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided , that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than thirty (30) days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.

SECTION 10.3. Statement as to Compliance.

The Company shall deliver to the Trustee, within one hundred and twenty (120) days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate covering the preceding fiscal year, stating whether or not to the knowledge of the signers thereof the Company is in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder), and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

SECTION 10.4. Calculation Agent.

(a)

The Company hereby agrees that for so long as any of the Securities remain Outstanding, there will at all times be an agent appointed to calculate LIBOR in respect of each Interest Payment Date in accordance with the terms of Schedule A (the “ Calculation Agent ”). The Company has initially appointed the Trustee as Calculation Agent for purposes of determining LIBOR for each Interest Payment Date. The Calculation Agent may be removed by the Company at any time. So long as the Property Trustee holds any of the Securities, the Calculation Agent shall be the Property Trustee. If the Calculation Agent is unable or unwilling to act as such or is removed by the Company, the Company will promptly appoint as a replacement Calculation Agent the London office of a leading bank which is engaged in transactions in Eurodollar deposits in the international Eurodollar market and which does not control or is not controlled by or under common control with the Company or its Affiliates. The Calculation Agent may not resign its duties without a successor having been duly appointed.

(b)

The Calculation Agent shall be required to agree that, as soon as possible after 11:00 a.m. (London time) on each LIBOR Determination Date (as defined in Schedule A ), but in no event later than 11:00 a.m. (London time) on the Business Day immediately following each LIBOR Determination Date, the Calculation Agent will calculate the interest rate (rounded to the nearest cent, with half a cent being rounded upwards) for the related Interest Payment Date, and will communicate such rate and amount to the Company, the Trustee, each Paying Agent and the Depositary. The Calculation Agent will also specify to the Company the quotations upon which the foregoing rates and amounts are based and, in any event, the Calculation Agent shall notify the Company before 5:00 p.m. (London time) on each LIBOR Determination Date that either: (i) it has determined or is in the process of determining the foregoing rates and amounts or (ii) it has not determined and is not in the process of determining the foregoing rates and amounts, together with its reasons therefor. The Calculation Agent’s determination of the foregoing rates and amounts for any Interest Payment Date will (in the absence of manifest error) be final and binding upon all parties. For the sole purpose of calculating the interest rate for the Securities, “Business Day” shall be defined as any day on which dealings in deposits in Dollars are transacted in the London interbank market.

SECTION 10.5. Additional Tax Sums.

So long as no Event of Default has occurred and is continuing, if (a) the Trust is the Holder of all of the Outstanding Securities and (b) a Tax Event described in clause (i) or (iii) in the definition of Tax Event in Section 1.1 hereof has occurred and is continuing, the Company shall pay to the Trust (and its permitted successors or assigns under the related Trust Agreement) for so long as the Trust (or its permitted successor or assignee) is the registered holder of the Outstanding Securities, such amounts as may be necessary in order that the amount of Distributions (including any Additional Interest Amount (as defined in the Trust Agreement)) then due and payable by the Trust on the Preferred Securities and Common Securities that at any time remain outstanding in accordance with the terms thereof shall not be reduced as a result of any Additional Taxes arising from such Tax Event (additional such amounts payable by the Company to the Trust, the “ Additional Tax Sums ”). Whenever in this Indenture or the Securities there is a reference in any context to the payment of principal of or interest on the Securities, such mention shall be deemed to include mention of the payments of the Additional Tax Sums provided for in this Section 10.5 to the extent that, in such context, Additional Tax Sums are, were or would be payable in respect thereof pursuant to the provisions of this Section 10.5 and express mention of the payment of Additional Tax Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Tax Sums in those provisions hereof where such express mention is not made; provided , that the deferral of the payment of interest pursuant to Section 3.9 on the Securities shall not defer the payment of any Additional Tax Sums that may be due and payable.

SECTION 10.6. Additional Covenants.

(a)

The Company covenants and agrees with each Holder of Securities that if an Event of Default shall have occurred and be continuing or the Company shall have given notice of its election to begin an Extension Period with respect to the Securities and shall not have rescinded such notice, or such Extension Period, or any extension thereof, shall be continuing, it shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any shares of the Company’s capital stock, or (ii) make any payment of principal of or any interest or premium on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Securities (other than (A) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (B) as a result of an exchange or conversion of any class or series of the Company’s capital stock (or any capital stock of a Subsidiary of the Company) for any class or series of the Company’s capital stock or of any class or series of the Company’s indebtedness for any class or series of the Company’s capital stock, (C) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (D) any declaration of a dividend in connection with any Rights Plan, the issuance of rights, stock or other property under any Rights Plan or the redemption or repurchase of rights pursuant thereto, or (E) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).

(b)

The Company also covenants with each Holder of Securities (i) to hold, directly or indirectly, one hundred percent (100%) of the Common Securities of the Trust, provided , that any permitted successor of the Company hereunder may succeed to the Company’s ownership of such Common Securities, (ii) as holder of such Common Securities, not to voluntarily dissolve, wind-up or liquidate the Trust other than (A) in connection with a distribution of the Securities to the holders of the Preferred Securities in liquidation of the Trust or (B) in connection with certain mergers, consolidations or amalgamations permitted by the Trust Agreement and (iii) to use its reasonable commercial efforts, consistent with the terms and provisions of the Trust Agreement, to cause the Trust to continue to be taxable as a grantor trust and not as a corporation for United States Federal income tax purposes.

SECTION 10.7. Waiver of Covenants.

The Company may omit in any particular instance to comply with any covenant or condition contained in Section 10.6 if, before or after the time for such compliance, the Holders of at least a majority in aggregate principal amount of the Outstanding Securities shall, by Act of such Holders, and at least a majority of the aggregate Liquidation Amount (as defined in the Trust Agreement) of the Preferred Securities then outstanding, by consent of such holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of any such covenant or condition shall remain in full force and effect.

SECTION 10.8. Treatment of Securities.

The Company will treat the Securities as indebtedness, and the amounts payable in respect of the principal amount of such Securities as interest, for all U.S. federal income tax purposes. All payments in respect of the Securities will be made free and clear of U.S. withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W-8BEN (or any substitute or successor form) establishing its non-U.S. status for U.S. federal income tax purposes.

ARTICLE XI

Redemption of Securities

SECTION 11.1. Optional Redemption.

The Company may, at its option, on any Interest Payment Date, on or after March 31, 2010, redeem the Securities in whole at any time or in part from time to time, at a Redemption Price equal to one hundred percent (100%) of the principal amount thereof (or of the redeemed portion thereof, as applicable), together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption; provided , that the Company shall have received the prior approval of the Federal Reserve with respect to such redemption if then required.

SECTION 11.2. Special Event Redemption.

Upon the occurrence and during the continuation of a Special Event, the Company may, at its option, redeem the Securities, in whole but not in part, at a redemption price equal to the Redemption Price specified in Section 11.1 above, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption (the “Special Event Redemption Price”); provided , that the Company shall have received the prior approval of the Federal Reserve with respect to such redemption if then required.

SECTION 11.3. Election to Redeem; Notice to Trustee.

The election of the Company to redeem any Securities, in whole or in part, shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company, the Company shall, not less than forty five (45) days and not more than seventy five (75) days prior to the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee and the Property Trustee under the Trust Agreement in writing of such date and of the principal amount of the Securities to be redeemed and provide the additional information required to be included in the notice or notices contemplated by Section 11.5 . In the case of any redemption of Securities, in whole or in part, (a) prior to the expiration of any restriction on such redemption provided in this Indenture or the Securities or (b) pursuant to an election of the Company which is subject to a condition specified in this Indenture or the Securities, the Company shall furnish the Trustee with an Officers’ Certificate and an Opinion of Counsel evidencing compliance with such restriction or condition.

SECTION 11.4. Selection of Securities to be Redeemed.

(a)

If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any or each Security, provided , that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

(b)

The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security that has been or is to be redeemed.

(c)

The provisions of paragraphs (a) and (b) of this Section 11.4 shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

SECTION 11.5. Notice of Redemption.

(a)

Notice of redemption shall be given not later than the thirtieth (30th) day, and not earlier than the sixtieth (60th) day, prior to the Redemption Date to each Holder of Securities to be redeemed, in whole or in part (unless a shorter notice shall be satisfactory to the Property Trustee under the related Trust Agreement).

(b)

With respect to Securities to be redeemed, in whole or in part, each notice of redemption shall state:

(i)

the Redemption Date;

(ii)

the Redemption Price or, if the Redemption Price cannot be calculated prior to the time the notice is required to be sent, the estimate of the Redemption Price, as calculated by the Company, together with a statement that it is an estimate and that the actual Redemption Price will be calculated on the fifth Business Day prior to the Redemption Date (and if an estimate is provided, a further notice shall be sent of the actual Redemption Price on the date that such Redemption Price is calculated);

(iii)

if less than all Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the particular Securities to be redeemed;

(iv)

that on the Redemption Date, the Redemption Price will become due and payable upon each such Security or portion thereof, and that any interest (including any Additional Interest) on such Security or such portion, as the case may be, shall cease to accrue on and after said date; and

(v)

the place or places where such Securities are to be surrendered for payment of the Redemption Price.

(c)

Notice of redemption of Securities to be redeemed, in whole or in part, at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company and shall be irrevocable. The notice if mailed in the manner provided above shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, a failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security.

SECTION 11.6. Deposit of Redemption Price.

Prior to 10:00 a.m., New York City time, on the Redemption Date specified in the notice of redemption given as provided in Section 11.5 , the Company will deposit with the Trustee or with one or more Paying Agents (or if the Company is acting as its own Paying Agent, the Company will segregate and hold in trust as provided in Section 10.2 ) an amount of money sufficient to pay the Redemption Price of, and any accrued interest (including any Additional Interest) on, all the Securities (or portions thereof) that are to be redeemed on that date.

SECTION 11.7. Payment of Securities Called for Redemption.

(a)

If any notice of redemption has been given as provided in Section 11.5 , the Securities or portion of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Redemption Price, together with accrued interest (including any Additional Interest) to the Redemption Date. On presentation and surrender of such Securities at a Place of Payment specified in such notice, the Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price, together with accrued interest (including any Additional Interest) to the Redemption Date.

(b)

Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities, of authorized denominations, in aggregate principal amount equal to the unredeemed portion of the Security so presented and having the same Original Issue Date, Stated Maturity and terms.

(c)

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal of and any premium on such Security shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

ARTICLE XII

Subordination of Securities

SECTION 12.1. Securities Subordinate to Senior Debt.

The Company covenants and agrees, and each Holder of a Security, by its acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article XII , the payment of the principal of and any premium and interest (including any Additional Interest) on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Debt.

SECTION 12.2. No Payment When Senior Debt in Default; Payment Over of Proceeds Upon Dissolution, Etc.

(a)

In the event and during the continuation of any default by the Company in the payment of any principal of or any premium or interest on any Senior Debt (following any grace period, if applicable) when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise, then, upon written notice of such default to the Company by the holders of such Senior Debt or any trustee therefor, unless and until such default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property, securities, by set-off or otherwise) shall be made or agreed to be made on account of the principal of or any premium or interest (including any Additional Interest) on any of the Securities, or in respect of any redemption, repayment, retirement, purchase or other acquisition of any of the Securities.

(b)

In the event of a bankruptcy, insolvency or other proceeding described in clause (d) or (e) of the definition of Event of Default (each such event, if any, herein sometimes referred to as a “ Proceeding ”), all Senior Debt (including any interest thereon accruing after the commencement of any such proceedings) shall first be paid in full before any payment or distribution, whether in cash, securities or other property, shall be made to any Holder of any of the Securities on account thereof. Any payment or distribution, whether in cash, securities or other property (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), which would otherwise (but for these subordination provisions) be payable or deliverable in respect of the Securities shall be paid or delivered directly to the holders of Senior Debt in accordance with the priorities then existing among such holders until all Senior Debt (including any interest thereon accruing after the commencement of any Proceeding) shall have been paid in full.

(c)

In the event of any Proceeding, after payment in full of all sums owing with respect to Senior Debt, the Holders of the Securities, together with the holders of any obligations of the Company ranking on a parity with the Securities, shall be entitled to be paid from the remaining assets of the Company the amounts at the time due and owing on account of unpaid principal of and any premium and interest (including any Additional Interest) on the Securities and such other obligations before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligations of the Company ranking junior to the Securities and such other obligations. If, notwithstanding the foregoing, any payment or distribution of any character or any security, whether in cash, securities or other property (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) shall be received by the Trustee or any Holder in contravention of any of the terms hereof and before all Senior Debt shall have been paid in full, such payment or distribution or security shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Debt at the time outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Debt remaining unpaid, to the extent necessary to pay all such Senior Debt (including any interest thereon accruing after the commencement of any Proceeding) in full. In the event of the failure of the Trustee or any Holder to endorse or assign any such payment, distribution or security, each holder of Senior Debt is hereby irrevocably authorized to endorse or assign the same.

(d)

The Trustee and the Holders, at the expense of the Company, shall take such reasonable action (including the delivery of this Indenture to an agent for any holders of Senior Debt or consent to the filing of a financing statement with respect hereto) as may, in the opinion of counsel designated by the holders of a majority in principal amount of the Senior Debt at the time outstanding, be necessary or appropriate to assure the effectiveness of the subordination effected by these provisions.

(e)

The provisions of this Section 12.2 shall not impair any rights, interests, remedies or powers of any secured creditor of the Company in respect of any security interest the creation of which is not prohibited by the provisions of this Indenture.

(f)

The securing of any obligations of the Company, otherwise ranking on a parity with the Securities or ranking junior to the Securities, shall not be deemed to prevent such obligations from constituting, respectively, obligations ranking on a parity with the Securities or ranking junior to the Securities.

SECTION 12.3. Payment Permitted If No Default.

Nothing contained in this Article XII or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time, except during the pendency of the conditions described in paragraph (a) of Section 12.2 or of any Proceeding referred to in Section 12.2 , from making payments at any time of principal of and any premium or interest (including any Additional Interest) on the Securities or (b) the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of and any premium or interest (including any Additional Interest) on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, it did not have knowledge (in accordance with Section 12.8 ) that such payment would have been prohibited by the provisions of this Article XII , except as provided in Section 12.8 .

SECTION 12.4. Subrogation to Rights of Holders of Senior Debt.

Subject to the payment in full of all amounts due or to become due on all Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Debt pursuant to the provisions of this Article XII (equally and ratably with the holders of all indebtedness of the Company that by its express terms is subordinated to Senior Debt of the Company to substantially the same extent as the Securities are subordinated to the Senior Debt and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Senior Debt) to the rights of the holders of such Senior Debt to receive payments and distributions of cash, property and securities applicable to the Senior Debt until the principal of and any premium and interest (including any Additional Interest) on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XII , and no payments made pursuant to the provisions of this Article XII to the holders of Senior Debt by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Debt.

SECTION 12.5. Provisions Solely to Define Relative Rights.

The provisions of this Article XII are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Debt on the other hand. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as between the Company and the Holders of the Securities, the obligations of the Company, which are absolute and unconditional, to pay to the Holders of the Securities the principal of and any premium and interest (including any Additional Interest) on the Securities as and when the same shall become due and payable in accordance with their terms, (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than their rights in relation to the holders of Senior Debt or (c) prevent the Trustee or the Holder of any Security (or to the extent expressly provided herein, the holder of any Preferred Security) from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, including filing and voting claims in any Proceeding, subject to the rights, if any, under this Article XII of the holders of Senior Debt to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder.

SECTION 12.6. Trustee to Effectuate Subordination.

Each Holder of a Security by his or her acceptance thereof authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination provided in this Article XII and appoints the Trustee his or her attorney-in-fact for any and all such purposes.

SECTION 12.7. No Waiver of Subordination Provisions.

(a)

No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with.

(b)

Without in any way limiting the generality of paragraph (a) of this Section 12.7 , the holders of Senior Debt may, at any time and from to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to such Holders of the Securities and without impairing or releasing the subordination provided in this Article XII or the obligations hereunder of such Holders of the Securities to the holders of Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding, (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt, (iii) release any Person liable in any manner for the payment of Senior Debt and (iv) exercise or refrain from exercising any rights against the Company and any other Person.

SECTION 12.8. Notice to Trustee.

(a)

The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder of Senior Debt or from any trustee, agent or representative therefor; provided , that if the Trustee shall not have received the notice provided for in this Section 12.8 at least two Business Days prior to the date upon which by the terms hereof any monies may become payable for any purpose (including, the payment of the principal of and any premium on or interest (including any Additional Interest) on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.

(b)

The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Debt (or a trustee, agent, representative or attorney-in-fact therefor) to establish that such notice has been given by a holder of Senior Debt (or a trustee, agent, representative or attorney-in-fact therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article XII , the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XII , and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

SECTION 12.9. Reliance on Judicial Order or Certificate of Liquidating Agent.

Upon any payment or distribution of assets of the Company referred to in this Article XII , the Trustee and the Holders of the Securities shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII .

SECTION 12.10. Trustee Not Fiduciary for Holders of Senior Debt.

The Trustee, in its capacity as trustee under this Indenture, shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Debt shall be entitled by virtue of this Article XII or otherwise.

SECTION 12.11. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee’s Rights.

The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XII with respect to any Senior Debt that may at any time be held by it, to the same extent as any other holder of Senior Debt, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder.

SECTION 12.12. Article Applicable to Paying Agents.

If at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term “ Trustee ” as used in this Article XII shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XII in addition to or in place of the Trustee; provided , that Sections 12.8 and 12.11 shall not apply to the Company or any Affiliate of the Company if the Company or such Affiliate acts as Paying Agent.

* * * *

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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.

ARROW FINANCIAL CORPORATION

By:

Name:
Title:

WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Trustee

By:

Name:
Title:

Schedule A-1

::ODMA\PCDOCS\ATL\824305\3

Schedule A

DETERMINATION OF LIBOR

With respect to the Securities, the London interbank offered rate (“ LIBOR ”) shall be determined by the Calculation Agent in accordance with the following provisions (in each case rounded to the nearest .000001%):

(1)

On the second LIBOR Business Day (as defined below) prior to an Interest Payment Date (except, with respect to the first interest payment period, on December 27, 2004) (each such day, a “ LIBOR Determination Date ”), LIBOR for any given security shall, for the following interest payment period, equal the rate, as obtained by the Calculation Agent from Bloomberg Financial Markets Commodities News, for three-month U.S. Dollar deposits in Europe, which appears on Dow Jones Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions), or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date.

(2)

If, on any LIBOR Determination Date, such rate does not appear on Dow Jones Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for three-month U.S. Dollar deposits in Europe in an amount determined by the Calculation Agent by reference to requests for quotations as of approximately 11:00 a.m. (London time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal such arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that leading banks in the City of New York selected by the Calculation Agent are quoting on the relevant LIBOR Determination Date for three-month U.S. Dollar deposits in Europe in an amount determined by the Calculation Agent by reference to the principal London offices of leading banks in the London interbank market; provided that, if the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR as determined on the previous LIBOR Determination Date.

(3)

As used herein: “ Reference Banks ” means four major banks in the London interbank market selected by the Calculation Agent; and “ LIBOR Business Day ” means a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) in London.

Ex. A-1

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Exhibit A

Officer’s Certificate

The undersigned, the [Chief Financial Officer] [Treasurer] [Executive Vice President] hereby certifies, pursuant to Section 7.3(b) of the Junior Subordinated Indenture, dated as of December 28, 2004, among Arrow Financial Corporation (the “Company”) and Wilmington Trust Company, as trustee, that, as of [date], [20__], the Company had the following ratios and balances:

BANK HOLDING COMPANY
As of [Quarterly Financial Dates]

Tier 1 Risk Weighted Assets	%
Ratio of Double Leverage	%
Non-Performing Assets to Loans and OREO	%
Tangible Common Equity as a Percentage of Tangible Assets	%
Ratio of Reserves to Non-Performing Loans	%
Ratio of Net Charge-Offs to Loans	%
Return on Average Assets (annualized)	%
Net Interest Margin (annualized)	%
Efficiency Ratio	%
Ratio of Loans to Assets	%
Ratio of Loans to Deposits	%
Total Assets	$
Year to Date Income	$

* A table describing the quarterly report calculation procedures is provided on page __

[ FOR FISCAL YEAR END : Attached hereto are the audited consolidated financial statements (including the balance sheet, income statement and statement of cash flows, and notes thereto, together with the report of the independent accountants thereon) of the Company and its consolidated subsidiaries for the three years ended _______, 20___.]

[ FOR FISCAL QUARTER END : Attached hereto are the unaudited consolidated and consolidating financial statements (including the balance sheet and income statement) of the Company and its consolidated subsidiaries for the fiscal quarter] ended [date], 20__.

IN WITNESS WHEREOF, the undersigned has executed this Officer’s Certificate as of this _____ day of _____________, 20__

Name:
Title:

Arrow Financial Corporation
250 Glen Street

Glens Falls, NY 12801
(518) 745-1000

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Exhibit A

Financial Definitions

Report Item	Corresponding FRY-9C or LP Line Items with Line Item corresponding Schedules	Description of Calculation
Tier 1 Risk Weighted Assets	BHCK7206 Schedule HC-R	Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets
Ratio of Double Leverage	(BHCP0365)/(BCHCP3210) Schedule PC in the LP	Total equity investments in subsidiaries divided by the total equity capital. This field is calculated at the parent company level. “Subsidiaries” include bank, bank holding company, and non-bank subsidiaries.
Non-Performing Assets to Loans and OREO	(BHCK5525-BHCK3506+BHCK5526-BHCK3507+BHCK2744)/(BHCK2122+BHCK2744) Schedules HC-C, HC-M & HC-N	Total Nonperforming Assets (NPLs+Foreclosed Real Estate+Other Nonaccrual & Repossessed Assets)/Total Loans+Foreclosed Real Estate
Tangible Common Equity as a Percentage of Tangible Assets	(BHDM3210-BHCK3163)/(BHCK2170-BHCK3163) Schedule HC	(Equity Capital – Goodwill)/(Total Assets – Goodwill)
Ratio of Reserves to Non-Performing Loans	(BHCK3123+BHCK3128)/(BHCK5525-BHCK3506+BHCK5526-BHCK3507) Schedules HC & HC-N & HC-R	Total Loan Loss and Allocated Transfer Risk Reserves/ Total Nonperforming Loans (Nonaccrual + Restructured)
Ratio of Net Charge-Offs to Loans	(BHCK4635-BHCK4605)/(BHCK3516) Schedules HC-B & HC-K	Net charge offs for the period as a percentage of average loans.
Return on Average Assets (annualized)	(BHCK4340/BHCK3368) Schedules HI & HC-K	Net Income as a percentage of Assets.
Net Interest Margin (annualized)	(BHCK4519)/(BHCK3515+BHCK3365+BHCK3516+BHCK3401+BHCKB985) Schedules HI Memorandum and HC-K	(Net Interest Income Fully Taxable Equivalent, if available/Average Earning Assets)
Efficiency Ratio	(BHCK4093)/(BHCK4519+BHCK4079) Schedule HI	(Non-interest Expense)/(Net Interest Income Fully Taxable Equivalent, if available, plus Non-interest Income)
Ratio of Loans to Assets	(BHCKB528+BHCK5369)/(BHCK2170) Schedule HC	Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/Total Assets
Ratio of Loans to Deposits	(BHCKB528+BHCK5369)/(BHDM6631+BHDM6636+BHFN6631+BHFN6636) Schedule HC	Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/Total Deposits (Includes Domestic and Foreign Deposits)
Total Assets	(BHCK2170) Schedule HC	The sum of total assets. Includes cash and balances due from depository institutions; securities; federal funds sold and securities purchased under agreements to resell; loans and lease financing receivables; trading assets; premises and fixed assets; other real estate owned; investments in unconsolidated subsidiaries and associated companies; customer’s liability on acceptances outstanding; intangible assets; and other assets.
Net Income	(BHCK4300) Schedule HI	The sum of income (loss)before extraordinary items and other adjustments and extraordinary items; and other adjustments, net of income taxes.

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Exhibit A

Financial Definitions
THRIFT HOLDING COMPANY

Report Item	Corresponding TFR	Description of Calculation
Tier I Risk Weighted Assets -	Schedule CCR – Consolidated Capital Requirement CCR 830	Tier 1 Risk Ratio: Core Capital (Tier 1)/Risk-adjusted assets
Ratio of Double Leverage	Not applicable	Not applicable
Non-performing assets to loans and OREO	Schedule PD – Consolidated Past Due and Nonaccrual Schedule SC – Consolidated Statement of Condition PD30/(SC23+SC30+SC34+SC40)	Total Non-performing assets (NPLs + Foreclosed Real Estate+Other Non-accrual & Repossessed assets+Foreclosed Real Estate)
Tangible Common Equity as a Percentage of Total Assets	Schedule CCR CCR 840	(Equity Capital-Goodwill) / (Total assets – Goodwill)
Ratio of Reserves to Non-performing loans	SC283/PD30	Total loan loss reserves / Total Non-performing loans
Ratio of Net Charge-offs to Loans	Schedule VA – Consolidated Valuation Allowances and Related Data (VA155-VA135)/(SC23+SC30+SC34)	Net charge offs for the period as a percentage of average loans
Return on Assets (annualized)	Schedule SO – Consolidated Statements of Operations SO91/SC60	Net income as a percentage of assets
Net interest margin (annualized)	SO311/((SC10-SC110)+SC20+SC23+SC30+SC34)	Net interest income / Average earning assets
Efficiency Ratio	(SO51/(SO311+SO40))	(Non-interest expense) / (Net interest income + Non-interest income)
Ratio of Loans to Assets	(SC23+SC30+SC34)/(SC60)	Total Loan & Leases / Total assets
Ratio of Loans to Deposits	(SC23+SC30+SC34)/(SC710)	Total Loans & Leases / Total Deposits
Total Assets	Schedule SC SC60	The sum of total assets.
Net Income	Schedule SO SO91	The sum of income (loss).

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PLACEMENT AGREEMENT

AMONG

ARROW FINANCIAL CORPORATION,

ARROW CAPITAL STATUTORY TRUST III

AND

SUNTRUST CAPITAL MARKETS, INC.

________________

Dated as of December 28, 2004

________________

::ODMA\PCDOCS\ATL\824612\3

Arrow Financial Corporation

$10,000,000 Preferred Securities

Floating Rate Preferred Securities
(Liquidation Amount $1,000 per Preferred Security)

PLACEMENT AGREEMENT

______________________

December 27, 2004

SunTrust Capital Markets, Inc.

303 Peachtree Street, N.E.

24th Floor, Mail Code 3950

Atlanta, Georgia 30308

Ladies and Gentlemen:

Arrow Financial Corporation, a New York corporation (the “Company”), and its financing subsidiary, Arrow Capital Statutory Trust III, a Delaware statutory trust (the “Trust,” and hereinafter together with the Company, the “Offerors”), hereby confirm their agreement (this “Agreement”) with you as placement agent (the “Placement Agent”), as follows:

Section 1.

Issuance and Sale of Securities .

1.1

Introduction . The Offerors propose to issue and sell at the Closing (as defined in Section 2.3.1 hereof) TEN MILLION ($10,000,000) DOLLARS of the Trust’s Floating Rate Preferred Securities, with a liquidation amount of $1,000 per preferred security, bearing a variable rate of interest per annum, reset quarterly, equal to LIBOR (as defined in the Indenture (as defined below)) plus 2.00% (the “Preferred Securities”), to STI Investment Management, Inc., a Delaware corporation (the “Purchaser”), pursuant to the terms of the Preferred Securities Subscription Agreement entered into, or to be entered into on or prior to the Closing Date (as defined in Section 2.3.1 hereof), between the Offerors and the Purchaser (the “Subscription Agreement”), the form of which is attached hereto as Exhibit A and incorporated herein by this reference.

1.2

Operative Agreements . The Preferred Securities shall be fully and unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment (the “Guarantee”) pursuant and subject to the Guarantee Agreement (the “Guarantee Agreement”), to be dated as of the Closing Date and executed and delivered by the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee (the “Guarantee Trustee”), for the benefit from time to time of the holders of the Preferred Securities. The entire proceeds from the sale by the Trust to the holders of the Preferred Securities shall be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the “Common Securities”), and shall be used by the Trust to purchase TEN MILLION THREE HUNDRED TEN THOUSAND ($10,310,000) DOLLARS in principal amount of the Floating Rate Junior Subordinated Notes (the “Junior Subordinated Notes”) of the Company. The Preferred Securities and the Common Securities of the Trust shall be issued pursuant to an Amended and Restated Trust Agreement among Wilmington Trust Company, as property trustee (the “Property Trustee”), Wilmington Trust Company, as Delaware Trustee, the Administrative Trustees named therein and the Company, as depositor, to be dated as of the Closing Date and in substantially the form heretofore delivered to the Placement Agent (the “Trust Agreement”). The Junior Subordinated Notes shall be issued pursuant to an Indenture (the “Indenture”), to be dated as of the Closing Date, between the Company and Wilmington Trust Company, as indenture trustee (the “Indenture Trustee”). The documents identified in this Section 1.2 and in Section 1.1 are referred to herein as the “Operative Documents.” The Preferred Securities, the Common Securities and the Junior Subordinated Notes are collectively referred to as the “Securities.” All other capitalized terms used but not defined in this Agreement shall have the meanings ascribed to them in the Indenture.

1.3

Rights of Purchaser . The Preferred Securities shall be offered and sold by the Trust directly to the Purchaser without registration of any of the Preferred Securities, the Junior Subordinated Notes or the Guarantee under the Securities Act of 1933, as amended (the “Securities Act”), Securities and Exchange Commission (the “SEC”) rules or any other applicable securities laws in reliance upon exemptions from the registration requirements of the Securities Act set forth under Section 4(2) of the Securities Act and other applicable securities laws. The Offerors agree that this Agreement shall be incorporated by reference into the Subscription Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agent and the Purchaser under this Agreement and shall be entitled to enforce obligations of the Offerors under this Agreement as fully as if the Purchaser were a party to this Agreement. The Offerors and the Placement Agent have entered into this Agreement to set forth their understanding as to their relationship and their respective rights, duties and obligations.

1.4

Legends . Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the Preferred Securities, the Junior Subordinated Notes and the Common Securities certificates shall each contain a legend as required pursuant to any of the Operative Documents.

Section 2.

Purchase of Preferred Securities .

2.1

Exclusive Rights; Purchase Price . From the date hereof until the Closing Date (which date may be extended by mutual agreement of the Offerors and the Placement Agent), the Offerors hereby grant to the Placement Agent the exclusive right to arrange for the sale to the Purchaser of the Preferred Securities at a purchase price equal to $1,000 per Preferred Security. The aggregate purchase price shall be TEN MILLION ($10,000,000) DOLLARS (the “Purchase Price”), which Purchase Price is equal to 100% of the stated liquidation amount of the Preferred Securities.

2.2

Subscription . The Offerors hereby agree to evidence their acceptance of the subscription by countersigning a copy of the Subscription Agreement and returning the same to the Placement Agent.

2.3

Closing and Delivery of Payment .

2.3.1

Closing; Closing Date . The closing (the “Closing”) for the sale and purchase of the Preferred Securities by the Offerors to the Purchaser shall occur at the offices of Powell Goldstein LLP, or such other place as the parties hereto shall agree at 11:00 a.m. (eastern time) on December 28, 2004, or such other later date as the parties may designate (such date and time of delivery and payment for the Preferred Securities being herein called the “Closing Date”). The Preferred Securities shall be transferred and delivered to the Purchaser against the payment of the Purchase Price (as defined in the Subscription Agreement) to the Offerors in immediately available funds on the Closing Date to a U.S. account designated in writing by the Company at least two (2) business days prior to the Closing Date.

2.3.2

Delivery . Delivery of the Preferred Securities shall be made at such location, and in such names and denominations, as the Purchaser shall designate at least two (2) business days in advance of the Closing Date. The Company and the Trust agree to have the Preferred Securities available for inspection and checking by the Purchaser in Atlanta, Georgia not later than 1:00 P.M., Eastern Time, on the business day prior to the Closing Date.

2.4

Placement Agent’s Fees and Expenses .

2.4.1

Placement Agent’s Compensation . The Offerors shall use the proceeds from the sale of the Preferred Securities, together with the proceeds from the sale of the Common Securities, to purchase the Junior Subordinated Notes. Because the proceeds from the sale of the Preferred Securities shall be used to purchase the Junior Subordinated Notes from the Company, the Company shall pay an aggregate of $0 for each $1,000 of principal amount of Junior Subordinated Notes (0%) sold to the Trust (excluding the Junior Subordinated Notes related to the Common Securities purchased by the Company) as commission to the Placement Agent (the “Commission”). Such amount shall be delivered to the Placement Agent or such other person designated by the Placement Agent on the Closing Date.

2.4.2

Costs and Expenses . The Company hereby covenants and agrees that it shall pay or cause to be paid (directly or by reimbursement) (i) all costs and expenses incident to the performance of the obligations of the Offerors or either of them under this Agreement, the Trust Agreement or the Indenture; provided, however, that the Purchaser shall pay, at Closing (x) a single payment to Wilmington Trust Company, pursuant to a negotiated fee arrangement, between them, in payment of certain administration fees as further described in the following sentence, for services rendered by Wilmington Trust Company under the Trust Agreement and the Indenture, (y) the legal fees and expenses of Richards, Layton & Finger, P.A. in its capacity as special Delaware counsel to the Placement Agent and the Purchaser and as special counsel to the Indenture Trustee, the Property Trustee and the Guarantee Trustee incurred through the Closing Date, and (z) the legal fees and expenses, up to but not in excess of $10,000, incurred by the Company in connection with the Offering. The negotiated fixed administrative fee to be paid to Wilmington Trust Company by the Purchaser as described in the preceding sentence covers, in a single payment, the standard administrative fees to be charged by Wilmington Trust Company as Guarantee Trustee, Property Trustee or Indenture Trustee for the life of the Trust so long as there is no event of default or other event, including early repayment of the Preferred Securities as a result of which the trustee has the right or obligation to retain counsel or take other action. In such a case, Wilmington Trust Company, if it is still serving as Guarantee Trustee, Property Trustee or Indenture Trustee may charge or incur additional fees and expenses, including counsel fees, which will be billed to and payable by the Company at the trustee’s cost.

2.4.3

Reimbursement of Expenses . If the sale of the Preferred Securities provided for in this Agreement is not consummated (i) because any condition set forth in Section 3 to be satisfied by either the Company or the Trust is not satisfied, (ii) because this Agreement is terminated pursuant to Section 9(i) or (ii) or (iii) because of any failure, refusal or inability on the part of the Company or the Trust to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by a reason of a breach of this Agreement by the Placement Agent, the Company shall reimburse the Placement Agent upon demand for all reasonable out-of-pocket expenses (including the fees and expenses of counsel to the Placement Agent or Purchaser) that shall have been incurred by the Placement Agent or Purchaser in connection with the proposed purchase and sale of the Preferred Securities. The Company shall not in any event be liable to the Placement Agent or Purchaser for the loss of anticipated profits from the transactions contemplated by this Agreement.

Section 3.

Closing Conditions . The obligations of the parties under this Agreement on the Closing Date are subject to the following conditions:

3.1

Accuracy of Representations and Warranties . The representations and warranties contained in this Agreement, and the statements of the Offerors made in any certificates pursuant to this Agreement, shall be accurate as of the date of delivery of the Preferred Securities:

3.2

Opinions of Counsel . On the Closing Date, the Placement Agent shall have received the following favorable opinions, each dated as of the Closing Date: (a) from Stinson Morrison Hecker LLP, counsel for the Offerors, addressed to the Purchaser, the Placement Agent and the Indenture Trustee in substantially the form set forth on Exhibit B-1 attached hereto and incorporated herein by this reference, (b) from Powell Goldstein LLP, special tax counsel for the Placement Agent and Purchaser, addressed to the Placement Agent and Purchaser in substantially the form set forth on Exhibit B-2 attached hereto and incorporated herein by this reference, (c) from Richards Layton & Finger, P.A., special Delaware counsel to the Placement Agent and Purchaser and addressed to the Purchaser, the Placement Agent and the Offerors, in substantially the form set forth on Exhibit B-3 attached hereto and incorporated herein by this reference, and (d) from Richards Layton & Finger, P.A., special counsel to the Indenture Trustee, the Property Trustee and the Guarantee Trustee and addressed to the Purchaser, the Placement Agent and the Offerors, in substantially the form set forth on Exhibit B-4 attached hereto and incorporated herein by this reference. Each opinion addressed to the Purchaser shall state that the first entity, if any, to which the Purchaser transfers any of the Preferred Securities (each, a “Subsequent Purchaser”) shall be entitled to rely on such opinion. In rendering the opinion of counsel to the Offerors’, counsel to the Offerors may rely as to factual matters upon certificates or other documents furnished by officers, directors and trustees of the Offerors and by government officials, and upon such other documents as counsel to the Offerors may, in their reasonable opinion, deem appropriate as a basis for the opinion of counsel to the Offerors’.

3.3

Officer’s Certificate . The Company shall have furnished to the Placement Agent and the Purchaser a certificate of the Company, signed by the Chief Executive Officer, President or an Executive Vice President and by the Chief Financial Officer, Treasurer or Assistant Treasurer of the Company, and the Trust shall have furnished to the Placement Agent and the Purchaser a certificate of the Trust, signed by an Administrative Trustee of the Trust, in each case dated the Closing Date, and, in the case of the Company, as to 3.3.1 and 3.3.2 below and, in the case of the Trust, as to 3.3.1 below:

3.3.1

the representations and warranties in this Agreement are true and correct on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company and the Trust have complied with all the agreements and satisfied all the conditions on either of their part to be performed or satisfied at or prior to the Closing Date; and

3.3.2

since the date of the Interim Financial Statements (as defined below), there has been no material adverse change in the condition (financial or other), earnings, business, prospects or assets of the Company and its subsidiaries, whether or not arising from transactions occurring in the ordinary course of business.

3.4

Delivery of Operative Documents . Each of the Operative Documents shall have been duly authorized, executed and delivered by each party thereto, and copies thereof shall have been delivered to the Company, the Trust, the Purchaser and the Placement Agent.

3.5

Consents and Permits . The Company and the Trust shall have received all consents, permits and other authorizations, and made all such filings and declarations, as may be required from any person or entity pursuant to any law, statute, regulation or rule (federal, state, local and foreign), or pursuant to any agreement, order or decree to which the Company or the Trust is a party or to which either is subject, in connection with the transactions contemplated by this Agreement.

3.6

Information . Prior to or on the Closing Date, the Offerors shall have furnished to the Placement Agent, the Purchaser and their respective counsel such further information, certificates, opinions and documents as the Placement Agent, Purchaser or their respective counsel may reasonably request.

If any of the conditions specified in this Section 3 shall not have been fulfilled when and as required in this Agreement, or if any of the opinions, certificates and documents mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Placement Agent, the Purchaser or their respective counsel, this Agreement and all the Placement Agent’s obligations hereunder may be canceled at, or any time prior to, the Closing Date by the Placement Agent. Notice of such cancellation shall be given to the Offerors in writing or by telephone or facsimile confirmed in writing.

Each certificate signed by any trustee of the Trust or any officer of the Company and delivered to the Placement Agent, Purchaser or their respective counsel in connection with the Operative Documents and the transactions contemplated hereby and thereby shall be deemed to be a representation and warranty of the Trust and/or the Company, as the case may be, and not by such trustee or officer in any individual capacity.

Section 4.

Representations and Warranties of the Offerors . The Offerors jointly and severally represent and warrant to the Placement Agent and the Purchaser as of the date hereof and as of the Closing Date as follows:

4.1

Representations and Warranties of the Company and the Trust .

(a)

Neither the Company nor the Trust, nor any of their “Affiliates” (as defined in Rule 501(b) of Regulation D under the Securities Act (“Regulation D”)), nor any person acting on any of their behalf (except for the Placement Agent, as to which neither the Company nor the Trust makes any representation) has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration under the Securities Act of any of the Securities.

(b)

Neither the Company nor the Trust, nor any of their Affiliates, nor any person acting on its or their behalf (except for the Placement Agent, as to which neither the Company nor the Trust make any representation) has (i) offered for sale or solicited offers to purchase the Securities, (ii) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of any of the Securities, or (iii) engaged in any “directed selling efforts” within the meaning of Regulation S under the Securities Act (“Regulation S”) with respect to the Securities.

(c)

The Securities (i) are not and have not been listed on a national securities exchange registered under section 6 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or quoted on a U.S. automated interdealer quotation system and (ii) are not of an open-end investment company, unit investment trust or face-amount certificate company that are, or are required to be, registered under section 8 of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and the Securities otherwise satisfy the eligibility requirements of Rule 144A(d)(3) promulgated pursuant to the Securities Act (“Rule 144A(d)(3)”).

(d)

Neither the Company nor the Trust is, and, immediately following consummation of the transactions contemplated hereby and the application of the net proceeds therefrom, neither the Company nor the Trust will be, an “investment company” or an entity “controlled” by an “investment company,” in each case within the meaning of section 3(a) of the Investment Company Act.

(e)

Neither the Company nor the Trust has paid or agreed to pay to any person or entity, directly or indirectly, any fees or other compensation for soliciting another to purchase any of the Securities, except for the Commission.

4.2

Standing and Qualification of the Trust . The Trust has been duly created and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act, 12 Del. C. §3801, et seq . (the “Statutory Trust Act”) with all requisite power and authority to own property and to conduct the business it transacts and proposes to transact and to enter into and perform its obligations under the Operative Documents to which it is a party. The Trust is duly qualified to transact business as a foreign entity and is in good standing in each jurisdiction in which such qualification is necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or assets of the Trust, whether or not occurring in the ordinary course of business. The Trust is not a party to, or otherwise bound by, any agreement other than the Operative Documents. The Trust is, and under current law will continue to be, classified for United States federal income tax purposes as a grantor trust and not as an association or publicly traded partnership taxable as a corporation.

4.3

Trust Agreement . The Trust Agreement has been duly authorized by the Company and, on the Closing Date specified in Section 2.3.1 , will have been duly executed and delivered by the Company and the Administrative Trustees of the Trust, and, assuming due authorization, execution and delivery by the Property Trustee and the Delaware Trustee, will be a legal, valid and binding obligation of the Company and the Administrative Trustees, enforceable against them in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally and to general principles of equity. Each of the Administrative Trustees of the Trust is an employee of the Company or one of its subsidiary banks and has been duly authorized by the Company to execute and deliver the Trust Agreement. To the knowledge of the Administrative Trustees, the Trust is not in violation of any provision of the Statutory Trust Act.

4.4

Guarantee Agreement and the Indenture . Each of the Guarantee and the Indenture has been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by the Guarantee Trustee, in the case of the Guarantee, and by the Indenture Trustee, in the case of the Indenture, will be a legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally and to general principles of equity.

4.5

Preferred Securities and Common Securities . The Preferred Securities and the Common Securities have been duly authorized by the Trust and, when issued and delivered against payment therefor on the Closing Date to the Purchaser in accordance with this Agreement and the Subscription Agreement, in the case of the Preferred Securities, and to the Company in accordance with the Common Securities Subscription Agreement between the Company and the Trust, dated as of the Closing Date, in the case of the Common Securities, will be validly issued, fully paid and nonassessable and will represent undivided beneficial interests in the assets of the Trust entitled to the benefits of the Trust Agreement, enforceable against the Trust in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights generally and to general principles of equity. The issuance of the Securities is not subject to preemptive or other similar rights. On the Closing Date, all of the issued and outstanding Common Securities will be directly owned by the Company free and clear of any pledge, security interest, claim, lien or other encumbrance (each, a “Lien”).

4.6

Junior Subordinated Notes . The Junior Subordinated Notes have been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered to the Indenture Trustee for authentication in accordance with the Indenture and, when authenticated in the manner provided for in the Indenture and delivered to the Trust against payment therefor in accordance with the Junior Subordinated Note Subscription Agreement between the Company and the Trust, dated as of the Closing Date, will constitute legal, valid and binding obligations of the Company entitled to the benefits of the Indenture enforceable against the Company in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally and to general principles of equity.

4.7

Placement Agreement . This Agreement has been duly authorized, executed and delivered by the Company and the Trust and constitutes the legal, valid and binding obligation of the Company and the Trust, enforceable against the Company and the Trust in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights generally and to general principles of equity.

4.8

Defaults . Neither the issue and sale of the Common Securities, the Preferred Securities or the Junior Subordinated Notes, nor the purchase of the Junior Subordinated Notes by the Trust, the execution and delivery of and compliance with the Operative Documents by the Company or the Trust, the consummation of the transactions contemplated herein or therein, or the use of the proceeds therefrom, (i) will conflict with or constitute a breach of, or a default under, the Trust Agreement or the charter or bylaws of the Company or any subsidiary of the Company or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, governmental authority, agency or instrumentality or court, domestic or foreign, having jurisdiction over the Trust, or the Company or any of its subsidiaries, or their respective properties or assets (collectively, “Governmental Entities”), (ii) will conflict with or constitute a violation or breach of, or a default or Repayment Event (as defined below) under, or result in the creation or imposition of any Lien upon any property or assets of the Trust, the Company or any of the Company’s subsidiaries pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which (A) the Trust, the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or (B) any of the property or assets of any of them is subject, or any judgment, order or decree of any court, governmental authority or arbitrator, except, in the case of this clause (ii), for such conflicts, breaches, violations, defaults, Repayment Events (as defined below) or Liens which (X) would not, singly or in the aggregate, adversely affect the consummation of the transactions contemplated by the Operative Documents and (Y) would not, singly or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, liabilities, prospects and assets (taken as a whole) or business prospects of the Company and its subsidiaries taken as a whole, whether or not occurring in the ordinary course of business (a “Material Adverse Effect”) or (iii) require the consent, approval, authorization or order of any court or Governmental Entity, other than such as have been previously obtained. As used herein, a “Repayment Event” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Trust or the Company or any of its subsidiaries prior to its scheduled maturity.

4.9

Organization, Standing and Qualification of the Company . The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of New York, with all requisite corporate power and authority to own, lease and operate its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such qualification, except where the failure of the Company to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect.

4.10

Subsidiaries of the Company . Each of the Company’s significant subsidiaries listed in Schedule 1 (as defined in Section 1-02 of Regulation S-X under the Securities Act) (the “Subsidiaries”) has been duly organized and is validly existing and in good standing under the laws of the jurisdiction in which it is chartered or organized, with all requisite power and authority to own its properties and conduct the business it transacts and proposes to transact. Each Subsidiary is duly qualified to transact business and is in good standing as a foreign entity in each jurisdiction where the nature of its activities requires such qualification, except where the failure of any such Subsidiary to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect.

4.11

Government Licenses and Regulatory Compliance . Each of the Trust, the Company and each of its Subsidiaries hold all necessary approvals, authorizations, orders, licenses, certificates and permits (collectively, “Government Licenses”) of and from Governmental Entities necessary to conduct its respective business as now being conducted, and neither the Trust, the Company nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Government License, except where the failure to be so licensed or approved or the receipt of an unfavorable decision, ruling or finding, would not, singly or in the aggregate, have a Material Adverse Effect; all of the Government Licenses are valid and in full force and effect, except where the invalidity or the failure of such Government Licenses to be in full force and effect, would not, singly or in the aggregate, have a Material Adverse Effect; and the Company and the Subsidiaries are in compliance with all applicable laws, rules, regulations, judgments, orders, decrees and consents, except where the failure to be in compliance would not, singly or in the aggregate, have a Material Adverse Effect.

4.12

Property . Each of the Company and its Subsidiaries owns or leases all such properties as are necessary to the conduct of its operations as presently conducted and has good and marketable title to all of its respective real and personal properties, in each case free and clear of all Liens and defects, except for those that would not, singly or in the aggregate, have a Material Adverse Effect; and all of the leases and subleases under which the Trust, the Company or any Subsidiary holds properties are in full force and effect, except where the failure of such leases and subleases to be in full force and effect would not, singly or in the aggregate, have a Material Adverse Effect and none of the Trust, the Company or any Subsidiary has any notice of any claim of any sort that has been asserted by anyone adverse to the rights of the Trust, the Company or any Subsidiary under any such leases or subleases, or affecting or questioning the rights of such entity to the continued possession of the leased or subleased premises under any such lease or sublease, except for such claims that would not, singly or in the aggregate, have a Material Adverse Effect.

4.13

Conflicts, Authorizations and Approvals . Neither the Company nor any of its Subsidiaries is (i) in violation of its respective charter, bylaws or similar organizational documents or (ii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which either the Company or any such Subsidiary is a party or by which it or any of them may be bound or to which any of the property or assets of any of them is subject, except, in the case of clause (ii), where such default would not, singly or in the aggregate, have a Material Adverse Effect. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity, other than those that have been made or obtained, is necessary or required for the performance by the Trust or the Company of their respective obligations under the Operative Documents, as applicable, or the consummation by the Trust and the Company of the transactions contemplated by the Operative Documents.

4.14

Holding Company Registration and Deposit Insurance . The Company is duly registered (i) as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “ Bank Holding Company Act ”), and the regulations of the Board of Governors of the Federal Reserve System (the “ Federal Reserve ”), and the deposit accounts of the Company’s subsidiary depository institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the fullest extent permitted by law and the rules and regulations of the FDIC, and no proceeding for the termination of such insurance are pending or, to the knowledge of the Company, threatened.

4.15

Financial Statements .

(a)

The audited consolidated financial statements (including the notes thereto) and schedules of the Company and its consolidated subsidiaries at and for the fiscal year ended December 31, 2003, (the “Financial Statements”) and the interim unaudited consolidated financial statements of the Company and its consolidated subsidiaries at and for the quarter ended September 30, 2004 (the “Interim Financial Statements”) provided to the Placement Agent are the most recently available audited and unaudited consolidated financial statements of the Company and its consolidated subsidiaries, respectively, and fairly present in all material respects, in accordance with U.S. generally accepted accounting principles (“GAAP”), the financial position of the Company and its consolidated subsidiaries, and the results of operations and changes in financial condition as of the dates and for the periods therein specified, subject, in the case of Interim Financial Statements, to year-end adjustments (which are expected to consist solely of normal recurring adjustments). Such consolidated financial statements and schedules have been prepared in accordance with GAAP consistently applied throughout the periods involved (except as otherwise noted therein).

(b)

The Company’s report on FRY-9C, dated September 30, 2004 (the “FRY-9C”), provided to the Placement Agent is the most recently available such report, and the information therein fairly presents in all material respects the financial position of the Company and its subsidiaries.

(c)

Since the respective dates of the Financial Statements, Interim Financial Statements and the FRY-9C, there has not been any material adverse change or development with respect to the condition (financial or otherwise), earnings, business, assets or business prospects of the Company and its subsidiaries, taken as a whole.

(d)

The accountants of the Company who certified the Financial Statements are independent public accountants of the Company and its subsidiaries within the meaning of the Securities Act and the rules and regulations of the SEC thereunder.

4.16

Regulatory Enforcement Matters . None of the Trust, the Company nor any of its Subsidiaries, nor any of their respective officers, directors, employees or representatives, is subject or is party to, or has received any notice from any Regulatory Agency (as defined below) that any of them will become subject or party to any investigation with respect to, any cease-and-desist order, agreement, civil monetary penalty, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been a recipient of any supervisory letter from, or has adopted any board resolutions at the request or suggestion of, any Regulatory Agency that, in any such case, currently restricts in any material respect the conduct of their business or that in any material manner relates to their capital adequacy, their credit policies, their management or their business (each, a “Regulatory Action”), nor has the Trust, the Company or any of its Subsidiaries been advised by any Regulatory Agency that it is considering issuing or requesting any such Regulatory Action; and there is no unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Trust, the Company or any of its Subsidiaries, except where such unresolved violation, criticism or exception would not, singly or in the aggregate, have a Material Adverse Effect. As used herein, the term “Regulatory Agency” means any federal or state agency charged with the supervision or regulation of depositary institutions or holding companies of depositary institutions, or engaged in the insurance of depositary institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Trust, the Company or any of its Subsidiaries.

4.17

No Undisclosed Liabilities . None of the Trust, the Company nor any of its Subsidiaries has any material liability, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes (and there is no past or present fact, situation, circumstance, condition or other basis for any present or future action, suit, proceeding, hearing, charge, complaint, claim or demand against the Company or its Subsidiaries that could give rise to any such liability), except for (i) liabilities set forth in the Financial Statements or the Interim Financial Statements and (ii) normal fluctuations in the amount of the liabilities referred to in clause (i) above occurring in the ordinary course of business of the Trust, the Company and all of its Subsidiaries since the date of the most recent balance sheet included in such Financial Statements.

4.18

Litigation . There is no action, suit or proceeding before or by any Governmental Entity, arbitrator or court, domestic or foreign, now pending or, to the knowledge of the Company or the Trust, threatened against or affecting the Trust or the Company or any of the Subsidiaries, except for such actions, suits or proceedings that, if adversely determined, could not, singly or in the aggregate, reasonably be expected to materially adversely affect the consummation of the transactions contemplated by the Operative Documents or to have a Material Adverse Effect.

4.19

Deferral of Interest Payments on Junior Subordinated Notes . The Company has no present intention to exercise its option to defer payments of interest on the Junior Subordinated Notes as provided in the Indenture. The Company believes that the likelihood that it would exercise its rights to defer payments of interest on the Junior Subordinated Notes as provided in the Indenture at any time during which the Junior Subordinated Notes are outstanding is remote because of the restrictions that would be imposed on the Company’s ability to declare or pay dividends or distributions on, or to redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company’s capital stock and on the Company’s ability to make any payments of principal, interest or premium on, or repay, repurchase or redeem, any of its debt securities that rank pari passu in all respects with or junior in interest to the Junior Subordinated Notes.

Section 5.

Representations and Warranties of the Placement Agent . The Placement Agent represents and warrants to, and agrees with, the Company and the Trust as follows:

5.1

Organization, Standing and Qualification . The Placement Agent is a corporation, validly existing and in good standing under the laws of the state of Tennessee, with full power and authority to own, lease and operate its properties and conduct its business as currently being conducted. The Placement Agent is duly qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases property or conducts its business so as to require such qualification and in which the failure to so qualify would, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of operations of the Placement Agent.

5.2

Power and Authority . The Placement Agent has all requisite power and authority to enter into this Agreement, and this Agreement has been duly and validly authorized, executed and delivered by the Placement Agent and constitutes the legal, valid and binding agreement of the Placement Agent, enforceable against the Placement Agent in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights generally and to general principles of equity and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws.

5.3

General Solicitation . Neither the Placement Agent, nor any representative of the Placement Agent has engaged, or will engage, in any form of “general solicitation or general advertising” (within the meaning of Regulation D under the Securities Act) or in any “directed selling efforts” (within the meaning of Regulation S under the Securities Act) in connection with any offer or sale of the Preferred Securities.

5.4

Purchaser . The Placement Agent has made such reasonable inquiry as is necessary to determine that the Purchaser is acquiring the Preferred Securities for its own account, the Purchaser does not intend to distribute the Preferred Securities in contravention of the Securities Act or any other applicable securities laws.

5.5

Qualified Purchasers . The Placement Agent has not offered or sold, and will not arrange for the offer or sale of, the Preferred Securities except (i) to those the Placement Agent reasonably believes are “accredited investors” (within the meaning of Rule 501 of Regulation D), (ii) in an offshore transaction complying with Rule 903 of Regulation S or (iii) in any other manner that does not require registration of the Preferred Securities under the Securities Act. In connection with each such sale, the Placement Agent has taken or will take reasonable steps to ensure that the Purchaser is aware that (a) such sale is being made in reliance on an exemption under the Securities Act and (b) future transfers of the Preferred Securities will not be made except in compliance with applicable securities laws.

5.6

Offering Circulars . Neither the Placement Agent nor its representatives will include any nonpublic information about the Company, the Trust or any of their affiliates in any registration statement, prospectus, offering circular or private placement memorandum used in connection with any purchase of Preferred Securities without the prior written consent of the Company or the Trust, as applicable.

Section 6.

Covenants of the Offerors . The Offerors covenant and agree with the Placement Agent and the Purchaser as follows:

6.1

Compliance with Representations and Warranties . During the period from the date of this Agreement to the Closing Date, the Offerors shall use their best efforts to cause their representations and warranties contained in Section 4 hereof to be true as of the Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date.

6.2

Sale and Registration of Securities . Neither the Company nor the Trust will, nor will either of them permit any of its Affiliates to, nor will either of them permit any person acting on its or their behalf (other than the Placement Agent and the Purchaser) to, directly or indirectly, (i) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) that would or could be integrated with the sale of the Preferred Securities in any manner that would require the registration of the Securities under the Securities Act or (ii) make offers or sales of any such Security, or solicit offers to buy any such Security, under any circumstances that would require the registration of any of such Securities under the Securities Act.

6.3

Use of Proceeds . The Trust shall use the proceeds from the sale of the Preferred Securities and the Common Securities solely to purchase the Junior Subordinated Notes from the Company.

6.4

Investment Company . So long as any of the Securities are outstanding, (i) the Securities shall not be listed on a national securities exchange registered under section 6 of the Exchange Act or quoted in a U.S. automated interdealer quotation system, (ii) neither the Company nor the Trust shall be an open-end investment company, unit investment trust or face-amount certificate company that is, or is required to be, registered under section 8 of the Investment Company Act, and, the Securities shall otherwise satisfy the eligibility requirements of Rule 144A(d)(3) and (iii) neither of the Offerors shall engage, or permit any subsidiary to engage, in any activity which would cause it or any subsidiary to be an “investment company” under the provisions of the Investment Company Act.

6.5

Solicitation and Advertising . Neither the Company nor the Trust will, nor will either of them permit any of their Affiliates or any person acting on their behalf to (other than the Placement Agent), (i) engage in any “directed selling efforts” within the meaning of Regulation S under the Securities Act or (ii) engage in any form of “general solicitation or general advertising” (within the meaning of Regulation D) in connection with any offer or sale of any of the Securities.

6.6

Compliance with Rule 144A(d)(4) under the Securities Act . So long as any of the Securities are outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Offerors will, during any period in which they are not subject to and in compliance with Section 13 or 15(d) of the Exchange Act, or the Offerors are not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2(b) under the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser in connection with any proposed transfer, any information required to be provided by Rule 144A(d)(4) under the Securities Act, if applicable. The information provided by the Offerors pursuant to this Section 6.6 will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company and the Trust are required to register under the Exchange Act, such reports filed in compliance with Rule 12g3-2(b) shall be sufficient information as required above. This covenant is intended to be for the benefit of the Purchaser, the holders of the Securities, and the prospective purchasers designated by such holders, from time to time, of the Securities.

6.7

Reports . Each of the Company and the Trust shall furnish to (i) the Placement Agent, (ii) the Purchaser and any subsequent holder of the Securities, and (iii) any beneficial owner of the Securities reasonably identified to the Company and the Trust (which identification may be made by either such beneficial owner or by the Purchaser), a duly completed and executed certificate in the form attached hereto as Exhibit C , including the financial statements referenced in such Exhibit, which certificate and financial statements shall be so furnished by the Company and the Trust not later than fifty (50) days after the end of each of the first three fiscal quarters of each fiscal year of the Company and not later than one hundred (100) days after the end of each fiscal year of the Company during which the Junior Subordinated Notes are outstanding, provided , however , that the Company shall not be required to furnish a completed and executed certificate in the form attached hereto as Exhibit C so long as the Company is subject to Section 15(d) of the Exchange Act. The Company shall furnish all financial statements referenced in the certificate attached hereto as Exhibit C , notwithstanding the fact that the certificate may not be required to be furnished under this Section 6.7 .

Section 7.

Indemnification & Contribution .

7.1

Indemnification .

7.1.1

The Company and the Trust agree jointly and severally to indemnify and hold harmless the Placement Agent, the Purchaser, the Placement Agent’s affiliates (collectively, the “Indemnified Parties”) and the Indemnified Parties’ respective directors, officers, employees and agents and each person who “controls” the Indemnified Parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, actions or proceedings (each a “Claim”) to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any information (whether oral or written) or documents furnished or made available to the Purchaser or the Placement Agent by or on behalf of the Company, the Trust, or their respective representatives pursuant to the due diligence request form provided by the Placement Agent in connection with the transactions contemplated by the Operative Documents, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and agrees to reimburse each such Indemnified Party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Company or the Trust may otherwise have.

7.1.2

The Company agrees to indemnify and hold harmless the Trust against all loss, liability, claim, damage and expense whatsoever, as due from the Trust under Section 7.1.1 above.

7.1.3

Promptly after receipt by an Indemnified Party under this Section 7 of notice of the commencement of any Claim, such Indemnified Party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 7 , promptly notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve the indemnifying party from liability under Section 7.1.1 above, except and to the extent that such failure results in the forfeiture by the indemnifying party of material rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any Indemnified Party other than the indemnification obligation provided in Section 7.1.1 above. The indemnifying party shall be entitled to appoint counsel at the indemnifying party’s expense to represent the Indemnified Party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Party or parties except as set forth below); provided , however , that such counsel shall be satisfactory to the Indemnified Party (and which may be counsel to the indemnifying party). Notwithstanding the indemnifying party’s election to appoint counsel to represent the Indemnified Party in an action, the Indemnified Party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the Indemnified Party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Party and the indemnifying party and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it and/or other Indemnified Parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of the institution of such action, or (iv) the indemnifying party shall authorize the Indemnified Party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the Indemnified Parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Party from all liability arising out of such claim, action, suit or proceeding. An Indemnified Party will not, without the prior written consent of the indemnifying parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Parties are actual or potential parties to such claim or action).

7.1.4

In the event that the indemnity provided in Sections 7.1.1, 7.1.2 or 7.1.3 is unavailable to or insufficient to hold harmless an Indemnified Party for any reason, then each indemnifying party agrees to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively “Losses”) to which the indemnifying party may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and the Trust on the one hand and by the Placement Agent on the other hand from the offering of the Securities; provided , however , that in no case shall the Placement Agent be responsible for any amount in excess of the purchase discount or commission applicable to the Preferred Securities purchased hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, then each indemnifying party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Trust on the one hand and of the Placement Agent on the other hand in connection with the statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. Benefits received by the Company and the Trust shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) received by it, and benefits received by the Placement Agent shall be deemed to be equal to the total Commission specified in Section 2.4.1 . Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information provided by the Company and the Trust on the one hand or the Placement Agent on the other hand, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Trust and the Placement Agent agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 7.1.4 , no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7 , the Purchaser, each person who controls the Placement Agent or the Purchaser within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of the Placement Agent or the Purchaser shall have the same rights to contribution as the Placement Agent, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act, each officer and director of the Company and each Administrator of the Trust shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this Section 7.1.4 .

Section 8.

Rights and Responsibilities of Placement Agent .

8.1

Reliance . In performing its duties under this Agreement, the Placement Agent shall be entitled to rely upon any notice, signature or writing which it shall in good faith believe to be genuine and to be signed or presented by a proper party or parties. The Placement Agent may rely upon any opinions or certificates or other documents delivered by the Offerors or their counsel or designees to either the Placement Agent or the Purchaser.

8.2

Rights of Placement Agent . In connection with the performance of its duties under this Agreement, the Placement Agent shall not be liable for any error of judgment or any action taken or omitted to be taken unless the Placement Agent was grossly negligent or engaged in willful misconduct in connection with such performance or non-performance. No provision of this Agreement shall require the Placement Agent to expend or risk its own funds or otherwise incur any financial liability on behalf of the Purchaser in connection with the performance of any of its duties hereunder. The Placement Agent shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement.

Section 9.

Termination . This Agreement shall be subject to termination in the absolute discretion of the Placement Agent, by notice given to the Company and the Trust prior to delivery of and payment for the Preferred Securities, if prior to such time (i) there has occurred any Material Adverse Effect, or (ii) trading in any of the Company’s securities shall have been suspended by the SEC or the exchange upon which the Company’s securities are traded, if any, or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such exchange, (iii) a banking moratorium shall have been declared either by federal or New York authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on financial markets is such as to make it, in the Placement Agent’s judgment, impracticable or inadvisable to proceed with the offering or delivery of the Preferred Securities.

Section 10.

Miscellaneous .

10.1

Disclosure Schedule . The term “Disclosure Schedule,” as used herein, means the schedule, if any, attached to this Agreement that sets forth items the disclosure of which is necessary or appropriate as an exception to one or more representations or warranties contained in Section 4 hereof. The Disclosure Schedule shall be arranged in paragraphs corresponding to the section numbers contained in Section 4 . Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the immediately preceding sentence, the mere listing (or inclusion of a copy) of a document or other item in the Disclosure Schedule shall not be deemed adequate to disclose an exception to a representation or warranty made herein unless the representation or warranty has to do with the existence of the document or other item itself. Information provided by the Company in response to any due diligence questionnaire shall not be deemed part of the Disclosure Schedule and shall not be deemed to be an exception to one or more representations or warranties contained in Section 4 hereof unless such information is specifically included on the Disclosure Schedule in accordance with the provisions of this Section 10.1 .

10.2

Notices . All communications hereunder will be in writing and effective only on receipt, and will be mailed, delivered by hand or courier or sent by facsimile and confirmed:

If to the Placement Agent, to:

SunTrust Capital Markets, Inc.

303 Peachtree Street, N.E., 24th Floor

Mail Code 3950

Atlanta, Georgia 30308

Facsimile: (404) 813-5000

Attention: Trust Preferred

with a copy to:

Powell Goldstein LLP

One Atlantic Center

Fourteenth Floor

1201 West Peachtree St., NW

Atlanta, GA 30309-3488

if to the Offerors, to:

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

Facsimile: (518) 761-0805

Telephone: (518) 745-1000

Attention: John J. Murphy

The Placement Agent, the Company, and their respective counsel, may change their respective notice addresses, from time to time, by written notice to all of the foregoing persons.

10.3

Parties in Interest, Successors and Assigns . This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the parties hereto and the affiliates, directors, officers, employees, agents and controlling persons referred to in Section 7 hereof and their successors, assigns, heirs and legal representatives, any right or obligation hereunder. None of the rights or obligations of the Company or the Trust under this Agreement may be assigned, whether by operation of law or otherwise, without the Placement Agent’s prior written consent. The rights and obligations of the Placement Agent and Purchaser under this Agreement may be assigned by such party without the Company’s or the Trust’s consent; provided that the assignee assumes the obligations of such party under this Agreement.

10.4

Amendments . This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement by each of the parties hereto.

10.5

Counterparts and Facsimile . This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. This Agreement may be executed by any one or more of the parties hereto by facsimile.

10.6

Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

10.7

Governing Law . THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF DELAWARE WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW.

10.8

Entire Agreement . This Agreement, together with the Operative Documents and the other documents delivered in connection with the transactions contemplated by this Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Operative Documents and the other documents delivered in connection with the transaction contemplated by this Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject matter.

10.9

Severability . In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Placement Agent’s and the Purchaser’s rights and privileges shall be enforceable to the fullest extent permitted by law.

10.10

Survival . The respective agreements, representations, warranties, indemnities and other statements of the Company and the Trust and their respective officers or trustees and of the Placement Agent set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Placement Agent, the Purchaser, the Company or the Trust or any of their respective officers, directors, trustees or controlling persons, and will survive delivery of and payment for the Preferred Securities. The provisions of Sections 2.4 and 7 shall survive the termination or cancellation of this Agreement.

Signatures appear on the following page

If this Agreement is satisfactory to you, please so indicate by signing the acceptance of this Agreement and deliver such counterpart to the Offerors whereupon this Agreement will become binding between us in accordance with its terms.

Very truly yours,


Arrow Financial Corporation

By:
		Name:
		Title:

Arrow Capital Statutory Trust III
By: Arrow Financial Corporation, as Depositor

	By:
			Name:
			Title:

CONFIRMED AND ACCEPTED

as of the date first set forth above

SunTrust Capital Markets, Inc., as Placement Agent
By:
	Name:
	Title:

Schedule 1

List of Significant Subsidiaries

Glens Falls National Bank & Trust Co.

Saratoga National Bank & Trust

A-1

::ODMA\PCDOCS\ATL\824612\1

EXHIBIT A

FORM OF SUBSCRIPTION AGREEMENT

PREFERRED SECURITIES SUBSCRIPTION AGREEMENT

December 28, 2004

THIS PREFERRED SECURITIES SUBSCRIPTION AGREEMENT (this “Agreement”) made among Arrow Capital Statutory Trust III (the “Trust”), a statutory trust created under the Delaware Statutory Trust Act (12 Del. C. §3801, et seq .), Arrow Financial Corporation, a New York corporation, with its principal offices located at 250 Glen Street, Glens Falls, New York 12801 (the “Company” and, together with the Trust, the “Offerors”), STI Investment Management, Inc. (the “Purchaser”), and SunTrust Capital Markets, Inc. (as to Sections 1.2, 1.3 and Article III).

RECITALS:

A. The Trust desires to issue TEN MILLION ($10,000,000) DOLLARS of its Floating Rate Preferred Securities (the “Preferred Securities”), liquidation amount $1,000 per Preferred Security, representing an undivided beneficial interest in the assets of the Trust (the “Offering”), to be issued pursuant to an Amended and Restated Trust Agreement (the “Trust Agreement”) by and among the Company, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, the Administrative Trustees named therein and the Holders (as defined therein), which Preferred Securities are to be guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a Guarantee Agreement between the Company and Wilmington Trust Company, as Guarantee Trustee (the “Guarantee”); and

B. The proceeds from the sale of the Preferred Securities will be combined with the proceeds from the sale by the Trust to the Company of its Common Securities, and will be used by the Trust to purchase an equivalent amount of Floating Rate Junior Subordinated Notes of the Company (the “Notes”) to be issued by the Company pursuant to an indenture (the “Indenture”) between the Company and Wilmington Trust Company, as Indenture Trustee; and

C. In consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto agree as follows:

Article I
PURCHASE AND SALE OF PREFERRED SECURITIES

1.1

Upon the execution of this Agreement, the Purchaser hereby agrees to purchase Preferred Securities from the Trust at a price equal to $1,000 per Preferred Security (the “Purchase Price”), which Purchase Price is equal to TEN MILLION ($10,000,000) DOLLARS, and the Trust agrees to sell such Preferred Securities to the Purchaser for said Purchase Price. The rights and preferences of the Preferred Securities are set forth in the Trust Agreement. The closing of the sale and purchase of the Preferred Securities by the Offerors to the Purchaser shall occur on December 28, 2004 or such other later date as the parties may designate (the “Closing Date”) The Purchase Price is payable in immediately available funds on the Closing Date. The Offerors shall provide the Purchaser payment instructions no later than two (2) days prior to the Closing Date.

1.2

The Placement Agreement, dated as of December 28, 2004 (the “Placement Agreement”), among the Offerors and the Placement Agent identified therein (the “Placement Agent”) includes certain representations and warranties, covenants and conditions to closing and certain other matters governing the Offering. The Placement Agreement is hereby incorporated by reference into this Agreement, and the Purchaser shall be entitled to each of the benefits of the Placement Agent and the Purchaser under the Placement Agreement and shall be entitled to enforce the obligations of the Offerors under such Placement Agreement as fully as if the Purchaser were a party to such Placement Agreement.

1.3

Subject to the provisions of Section 2.2 hereof, the Purchaser may resell the Preferred Securities to a subsequent purchaser (any such purchaser from the Purchaser being referred to hereinafter as a “Subsequent Purchaser”). Upon transfer of the Preferred Securities to a Subsequent Purchaser, the Subsequent Purchaser shall be entitled to each of the benefits of the Placement Agent and the Purchaser under the Placement Agreement and this Agreement, and shall be entitled to enforce the obligations of the Offerors under the Placement Agreement and this Agreement, as fully as if the Subsequent Purchaser were a party to the Placement Agreement and this Agreement.

Article II
REPRESENTATIONS AND WARRANTIES OF PURCHASER

2.1

The Purchaser understands and acknowledges that the Preferred Securities, the Notes and the Guarantee (i) have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any other applicable securities law, (ii) are being offered for sale by the Trust in transactions not requiring registration under the Securities Act and (iii) may not be offered, sold, pledged or otherwise transferred by the Purchaser except in compliance with the registration requirements of the Securities Act or any other applicable securities laws, pursuant to an exemption therefrom or in a transaction not subject thereto.

2.2

The Purchaser represents and warrants that it is purchasing the Preferred Securities for its own account and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any requirement of law that the disposition of its property be at all times within its control and subject to its ability to resell such Preferred Securities pursuant to an effective registration statement under the Securities Act or under Rule 144A or any other exemption from registration available under the Securities Act or any other applicable securities law. The Purchaser understands that no public market exists for any of the Preferred Securities, and that it is unlikely that a public market will ever exist for the Preferred Securities.

2.3

The Purchaser represents and warrants that (a) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary; (b) it has had a reasonable opportunity to ask questions of and receive answers from officers and representatives of the Offerors concerning their respective financial condition and results of operations and the purchase of the Preferred Securities and any such questions have been answered to its satisfaction; (c) it has had the opportunity to review all publicly available records and filings concerning the Offerors and it has carefully reviewed such records and filings that it considers relevant to making an investment decision; and (d) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary and not upon any view expressed by the Offerors or the Placement Agent.

2.4

The Purchaser represents and warrants that it is an institutional “accredited investor” within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 of Regulation D under the Securities Act.

2.5

[Reserved].

2.6

The Purchaser represents and warrants that it has full power and authority to execute and deliver this Agreement, to make the representations and warranties specified herein, and to consummate the transactions contemplated hereby, and it has full right and power to subscribe for Preferred Securities and perform its obligations pursuant to this Agreement.

2.7

The Purchaser represents and warrants that no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any governmental body, agency or court having jurisdiction over the Purchaser, other than those that have been made or obtained, is necessary or required for the performance by the Purchaser of its obligations under this Agreement or to consummate the transactions contemplated herein.

2.8

The Purchaser represents and warrants that this Agreement has been duly authorized, executed and delivered by the Purchaser.

Article III
MISCELLANEOUS

3.1

Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, international courier or delivered by hand against written receipt therefor, or by facsimile transmission and confirmed by telephone, to the following addresses, or such other address as may be furnished to the other parties as herein provided:

To the Offerors:

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

Attention: John J. Murphy

Fax: (518) 761-0805

To the Purchaser:

STI Investment Management, Inc.

2202 Polly Drummond Office Park

Newark, Delaware 19711

Fax: (302) 737-3425

Attention: Treasurer

Unless otherwise expressly provided herein, notices shall be deemed to have been given on the date of mailing, except notice of change of address, which shall be deemed to have been given when received.

3.2

This Agreement shall not be changed, modified or amended except by a writing signed by the parties, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged.

3.3

Upon the execution and delivery of this Agreement by the Purchaser, this Agreement shall become a binding obligation of the Purchaser with respect to the purchase of Preferred Securities as herein provided.

3.4

NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

3.5

The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement.

3.6

This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument.

3.7

In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Offerors’ and the Purchaser’s rights and privileges shall be enforceable to the fullest extent permitted by law.

Signatures appear on the following page

A-2

::ODMA\PCDOCS\ATL\824612\1

IN WITNESS WHEREOF, this Agreement is agreed to and accepted as of the day and year first written above.

STI Investment Management, Inc.
By:
	Name:
	Title:

		Arrow Financial Corporation

		By:
			Name:
			Title:

		Arrow Capital Statutory Trust III
		By: Arrow Financial Corporation, as Depositor

		By:
			Name:
			Title:

		SunTrust Capital Markets, Inc. (for purposes of the rights and obligations in Sections 1.2, 1.3 and Article III only)

		By:
			Name:
			Title:

B-1-3

::ODMA\PCDOCS\ATL\824612\1

EXHIBIT B-1

FORM OF COMPANY COUNSEL OPINION

December 28, 2004

SunTrust Capital Markets, Inc.

303 Peachtree Street, NE

24th Floor, Mail Code 3947

Atlanta, Georgia 30308

STI Investment Management, Inc.

2202 Polly Drummond Office Park

Newark, Delaware 19711

Wilmington Trust Company

Rodney Square North

1100 North Market Street

Wilmington, Delaware 19890-1600

Ladies and Gentlemen:

We have acted as counsel to Arrow Financial Corporation (the “Company”), a New York corporation in connection with a certain Placement Agreement, dated December 28, 2004, (the “Placement Agreement”), between the Company and Arrow Capital Statutory Trust III (the “Trust”), on one hand, and SunTrust Capital Markets, Inc. (the “Placement Agent”), on the other hand. Pursuant to the Placement Agreement, and subject to the terms and conditions stated therein, the Trust will issue and sell to STI Investment Management, Inc. (the “Purchaser”), $10,000,000 aggregate principal amount of Floating Rate Preferred Securities (liquidation amount $1,000.00 per preferred security) (the “Preferred Securities”), which Preferred Securities are guaranteed on a subordinated basis by the Company to the extent set forth in the Guarantee Agreement dated December 28, 2004, between the Company and the Guarantee Trustee named therein (the “Guarantee Agreement”). The Trust is purchasing, with the proceeds from the sale of the Preferred Securities and the sale to the Company of 310 Common Securities, liquidation amount $1,000 per common security (the “Common Securities”), $10,310,000 aggregate principal amount of Floating Rate Junior Subordinated Notes due 2035 (the “Junior Subordinated Notes”) of the Company issued pursuant to an Indenture dated as of December 28, 2004 (the “Indenture”), between the Company and Wilmington Trust Company, as indenture trustee (the “Indenture Trustee”).

Capitalized terms used herein and not otherwise defined shall have the same meaning ascribed to them in the Placement Agreement.

The law covered by the opinions expressed herein is limited to the law of the United States of America and of the State of New York.

We have made such investigations of law as, in our judgment, were necessary to render the following opinions. We have also reviewed (a) the Company’s Articles of Incorporation, as amended, and its Bylaws, as amended; and (b) such corporate documents, records, information and certificates of the Company and its subsidiaries, certificates of public officials or government authorities and other documents as we have deemed necessary or appropriate as a basis for the opinions hereinafter expressed. As to certain facts material to our opinions, we have relied, with your permission, upon statements, certificates or representations, including those delivered or made in connection with the above-referenced transaction, of officers and other representatives of the Company and its subsidiaries and the Trust after discussing the contents thereof with such officers. We have not made any independent investigation as to the existence of actions, suits, investigations or proceedings, if any, pending or threatened against the Company or any of its subsidiaries, and we have not conducted any independent search of any public records in connection with our rendering our opinions set forth herein.

In rendering the opinions expressed below, we have assumed, without verification (i) the genuineness of the signatures on all documents that we have examined, (ii) the authenticity of all documents submitted to us as originals, (iii)the conformity with authentic original documents of all documents submitted to us as copies, and (iv) the legal capacity of all natural persons. We have assumed (except to the extent set forth in our opinions below as to the Company) (a) that all parties to, or that have otherwise executed, the Operative Documents have been duly organized or formed, as the case may be, and are in good standing under the laws of their respective jurisdictions of organization or formation, as the case may be, and have full power, corporate or other, to enter into and perform all obligations thereunder and (b) the due authorization by all requisite action, corporate or otherwise, and execution delivery by such persons of such documents.

Based upon and subject to the foregoing and the further qualifications set forth below, we are of the opinion as of the date hereof that:

The Company is validly existing and in good standing under the laws of the State of New York and is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Each of the Subsidiaries is validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and the Subsidiaries has full corporate power and authority to own or lease its properties and to conduct its business as such business is currently conducted in all material respects.

The issuance, sale and delivery of the Preferred Securities and the Junior Subordinated Notes in accordance with the terms and conditions of the Placement Agreement and the other Operative Documents have been duly authorized by all necessary actions of the Company. The issuance, sale and delivery of the Junior Subordinated Notes by the Company and the issuance, sale and delivery of the Preferred Securities and Common Securities by the Trust do not give rise to any preemptive rights to subscribe for or to purchase any shares of capital stock or equity securities of the Company under the Articles of Incorporation or Bylaws of the Company or, to our knowledge, under any agreement or other instrument to which the Company is a party or by which the Company may be bound.

The Company has all requisite corporate power to enter into and perform its obligations under the Placement Agreement and the Subscription Agreement, and the Placement Agreement and the Subscription Agreement have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms.

Each of the Operative Documents has been duly authorized, executed and delivered by the Company. Each of the Indenture and the Guarantee Agreement constitutes a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms.

The Junior Subordinated Notes have been duly authorized for issuance by the Company, and the Junior Subordinated Note issued and delivered by the Company to the Trust on this date has been duly executed and delivered by the Company and, assuming due authentication by the Indenture Trustee under the Indenture, is entitled to the benefits of the Indenture and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

The execution, delivery and performance of the Placement Agreement and the other Operative Documents and the consummation of the transactions contemplated by the Placement Agreement and the other Operative Documents do not and will not conflict with, result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Company or the Subsidiaries pursuant to, or constitute a material breach or violation of, or constitute a material default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of (i) the articles of incorporation or charter, bylaws or other governing documents of the Company or the Subsidiaries, or (ii) to our knowledge, any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license or any other agreement or instrument known to us to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound or (iii) any order, decree, judgment, franchise, license, permit, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, known to us having jurisdiction over the Company or the Subsidiaries or any of their respective properties which, in each case or in the aggregate, is material to the Company and the Subsidiaries on a consolidated basis.

Except for filings, registrations or qualifications that may be required by applicable securities laws, no authorization, approval, consent or order of, or filing, registration or qualification with, any person (including without limitation, any court, governmental body or authority) is required under the laws of the State of New York in connection with the offer and sale of the Preferred Securities as contemplated by the Placement Agreement and the other Operative Documents.

To our knowledge, (i) neither the Company nor any of the Subsidiaries is in breach or violation of, or default under, with or without notice or lapse of time or both, its Articles of Incorporation or Charter, Bylaws or other governing documents, and (ii) no action, suit or proceeding is pending or threatened against the Company or any of the Subsidiaries, before or by any court or governmental official, commission, board or other administrative agency, authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated by the Placement Agreement and the other Operative Documents or the issuance and sale of the Preferred Securities as contemplated therein or the condition (financial or otherwise), earnings, affairs, business, or results of operations of the Company and its subsidiaries on a consolidated basis.

Assuming the accuracy of the representations and warranties of the Company, the Placement Agent and the Purchaser in the respective Operative Documents, it is not necessary in connection with the offering, sale and delivery of the Preferred Securities, the Junior Subordinated Notes and the Guarantee Agreement (or the Guarantee) to register the same under the Securities Act of 1933, as amended, under the circumstances contemplated in the Placement Agreement and the Subscription Agreement.

10.

Neither the Company nor the Trust is or after giving effect to the offering and sale of the Preferred Securities and the consummation of the transactions described in the Placement Agreement will be, an “investment company” or an entity “controlled” by an “investment company,” in each case within the meaning of the Investment Company Act of 1940, as amended.

Our opinions set forth herein are limited by the following exceptions and qualifications:

(A)

The opinions expressed in the first two sentences of numbered paragraph 1 of this Opinion Letter are based solely upon certain certificates and confirmations issued by the applicable governmental officer or authority with respect to each of the Company and the Subsidiaries.

(B)

As used in paragraph 1 of this Opinion Letter, the term “in good standing” shall mean (i) when used in connection with a corporation, that all filings and registrations required to have been made by such corporation under the New York Business Corporation Law have been made and that all filing fees that are due and payable in connection therewith have been paid, and (ii) when used in connection with a bank, that all filings and registrations required to have been made by such bank under the New York banking law have been made and that all filing fees that are due and payable in connection therewith have been paid.

(C)

We have assumed for purposes of this Opinion Letter that all the documents as to which we have opined with respect to enforceability constitute the legal, valid and binding obligations of the parties thereto other than the Company.

(D)

Our opinions regarding the legality, validity, binding effect or enforceability of each of the Placement Agreement and Subscription Agreement are subject to and limited by: (i) bankruptcy, insolvency, moratorium, reorganization or other laws affecting the rights of creditors, generally; (ii) the effect of general principles of equity, whether applied by a court of law or equity, including the discretionary nature of equitable remedies; (iii) the possible unenforceability, as contrary to public policy, of provisions regarding indemnities for violations of securities laws; and (iv) the possible unavailability of certain remedies in the case of a non-material breach.

(E)

Our opinions regarding the legality, validity, binding effect or enforceability of each of the Indenture, the Trust Agreement, the Guarantee Agreement and the Junior Subordinated Notes are subject to and limited by: (i) bankruptcy, insolvency, moratorium, reorganization or other laws affecting the rights of creditors, generally; and (ii) the effect of general principles of equity, whether applied by a court of law or equity, including the discretionary nature of equitable remedies.

With respect to any matters indicated herein to be limited to our knowledge (or words to like effect), the opinions set forth herein with respect to such matters are specifically limited to the actual knowledge of the attorneys who are members of or are employed by this firm who have obtained such knowledge solely in connection with the representation of the Company with respect to the offering of the Preferred Securities and the other transactions contemplated by the Placement Agreement.

This opinion is rendered to you solely pursuant to Section 3.2(a) of the Placement Agreement. As such, it may be relied upon by you or by a Subsequent Purchaser as defined in Section 3.2 of the Placement Agreement only and may not be used or relied upon by any other person for any purpose whatsoever without our prior written consent.

Very truly yours,

STINSON MORRISON HECKER LLP

B-2-4

EXHIBIT B-2

FORM OF TAX COUNSEL OPINION

Pursuant to Section 3.2(c) of the Placement Agreement, Powell Goldstein LLP counsel for the Placement Agent and Purchaser, shall deliver an opinion to the following effect:

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

SunTrust Capital Markets, Inc.

303 Peachtree Street, NE

24th Floor, Mail Code 3950

Atlanta, Georgia 30308

STI Investment Management, Inc.

2202 Polly Drummond Office Park

Newark, Delaware 19711

Ladies and Gentlemen:

We have acted as counsel to SunTrust Capital Markets, Inc. (the “Placement Agent”), a Tennessee corporation, and STI Investment Management, Inc. (the “Purchaser”), a Delaware corporation, in connection with the Purchaser’s purchase of $10,000,000 Floating Rate Preferred Securities (liquidation amount $1,000 per capital security) (the “Preferred Securities”) to be issued by Arrow Capital Statutory Trust III (the “Trust”). The Preferred Securities represent undivided beneficial ownership interests in $10,310,000 in aggregate principal amount of Floating Rate Junior Subordinated Notes due 2035 (the “Junior Subordinated Notes”) of Arrow Financial Corporation (the “Company”). This opinion letter is furnished pursuant to Section 3.2(b) of the Placement Agreement dated December 28, 2004, between the Company, the Trust and the Placement Agent.

In arriving at the opinions expressed below we have examined executed copies of (i) the Amended and Restated Trust Agreement of the Trust dated the date hereof (the “Trust Agreement”) and (ii) the Junior Subordinated Indenture relating to the issuance of the Junior Subordinated Notes dated the date hereof (the “Indenture”) (together, the “Operative Documents”). In addition, we have relied on the representations of the Company contained in its letter dated as of the date hereof and delivered to us in connection with the issuance of our opinions expressed below. We have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents and records submitted to us as originals, the conformity to original documents and records of all documents and records submitted to us as copies, and the truthfulness of all statements of facts contained therein. We have also made such investigations of law and fact as we have deemed appropriate as a basis for the opinion expressed below.

Based upon and subject to the foregoing and such further qualifications as set forth below, it is our opinion that, under current law and assuming the performance of the Operative Documents in accordance with the terms described therein:

the Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association that is taxable as a corporation, and

the Junior Subordinated Notes will be treated for United States federal income tax purposes as indebtedness of the Company.

Our opinion is based on the U.S. Internal Revenue Code of 1986, as amended, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly on a retroactive basis. In rendering this opinion, we are expressing our views only as to the federal income tax laws of the United States of America. In rendering this opinion, we make no undertaking to advise you of the effect of changes in matters of law or fact occurring subsequent to the date hereof.

This opinion is rendered to you solely pursuant to Section 3.2(b) of the Placement Agreement. As such, it may be relied upon by you and by any Subsequent Purchaser as defined in Section 3.2 of the Placement Agreement only and may not be used or relied upon by any other person for any purpose whatsoever without our prior written consent.

Very truly yours,

POWELL GOLDSTEIN LLP

B-3-5

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EXHIBIT B-3

FORM OF DELAWARE COUNSEL TRUST OPINION

Pursuant to Section 3.2(c) of the Placement Agreement, Richards, Layton & Finger, P.A., special Delaware counsel for the Placement Agent and Purchaser, shall deliver an opinion to the effect that:

(i)

the Trust has been duly created and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act, and all filings required under the laws of the State of Delaware with respect to the creation and valid existence of the Trust as a statutory trust have been made;

(ii)

under the Delaware Statutory Trust Act and the Amended and Restated Trust Agreement, the Trust has the trust power and authority (A) to own property and conduct its business, all as described in the Amended and Restated Trust Agreement, (B) to execute and deliver, and to perform its obligations under, each of the Placement Agreement, the Subscription Agreement, the Common Securities Subscription Agreement, the Junior Subordinated Note Subscription Agreement and the Preferred Securities and the Common Securities and (C) to purchase and hold the Junior Subordinated Notes;

(iii)

under the Delaware Statutory Trust Act, the certificate attached to the Amended and Restated Trust Agreement as Exhibit C is an appropriate form of certificate to evidence ownership of the Preferred Securities; the Preferred Securities have been duly authorized by the Trust Agreement and, when issued and delivered against payment of the consideration as set forth in the Subscription Agreement, the Preferred Securities will be validly issued and (subject to the qualifications set forth in this paragraph) fully paid and nonassessable and will represent undivided beneficial interests in the assets of the Trust; the holders of the Preferred Securities will be entitled to the benefits of the Amended and Restated Trust Agreement and, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware; and such counsel may note that the holders of the Preferred Securities may be obligated, pursuant to the Amended and Restated Trust Agreement, to (A) provide indemnity and/or security in connection with and pay taxes or governmental charges arising from transfers or exchanges of Preferred Securities certificates and the issuance of replacement Preferred Securities certificates and (B) provide security or indemnity in connection with requests of or directions to the Property Trustee to exercise its rights and remedies under the Amended and Restated Trust Agreement;

(iv)

the Common Securities have been duly authorized by the Trust Agreement and, when issued and delivered by the Trust to the Company against payment therefor as described in the related Amended and Restated Trust Agreement and the related Common Securities Subscription Agreement, will be validly issued and fully paid and will represent undivided beneficial interests in the assets of the Trust entitled to the benefits of the Trust Agreement;

(v)

under the Delaware Statutory Trust Act and the Amended and Restated Trust Agreement, the issuance of the Preferred Securities and the Common Securities is not subject to preemptive or other similar rights;

(vi)

under the Delaware Statutory Trust Act and the Amended and Restated Trust Agreement, the execution and delivery by the Trust of the Placement Agreement, the Subscription Agreement, the Common Securities Subscription Agreement and the Junior Subordinated Note Subscription Agreement, and the performance by the Trust of its obligations thereunder, have been duly authorized by all necessary trust action on the part of the Trust;

(vii)

the Amended and Restated Trust Agreement constitutes a legal, valid and binding obligation of the Company and the Trustees, and is enforceable against the Company and the Trustees, in accordance with its terms subject, as to enforcement, to the effect upon the Amended and Restated Trust Agreement of (a) bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation, fraudulent conveyance or transfer and other similar laws relating to or affecting the rights and remedies of creditors generally, (b) principles of equity, including applicable law relating to fiduciary duties (regardless of whether considered and applied in a proceeding in equity or at law), and (c) the effect of applicable public policy on the enforceability of provisions relating to indemnification or contribution;

(viii)

the issuance and sale by the Trust of the Preferred Securities and the Common Securities, the purchase by the Trust of the Junior Subordinated Notes, the execution, delivery and performance by the Trust of the Placement Agreement, the Subscription Agreement, the Common Securities Subscription Agreement and the Junior Subordinated Note Subscription Agreement, the consummation by the Trust of the transactions contemplated by the Placement Agreement and Subscription Agreement and compliance by the Trust with its obligations thereunder do not violate (a) any of the provisions of the Certificate of Trust or the Amended and Restated Trust Agreement or (b) any applicable Delaware law, rule or regulation;

(ix)

no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Delaware court or Delaware governmental authority or Delaware agency is necessary or required solely in connection with the issuance and sale by the Trust of the Common Securities or the Preferred Securities, the purchase by the Trust of the Junior Subordinated Notes, the execution, delivery and performance by the Trust of the Placement Agreement, the Subscription Agreement, the Common Securities Subscription Agreement and the Junior Subordinated Note Subscription Agreement, the consummation by the Trust of the transactions contemplated by the Placement Agreement and the Subscription Agreement and compliance by the Trust with its obligations thereunder; and

(x)

the holders of the Preferred Securities (other than those holders who reside or are domiciled in the State of Delaware) will have no liability for income taxes imposed by the State of Delaware solely as a result of their participation in the Trust and the Trust will not be liable for any income tax imposed by the State of Delaware.

In rendering such opinions, such counsel may (A) state that its opinion is limited to the laws of the State of Delaware and (B) rely as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials.

B-4-6

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EXHIBIT B-4

FORM OF TRUSTEE COUNSEL OPINION

Pursuant to Section 3.2(d) of the Placement Agreement, Richards, Layton & Finger, P.A., special counsel for the Guarantee Trustee, the Property Trustee and the Indenture Trustee, shall deliver an opinion to the effect that:

(1)

Wilmington Trust Company (the “Bank”) has been duly incorporated and is validly existing in good standing as a Delaware banking corporation under the laws of the State of Delaware and has the power and authority to enter into, and to take all action required of it under, the Amended and Restated Trust Agreement, the Indenture and the Guarantee.

(2)

The Amended and Restated Trust Agreement, the Indenture and the Guarantee have been duly authorized, executed and delivered by the Indenture Trustee, the Property Trustee and the Guarantee Trustee and each constitutes a legal, valid and binding obligation of the Indenture Trustee, the Property Trustee and the Guarantee Trustee enforceable against them in accordance with their respective terms, except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors’ rights generally, as such laws would apply in the event of a bankruptcy, insolvency or reorganization or similar occurrence affecting the Indenture Trustee, the Property Trustee and the Guarantee Trustee; (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and (iii) the effect of applicable public policy on the enforceability of provisions relating to indemnification or contribution.

(3)

The Junior Subordinated Notes have been duly authenticated and delivered by the Indenture Trustee.

(4)

The Preferred Securities have been duly authenticated and delivered by the Property Trustee.

(5)

The execution and delivery of each of the Amended and Restated Trust Agreement, the Indenture and the Guarantee by the Indenture Trustee, the Property Trustee and the Guarantee and the performance by them of their respective terms do not conflict with or result in a violation of (A) any law or regulation of the United States of America or the State of Delaware governing the banking or trust powers of the Bank, or (B) the charter or By-laws of the Bank.

(6)

No approval, authorization or other action by, or filing with, any governmental authority of the United States of America or the State of Delaware having jurisdiction over the banking or trust powers of the Bank is required in connection with the execution and delivery by the Indenture Trustee, the Property Trustee and the Guarantee Trustee of the Amended and Restated Trust Agreement, the Indenture and the Guarantee or the performance by the Indenture Trustee, the Property Trustee and the Guarantee Trustee of the terms of the Amended and Restated Trust Agreement, the Indenture and the Guarantee, other than the filing of the Certificate of Trust.

In rendering such opinions, such counsel may (A) state that its opinion is limited to the laws of the State of Delaware and the federal laws of the United States governing the banking and trust powers of the Bank and (B) rely as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials.

C-1

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Exhibit C

EXHIBIT C

OFFICER’S CERTIFICATE

The undersigned, the [Chief Financial Officer] [Treasurer] [Executive Vice President] hereby certifies, pursuant to Section 6.7 of the Placement Agreement, dated as of December 28, 2004, among Arrow Financial Corporation (the “Company”), Arrow Capital Statutory Trust III (the “Trust”) and SunTrust Capital Markets, Inc. that, as of [date], [20__], the Company had the following ratios and balances:

[BANK HOLDING COMPANY/THRIFT HOLDING COMPANY]

As of [Quarterly Financial Dates], 2004

Tier 1 Risk Weighted Assets		%
Ratio of Double Leverage		%
Non-Performing Assets to Loans and OREO		%
Tangible Common Equity as a Percentage of Tangible Assets		%
Ratio of Reserves to Non-Performing Loans		%
Ratio of Net Charge-Offs to Loans		%
Return on Average Assets (annualized)		%
Net Interest Margin (annualized)		%
Efficiency Ratio		%
Ratio of Loans to Assets		%
Ratio of Loans to Deposits		%
Total Assets	$
Year to Date Income	$

* A table describing the quarterly report calculation procedures is provided on page __

[FOR FISCAL YEAR END: Attached hereto are the audited consolidated financial statements (including the balance sheet, income statement and statement of cash flows, and notes thereto, together with the report of the independent accountants thereon) of the Company and its consolidated subsidiaries for the three years ended [date], 20__.]

[FOR FISCAL QUARTER END: Attached hereto are the unaudited consolidated and consolidating financial statements (including the balance sheet and income statement) of the Company and its consolidated subsidiaries for the fiscal quarter ended [date], 20__.]

IN WITNESS WHEREOF, the undersigned has executed this Officer’s Certificate as of this _____ day of _____________, 20__

_________________________________

Name:

Title:

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

(518) 745-1000

::ODMA\PCDOCS\ATL\824612\1

FINANCIAL DEFINITIONS

BANK HOLDING COMPANY

Report Item	Corresponding FRY-9C or LP Line Items with Line Item corresponding Schedules	Description of Calculation
Tier 1 Risk Weighted Assets	BHCK7206 Schedule HC-R	Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets
Ratio of Double Leverage	(BHCP0365)/(BCHCP3210) Schedule PC in the LP	Total equity investments in subsidiaries divided by the total equity capital. This field is calculated at the parent company level. “Subsidiaries” include bank, bank holding company, and non-bank subsidiaries.
Non-Performing Assets to Loans and OREO	(BHCK5525-BHCK3506+BHCK5526-BHCK3507+BHCK2744)/(BHCK2122+BHCK2744) Schedules HC-C, HC-M & HC-N	Total Nonperforming Assets (NPLs+Foreclosed Real Estate+Other Nonaccrual & Repossessed Assets)/Total Loans+Foreclosed Real Estate
Tangible Common Equity as a Percentage of Tangible Assets	(BHDM3210-BHCK3163)/(BHCK2170-BHCK3163) Schedule HC	(Equity Capital – Goodwill)/(Total Assets – Goodwill)
Ratio of Reserves to Non-Performing Loans	(BHCK3123+BHCK3128)/(BHCK5525-BHCK3506+BHCK5526-BHCK3507) Schedules HC & HC-N & HC-R	Total Loan Loss and Allocated Transfer Risk Reserves/ Total Nonperforming Loans (Nonaccrual + Restructured)
Ratio of Net Charge-Offs to Loans	(BHCK4635-BHCK4605)/(BHCK3516) Schedules HC-B & HC-K	Net charge offs for the period as a percentage of average loans.
Return on Average Assets (annualized)	(BHCK4340/BHCK3368) Schedules HI & HC-K	Net Income as a percentage of Assets.
Net Interest Margin (annualized)	(BHCK4519)/(BHCK3515+BHCK3365+BHCK3516+BHCK3401+BHCKB985) Schedules HI Memorandum and HC-K	(Net Interest Income Fully Taxable Equivalent, if available/Average Earning Assets)
Efficiency Ratio	(BHCK4093)/(BHCK4519+BHCK4079) Schedule HI	(Non-interest Expense)/(Net Interest Income Fully Taxable Equivalent, if available, plus Non-interest Income)
Ratio of Loans to Assets	(BHCKB528+BHCK5369)/(BHCK2170) Schedule HC	Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/Total Assets
Ratio of Loans to Deposits	(BHCKB528+BHCK5369)/(BHDM6631+BHDM6636+BHFN6631+BHFN6636) Schedule HC	Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/Total Deposits (Includes Domestic and Foreign Deposits)
Total Assets	(BHCK2170) Schedule HC	The sum of total assets. Includes cash and balances due from depository institutions; securities; federal funds sold and securities purchased under agreements to resell; loans and lease financing receivables; trading assets; premises and fixed assets; other real estate owned; investments in unconsolidated subsidiaries and associated companies; customer’s liability on acceptances outstanding; intangible assets; and other assets.

::ODMA\PCDOCS\ATL\824612\1

GUARANTEE AGREEMENT

between

ARROW FINANCIAL CORPORATION,
As Guarantor,

and

WILMINGTON TRUST COMPANY,
As Guarantee Trustee

Dated as of December 28, 2004

ARROW CAPITAL STATUTORY TRUST III

::ODMA\PCDOCS\ATL\824301\2

TABLE OF CONTENTS

ARTICLE I

INTERPRETATION AND DEFINITIONS

SECTION 1.1

Interpretation.

SECTION 1.2

Definitions.

ARTICLE II

REPORTS

SECTION 2.1

List of Holders.

SECTION 2.2

Periodic Reports to the Guarantee Trustee.

SECTION 2.3

Event of Default; Waiver.

SECTION 2.4

Event of Default; Notice.

ARTICLE III

POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

SECTION 3.1

Powers and Duties of the Guarantee Trustee.

SECTION 3.2

Certain Rights of the Guarantee Trustee.

SECTION 3.3

Compensation.

SECTION 3.4

Indemnity.

SECTION 3.5

Securities.

ARTICLE IV

GUARANTEE TRUSTEE

SECTION 4.1

Guarantee Trustee; Eligibility.

SECTION 4.2

Appointment, Removal and Resignation of the Guarantee Trustee.

ARTICLE V

GUARANTEE

SECTION 5.1

Guarantee.

SECTION 5.2

Waiver of Notice and Demand.

SECTION 5.3

Obligations Not Affected.

SECTION 5.4

Rights of Holders.

SECTION 5.5

Guarantee of Payment.

SECTION 5.6

Subrogation.

SECTION 5.7

Independent Obligations.

SECTION 5.8

Enforcement.

ARTICLE VI

COVENANTS AND SUBORDINATION

SECTION 6.1

Dividends, Distributions and Payments.

SECTION 6.2

Subordination.

SECTION 6.3

Pari Passu Guarantees.

ARTICLE VII

TERMINATION

SECTION 7.1

Termination.

ARTICLE VIII

MISCELLANEOUS

SECTION 8.1

Successors and Assigns.

SECTION 8.2

Amendments.

SECTION 8.3

Notices.

SECTION 8.4

Benefit.

SECTION 8.5

Governing Law.

SECTION 8.6

Submission to Jurisdiction.

SECTION 8.7

Counterparts.

::ODMA\PCDOCS\ATL\824301\2

Guarantee Agreement, dated as of December 28, 2004, executed and delivered by Arrow Financial Corporation, a New York corporation (the “Guarantor” ) having its principal office at 250 Glen Street, Glens Falls, New York 12801, and Wilmington Trust Company, a Delaware banking corporation, as trustee (in such capacity, the “Guarantee Trustee” ), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of Arrow Capital Statutory Trust III, a Delaware statutory trust (the “Issuer” ).

W i t n e s s e t h :

Whereas, pursuant to an Amended and Restated Trust Agreement, dated as of the date hereof (the “Trust Agreement” ), among the Guarantor, as Depositor, the Property Trustee, the Delaware Trustee and the Administrative Trustees named therein and the holders from time to time of the Preferred Securities (as hereinafter defined), the Issuer is issuing $10,000,000 aggregate Liquidation Amount (as defined in the Trust Agreement) of its Floating Rate Preferred Securities (Liquidation Amount $1,000 per preferred security) (the “Preferred Securities” ) representing preferred undivided beneficial interests in the assets of the Issuer and having the terms set forth in the Trust Agreement;

Whereas, the Preferred Securities will be issued by the Issuer and the proceeds thereof, together with the proceeds from the issuance of the Issuer’s Common Securities (as defined below), will be used to purchase the Notes (as defined in the Trust Agreement) of the Guarantor; and

Whereas, as incentive for the Holders to purchase Preferred Securities the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth herein, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein.

Now, Therefore, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee Agreement to provide as follows for the benefit of the Holders from time to time of the Preferred Securities:

::ODMA\PCDOCS\ATL\824301\2

ARTICLE I

Interpretation and Definitions

SECTION 1.1

Interpretation.

In this Guarantee Agreement, unless the context otherwise requires:

(a)

capitalized terms used in this Guarantee Agreement but not defined in the preamble hereto have the respective meanings assigned to them in Section 1.2 ;

(b)

the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;

(c)

all references to “the Guarantee Agreement” or “this Guarantee Agreement” are to this Guarantee Agreement as modified, supplemented or amended from time to time;

(d)

all references in this Guarantee Agreement to Articles and Sections are to Articles and Sections of this Guarantee Agreement unless otherwise specified;

(e)

the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Guarantee Agreement as a whole and not to any particular Article, Section or other subdivision;

(f)

a reference to the singular includes the plural and vice versa; and

(g)

a reference to the masculine, feminine or neuter gender herein shall include all of the masculine, feminine and neuter genders.

SECTION 1.2

Definitions .

As used in this Guarantee Agreement, the terms set forth below shall, unless the context otherwise requires, have the following meanings:

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; provided , that the Issuer shall not be deemed to be an Affiliate of the Guarantor. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Beneficiaries” means any Person to whom the Issuer is or hereafter becomes indebted or liable.

“Board of Directors” means either the board of directors of the Guarantor or any duly authorized committee of that board.

“Common Securities” means the securities representing common undivided beneficial interests in the assets of the Issuer.

“Debt” means with respect to any Person, whether recourse is to all or a portion of the assets of such Person, whether currently existing or hereafter incurred, and whether or not contingent and without duplication, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable arising in the ordinary course of business); (v) every capital lease obligation of such Person; (vi) all indebtedness of such Person, whether incurred on or prior to the date of this Guarantee Agreement or thereafter incurred, for claims in respect of derivative products, including interest rate, foreign exchange rate and commodity forward contracts, options, swaps and similar arrangements; (vii) every obligation of the type referred to in clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise; and (viii) any renewals, extensions, refundings, amendments or modifications of any obligation of the type referred to in clauses (i) through (vii).

“Event of Default” means a default by the Guarantor on any of its payment or other obligations under this Guarantee Agreement; provided, that except with respect to a default in payment of any Guarantee Payments, the Guarantor shall have received notice of default from the Guarantee Trustee and shall not have cured such default within thirty (30) days after receipt of such notice.

“Guarantee Payments” means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Trust Agreement) required to be paid on the Preferred Securities, to the extent the Issuer shall have funds on hand available therefor at such time, (ii) the Redemption Price (as defined in the Trust Agreement) with respect to any Preferred Securities to the extent the Issuer shall have funds on hand available therefor at such time, and (iii) upon a voluntary or involuntary termination, winding up or liquidation of the Issuer, unless Notes are distributed to the Holders, the lesser of (a) the aggregate of the Liquidation Amount of $1,000 per Preferred Security plus accumulated and unpaid Distributions on the Preferred Securities to the date of payment, to the extent that the Issuer shall have funds available therefor at such time and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer after satisfaction of liabilities to creditors of the Issuer in accordance with applicable law (in either case, the “Liquidation Distribution” ).

“Guarantee Trustee” means Wilmington Trust Company, until a Successor Guarantee Trustee, as defined below, has been appointed and has accepted such appointment pursuant to the terms of this Guarantee Agreement, and thereafter means each such Successor Guarantee Trustee.

“Holder” means any holder, as registered on the books and records of the Issuer, of any Preferred Securities; provided , that, in determining whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, “Holder” shall not include the Guarantor, the Guarantee Trustee or any Affiliate of the Guarantor or the Guarantee Trustee.

“Indenture” means the Junior Subordinated Indenture, dated as of the date hereof, as supplemented and amended, between the Guarantor and Wilmington Trust Company, as trustee.

“List of Holders” has the meaning specified in Section 2.1.

“Majority in Liquidation Amount of the Preferred Securities” means a vote by the Holder(s), voting separately as a class, of more than fifty percent (50%) of the aggregate Liquidation Amount of all then outstanding Preferred Securities issued by the Issuer.

“Obligations” means any costs, expenses or liabilities (but not including liabilities related to taxes) of the Issuer, other than obligations of the Issuer to pay to holders of any Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities.

“Officers’ Certificate” means, with respect to any Person, a certificate signed by the Chief Executive Officer, Chief Financial Officer, President or a Vice President of such Person, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of such Person, and delivered to the Guarantee Trustee. Any Officers’ Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee Agreement (other than the certificate provided pursuant to Section 2.4 ) shall include:

(a)

a statement that each officer signing the Officers’ Certificate has read the covenant or condition and the definitions relating thereto;

(b)

a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers’ Certificate;

(c)

a statement that each officer has made such examination or investigation as, in such officer’s opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(d)

a statement as to whether, in the opinion of each officer, such condition or covenant has been complied with.

“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof or any other entity of whatever nature.

“Responsible Officer” means, with respect to the Guarantee Trustee, any Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Financial Services Officer or Assistant Financial Services Officer or any other officer of the Corporate Trust Department of the Guarantee Trustee and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer’s knowledge of and familiarity with the particular subject.

“Senior Debt” means the principal of and any premium and interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding) all Debt of the Guarantor, whether incurred on or prior to the date of the Indenture or thereafter incurred, unless it is provided in the instrument creating or evidencing the same or pursuant to which the same is outstanding, that such obligations are not superior in right of payment to the Preferred Securities; provided, however , that if the Guarantor is subject to the regulation and supervision of an “appropriate Federal banking agency” within the meaning of 12 U.S.C. 1813(q), the Guarantor shall have received the approval of such appropriate Federal banking agency prior to issuing any such obligation if not otherwise generally approved; provided further , that Senior Debt shall not include any other debt securities, and guarantees in respect of such debt securities, issued to any trust other than the Issuer (or a trustee of such trust), partnership or other entity affiliated with the Guarantor that is a financing vehicle of the Guarantor (a “financing entity”), in connection with the issuance by such financing entity of equity securities or other securities that are treated as equity capital for regulatory capital purposes guaranteed by the Guarantor pursuant to an instrument that ranks pari passu with or junior in right of payment to this Guarantee Agreement, including, without limitation, securities issued by Arrow Capital Trust I and Arrow Capital Statutory Trust II .

“Successor Guarantee Trustee” means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 4.1.

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended and as in effect on the date of this Guarantee Agreement.

Capitalized or otherwise defined terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Trust Agreement as in effect on the date hereof.

ARTICLE II

Reports

SECTION 2.1

List of Holders.

The Guarantor shall furnish or cause to be furnished to the Guarantee Trustee at such times as the Guarantee Trustee may request in writing, within thirty (30) days after the receipt by the Guarantor of any such request, a list, in such form as the Guarantee Trustee may reasonably require, of the names and addresses of the Holders (the “List of Holders” ) as of a date not more than fifteen (15) days prior to the time such list is furnished, in each case to the extent such information is in the possession or control of the Guarantor and is not identical to a previously supplied list of Holders or has not otherwise been received by the Guarantee Trustee in its capacity as such. The Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders.

SECTION 2.2

Periodic Reports to the Guarantee Trustee.

The Guarantor shall deliver to the Guarantee Trustee, within one hundred and twenty (120) days after the end of each fiscal year of the Guarantor ending after the date of this Guarantee Agreement, an Officers’ Certificate covering the preceding fiscal year, stating whether or not to the knowledge of the signers thereof the Guarantor is in default in the performance or observance of any of the terms or provisions or any of the conditions of this Guarantee Agreement (without regard to any period of grace or requirement of notice provided hereunder) and, if the Guarantor shall be in default thereof, specifying all such defaults and the nature and status thereof of which they have knowledge.

SECTION 2.3

Event of Default; Waiver.

The Holders of a Majority in Liquidation Amount of the Preferred Securities may, on behalf of the Holders, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent therefrom.

SECTION 2.4

Event of Default; Notice.

(a)

The Guarantee Trustee shall, within ninety (90) days after the occurrence of a default, transmit to the Holders notices of all defaults actually known to the Guarantee Trustee, unless such defaults have been cured or waived before the giving of such notice, provided , that, except in the case of a default in the payment of a Guarantee Payment, the Guarantee Trustee shall be protected in withholding such notice if and so long as the Board of Directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Guarantee Trustee in good faith determine that the withholding of such notice is in the interests of the Holders. For the purpose of this Section 2.4 , the term “default” means any event that is, or after notice or lapse of time or both would become, an Event of Default.

(b)

The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice, or a Responsible Officer charged with the administration of this Guarantee Agreement shall have obtained written notice, of such Event of Default from the Guarantor or a Holder.

ARTICLE III

Powers, Duties And Rights Of The Guarantee Trustee

SECTION 3.1

Powers and Duties of the Guarantee Trustee.

(a)

This Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of the Holders, and the Guarantee Trustee shall not transfer this Guarantee Agreement to any Person except a Holder exercising its rights pursuant to Section 5.4(d) or to a Successor Guarantee Trustee upon acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee of its appointment hereunder, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee.

(b)

The rights, immunities, duties and responsibilities of the Guarantee Trustee shall be as provided by this Guarantee Agreement and there shall be no other duties or obligations, express or implied, of the Guarantee Trustee. Notwithstanding the foregoing, no provisions of this Guarantee Agreement shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not herein expressly so provided, every provision of this Guarantee Agreement relating to the conduct or affecting the liability of or affording protection to the Guarantee Trustee shall be subject to the provisions of this Section 3.1 . To the extent that, at law or in equity, the Guarantee Trustee has duties and liabilities relating to the Guarantor or the Holders, the Guarantee Trustee shall not be liable to any Holder for the Guarantee Trustee’s good faith reliance on the provisions of this Guarantee Agreement. The provisions of this Guarantee Agreement, to the extent that they restrict the duties and liabilities of the Guarantee Trustee otherwise existing at law or in equity, are agreed by the Guarantor and the Holders to replace such other duties and liabilities of the Guarantee Trustee.

(c)

No provision of this Guarantee Agreement shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, negligent failure to act or own willful misconduct, except that:

(i)

the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; and

(ii)

the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in Liquidation Amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement.

SECTION 3.2

Certain Rights of the Guarantee Trustee.

(a)

Subject to the provisions of Section 3.1 :

(i)

the Guarantee Trustee may conclusively rely and shall be fully protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties;

(ii)

any direction or act of the Guarantor contemplated by this Guarantee Agreement shall be sufficiently evidenced by an Officers’ Certificate unless otherwise prescribed herein;

(iii)

the Guarantee Trustee may consult with counsel, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in reliance thereon and in accordance with such advice. Such counsel may be counsel to the Guarantee Trustee, the Guarantor or any of its Affiliates and may be one of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee Agreement from any court of competent jurisdiction;

(iv)

the Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee reasonable security or indemnity against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided , that, nothing contained in this Section 3.2(a)(iv) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee Agreement;

(v)

the Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and if the Guarantee Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Guarantor, personally or by agent or attorney;

(vi)

the Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents, attorneys, custodians or nominees and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;

(vii)

whenever in the administration of this Guarantee Agreement the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right hereunder, the Guarantee Trustee (A) may request instructions from the Holders of a Majority in Liquidation Amount of the Preferred Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (C) shall be protected in acting in accordance with such instructions;

(viii)

except as otherwise expressly provided by this Guarantee Agreement, the Guarantee Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Guarantee Agreement; and

(ix)

whenever, in the administration of this Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting to take any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers’ Certificate which, upon receipt of such request from the Guarantee Trustee, shall be promptly delivered by the Guarantor.

(b)

No provision of this Guarantee Agreement shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty to act in accordance with such power and authority.

SECTION 3.3

Compensation.

The Guarantor agrees to pay to the Guarantee Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provisions of law in regard to the compensation of a trustee of an express trust) and to reimburse the Guarantee Trustee upon request for all reasonable expenses, disbursements and advances (including the reasonable fees and expenses of its attorneys and agents) incurred or made by the Guarantee Trustee in accordance with any provisions of this Guarantee Agreement.

SECTION 3.4

Indemnity.

The Guarantor agrees to indemnify and hold harmless the Guarantee Trustee and any of its Affiliates and any of their officers, directors, shareholders, employees, representatives or agents from and against any loss, damage, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to Section 3.3 ), penalty, expense or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this Guarantee Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Guarantee Trustee will not claim or exact any lien or charge on any Guarantee Payments as a result of any amount due to it under this Guarantee Agreement. This indemnity shall survive the termination of this Agreement or the resignation or removal of the Guarantee Trustee.

In no event shall the Guarantee Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Guarantee Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.

In no event shall the Guarantee Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (declared or undeclared), terrorism, fire, riot, embargo or government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Guarantee Agreement.

SECTION 3.5

Securities.

The Guarantee Trustee or any other agent of the Guarantee Trustee, in its individual or any other capacity, may become the owner or pledgee of Common or Preferred Securities.

ARTICLE IV

Guarantee Trustee

SECTION 4.1

Guarantee Trustee; Eligibility .

(a)

There shall at all times be a Guarantee Trustee which shall:

(i)

not be an Affiliate of the Guarantor; and

(ii)

be a corporation organized and doing business under the laws of the United States or of any State thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least fifty million dollars ($50,000,000), subject to supervision or examination by Federal or State authority and having an office within the United States. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of such supervising or examining authority, then, for the purposes of this Section 4.1 , the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

(b)

If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a) , the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c) .

(c)

If the Guarantee Trustee has or shall acquire any “conflicting interest” within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee shall either eliminate such interest or resign in the manner and with the effect set out in Section 4.2(c) .

SECTION 4.2

Appointment, Removal and Resignation of the Guarantee Trustee.

(a)

Subject to Section 4.2(b) , the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor, except during an Event of Default.

(b)

The Guarantee Trustee shall not be removed until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor.

(c)

The Guarantee Trustee appointed hereunder shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee.

(d)

If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within thirty (30) days after delivery to the Guarantor of an instrument of resignation, the resigning Guarantee Trustee may petition, at the expense of the Guarantor, any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee.

ARTICLE V

Guarantee

SECTION 5.1

Guarantee.

(a)

The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by or on behalf of the Issuer), as and when due, regardless of any defense (except for the defense of payment by the Issuer), right of set-off or counterclaim which the Issuer may have or assert. The Guarantor’s obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. The Guarantor shall give prompt written notice to the Guarantee Trustee in the event it makes any direct payment to the Holders hereunder.

(b)

The Guarantor hereby also agrees to assume any and all Obligations of the Issuer, and, in the event any such Obligation is not so assumed, subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees to each Beneficiary the full payment, when and as due, of any and all Obligations to such Beneficiaries. This Guarantee is intended to be for the Beneficiaries who have received notice hereof.

SECTION 5.2

Waiver of Notice and Demand.

The Guarantor hereby waives notice of acceptance of the Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Guarantee Trustee, Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands.

SECTION 5.3

Obligations Not Affected.

The obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following:

(a)

the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer;

(b)

the extension of time for the payment by the Issuer of all or any portion of the Distributions (other than an extension of time for payment of Distributions that results from the extension of any interest payment period on the Notes as provided in the Indenture), Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities;

(c)

any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Issuer granting indulgence or extension of any kind;

(d)

the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer;

(e)

any invalidity of, or defect or deficiency in, the Preferred Securities;

(f)

the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or

(g)

any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances.

There shall be no obligation of the Holders to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing.

SECTION 5.4

Rights of Holders.

The Guarantor expressly acknowledges that: (a) this Guarantee Agreement will be deposited with the Guarantee Trustee to be held for the benefit of the Holders; (b) the Guarantee Trustee has the right to enforce this Guarantee Agreement on behalf of the Holders; (c) the Holders of a Majority in Liquidation Amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee Agreement or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (d) any Holder may institute a legal proceeding directly against the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against the Guarantee Trustee, the Issuer or any other Person.

SECTION 5.5

Guarantee of Payment.

This Guarantee Agreement creates a guarantee of payment and not of collection. This Guarantee Agreement will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by the Issuer) or upon distribution of Notes to Holders as provided in the Trust Agreement.

SECTION 5.6

Subrogation.

The Guarantor shall be subrogated to all (if any) rights of the Holders against the Issuer in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement and shall have the right to waive payment by the Issuer pursuant to Section 5.1 ; provided , that, the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders.

SECTION 5.7

Independent Obligations.

The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 .

SECTION 5.8

Enforcement.

A Beneficiary may enforce the Obligations of the Guarantor contained in Section 5.1(b) directly against the Guarantor, and the Guarantor waives any right or remedy to require that any action be brought against the Issuer or any other person or entity before proceeding against the Guarantor.

ARTICLE VI

Covenants and Subordination

SECTION 6.1

Dividends, Distributions and Payments .

So long as any Preferred Securities remain outstanding, if there shall have occurred and be continuing an Event of Default or the Guarantor shall have entered into an Extension Period as provided for in the Indenture and such period, or any extension thereof, shall have commenced and be continuing, then the Guarantor may not (a) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make liquidation payment with respect to, any of the Guarantor’s capital stock or (b) make any payment of principal of or any interest or premium on or repay, repurchase or redeem any debt securities of the Guarantor that rank pari passu in all respects with or junior in interest to the Preferred Securities (other than (i) repurchases, redemptions or other acquisitions of shares of capital stock of the Guarantor in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Guarantor (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the occurrence of such Event of Default or the applicable Extension Period, (ii) as a result of an exchange or conversion of any class or series of the Guarantor’s capital stock (or any capital stock of a subsidiary of the Guarantor) for any class or series of the Guarantor’s capital stock or any class of series of the Guarantor’s indebtedness for any class or series of the Guarantor’s capital stock, (iii) the purchase of fractional interests in shares of the Guarantor’s capital stock pursuant to the conversions or exchange provisions of such capital stock or the security being converted or exchanged, (iv) any declaration of a dividend in connection with any rights plan, the issuance of rights, stock or other property under any rights plan or the redemption or repurchase of rights pursuant thereto, or (v) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).

SECTION 6.2

Subordination.

The obligations of the Guarantor under this Guarantee Agreement will constitute unsecured obligations of the Guarantor and will rank subordinate and junior in right of payment to all Senior Debt of the Guarantor.

SECTION 6.3

Pari Passu Guarantees.

(a)

The obligations of the Guarantor under this Guarantee Agreement shall rank pari passu with the obligations of the Guarantor under any similar guarantee agreements issued by the Guarantor with respect to preferred securities similar to the Preferred Securities, issued by trusts other than the Issuer established or to be established by the Guarantor, in each case similar to the Issuer, including, without limitation, (i) the Guarantee Agreement, dated December 13, 1999 by and between the Guarantor and J.P Morgan Chase Bank, National Association, formerly known as the Chase Manhattan Bank, issued by the Guarantor with respect to the preferred securities issued by Arrow Capital Trust I and (ii) the Guarantee Agreement, dated July 23, 2003, by and between the Guarantor and U.S. Bank National Association, issued by the Guarantor with respect to the preferred securities issued by Arrow Capital Statutory Trust II.

(b)

The right of the Guarantor to participate in any distribution of assets of any of its subsidiaries upon any such subsidiary’s liquidation or reorganization or otherwise is subject to the prior claims of creditors of that subsidiary, except to the extent the Guarantor may itself be recognized as a creditor of that subsidiary. Accordingly, the Guarantor’s obligations under this Guarantee will be effectively subordinated to all existing and future liabilities of the Guarantor’s subsidiaries, and claimants should look only to the assets of the Guarantor for payments thereunder. This Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Guarantor, including Senior Debt of the Guarantor, under any indenture or agreement that the Guarantor may enter into in the future or otherwise.

ARTICLE VII

Termination

SECTION 7.1

Termination.

This Guarantee Agreement shall terminate and be of no further force and effect upon (a) full payment of the Redemption Price of all Preferred Securities, (b) the distribution of Notes to the Holders in exchange for all of the Preferred Securities or (c) full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid with respect to Preferred Securities or this Guarantee Agreement. The obligations of the Guarantor under Sections 3.3 and 3.4 shall survive any such termination or the resignation and removal of the Guarantee Trustee.

ARTICLE VIII

Miscellaneous

SECTION 8.1

Successors and Assigns.

All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article VIII of the Indenture and pursuant to which the successor or assignee agrees in writing to perform the Guarantor’s obligations hereunder, the Guarantor shall not assign its rights or delegate its obligations hereunder without the prior approval of the Holders of a Majority in Liquidation Amount of the Preferred Securities.

SECTION 8.2

Amendments.

Except with respect to any changes that do not adversely affect the rights of the Holders in any material respect (in which case no consent of the Holders will be required), this Guarantee Agreement may only be amended with the prior approval of the Guarantor, the Guarantee Trustee and the Holders of not less than a Majority in Liquidation Amount of the Preferred Securities. The provisions of Article VI of the Trust Agreement concerning meetings or consents of the Holders shall apply to the giving of such approval.

SECTION 8.3

Notices.

Any notice, request or other communication required or permitted to be given hereunder shall be in writing, duly signed by the party giving such notice, and delivered, telecopied or mailed by first class mail as follows:

(a)

if given to the Guarantor, to the address or facsimile number set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantor may give notice to the Guarantee Trustee and the Holders:

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

Facsimile No.: (518) 761-0805

Attention: Chief Financial Officer

(b)

if given to the Issuer, at the Issuer’s address or facsimile number set forth below or such other address, facsimile number or to the attention of such other Person as the Issuer may give notice to the Guarantee Trustee and the Holders:

Arrow Capital Statutory Trust III

c/o Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

Facsimile No.: (518) 761-0805

Attention: Administrative Trustee

(c)

if given to the Guarantee Trustee, at the address or facsimile number set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantee Trustee may give notice to the Guarantor and the Holders:

Wilmington Trust Company

Rodney Square North

1100 North Market St.

Wilmington, Delaware 19890-1600

Facsimile No.: (302) 636-4140

Attention: Corporate Trust Administration

(d)

if given to any Holder, at the address set forth on the books and records of the Issuer.

All notices hereunder shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.

SECTION 8.4

Benefit.

This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Preferred Securities.

SECTION 8.5

Governing Law.

This Guarantee Agreement and the rights and obligations of each party hereto, shall be construed and enforced in accordance with and governed by the laws of the State of New York without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).

SECTION 8.6

Submission to Jurisdiction.

ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS GUARANTEE AGREEMENT MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS GUARANTEE AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTEE AGREEMENT.

SECTION 8.7

Counterparts.

[THE NEXT PAGE IS THE SIGNATURE PAGE]

In Witness Whereof, the undersigned have executed this Guarantee Agreement as of the date first above written.

ARROW FINANCIAL CORPORATION

By:

Name

Title:

WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Guarantee Trustee

By:

Name
Title:

::ODMA\PCDOCS\ATL\824301\1

::ODMA\PCDOCS\ATL\824301\2

EMPLOYMENT AGREEMENT

(As Amended 6/28/00)

AGREEMENT made as of the 1st day of January, 2005 , (“Agreement”) among ARROW FINANCIAL CORPORATION, a New York corporation with its principal place of business at 250 Glen Street, Glens Falls, New York 12801 ("Arrow"), its wholly-owned subsidiary, GLENS FALLS NATIONAL BANK AND TRUST COMPANY, a national banking association with its principal place of business at 250 Glen Street, Glens Falls, New York 12801 (the "Bank"), and THOMAS L. HOY , residing at 25 Pershing Road, Queensbury, New York 12804 (the "Executive").

Recitals

WHEREAS, Arrow and the Bank, consider the maintenance of a competent and experienced executive management team to be essential to the long-term success of Arrow and the Bank; and

WHEREAS, in this regard, Arrow and the Bank have determined that it is in the best interests of each that the Executive continue to serve as Chairman, President and Chief Executive Officer of Arrow and the Bank, pursuant to a written employment agreement; and

WHEREAS, Arrow and the Bank have agreed with the Executive that the pre-existing employment agreement between the Executive and each of them should be replaced by this Agreement.

NOW, THEREFORE, in furtherance of the interests described above and in consideration of the respective covenants and agreements herein contained, the parties hereto agree as follows:

Employment

Arrow and the Bank agree to employ the Executive and the Executive agrees to continue to serve as Chairman, President and Chief Executive Officer of Arrow and the Bank during the term of this Agreement.

2 .

Term

(a)

The term of this Agreement shall commence on the date hereof and, unless the Executive becomes a Retired Early Employee under Paragraph 6 of this Agreement or such employment is earlier terminated as provided in Paragraph 7 of this Agreement, employment under this Employment Agreement shall terminate on December 31, 2007 , or such earlier date on which the Executive’s retirement (including early retirement if the Executive so elects) becomes effective under any retirement plan of Arrow then in effect.

(b)

Annual Review . On or before December 31 of each year during the term of this agreement, the Board of Directors of Arrow (the “Arrow Board”), or the committee of the Arrow Board, if any, duly authorized to make determinations regarding executives and the terms of their employment (the “Committee”), will consider and vote upon a proposal to extend to the Executive an offer to replace this Agreement with a new employment agreement (the “Replacement Agreement”) commencing January 1 of the ensuing year. The Replacement Agreement will be for a new term of three years, will provide for a base annual salary for the Executive at commencement of the Replacement Agreement at least equal to the base annual salary of the Executive as of December 31 of the year just completed (the “Preceding Year-End”), will provide for other benefits having an aggregate value to the Executive at least equal to the aggregate value of the other benefits provided to the Executive as of the Preceding Year-End, and will contain other terms and conditions relating to the Executive’s position and duties, place of performance, rights upon a change of control of Arrow or the Bank or a change of authority of the Executive, and rights in connection with any early termination of the employment of the Executive that are, in each such instance, at least as favorable to the Executive as the terms and conditions relating to such matters under this Agreement and generally shall be as favorable to the Executive as is this Agreement, as of the Preceding Year-End. If the Arrow Board or the Committee shall vote to offer such a Replacement Agreement to the Executive and the Executive shall accept, this Agreement shall terminate as of December 31 of the year of such offer and acceptance and the Replacement Agreement shall take effect as of January 1 of the ensuing year.

If the Arrow Board or the Committee shall elect not to offer such a Replacement Agreement to the Executive or the Executive, having been offered such a Replacement Agreement, shall elect not to accept such Replacement Agreement, this Agreement and the employment of the Executive hereunder shall continue in full force and effect from the date of such election until the termination of this Agreement in accordance with its terms (such period to be referred to hereinafter as the “Winding-Down Period”), and the rights and obligations of each of the parties hereunder shall continue unchanged during the Winding-Down Period except as may be specifically provided otherwise in this Agreement.

Position and Duties

The Executive shall continue to serve as Chairman, President and Chief Executive Officer of Arrow and the Bank and shall have duties, responsibilities, and authority as normally attend such positions or as may reasonably be assigned to the Executive from time to time by the Arrow Board or the Board of Directors of the Bank (the "Bank Board"). The Executive shall devote substantially all his working time and efforts to the business and affairs of Arrow and the Bank, provided however, that the Executive may, with the approval of the Arrow Board, serve as a director or officer of any non-competing business or engage in any other activity, including but not limited to, charitable or community activity, to the extent that they do not inhibit the performance of his duties hereunder.

Place of Performance

In connection with the Executive's employment hereunder, the Executive shall be based at the principal executive offices of the Bank, except for required travel on business. The Executive shall not be required to change his residence from the area in which he now resides. The Bank shall furnish the Executive with office space, stenographic assistance, and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties hereunder.

Compensation

(a)

Salary . Upon commencement of this Agreement, the base annual salary of the Executive should be $370,000.00 , payable by the Bank in equal bi-weekly installments or at such other intervals as shall be agreed upon by the parties. In addition, the Executive shall receive from the Bank or Arrow such annual bonus, if any, as may be determined by the Arrow Board or the Committee. The Executive's base annual salary may be increased from time to time in accordance with the normal business practices of Arrow and the Bank as determined by the Arrow Board or the Committee, and, if so increased, such base annual salary shall not thereafter during the Executive's employment under this Agreement be decreased and the obligation of the Bank hereunder to pay the Executive's base annual salary shall thereafter relate to such increased base annual salary. Compensation of the Executive by base annual salary payments shall not prevent the Executive from participating in any other compensation or benefit plan of Arrow or the Bank in which he is entitled to participate and participation in any such other compensation or benefit plan shall not in any way limit or reduce the obligation of the Bank to pay the Executive's base annual salary hereunder.

(b)

Other Benefits . In addition to the compensation provided for in subparagraph (a) above, the Executive shall be entitled during the term of his employment under this Agreement (i) to participate in any and all employee benefit programs or stock purchase programs of Arrow or the Bank now or hereafter in effect and open to participation by qualifying employees of Arrow or the Bank generally, including but not limited to the retirement plan, supplemental retirement plan, employee stock purchase plan and employee stock ownership plan of Arrow or the Bank, and (ii) to enjoy certain personal benefits provided by Arrow or the Bank, including but not limited to:

(A)

life insurance on the life of the Executive, at no cost to the Executive, under a group plan maintained by Arrow;

(B)

disability insurance for the Executive, at no cost to the Executive, under a group plan maintained by Arrow;

(C)

comprehensive medical and dental insurance under a group plan provided by Arrow, with the Executive to pay only those amounts required to be paid thereunder by covered employees generally under the cost-sharing arrangements in effect from time to time under such plan;

(D)

reimbursement in full of all business, travel and entertainment expenses incurred by the Executive in performing his duties hereunder; and

(E)

fully paid vacation during each calendar year in accordance with the vacation policies of Arrow in effect from time to time.

Arrow shall not make any material changes in any of the personal benefits itemized above adversely affecting the Executive unless such change occurs pursuant to a program applicable to all executive officers of Arrow and the adverse effect on the Executive is not proportionately greater than the adverse effect of the change on any other executive officer of Arrow previously enjoying such benefit.

Change of Control or Change of Authority

(a)

Retired Early Employee . If a Change of Control or Change of Authority (as such terms are defined in subparagraph 6(f) below) occurs during the term of the Executive's employment under this Employment Agreement, either the Executive, on the one hand, or Arrow or the Bank, on the other, may elect by written notice, given to the other party or parties, at any time within twelve (12) months after such Change of Control or Change of Authority, to terminate the employment of the Executive by Arrow and the Bank, whereupon the Executive will become a "Retired Early Employee," and will be entitled to receive such payments as are provided hereafter in this Paragraph 6. Such election and the termination of the Executive's employment shall become effective on the first day of the second calendar month commencing after delivery of the notice or on such earlier date as the Executive in his sole discretion may specify (the "Effective Date").

(b)

Cash Payments . If the Executive should become a Retired Early Employee hereunder, the Bank shall, during the period commencing on the Effective Date and ending two years thereafter (the "Pay-Out Period"), make equal monthly payments to the Executive (which shall not be deemed base annual salary payments) in an amount such that the present value of all such payments, determined as of the Effective Date, equals two hundred ninety-nine percent (299%) of the Base Amount, as such term is defined in subparagraph 6(f) below. If at any time during the Pay-Out Period the Arrow Board in its sole discretion shall determine, upon application of the Retired Early Employee supported by substantial evidence, that the Retired Early Employee is then under a severe financial hardship resulting from (i) a sudden and unexpected illness or accident of the Retired Early Employee or any of his dependents (as defined in section 152(a) of the Internal Revenue Code), (ii) loss of the Retired Early Employee's property due to casualty, or (iii) other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Retired Early Employee, the Bank shall make available to the Retired Early Employee, in one (1) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated as of the date of such determination by the Arrow Board, for the purpose of relieving such severe financial hardship to the extent the same has not been or may not be relieved by (xi) reimbursement or compensation by insurance or otherwise, (xii) liquidation of the Retired Early Employee's assets (to the extent such liquidation would not itself cause severe financial hardship), or (xiii) distributions from other benefit plans. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, the Bank shall continue to pay to the Retired Early Employee monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of all such reduced payments will equal the difference between (b) and (a), above. The Retired Early Employee may elect to waive any or all payments due him under this subparagraph.

(c)

Death of Retired Early Employee . If the Retired Early Employee dies before receiving all monthly payments payable to him under subparagraph 6(b), above, the Bank shall pay to the Retired Early Employee's spouse, or if the Retired Early Employee leaves no spouse, to the estate of the Retired Early Employee, one (1) lump sum payment in an amount equal to the present value of all such remaining unpaid monthly payments, determined as of the date of death of the Retired Early Employee.

(d)

Indemnification of Executive . In the event a Change of Control or Change of Authority occurs, Arrow and the Bank shall indemnify the Executive for all legal fees and expenses subsequently incurred by the Executive in seeking to obtain or enforce any right or benefit provided under this Employment Agreement, not limited to the rights and benefits provided under this Paragraph 6 and whether or not the Executive has become a Retired Early Employee hereunder, provided, however, that such right to indemnification will not apply if and to the extent that a court of competent jurisdiction shall determine that any such fees and expenses have been incurred as a result of the Executive's bad faith. Indemnification payments payable hereunder by Arrow or the Bank shall be made not later than thirty (30) days after a request for payment has been received from the Executive with such evidence of indemnifiable fees and expenses as Arrow or the Bank may reasonably request.

(e)

No Offset . Amounts payable to a Retired Early Employee under this Paragraph 6 shall not be subject to any offset or reduction for (i) any amounts owed or claimed to be owed by the Retired Early Employee to Arrow or the Bank or their affiliates or (ii) any amounts of compensation or income received or generated by the Retired Early Employee as a result of any other employment or self-employment of the Retired Early Employee during the Pay-Out Period. The Retired Early Employee shall be under no obligation to seek other employment or gainful pursuit during the Pay-Out Period as a result of this Agreement, and shall be prohibited from accepting certain other forms of employment and from engaging in certain other types of business during the Pay-Out Period (as well as during certain other post-termination of employment periods) as and to the extent specified in Paragraph 8 of this Agreement.

(f)

Allocation . If the Executive should elect to become a Retired Early Employee under this Paragraph 6 and as a result of such election should become entitled to receive certain cash payments during the Pay-Out Period as set forth above, Arrow shall determine, as soon as practicable following its receipt from the Executive of written notice of such election, the amount, if any, of such future cash payments that may properly be allocated to the Retired Early Employee’s future performance of his obligations not to compete with, solicit customers or employees from, or disparage Arrow or its affiliates under Paragraph 8 of this Agreement, with such allocation to be expressed as a single dollar amount equal to the present value on the Effective Date of the amounts of the required future payments thus allocated. When thus determined, the dollar amount of this allocation shall be communicated by Arrow to the Retired Early Employee.

(g)

Section 280G Tax Gross-Up . Notwithstanding anything to the contrary contained elsewhere in this Agreement or in any other agreement, plan or policy of or binding upon Arrow or the Bank, in the event that the aggregate payments or benefits to be made or afforded to the Executive under (i) this Agreement, (ii) any and all other agreements between the Executive and Arrow or its affiliates and (iii) any and all plans and arrangements of Arrow or its affiliates in which the Executive participates, should cause the Executive to be obligated to pay or to become liable for any Federal excise taxes under Section 4999(a) of the Code and/or any state or local excise taxes attributable to payments that qualify as “excess parachute payments” under Section 280G of the Code (collectively, such Federal, state and local taxes to be referred to as “Parachute Taxes”), Arrow promptly shall pay on behalf of the Executive or reimburse the Executive for the latter’s payment of the following:

(i)

such Parachute Taxes;

(ii)

all Parachute Taxes payable by the Executive as a result of Arrow’s payment or reimbursement of amounts under subsection (i), above, this subsection (ii) or subsection (iii) below; and

(iii)

all Federal, state, and local income taxes payable by the Executive as a result of Arrow’s payment or reimbursement of amounts under subsections (i) and (ii), above, and this subsection (iii).

(h)

Definitions .

(i) The "Base Amount" for purpose of this Paragraph 6 shall equal the average Annual Compensation (as defined below) of the Executive for the most recent five (5) taxable years ending before the date on which the Change of Control or Change of Authority occurred. “Annual Compensation” as used in the foregoing sentence shall mean, for any given taxable year of the Executive, all compensation payable by Arrow or the Bank to the Executive that is includible in the gross income of the Executive for such year for federal income tax purposes, plus any amount of salary otherwise payable by Arrow or the Bank to the Executive for such year (A) that is deferred under Section 401(k) of the Code under any plan maintained by Arrow or the Bank permitting such deferrals, or (B) that is deferred by the Executive under any nonqualified retirement or income deferral plan maintained by Arrow or the Bank, to the extent deferred amounts under such plan are excludable for federal income tax purposes from the gross income of the deferring employee in the year of deferral.

(ii) A "Change of Control" shall be deemed to have occurred if (A) any individual corporation (other than Arrow), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (B), following), of securities of Arrow possessing twenty-five percent (25%) or more of the voting power for the election of directors of such entity, (B) there shall be consummated any consolidation, merger or stock-for-stock exchange involving Arrow or the securities of Arrow in which the holders of voting securities of Arrow immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of Arrow (or, if Arrow does not survive such transaction voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of Arrow (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group, (C) "approved directors" shall constitute less than a majority of the entire Arrow Board, with "approved directors" defined to mean the members of the Arrow Board as of the date of this Agreement and any subsequently elected members who shall be nominated or approved by a majority of the approved directors on the Arrow Board prior to such election, or (D) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (B), above), of all, or substantially all, of the assets of Arrow to a party which is not controlled by or under common control with Arrow.

(iii)

"Change of Authority" shall be deemed to have occurred if the Executive is assigned duties by Arrow which, in the reasonable opinion of the Executive have materially less authority than those duties currently being performed by him and otherwise described herein.

Early Termination of Employment

The employment of the Executive hereunder by Arrow and the Bank may be terminated or may terminate, other than as provided in Paragraph 2 of this Agreement or as permitted under Paragraph 6 of this Agreement, under the circumstances set forth below.

(a)

Termination for Cause . Arrow may terminate the Executive's employment under this Agreement prior to the normal expiration of its term for cause. "Cause" shall mean:

(i) any willful misconduct by the Executive which is materially injurious to Arrow or the Bank, monetarily or otherwise;

(ii) any willful failure by the Executive to follow the reasonable directions of the Arrow Board or the Bank Board; or

(iii) any failure by the Executive substantially to perform any reasonable directions of the Arrow Board or the Bank Board (other than failure resulting from disability), within thirty (30) days after delivery to the Executive by the respective Board of a written demand for substantial performance, which written demand shall specifically identify the manner in which the respective Board believes that the Executive has not substantially performed.

Notwithstanding the foregoing, the employment of the Executive hereunder shall not be deemed to have been terminated for cause unless and until:

(A)

reasonable notice is given to the Executive in writing setting forth the reasons Arrow intends to terminate the Executive for cause;

(B)

not sooner than thirty (30) days after delivery to the Executive of such notice, an opportunity is provided for the Executive to be heard before the Arrow Board with counsel; and

(C)

after such hearing or opportunity to be heard, written notice of final termination for cause is delivered to the Executive, setting forth the specific reasons therefore, which termination shall be effective as of the date of the delivery of such notice.

Termination for cause by Arrow shall require the affirmative vote of at least two-thirds (2/3) of the Arrow Board. The Executive will not be entitled to any further compensation for any period subsequent to the effective date of such termination, except for severance pay, if any, in accordance with the then existing severance policies of Arrow; provided, however, that any such termination for cause becoming effective after the Executive shall have elected to become a Retired Early Employee under Paragraph 6 of this Agreement will not affect the right of the Executive to receive all of the payments provided for therein.

(b)

Termination Without Cause . Arrow may terminate the Executive's employment under this Agreement prior to the normal expiration of its term without cause upon thirty (30) days' written notice. Termination without cause by Arrow shall require the affirmative vote of at least two-thirds (2/3) of the entire Arrow Board. In the event of any such termination without cause, the Bank shall pay to the Executive on the effective date of such termination one (1) lump sum payment in an amount equal to the greater of (i) the total amount of base annual salary payments which would have been payable to the Executive during the remaining term of the Agreement, assuming no early termination of the Agreement under Paragraph 6 or this Paragraph 7 and assuming the current base annual salary of the Executive on such date is unchanged throughout such remaining term, or (ii) an amount equal to one hundred percent (100%) of the current base annual salary of the Executive on such date. No attempted termination without cause under this subparagraph 7(b) shall be effective if the Executive shall have the right to elect, and shall have elected, to become a Retired Early Employee under Paragraph 6 of this Agreement, in which latter case the Executive will retain all of the rights of a Retired Early Employee specified in Paragraph 6, including the right to receive certain payments thereunder.

(c)

Termination for Disability . If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall not have performed his duties hereunder on a full time basis for six (6) consecutive months, the Executive's employment under this Agreement may be terminated by Arrow upon thirty (30) days' written notice. Such termination for disability shall require the affirmative vote of a majority of the entire Arrow Board. The Executive's compensation during any period of disability prior to the effective date of such termination shall be the amounts normally payable to him in accordance with his then current base annual salary, reduced by the sum of the amounts, if any, paid to the Executive under disability benefit plans maintained by Arrow. The Executive shall not be entitled to any further compensation from the Bank for any period subsequent to the effective date of such termination, except for severance pay in accordance with then existing severance policies of Arrow; provided, however, that any such termination for disability occurring after the Executive shall have elected to become a Retired Early Employee under Paragraph 6 of this Agreement will not affect the right of the Executive to receive all of the payments provided for therein.

(d)

Termination for Breach by Employer . In the event that Arrow or the Bank shall have materially breached any provision of this Agreement and such breach shall not have been cured within ten (10) days after delivery of written notice thereof to the breaching party by the Executive, identifying the breach with reasonable particularity, the Executive may cease to perform and may terminate this Agreement and his employment with Arrow and the Bank hereunder, without thereby forfeiting any cause of action he may have against the breaching party or parties as a result of such breach or otherwise.

(e)

Consensual Termination . All parties hereto may agree at any time to terminate this Agreement and the Executive's employment hereunder upon such terms and conditions as the parties may agree.

(f)

Termination by Executive During Winding-Down Period. At any point during a Winding-Down Period, the Executive may terminate his employment under this Agreement prior to the normal expiration date of his employment hereunder, for any reason or no reason, upon written notice delivered to Arrow. Such termination of employment shall become effective on the date indicated in the written notice, which date shall not be less than thirty (30) days nor more than ninety (90) days after delivery of the written notice. In the event of such termination of employment, neither Arrow nor the Bank shall have any obligation under this Agreement to make any payments or provide any benefits to the Executive, other than the obligation to make the base annual salary payments and to provide those benefits required to be paid or provided through the effective date of termination of employment pursuant to Paragraph 5 hereof, provided, however, that nothing herein shall reduce or affect any obligations that Arrow or the Bank may have to the Executive under any other agreement with the Executive or under any qualified or non-qualified employee benefit plan covering the Executive.

Non-Competition; Non-Solicitation; Non-Disparagement

If the employment of the Executive with Arrow and/or the Bank is terminated by any party under Paragraph 6 or is terminated by the Executive other than pursuant to one of the provisions of this Agreement specifically authorizing the Executive to so terminate:

(i)

For a period of two (2) years following the effective date of such termination of employment, the Executive will not, directly or indirectly, manage, operate, or control, or accept or hold a position as a director, officer, employee, agent or partner of or adviser or consultant to, or otherwise perform substantial services for, any bank or insured financial institution or other corporation or entity engaged in the financial services business or a corporation or entity controlling any of the foregoing, excluding Arrow and its affiliates (any such other bank, institution, corporation or entity, a “Financial Institution”), if, as of the effective date of such termination of employment, such Financial Institution is in competition with Arrow or any of its affiliates in the Designated Area (as defined below) by virtue of such Financial Institution’s having any office or branch located within the Designated Area or having immediate plans to establish any office or branch within the Designated Area. For purposes of the preceding sentence, the Designated Area as of any particular time will consist of all counties in the State of New York in which Arrow or any of its subsidiary banks or other affiliates engaged in providing financial services then maintains an office or a branch or has acted to establish an office or a branch.

(ii)

For a period of two (2) years following such termination of employment, the Executive will not, directly or indirectly,

(a)

acting on behalf of any Financial Institution, regardless of where such Financial Institution is located or doing business, solicit business for such Financial Institution from, or otherwise seek to obtain as a customer or client of such Financial Institution, any person or entity that, to the knowledge of the Executive, was a customer or client of Arrow or any of its subsidiary banks or other affiliates engaged in providing financial services at any point during the one-year period immediately preceding the effective date of such termination of employment; or

(b)

acting on behalf of any other corporation or entity, including any Financial Institution, regardless of where such other corporation or entity is located or doing business, employ or solicit as an employee of such corporation or entity or retain or seek to retain as an agent or consultant of such corporation or entity any individual employed by Arrow or any of its subsidiary banks or other affiliates engaged in providing financial services at any point during the one-year period immediately preceding the effective date of such termination of employment.

(iii)

For a period of ten (10) years following the effective date of such termination of employment, the Executive will not, directly or indirectly, make any one or more statements, declarations, announcements, assertions, remarks, comments or suggestions, orally or in writing, that individually or collectively are, or may be construed as being, defamatory, derogatory, negative, or disparaging to Arrow or its affiliates (including any successor to Arrow by merger or acquisition or any of such successor’s affiliates), or to any director, officer, controlling shareholder, employee or agent of any of the foregoing.

It is the intention of the parties to restrict the activities of the Executive under this Paragraph 8 only to the extent necessary for the protection of the legitimate business interests of Arrow, and the parties specifically covenant and agree that should any of the clauses or provisions of the restrictions set forth herein, under any set of circumstances, be held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, then and in that event, the court so holding may reduce the extent or duration of such restrictions or effect any other change to such restrictions to the extent necessary to render such restrictions enforceable by said court.

Confidential Information

The Executive specifically acknowledges that all information pertaining to the Bank and Arrow received by him during the course of his employment hereunder which has been designated confidential or otherwise has not been made publicly available, including, without limitation, plans, strategies, projections, analyses, and information pertaining to customers or potential customers, is the exclusive property of Arrow and the Executive covenants and agrees not to disclose any of such information, without the express prior consent of the Arrow Board, during his employment hereunder or after termination of such employment, to anyone not employed or engaged by Arrow or a subsidiary thereof to render services to it. The Executive further covenants and agrees that he will not at any time use any such information, without such express prior consent, for his own benefit or the benefit of any party other than Arrow. This Paragraph 9 shall survive termination of the Agreement.

10.

Successors and Assigns; Assumption by Successors

This Agreement is a personal services contract which may not be assigned by the Bank or Arrow to, or assumed from the Bank or Arrow by, any other party without the prior consent of the Executive. All rights hereunder shall inure to the benefit of the parties hereto, their personal or legal representatives, heirs, successors and assigns. Arrow will require any successor (whether direct or indirect, by purchase, assignment, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Arrow in any consensual transaction expressly to assume this Agreement and to agree to perform hereunder in the same manner and to the same extent that Arrow would be required to perform if no such succession had taken place. References herein to "Arrow" or the "Bank" will be understood to refer to the successor or successors of Arrow or the Bank, respectively.

11.

Notices

Any notice required or desired to be given hereunder shall be in writing and shall be deemed given when delivered personally or sent by certified or registered mail, postage prepaid, to the addresses of the other parties set forth in the first Paragraph of this Agreement, provided that all notices to Arrow or the Bank shall be directed in each case to the Chief Financial Officer thereof.

12.

Waiver of Breach

Waiver by any party of a breach of any provision shall not operate as or be construed a waiver by such party of any subsequent breach hereof.

13.

Invalidity

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions, which shall remain in full force and effect.

14.

Entire Agreement; Written Modification; Termination

This agreement contains the entire agreement among the parties concerning the employment of the Executive by Arrow and the Bank. No modification, amendment or waiver of any provision hereof shall be effective unless in writing specifically referring hereto and signed by the party against whom such provision as modified or amended or such waiver is sought to be enforced. This Agreement shall terminate as of the time Arrow or the Bank makes the final payment which it may be obligated to pay hereunder or provides the final benefit which it may be obligated to provide hereunder, or, if later, as of the time the last remaining restriction set forth in Paragraph 8 expires.

15 .

Payment by Arrow or Bank.

Any obligation of Arrow or the Bank to make a payment under any provision of this Agreement shall be deemed an obligation of both parties to make such payment, and the making of such payment by either such party shall be deemed performance of the obligation to pay by both such parties.

16.

Counterparts

This Agreement may be made and executed in counterparts, in which case all counterparts shall be deemed to constitute one original document for all purposes.

17.

Governing Law

This Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of New York.

18.

Authorization

The Bank and Arrow represent and warrant that the execution of this Employment Agreement has been duly authorized by resolution of their respective Boards. This Paragraph 18 shall survive termination of the Agreement.

IN WITNESS WHEREOF, the parties have executed or caused to be executed this Employment Agreement as of the day and year first above written.

ARROW FINANCIAL CORPORATION

By:

Kenneth C. Hopper

Chairman, Compensation/Nomination Committee

GLENS FALLS NATIONAL BANK AND TRUST COMPANY

By:

Kenneth C. Hopper

Chairman, Compensation/Nomination Committee

"EXECUTIVE"

Thomas L. Hoy

EMPLOYMENT AGREEMENT

(As Amended 6/28/00)

AGREEMENT made as of the 1st day of January, 2005 , (“Agreement”) among ARROW FINANCIAL CORPORATION, a New York corporation with its principal place of business at 250 Glen Street, Glens Falls, New York 12801 ("Arrow"), its wholly-owned subsidiary, GLENS FALLS NATIONAL BANK AND TRUST COMPANY, a national banking association with its principal place of business at 250 Glen Street, Glens Falls, New York 12801 (the "Bank"), and JOHN J. MURPHY residing at 33 Crownwood Lane, Queensbury, New York 12804 (the "Executive").

Recitals

WHEREAS, Arrow and the Bank, consider the maintenance of a competent and experienced executive management team to be essential to the long-term success of Arrow and the Bank; and

WHEREAS, in this regard, Arrow and the Bank have determined that it is in the best interests of each that the Executive continue to serve as Executive Vice President, Treasurer & Chief Financial Officer of Arrow and the Bank, pursuant to a written employment agreement; and

WHEREAS, Arrow and the Bank have agreed with the Executive that the pre-existing employment agreement between the Executive and each of them should be replaced by this Agreement.

NOW, THEREFORE, in furtherance of the interests described above and in consideration of the respective covenants and agreements herein contained, the parties hereto agree as follows:

Employment

Arrow and the Bank agree to employ the Executive and the Executive agrees to continue to serve as Executive Vice President, Treasurer and Chief Financial Officer of Arrow and the Bank during the term of this Agreement.

Term

(a) The term of this Agreement shall commence on the date hereof and, unless the Executive becomes a Retired Early Employee under Paragraph 6 of this Agreement or such employment is earlier terminated as provided in Paragraph 7 of this Agreement, employment under this Employment Agreement shall terminate on December 31, 2007 , or such earlier date on which the Executive’s retirement (including early retirement if the Executive so elects) becomes effective under any retirement plan of Arrow then in effect.

(b)

Annual Review . On or before December 31 of each year during the term of this Agreement, the Board of Directors of Arrow (the “Arrow Board”), or the committee of the Arrow Board, if any, duly authorized to make determinations regarding executives and the terms of their employment (the “Committee”), will consider and vote upon a proposal to extend to the Executive an offer to replace this Agreement with a new employment agreement (the “Replacement Agreement”) commencing January 1 of the ensuing year. The Replacement Agreement will be for a new term of three years, will provide for a base annual salary for the Executive at commencement of the Replacement Agreement at least equal to the base annual salary of the Executive as of December 31 of the year just completed (the “Preceding Year-End”), will provide for other benefits having an aggregate value to the Executive at least equal to the aggregate value of the other benefits provided to the Executive as of the Preceding Year-End, and will contain other terms and conditions relating to the Executive’s position and duties, place of performance, rights upon a change of control of Arrow or the Bank or a change of authority of the Executive, and rights in connection with any early termination of the employment of the Executive that are, in each such instance, at least as favorable to the Executive as the terms and conditions relating to such matters under this Agreement and generally shall be as favorable to the Executive as is this Agreement, as of the Preceding Year-End. If the Arrow Board or the Committee shall vote to offer such a Replacement Agreement to the Executive and the Executive shall accept, this Agreement shall terminate as of December 31 of the year of such offer and acceptance and the Replacement Agreement shall take effect as of January 1 of the ensuing year.

Position and Duties

The Executive shall continue to serve as Executive Vice President, Treasurer and Chief Financial Officer of Arrow and the Bank and shall have duties, responsibilities, and authority as normally attend such positions or as may reasonably be assigned to the Executive from time to time by the Arrow Board or the Board of Directors of the Bank (the "Bank Board") or the Chief Executive Officer of Arrow or the Bank. The Executive shall devote substantially all his working time and efforts to the business and affairs of Arrow and the Bank, provided however, that the Executive may, with the approval of the Arrow Board or the Chief Executive Officer of Arrow, serve as a director or officer of any non-competing business or engage in any other activity, including but not limited to, charitable or community activity, to the extent that they do not inhibit the performance of his duties hereunder.

Place of Performance

Compensation

(a)

Salary . Upon commencement of this Agreement, the base annual salary of the Executive should be $216,000.00 , payable by the Bank in equal bi-weekly installments or at such other intervals as shall be agreed upon by the parties. In addition, the Executive shall receive from the Bank or Arrow such annual bonus, if any, as may be determined by the Arrow Board or the Committee. The Executive's base annual salary may be increased from time to time in accordance with the normal business practices of Arrow and the Bank as determined by the Arrow Board or the Committee, and, if so increased, such base annual salary shall not thereafter during the Executive's employment under this Agreement be decreased and the obligation of the Bank hereunder to pay the Executive's base annual salary shall thereafter relate to such increased base annual salary. Compensation of the Executive by base annual salary payments shall not prevent the Executive from participating in any other compensation or benefit plan of Arrow or the Bank in which he is entitled to participate and participation in any such other compensation or benefit plan shall not in any way limit or reduce the obligation of the Bank to pay the Executive's base annual salary hereunder.

(b)

(A)

life insurance on the life of the Executive, at no cost to the Executive, under a group plan maintained by Arrow;

(B)

disability insurance for the Executive, at no cost to the Executive, under a group plan maintained by Arrow;

(C)

(D)

reimbursement in full of all business, travel and entertainment expenses incurred by the Executive in performing his duties hereunder; and

(E)

fully paid vacation during each calendar year in accordance with the vacation policies of Arrow in effect from time to time.

Change of Control or Change of Authority

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(i)

such Parachute Taxes;

(ii)

all Parachute Taxes payable by the Executive as a result of Arrow’s payment or reimbursement of amounts under subsection (i), above, this subsection (ii) or subsection (iii) below; and

(iii)

all Federal, state, and local income taxes payable by the Executive as a result of Arrow’s payment or reimbursement of amounts under subsections (i) and (ii), above, and this subsection (iii).

(h)

Definitions .

(iii)"Change of Authority" shall be deemed to have occurred if the Executive is assigned duties by Arrow which, in the reasonable opinion of the Executive have materially less authority than those duties currently being performed by him and otherwise described herein.

Early Termination of Employment

(a)

Termination for Cause . Arrow may terminate the Executive's employment under this Agreement prior to the normal expiration of its term for cause. "Cause" shall mean:

(i) any willful misconduct by the Executive which is materially injurious to Arrow or the Bank, monetarily or otherwise;

(ii) any willful failure by the Executive to follow the reasonable directions of the Arrow Board or the Bank Board or the Chief Executive Officer of Arrow or the Bank; or

(iii) any failure by the Executive substantially to perform any reasonable directions of the Arrow Board or the Bank Board or the Chief Executive Officer of Arrow or the Bank (other than failure resulting from disability), within thirty (30) days after delivery to the Executive by the respective Board or Chief Executive Officer of a written demand for substantial performance, which written demand shall specifically identify the manner in which the respective Board or Chief Executive Officer believes that the Executive has not substantially performed.

Notwithstanding the foregoing, the employment of the Executive hereunder shall not be deemed to have been terminated for cause unless and until:

(A)

reasonable notice is given to the Executive in writing setting forth the reasons Arrow intends to terminate the Executive for cause;

(B) not sooner than thirty (30) days after delivery to the Executive of such notice, an opportunity is provided for the Executive to be heard before the Arrow Board and the Chief Executive Officer of Arrow, with counsel; and

(C)

(b)

Termination Without Cause . Arrow may terminate the Executive's employment under this Agreement prior to the normal expiration of its term without cause upon thirty (30) days' written notice. Termination without cause by Arrow shall require the affirmative vote of at least two-thirds (2/3) of the entire Arrow Board. In the event of any such termination without cause, the Bank shall pay to the Executive on the effective date of such termination one (1) lump sum payment in an amount equal to the greater of (i) the total amount of base annual salary payments which would have been payable to the Executive during the remaining term of the Agreement, assuming no early termination of the Agreement under Section 6 or this Section 7 and assuming the current base annual salary of the Executive on such date is unchanged throughout such remaining term, or (ii) an amount equal to one hundred percent (100%) of the current base annual salary of the Executive on such date. No attempted termination without cause under this subparagraph 7(b) shall be effective if the Executive shall have the right to elect, and shall have elected, to become a Retired Early Employee under Paragraph 6 of this Agreement, in which latter case the Executive will retain all of the rights of a Retired Early Employee specified in Paragraph 6, including the right to receive certain payments thereunder.

(c)

(d)

(e)

Consensual Termination . All parties hereto may agree at any time to terminate this Agreement and the Executive's employment hereunder upon such terms and conditions as the parties may agree.

(f)

Non-Competition; Non-Solicitation; Non-Disparagement

(i)

(ii)

For a period of two (2) years following such termination of employment, the Executive will not, directly or indirectly,

(a)

(b)

(iii)

Confidential Information

The Executive specifically acknowledges that all information pertaining to the Bank and Arrow received by him during the course of his employment hereunder which has been designated confidential or otherwise has not been made publicly available, including, without limitation, plans, strategies, projections, analyses, and information pertaining to customers or potential customers, is the exclusive property of Arrow and the Executive covenants and agrees not to disclose any of such information, without the express prior consent of the Arrow Board or the Chief Executive Officer of Arrow, during his employment hereunder or after termination of such employment, to anyone not employed or engaged by Arrow or a subsidiary thereof to render services to it. The Executive further covenants and agrees that he will not at any time use any such information, without such express prior consent, for his own benefit or the benefit of any party other than Arrow. This Paragraph 9 shall survive termination of the Agreement.

10.

Successors and Assigns; Assumption by Successors

11.

Notices

12.

Waiver of Breach

Waiver by any party of a breach of any provision shall not operate as or be construed a waiver by such party of any subsequent breach hereof.

13.

Invalidity

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions, which shall remain in full force and effect.

14.

Entire Agreement; Written Modification; Termination

15.

Payment by Arrow or Bank.

16.

Counterparts

This Agreement may be made and executed in counterparts, in which case all

counterparts shall be deemed to constitute one original document for all purposes.

17.

Governing Law

This Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of New York.

18.

Authorization

IN WITNESS WHEREOF, the parties have executed or caused to be executed this Employment Agreement as of the day and year first above written.

ARROW FINANCIAL CORPORATION

By:

Thomas L. Hoy, Chairman, President & Chief

Executive Officer

GLENS FALLS NATIONAL BANK AND TRUST COMPANY

By:

Thomas L. Hoy, President & Chief

Thomas L. Hoy, Chairman, President & Chief

Executive Officer

"EXECUTIVE"

John J. Murphy

_____________________________________________________________________________

AGREEMENT AND PLAN OF REORGANIZATION

dated as of November 22, 2004

by and among

GLENS FALLS NATIONAL BANK AND TRUST COMPANY,

ARROW FINANCIAL CORPORATION,

429 SARATOGA ROAD CORPORATION,

CAPITAL FINANCIAL GROUP, INC.

and

JOHN WEBER

SMH Draft

3/11/2005 3:59 PM

AGREEMENT AND PLAN OF REORGANIZATION

AGREEMENT AND PLAN OF REORGANIZATION, dated as of _November 22, 2004 (this Agreement"), by and among GLENS FALLS NATIONAL BANK AND TRUST COMPANY, a national bank headquartered in Glens Falls, New York ("GFN"); ARROW FINANCIAL CORPORATION, a New York corporation and parent holding company for GFN ("AFC"); 429 SARATOGA ROAD CORPORATION, a New York corporation and wholly owned subsidiary of GFN ("Newco"); CAPITAL FINANCIAL GROUP, INC., a New York corporation ("Capital"); and JOHN WEBER, the beneficial owner of all of the outstanding shares of capital stock of Capital ("Stockholder").

WHEREAS, the Boards of Directors of GFN, AFC, Newco and Capital have each determined that it is advisable and in the best interest of their respective shareholders, and Stockholder has determined that it is advisable and in his best interest, to consummate the acquisition provided for herein (the "Acquisition"), as a result of which GFN will become the owner of all outstanding shares of the capital stock of Capital; and

WHEREAS, the Acquisition will be effected by way of a merger (the "Merger") of Newco, a newly created wholly owned subsidiary of GFN, with and into Capital, as a result of which Merger (i) Capital will become a wholly owned subsidiary of GFN, and (ii) Stockholder and any other holder or holders of outstanding shares of the capital stock of Capital at the time of the Merger will receive in exchange for such shares (A) shares of the common stock of GFN's parent holding company, AFC, and (B) the right to receive additional consideration in subsequent periods in the form of additional shares of stock of AFC, depending upon the future financial success of Capital; and

WHEREAS, the Boards of Directors of the merging entities in the Merger, Capital and Newco, have approved the Merger; and

WHEREAS, for U.S. Federal income tax purposes it is intended that the Merger qualify as a reorganization under the provisions of Section 368(a)(i)(B) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder;

NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, GFN, AFC, Newco, Capital, and Stockholder hereby agree as follows:

ARTICLE 1

THE ACQUISITION

Section 1.1. Structure of the Acquisition; the Merger . Subject to the terms and conditions provided for herein and in the other documents and agreements relating to the transactions provided for herein, GFN will acquire one hundred percent (100%) of the outstanding stock of Capital (the "Acquisition"). The Acquisition will be accomplished by way of a merger (the "Merger") of Newco, a newly formed, wholly owned subsidiary of GFN having no substantial assets, with and into Capital. As a result of the Merger, GFN will acquire all of the outstanding stock of Capital. The Merger will be effected pursuant to a certain Plan of Merger between Newco and Capital, and joined in by AFC, in substantially the form of Exhibit A attached hereto (the "Plan of Merger"). At the Effective Time of the Merger, as defined in Section 1.2, below, Newco will merge with and into Capital, with Capital to continue as the surviving corporation in the Merger and the separate corporate existence of Newco to cease.

Section 1.2. Effective Time . The effective time of the Merger ("Effective Time"), shall be a specific time on a specific date (the "Closing Date"), as agreed upon by the parties to the Merger, that is not later than 11:59 p.m. on the thirtieth (30 ^th ) business day after satisfaction of the last to be satisfied of the conditions to effectiveness of the Merger set forth in Section 5.1 hereof. The Effective Time as thus agreed upon shall be specified in a Certificate of Merger substantially in the form of Exhibit B attached hereto (the "Certificate of Merger") to be duly executed and acknowledged by the parties to the Merger as of the Closing Date and delivered to the Secretary of State of the State of New York for filing pursuant to Section 904 of the New York Business Corporation Law (the "NYBCL"). The closing of the Merger shall be at the offices of GFN, unless another place is agreed to in writing by the parties to the Merger prior to the Closing Date.

Section 1.3. Certificate of Incorporation and Bylaws of Surviving Company . The Certificate of Incorporation of Capital as in effect immediately prior to the Effective Time shall continue as the Certificate of Incorporation of the surviving company in the Merger at and after the Effective Time, amended at such time as provided in Exhibit C attached hereto. The By-Laws of Capital in effect immediately prior to the Effective Time shall continue as the By-Laws of Capital at and after the Effective Time, amended at such time to read in their entirety as provided in Exhibit D attached hereto.

Section 1.4. Directors . At the Effective Time, the Board of Directors of Capital shall be reconstituted automatically and without further action on the part of any party hereto to consist of five (5) members, who shall be those five (5) individuals listed in Exhibit E attached hereto, consisting of Stockholder and four (4) additional nominees of GFN (which nominees may be altered at the sole discretion of GFN at any time prior to the Closing Date). Each such director shall hold office thereafter in accordance with the Certificate of Incorporation and By-Laws of Capital until such director's successor is duly elected or appointed and qualified.

Section 1.5. Officers . At the Effective Time, the officers of Capital shall automatically become, without further action on the part of any party hereto, those named individuals holding such offices as are listed on Exhibit F attached hereto. Each such officer shall hold office thereafter until such officer's successor is duly elected or appointed and qualified.

Section 1.6. Purchase Price; Closing and Post-Closing Payments and Adjustments .

(a)

The total purchase price to be paid by GFN for all of the outstanding shares of stock of Capital, which GFN will acquire as a result of the Merger, will be (A) the Closing Consideration, as defined in subsection 1.6(b), below, payable to the shareholders of Capital on the Closing Date, plus (B) the Adjustment Amount, as defined in subsection 1.6(c), below, payable to the former shareholder or shareholders of Capital after the Closing Date, below, plus (C) the Post-Closing Consideration, if any, as defined in subsection 1.6(d), below, payable to the former shareholder or shareholders of Capital after the Closing Date.

(b)

The "Closing Consideration" payable to the shareholder or shareholders of Capital upon consummation of the Merger shall equal One Million Nine Hundred Eight Thousand Twenty-Seven Dollars ($1,908,027), which shall be payable in shares of the common stock, par value $1.00 per share, of AFC ("AFC Common Stock"), in accordance with the provisions of subsection 1.6(e) below and the terms and conditions set forth elsewhere in this Agreement and in the Plan of Merger.

(c)

The "Adjustment Amount" payable to former shareholder or shareholders of Capital after the Closing Date shall equal the Balance Sheet Value of Capital as of the close of business on the Closing Date, defined as provided in Exhibit G attached hereto. As soon as practicable after the Closing Date, GFN and Capital will calculate in good faith and agree upon the dollar amount of such Balance Sheet Value, in accordance with the terms set forth in said Exhibit G , and thereafter such amount shall be paid to the former shareholder or shareholders of Capital who received Closing Consideration as of the Closing Date, in amounts, if there is more than one such shareholder, in direct proportion to their receipt of such Closing Consideration. The Adjustment Amount shall be in the form of shares of AFC Common Stock, valued at the same AFC Stock Value used in calculating the number of shares distributable to such shareholder or shareholders as Closing Consideration pursuant to subsection 1.6(e) below, plus cash in lieu of any fractional shares of AFC Stock otherwise payable, calculated in accordance with subsection 1.7(d), below. The Adjustment Amount shall be deemed by the parties as an adjustment to the total purchase price paid by GFN in the Merger.

(d)

The "Post-Closing Consideration," if any, payable to the former shareholders of Capital or their successors in periods following the Closing Date shall be in such amounts and payable at such times as is provided in a certain Post-Closing Payment Agreement, dated the date hereof, by and among GFN, AFC, Newco, Capital, and Stockholder, attached hereto as Exhibit H , which Post-Closing Payment Agreement is hereby incorporated by reference into this Agreement and deemed by the parties hereto to be a part of this Agreement. Except as specifically provided otherwise herein, the term "Agreement" as used herein includes such Post-Closing Payment Agreement.

(e)

At the Effective Time of the Merger, each share of common stock, stated value $10.00 per share of Capital ("Capital Common Stock") issued and outstanding immediately prior to the Effective Time (exclusive of any Excluded Shares, as defined in subsection 1.6(f) below), shall, by virtue of the Merger and without further action on the part of any party, be converted into and become a number of fully paid and nonassessable shares of AFC Common Stock equal to one (1.0) multiplied by the Conversion Ratio, as defined in the ensuing sentence. For purposes of this Agreement, the "Conversion Ratio" shall be a number, expressed in a fraction to the nearest ten-thousandth (four decimal places), equal to "A" divided by "B, where "A" equals (i) the Closing Consideration, as defined in subsection 1.6(b), above, divided by the number of shares of Capital Common Stock issued and outstanding immediately prior to the Effective Time (excluding any Excluded Shares), and where "B" equals (ii) the AFC Stock Value, as defined in the ensuing sentence. For purposes of Section 1.6, the "AFC Stock Value" shall equal the average daily closing price per share of AFC Common Stock as reported on the NASDAQ Stock Market ("NASDAQ") reporting system for the ten (10) consecutive trading days ending on and including the second trading day preceding the Closing Date, rounded to the nearest one-hundredth (1/100) of a cent.

(f)

At the Effective Time, each share of Capital Common Stock, if any, held in the treasury of Capital or held by GFN or any affiliate of GFN immediately prior to such time (collectively, "Excluded Shares") shall, by virtue of the Merger and without any further action on the part of any party thereto, be canceled, retired and cease to exist, and no shares of AFC Common Stock or any other consideration, including as part of the Post-Closing Consideration or the Adjustment Amount, shall be delivered with respect thereto.

(g)

At the Effective Time, each outstanding share of the common stock, par value $100.00 per share, of Newco shall, by virtue of the Merger and without any action on the part of any party, be converted into and become ten (10) shares of Capital Common Stock.

Section 1.7. Exchange of Certificates .

(a)

Promptly after the Effective Time, each holder of record of outstanding shares of Capital Common Stock (other than Excluded Shares) immediately prior to the Effective Time (each such, a "Holder"; collectively, the "Holders") shall receive from AFC's transfer agent ("Exchange Agent"), and the Exchange Agent shall mail to each Holder the following: (A) a letter of transmittal for use by such Holder in surrendering to the Exchange Agent the certificate or certificates ("Certificates") formerly representing the shares of Capital Common Stock held by such Holder (which letter shall specify that delivery shall be effected and risk of loss and title to the Certificates shall pass only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other customary provisions as GFN and Capital may reasonably specify) and (B) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of AFC Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal duly executed, the Holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of AFC Common Stock into which such Holder's shares of Capital Common Stock have been converted in the Merger, and, if applicable, a check representing the cash consideration which such Holder is entitled to receive in lieu of any fractional share of AFC Common Stock that the Holder otherwise would have received, pursuant to the provisions of subsection 1.7(d), below, and the Certificates so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares of Capital Common Stock that is not registered in the transfer records of Capital on the Closing Date, a certificate representing the proper number of shares of AFC Common Stock may be issued to the transferee if the Certificate representing such shares of Capital Common Stock is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this subsection 1.7(a), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon surrender thereof (x) one or more certificates representing the whole shares of AFC Common Stock into which the shares of Capital Common Stock formerly represented by such Certificates have been converted at the Effective Time, and cash in lieu of any fractional share of AFC Common Stock otherwise distributable to such Holder, as contemplated by this subsection 1.7(a), and (y) the right to receive in subsequent periods a proportionate share of the Adjustment Amount payable by AFC to such Holder under Section 1.6(c), above, and a proportionate amount of any distributions of Post-Closing Consideration payable to such Holder or his or her successor or successors under the Post-Closing Payment Agreement.

(b)

No dividends or other distributions declared or made after the Closing Date with respect to AFC Common Stock with a record date after the Closing Date shall be paid to the Holder of any unsurrendered Certificate with respect to the shares of AFC Common Stock into which the shares of Capital Common Stock represented thereby have been converted at the Effective Time, and no cash payment in lieu of fractional shares of AFC Common Stock shall be paid to any such Holder pursuant to this Section 1.7, until the Holder of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate there shall be paid to the Holder surrendering such Certificate without interest (A) the amount of any such cash payable in lieu of a fractional share of AFC Common Stock not paid to such Holder pursuant to this Section 1.7 and the amount of such dividends or other distributions not theretofore paid to such Holder and (B) any other payments payable to such Holder but not previously paid due solely to such Holder's not having previously surrendered such Certificate.

(c)

In the event that any Certificate for shares of Capital Common Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange therefor upon the making of an affidavit of that fact by the Holder thereof, such shares of AFC Common Stock and cash in lieu of fractional shares, if any, as may be required pursuant to this Agreement; provided , however , that AFC or the Exchange Agent may, in its discretion, require the delivery of a suitable bond or indemnity.

(d)

No fractions of a share of AFC Common Stock shall be issued in the Merger, but in lieu thereof each Holder otherwise entitled to receive a fraction of a share of AFC Common Stock by virtue of application of the Conversion Ratio to such Holder's number of shares of Capital Common Stock shall upon surrender of his or her Certificate or Certificates be entitled to receive an amount of cash (without interest) determined by multiplying the AFC Stock Value by the fractional share interest to such Holder would otherwise be entitled to receive. The parties acknowledge that payment of cash consideration in lieu of issuing fractional shares of AFC Common Stock was not separately bargained for consideration, but merely represents a mechanical rounding off for purposes of simplifying the corporate and accounting complexities that would otherwise be caused by the issuance of fractional shares.

(e)

Notwithstanding anything herein to the contrary, GFN, AFC or the Exchange Agent may withhold such cash or other consideration otherwise distributable to any Holder or Holders on or after the Closing Date, including Closing Consideration and Post-Closing Consideration, as they may reasonably deem necessary to satisfy their withholding obligations under applicable law, and the withholding of any such cash or other consideration for such purpose shall be treated as the payment thereof to the person from whom such amount was withheld for purposes of determining whether such person received amounts to which such person is entitled hereunder.

Section 1.8. Dissenters and Appraisal Rights . Holders of shares of Capital Common Stock will not be entitled to dissenters and appraisal rights in connection with the Merger, in accordance with Section 910 of the NYBCL.

Section 1.9. Entire Agreement . This Agreement, the Plan of Merger and the Post-Closing Payment Agreement, together with the Exhibits hereto and thereto, the Seller's Disclosure Schedule and the Buyer's Disclosure Schedule delivered or to be delivered pursuant hereto, and the instruments and other documents and agreements referred to herein and therein, (i) shall constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all other prior agreements and understandings both written and oral among the parties with respect to the subject matter hereof and thereof, and (ii) shall not be assigned by operation of law or otherwise; provided , however , that Newco may assign any or all of its rights and obligations under this Agreement or the Plan of Merger to any other subsidiary of GFN, but no such assignment shall relieve Newco of its obligations hereunder or thereunder if such assignee does not perform such obligations.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES
OF CAPITAL AND STOCKHOLDER

Each of Capital and Stockholder hereby represents and warrants to each of GFN, AFC and Newco the following (except where such representation or warranty is given only by Capital or Stockholder, by specific language to that effect):

Section 2.1. Organization of Capital .

(a)

Capital is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, and is qualified or licensed as a foreign corporation authorized to do business in each other jurisdiction in which the character or location of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary. Capital has all requisite corporate power to own, operate and lease its assets and to carry on its business as now being conducted. Capital has delivered to GFN correct and complete copies of its Certificate of Incorporation and By-Laws as in effect on the date hereof.

(b)

Except as listed in Section 2.1(b) of the Seller's Disclosure Schedule, Capital does not own beneficially, directly or indirectly, any shares of any equity securities or similar interests of any person (as defined in Section 8.8).

Section 2.2. Capitalization of Capital; Ownership of Capital Stock .

(a)

The authorized capital stock of Capital consists of two hundred (200) shares, all of which are shares of common stock having no par value and a stated value of $10.00 per share (Capital Common Stock), one hundred (100) shares of Capital Common Stock are issued and outstanding as of the date hereof. Capital has no shares of preferred stock authorized or outstanding. The shares of Capital Common Stock issued and outstanding on the date hereof are owned of record by such person or persons as are listed in Section 2.2 of the Seller's Disclosure Schedule, and, to the knowledge of Capital and Stockholder, such persons, together with any other persons listed in Section 2.2 of the Seller's Disclosure Schedule as the beneficial owners of any outstanding shares of Capital Common Stock, constitute all persons who own of record or beneficially outstanding shares of Capital Common Stock as of the date hereof (such persons, collectively, constituting the "Capital Shareholders"). To the knowledge of Capital and Stockholder, all Capital Shareholders are residents of the State of New York. All of the shares of Capital Common Stock beneficially owned by Stockholder, whether of record or otherwise, are held by him free and clear of all Liens (as defined in Section 8.8). There are no shares of Capital Common Stock reserved for issuance upon exercise of outstanding stock options, warrants, rights or otherwise. All of the outstanding shares of Capital Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights and were issued in conformity with applicable laws. No shares of Capital Common Stock are or at the Effective Time will be held as treasury shares. No legend or other reference to any purported Lien (as defined in Section 8.8) appears upon any certificate representing shares of Capital Common Stock.

(b)

Capital does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Capital Common Stock or any other equity security of Capital or any securities representing the right to purchase or otherwise receive any shares of Capital Common Stock or any other equity security of Capital. There are no outstanding Contracts (as defined in Section 8.8) of Capital to repurchase, redeem or otherwise acquire any equity securities of Capital.

(c)

Stockholder is the record and beneficial owner of that number of shares of Capital Common Stock set forth as owned of record or beneficially by Stockholder in Section 2.2 of the Seller's Disclosure Schedule attached hereto, and possesses sole voting power with respect to a sufficient number of shares of Capital Common Stock such that the vote of Stockholder "FOR" the Acquisition, the Merger and the transactions provided for under this Agreement, the Plan of Merger and the Post-Closing Payment Agreement with respect to such number of shares, in and of itself, will ensure that all required approvals of the foregoing by the shareholders of Capital under applicable corporate law, the Certificate of Incorporation and By-Laws of Capital and all other agreements and instruments applicable to shareholders of Capital as a group have been obtained.

Section 2.3. Authorization . Capital has full corporate power and authority to execute, deliver and perform this Agreement, the Plan of Merger and the Certificate of Merger, and to consummate the transactions contemplated hereby and thereby. Stockholder has the right, capacity and all requisite authority to execute, deliver and perform this Agreement on his own behalf, and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, the Plan of Merger, the Certificate of Merger and all other documents and agreements to be delivered pursuant hereto and thereto and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved and authorized by the Board of Directors of Capital, and assuming approval of the Plan of Merger and the Merger by the shareholders of Capital, no other corporate proceedings on the part of Capital or its shareholders are necessary to authorize this Agreement, the Plan of Merger, the Certificate of Merger or any related documents or agreements or to consummate the transactions contemplated hereby or thereby. This Agreement and the Plan of Merger have been, and the Certificate of Merger when executed on the Closing Date will be duly and validly executed and delivered by Capital and this Agreement has been duly and validly executed and delivered by Stockholder. This Agreement constitutes a legal, valid and binding agreement of each of Capital and Stockholder, enforceable in accordance with its terms; the Plan of Merger constitutes a legal, valid and binding agreement of Capital, enforceable in accordance with its terms; and the Certificate of Merger when executed on the Closing Date will constitute a legal, valid and binding agreement of Capital enforceable in accordance with its terms.

Section 2.4. Financial Statements . Capital has delivered to GFN an interim unaudited balance sheet for Capital as of August 31, 2004 (the "Unaudited Balance Sheet"), and an unaudited income statement of Capital for the fiscal year ended August 31, 2004 (the "Unaudited Income Statement"), in each case prepared by Capital for GFN specifically in connection with the Acquisition (collectively, the Unaudited Balance Sheet and the Unaudited Income Statement are referred to as the "Unaudited Financial Statements"; August 31, 2004 is referred to as the “Balance Sheet Date”). The Unaudited Balance Sheet fairly presents the financial condition of Capital on the date thereof and the Unaudited Income Statement fairly presents the results of operations of the Company for the period covered thereby. The Unaudited Financial Statements have been prepared in all material respects in accordance with United States generally accepted accounting principles consistently applied and maintained throughout the periods indicated and fairly present in all material respects the financial condition of Capital at the date and the results of operations of Capital for the period covered thereby, in each case in conformity with United States generally accepted accounting principles. There has been no material change in Capital's accounting policies since the Balance Sheet Date.

Section 2.5. Consents and Approvals; No Violations . To the knowledge of Capital and Stockholder, except for (a) the filing of a regulatory notice with the Office of the Comptroller of the Currency (the "OCC") under the National Bank Act relating to the Acquisition (the "OCC Notice"), (b) the filing and recordation of the Certificate of Merger with the Secretary of State of the State of New York as required by the NYBCL, (c) the filing of a notice regarding the change in ownership of Capital with the New York State Insurance Department (the "Insurance Department Notice"), (d) approval of the quotation of the shares of AFC Common Stock to be issued in connection with the Acquisition on the NASDAQ Stock Market, and (e) such consents and approvals, if any, as may be required under applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or state securities ("blue sky") laws (collectively, (a) through (e) are sometimes referred to herein as the "Required Regulatory Filings and Approvals"), no filing with or notice to and no permit, authorization, consent or approval of any United States (federal or state) or foreign court or tribunal, or administrative, governmental or regulatory body, agency or authority (any such, a "Governmental Entity") is necessary in connection with the execution and delivery by Capital or Stockholder of this Agreement or by Capital of the Plan of Merger or in connection with the consummation by Capital and Stockholder of the transactions contemplated hereby or thereby. Neither the execution, delivery and performance by Capital and Stockholder of this Agreement and by Capital of the Plan of Merger nor the consummation by Capital and Stockholder of the transactions contemplated hereby or thereby will (i) conflict with or result in a breach of any provision of the Certificate of Incorporation or By-Laws of Capital; (ii) result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any Material Capital Contract (as defined in Section 2.14(a), below); (iii) to the knowledge of Capital or Stockholder, result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any Contract (that is not a Material Capital Contract) to which Capital is a party or by which it or its properties or assets are bound; or (iv) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to Capital or any of its properties or assets or to Stockholder in his capacity as an officer or employee of Capital.

Section 2.6. No Default . Capital is not in material breach, default or violation (and no event has occurred that with notice or the lapse of time, or both, would constitute a material breach, default or violation) of any term, condition or provision of its Certificate of Incorporation or By-Laws; and neither Capital nor Stockholder is in material breach, default or violation (and no event has occurred that with notice or the lapse of time, or both, would constitute a material breach, default or violation of any term, condition or provision of (i) any Material Capital Contract, (ii) any other Contract to which Capital is now a party or by which it or its properties or assets may be bound; or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to Capital or any of its properties or assets or to Stockholder in his capacity as an officer or employee of Capital.

Section 2.7. No Undisclosed Liabilities; Absence of Material Adverse Changes . Capital does not have any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise that would be required by United States generally accepted accounting principles to be reflected on a consolidated balance sheet of Capital (including the notes thereto), other than liabilities and obligations incurred since the Balance Sheet Date in the ordinary course of business consistent with past practices. Since the Balance Sheet Date, (i) Capital has conducted its business only in the ordinary course; (ii) there has not been any declaration, setting aside or payment of any dividend or other distribution in cash, stock or property in respect of Capital's capital stock; (iii) there has not been any action by Capital that, if taken during the period from the date of this Agreement through the Effective Time would constitute a breach of Section 4.1; and (iv) except as required by United States generally accepted accounting principles, there has not been any change by Capital in accounting principles, practices or methods. Since the Balance Sheet Date, there has not been any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect (as defined in Section 8.8) on Capital.

Section 2.8. Litigation . Except as set forth in Section 2.8 of the Seller's Disclosure Schedule, (a) there are no suits, claims, actions, proceedings or investigations, whether civil, criminal, administrative or regulatory, pending or, to the knowledge of Capital or Stockholder, threatened against Capital or any of its properties or assets or against Stockholder in his capacity as an officer or employee of Capital that, if decided adversely to Capital or Stockholder, would, individually, or in the aggregate (i) result in any charge, assessment, levy, fine or other liability being imposed upon or incurred by Capital or Stockholder exceeding Ten Thousand Dollars ($10,000), or (ii) adversely affect in any material respect the ability of Capital or Stockholder to engage the business currently engaged in by Capital or by Stockholder as an officer and employee of Capital (either such, a "Significant Penalty"); and (b) neither Capital nor Stockholder is subject to any outstanding order, writ, injunction or decree of any court, regulatory authority or agency, or other Governmental Entity that would, individually or in the aggregate, result in any Significant Penalty.

Section 2.9. Compliance with Applicable Law .

(a)

Capital, Stockholder and the other employees of Capital hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities (as defined in Section 2.5) necessary for the lawful conduct of the business of Capital as now being conducted by it, including, but not limited to, all insurance licenses required by New York State law (collectively, the "Regulatory Licenses"). Capital, Stockholder and the other employees of Capital are in compliance with the terms of the Regulatory Licenses. The consummation of the transactions contemplated hereunder and the operation of the business of Capital after such consummation in the manner in which it is currently operated will not require the issuance or re-issuance of any license to Capital by any Governmental Entity, or the filing of a notice with any such Governmental Entity, other than the filing of the Insurance Department Notice.

(b)

The business of Capital is being conducted in material compliance with all applicable laws, ordinances and regulations of the United States, political subdivisions thereof, foreign countries, and Governmental Entities. No investigation or review by any Governmental Entity with respect to Capital or Stockholder in his capacity as an officer or employee of Capital is pending nor, to the knowledge of Capital and Stockholder, has any Governmental Entity indicated an intention to initiate any such.

Section 2.10. Employee Benefit Plans; Labor Matters .

(a)

Section 2.10(a) of the Seller's Disclosure Schedule lists (i) all current employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) all current bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, health, life, or disability insurance, dependent care, severance and other similar fringe or employee benefit plans, programs or arrangements, and (iii) all current employment or executive compensation or severance agreements, written or otherwise, maintained or contributed to for the benefit of or relating to any employee or former employee, in each case, of, maintained by or for the benefit of, Capital or any trade or business (whether or not incorporated) that is a member of a controlled group including Capital or that is under common control with Capital within the meaning of Section 414 of the Code (an "ERISA Affiliate"), to the extent that Capital or any ERISA Affiliate currently has or may incur liability for payments or benefits thereunder, as well as each plan with respect to which Capital or an ERISA Affiliate could incur liability under Section 4069 (if such plan has been or were terminated) or Section 4212(c) of ERISA (together, the "Employee Plans").

(b)

With respect to each Employee Plan, no event has occurred, and there exists no condition or set of circumstances as a result of which Capital or an ERISA Affiliate could, directly, or indirectly, be subject to any liability under ERISA, the Code or any other applicable law, including applicable laws of foreign jurisdictions, if any, except liability for benefits claims and funding obligations payable in the ordinary course.

(c)

Except as otherwise provided in Section 4.9, there will be no payment, accrual of additional benefits, acceleration of payments or vesting of any benefit under any Employee Plan or any other agreement or arrangement to which Capital or any ERISA Affiliate is a party, and no employee, officer or director of Capital or any ERISA Affiliate will become entitled to severance, termination allowance or similar payments, solely by reason of entering into or in connection with the transactions contemplated by this Agreement.

(d)

No Employee Plan that is a welfare benefit plan within the meaning of Section 3(1) of ERISA provides benefits to former employees of Capital or any ERISA Affiliate other than as required by Section 4980B of the Code ("COBRA") or similar state laws. Capital and any ERISA Affiliates have complied in all material respects with the provisions of Part 6 of Title I of ERISA and Sections 4980B, 9801, 9802, 9811 and 9812 of the Code.

(e)

With respect to each master and prototype tax-qualified retirement plan ("M&P Plan") sponsored or maintained by Capital and/or any ERISA Affiliate, Capital and any such ERISA Affiliate has, on or before the end of the 2001 plan year or such later date as permitted pursuant to applicable IRS pronouncements, either adopted or certified in writing its intent to adopt the required GUST amendments to each such M&P Plan, and to the knowledge of Capital, an application for a GUST opinion letter for each such M&P Plan was filed with the IRS by the M&P Plan sponsor on or before December 31, 2000. Capital and each ERISA Affiliate has adopted or shall also adopt the GUST-approved M&P Plan by the deadline specified in IRS Announcement 2001-104 or subsequent IRS guidance. For purposes hereof, "GUST" means the statutes referenced in IRS Announcement 2001-104. With respect to any individually designed tax-qualified retirement plans sponsored or maintained by Capital or any ERISA Affiliate, Capital and each such ERISA Affiliate has adopted the required GUST amendments and submitted the plan to the IRS on or before February 28, 2002 or such later date as permitted by applicable IRS pronouncements for a favorable determination letter as to its tax qualified status.

Section 2.11. Environmental Laws and Regulations .

(a)

Capital represents the following: (i) No written notice, notification, demand, request for information, citation, summons, complaint or order has been received by, and no action, claim, suit, proceeding or review or, to the knowledge of Capital or Stockholder, investigation is pending or, to the knowledge of Capital or Stockholder, threatened by any person against, Capital with respect to any matters relating to or arising out of any Environmental Law (hereinafter defined); (ii) Capital is in compliance with all Environmental Laws, which compliance includes the possession by Capital of all material permits required under applicable Environmental Laws and compliance with the terms and conditions thereof; (iii) to the knowledge of Capital or Stockholder, there has been no disposal, release or threatened release of any Hazardous Substance (hereinafter defined) by Capital on, under, in, from or about any property currently or formerly owned or operated by Capital, or otherwise related to the operations of Capital, that has resulted or could reasonably be expected to result in any Environmental Claim (hereinafter defined) against Capital; (iv) Capital has not entered into or agreed to and is not subject to any consent decree, order or settlement or other agreement in any judicial, administrative, arbitral or other similar forum relating to its compliance with or liability under any Environmental Law; and (v) Capital has not assumed or retained by contract or otherwise any liabilities of any kind, fixed or contingent, known or unknown, under any applicable Environmental Law (including, but not limited to, any liability from the disposition of any of its real property).

(b)

For purposes of this Agreement, the term "Environmental Laws" means federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, codes, injunctions, permits and governmental agreements relating to human health and the environment, including, but not limited to, Hazardous Substances; the term "Hazardous Substance" means all substances, materials or wastes that are listed, classified or regulated pursuant to any Environmental Law or which may be the subject of regulatory action by any Governmental Entity pursuant to any Environmental Law including, but not limited to, (i) petroleum, asbestos or polychlorinated biphenyls and (ii) in the United States, all substances defined as Hazardous Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. 300.5; and the term "Environmental Claim" means any claim, violation, or liability, by any person relating to liability or potential liability (including liability or potential liability for enforcement, investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damage, personal injury, fines or penalties) arising out of, based on or resulting from (i) the presence, discharge, emission, release or threatened release of any Hazardous Substance at any location and any exposure of persons to such Hazardous Substance at any location, (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Laws or permits, or (iii) otherwise relating to obligations or liabilities under any Environmental Law.

Section 2.12. Taxes .

(a)

Tax Definitions . For purposes of this Agreement:

(i)

"Tax" (including "Taxes") means (A) all federal, state, local, foreign and other taxes (including but not limited to withholding taxes) and other governmental assessments, fees, duties or charges of any kind or nature whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (B) any liability for payment of amounts described in clause (A) whether as a result of transferee or successor liability, joint and several liability for being a member of an affiliated, consolidated, combined or unitary group for any period, or otherwise by operation of law and (C) any liability for the payment of amounts described in clause (A) or (B) as a result of any tax sharing, tax indemnity or tax allocation agreement or any other express or implied agreement to pay or indemnify any other person; and

(ii)

"Tax Return" means any return, declaration, report, statement, information statement and other document required to be filed with respect to Taxes, including any claims for refunds of Taxes and any amendments or supplements of any of the foregoing.

(b)

Tax Matters .

(i)

Within the times and in the manner prescribed by law, Capital has properly prepared and filed all Tax Returns required by law and has timely paid all Taxes due and payable (whether or not shown on any Tax Return). All such Tax Returns are true, correct and complete in all material respects and accurately reflect in all material respects the information pertaining to the tax attributes of Capital and its subsidiaries (if any), including tax basis in assets and net operating loss, capital loss and tax credit carryforwards. Capital has complied in all material respects with all applicable laws relating to Taxes.

(ii)

Except as described in Section 2.12(b) of the Seller's Disclosure Schedule, Capital (A) has not filed a consent or agreement pursuant to Section 341(f) of the Code, (B) is not a party to or bound by any closing agreement, offer in compromise, gain recognition agreement or any other agreement with any Tax authority or any Tax indemnity or Tax sharing agreement with any person, (C) has no present or contingent liabilities for Taxes, other than Taxes incurred in the ordinary course of business thereof and reflected the Unaudited Balance Sheet included in the Unaudited Financial Statements or incurred in the ordinary course of business since the date of the Unaudited Balance Sheet in amounts consistent with prior years, (D) is not a party to an agreement that could give rise to an "excess parachute payment" within the meaning of Section 280G of the Code or to remuneration the deduction for which could be disallowed under Section 162(m) of the Code, (E) has not issued options or stock purchase rights (or similar rights) that purported to be governed by Sections 421 or 423 of the Code that were not so governed when issued, (F) has not ever been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code, and (G) is not subject to any Lien for Taxes with respect to the assets of Capital (except for statutory liens for current Taxes not yet delinquent).

(iii)

Except as described in Section 2.12(b) of the Seller's Disclosure Schedule, there are no (A) proposed, threatened or actual assessments, audits, examinations or disputes as to Taxes relating to Capital which remain unsatisfied, or issues that could result in a deficiency being asserted against Capital that have been raised orally or in writing by any taxing authority in connection with a review or audit of any Tax Return or otherwise, (B) adjustments under Section 481 of the Code or any similar adjustments with respect to Capital or (C) waivers or extensions of the statute of limitations with respect to Taxes for which Capital could be held liable following the date hereof.

(iv)

There is no basis for the assertion by a taxing authority of a material Tax deficiency against Capital. Capital has not been a "distributing corporation" or a "controlled corporation" in connection with a distribution governed or intended to be governed by Section 355 of the Code.

(v)

There is currently no limitation on the utilization of tax attributes of Capital under Sections 269, 382, 383, 384 or 1502 of the Code (and comparable provisions of state, local or foreign law).

(vi)

Capital has not been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code, or a member of a combined, consolidated or unitary group for state, local or foreign Tax purposes, other than an affiliated group the common parent of which is Capital.

(vii)

Section 2.12(b) of the Seller's Disclosure Schedule identifies the Tax status of Capital for all years, including (i) whether any such years have been audited or are currently the subject of an audit, (ii) whether the applicable statute of limitations for assessment has expired or been extended, and (iii) whether an extension of time with respect to Capital to file any Tax Return has been requested.

(viii)

Except as set forth on Section 2.12(b) of the Seller's Disclosure Schedule, Capital has complied with all applicable laws relating to the withholding of Taxes (including withholding of Taxes pursuant to Sections 1441 and 1442 of the Code) and has, within the time and within the manner prescribed by law, withheld and paid over to the proper taxing authorities all amounts required to be withheld and paid over under all applicable laws in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party.

(ix)

Except as set forth on Section 2.12(b) of the Seller's Disclosure Schedule, Capital will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Effective Time as a result of any: (A) inter-company transactions or any excess loss account described in Treasury Regulations under Code section 1502 (or any corresponding or similar provision of state, local or foreign income Tax law); (B) installment sale or open transaction disposition made on or prior to Effective Time; or (C) prepaid amount received on or prior to the Effective Time.

(x)

Except as set forth on Section 2.12(b) of the Seller's Disclosure Schedule, Capital has not been at any time a member of any partnership, joint venture or other arrangement or contract which is treated as a partnership for federal, state, local or foreign tax purposes or the holder of a beneficial interest in any trust for any period for which the statute of limitations for any Tax has not expired.

Section 2.13. Intellectual Property .

(a)

Intellectual Property Definitions . As used herein, the term "Intellectual Property" means all intellectual property rights arising from or associated with the following, whether protected, created or arising under the laws of the United States or any other jurisdiction: (i) trade names, trademarks and service marks (registered and unregistered), domain names and other Internet addresses or identifiers, trade dress and similar rights and applications (including intent to use applications) to register any of the foregoing and registrations therefor (collectively, "Marks"); (ii) patents and patent applications, including continuation, divisional, continuation-in-part, reexamination and reissue patent applications and any patents issuing therefrom, and rights in respect of utility models or industrial designs (collectively, "Patents"); (iii) copyrights and registrations and applications therefor (collectively, "Copyrights"); (iv) non-public know-how, inventions, discoveries, improvements, concepts, ideas, methods, processes, designs, plans, schematics, drawings, formulae, technical data, specifications, research and development information, technology and product roadmaps, data bases and other proprietary or confidential information (including customer lists, but excluding any Copyrights or Patents) that may cover or protect any of the foregoing (collectively, "Trade Secrets") and (v) moral rights, publicity rights and any other proprietary, intellectual or industrial property rights of any kind or nature that do not comprise or are not protected by Marks, Patents, Copyrights, or Trade Secrets.

(b)

Intellectual Property . Section 2.13 of the Seller's Disclosure Schedule contains a list of all items of Intellectual Property material to the business or operations of Capital. Except as otherwise indicated in Section 2.13 of the Seller's Disclosure Schedule, Capital owns, or has a valid license to use, such Intellectual Property in the manner currently used by Capital. Except as disclosed in Section 2.13 of the Seller's Disclosure Schedule, there are no claims pending, or to the knowledge of Capital or Stockholder, threatened, (i) that Capital is in violation of any Intellectual Property rights of a third Person, or (ii) that any third Person is in violation of any Intellectual Property rights of Capital.

Section 2.14. Contracts .

(a)

Section 2.14(a) of the Seller's Disclosure Schedule contains a complete and accurate list of each Contract to which Capital is a party that:

(i)

is executory in whole or in part and involves performance of services by Capital of an amount or value in excess of $10,000;

(ii)

(A) is executory in whole or in part or was entered into by Capital on or after the Balance Sheet Date, and (B) was not entered into in the ordinary course of business, and (C) involves expenditures or receipts by Capital in excess of $10,000;

(iii)

is a lease, rental or occupancy agreement, license agreement, installment and conditional sale agreement, or otherwise affects the ownership of, leasing of, title to, use of or any leasehold or other interest in, any real or personal property (excluding any personal property leases or installment and conditional sales agreements having a value per item or aggregate payments of less than $10,000 and with terms of less than one year);

(iv)

is a collective bargaining agreement or is with or to any labor union or other employee representative of a group of employees;

(v)

is or forms a joint venture, partnership or similar arrangement or otherwise involves the sharing of profits, losses, costs or liabilities by Capital with any other person;

(vi)

in any way purports to restrict the business activity of Capital or limit the freedom of Capital to engage in any line of business or to compete with any person;

(vii)

contains a warranty, guaranty, and/or other similar undertaking with respect to contractual performance extended by Capital;

(viii)

upon and as a direct result of the consummation of the transactions contemplated by this Agreement and the Plan of Merger, will (either alone or upon the occurrence of any additional acts or events) result in any payments or benefits (whether of severance pay or otherwise) becoming due, or the acceleration or vesting of any rights to any payments of benefits, from Capital; or

(ix)

is with any employee, director or officer of Capital

(any Contract described in (i) through (ix) above to be referred to herein as a "Material Capital Contract").

(b)

Each Material Capital Contract is in full force and effect and enforceable in accordance with its terms (subject to bankruptcy, insolvency and other proceedings at law or in equity relating to the rights of creditors generally).

(c)

Except as set forth in Section 2.14(c) of the Seller's Disclosure Schedule, Capital has not received written notice of default under any Material Capital Contract, no default (without regard to any applicable grace or cure period) has occurred under any Material Capital Contract on the part of Capital, or, to the knowledge of Capital or Stockholder, on the part of any other party thereto, nor has any event occurred which with the giving of notice or the lapse of time, or both, would constitute any default on the part of Capital under any Material Capital Contract, nor to the knowledge of Capital or Stockholder, has any event occurred which with the giving of notice or lapse of time, or both, would constitute any default on the part of any other party to any Material Capital Contract.

(d)

Except as set forth in Section 2.14(d) of the Seller's Disclosure Schedule, no consent or approval of any party to any of the Material Capital Contracts is required for the execution, delivery or performance by Capital or Stockholder of this Agreement or by Capital of the Plan of Merger or for the consummation of the transactions contemplated hereby or thereby.

Section 2.15. Title to Properties; Absence of Liens and Encumbrances .

(a)

Except as disclosed in Section 2.15(a) of the Seller's Disclosure Schedule, Capital has good and valid title to all of its properties and assets reflected on the Unaudited Financial Statements, or, in the case of leased properties and assets, valid leasehold interests in such properties and assets, in each case free and clear of all Liens except for: (i) Liens reflected on the Unaudited Financial Statements, (ii) Liens consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real property or irregularities in title thereto which do not materially detract from the value of, or materially impair the use of, such property as it is presently used, (iii) liens for current Taxes, assessments or governmental charges or levies on property not yet due or which are being contested in good faith and for which appropriate reserves in accordance with United States generally accepted accounting principles have been created and (iv) mechanic's, materialmen's and similar liens arising in the ordinary course of business or by operation of law.

(b)

Section 2.15(b) of the Seller's Disclosure Schedule sets forth a true, complete and correct list of all real property owned or leased by Capital. Capital is in compliance in all material respects with the terms of all leases for real property to which it is a party. Capital is not a party to any lease, assignment or similar arrangement under which Capital is a lessor, assignor or otherwise makes available for use by any third party any portion of Capital's owned or leased real property.

(c)

The facilities, property and equipment owned, leased or otherwise used by Capital are in a good state of maintenance and repair, free from material defects and in good operating condition (subject to normal wear and tear) and suitable for the purposes for which they are presently used.

(d)

All tangible assets which are leased by Capital have been maintained with the manufacturers' standards and specifications required by each such lease such that at each such termination of the lease such assets can be returned to their owner without any further material obligation on the part of Capital with respect thereto.

Section 2.16. Off Balance Sheet Liabilities . Section 2.16 of the Seller's Disclosure Schedule sets forth a true, complete and correct list, as of the date hereof, of all transactions, arrangements and other relationships between and/or among Capital, any of its affiliates, and any special purpose or limited purpose entity or entities, including limited partnerships and limited liability companies that are beneficially owned by or were formed at the direction of Capital or any of its affiliates and are not included on a consolidated basis with Capital in the Unaudited Financial Statements.

Section 2.17. Customers . Section 2.17 of the Seller's Disclosure Schedule sets forth an accurate and complete list of all business customers of Capital ("Customers") as of the most recent practicable date, for each of whom Capital is listed on the appropriate records of any insurance company whose insurance products such Customer has purchased through the services of Capital as the "agent of record" for such product. To Capital's knowledge, there has not been any adverse change in the business relationship, and there has been no material dispute, between Capital and any of the Customers.

Section 2.18. Insurance Coverages . Section 2.18 of the Seller's Disclosure Schedule sets forth an accurate and complete list of all of the insurance policies and coverages presently maintained by Capital covering its business, properties, operations, principals and employees, including without limitation, general business insurance, director and officer and employment practices liability insurance, errors and omissions insurance and property and casualty insurance. The list identifies, in the case of each such insurance, the dollar amount of coverage (in the aggregate and per occurrence); the identity of the company or companies providing such insurance and reinsurance, if any; the amount of annual premiums and when payable; the expiration date or dates of the policies; and the extent and nature of recent claims and whether or not such claims were or are being contested.

Section 2.19. Brokers . No broker, finder or investment banker is entitled to any brokerage finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Capital or Stockholder.

Section 2.20. Stockholder Acquiring AFC Common Stock for Investment Purposes . Stockholder is acquiring the shares of AFC Common Stock to be received by Stockholder in connection with the Merger, including any shares that may be received by Stockholder as Post-Closing Consideration, solely for the purpose of investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of Section 2(11) of the Securities Act, other than any such resale by or for the benefit of Stockholder as shall be exempt from registration under Federal and state securities laws and otherwise complies with all applicable provisions of Federal and state securities laws. This representation by Stockholder shall be superseded in its entirety by the representations and warranties given by Stockholder at such time as Stockholder executes and delivers the Investment Letter referenced in Section 4.3(d).

Section 2.21. Accuracy of Representations and Warranties . All representations and warranties of Capital and Stockholder set forth in this Agreement and in any other agreement, certificate or document required to be delivered or given by Capital or Stockholder to GFN, AFC or Newco in connection with the Acquisition, as updated to the extent required and permitted to be updated, will be true and correct at the Effective Time with the same force and effect as if made at that time.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF GFN, AFC AND NEWCO

Each of GFN, AFC and Newco hereby represents and warrants to each of Capital and Stockholder that:

Section 3.1. Organization of GFN, AFC and Newco; Corporate Authority .

(a)

Each of AFC and Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. AFC is qualified or licensed as a foreign corporation authorized to do business in each other jurisdiction where the failure to so qualify could reasonably be expected to result in a Material Adverse Effect on AFC. Newco is an inactive, newly organized corporation formed solely to effect the Merger and Acquisition. GFN is a national bank in good standing under the National Bank Act. Each of GFN, AFC and Newco has all requisite corporate power to own, operate and lease its assets and to carry on its business as now being conducted by it. Each of GFN, AFC and Newco has delivered to Capital correct and complete copies of its Certificate of Incorporation or Articles of Association and its By-Laws as in effect on the date hereof.

(b)

Each of GFN, AFC and Newco has full corporate power and authority to execute, deliver and perform this Agreement and, if such entity is a party to the Plan of Merger or the Certificate of Merger, to execute, deliver and perform such plan or certificate, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement, the Plan of Merger, the Certificate of Merger and all other documents and agreements to be delivered pursuant hereto and thereto and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Boards of Directors of GFN, AFC and Newco, to the extent such entities are parties thereto, and assuming approval of the Plan of Merger and the Merger by the shareholders of Newco, no other corporate proceedings on the part of GFN, AFC Newco or the shareholders of any of them will be necessary to authorize the Merger, this Agreement, the Plan of Merger, or any related documents or agreements or to consummate the transactions contemplated hereby and thereby. This Agreement and the Plan of Merger have been duly and validly executed and delivered by GFN, AFC and Newco, to the extent such entities are parties thereto, and the Certificate of Merger when executed on the Closing Date will be duly and validly executed and delivered by Newco. This Agreement and the Plan of Merger constitute legal, valid and binding agreements of GFN, AFC and Newco, to the extent such entities are parties thereto, each enforceable in accordance with its terms, and the Certificate of Merger when executed on the Closing Date will constitute a legal, valid and binding agreement of Newco enforceable in accordance with its terms, subject in the case of each of the above, to any applicable bankruptcy, insolvency (including all applicable laws relating to fraudulent transfers), reorganization, moratorium or similar laws now or hereafter in effect relating to creditors' rights generally or to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

Section 3.2. Capitalization .

(a)

As of June 30, 2004, the authorized capital stock of AFC consisted of (i) Twenty Million (20,000,000) shares of common stock (AFC Common Stock), of which 9,925,044 shares were then issued and outstanding and an additional 3,161,075 shares were then held in the treasury, and (ii) One Million (1,000,000) shares of preferred stock, none of which were then issued and outstanding. All of the outstanding shares of AFC Common Stock on such date were duly authorized and validly issued and were fully paid and nonassessable and were issued in conformity with applicable laws.

(b)

The shares of AFC Common Stock are quoted on NASDAQ.

Section 3.3. SEC Reports; Financial Statements . AFC has filed all required forms, reports and documents with the U.S. Securities Exchange Commission ("SEC") required to be filed therewith since January 1, 2004 (the "SEC Reports"), and each of the SEC Reports complied at the time of filing in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as applicable, in each case as in effect on the dates such forms, reports and documents were filed. None of the SEC Reports, including any financial statements or schedules included or incorporated by reference therein, contained when filed any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading, except to the extent any such statement or omission may have been superseded by statements or omissions contained in SEC Reports subsequently filed by AFC. The consolidated financial statements (including any related notes and schedules thereto) contained in the SEC Reports have been prepared in all material respects in accordance with United States generally accepted accounting principles consistently applied and maintained throughout the periods indicated, except where noted therein, and fairly present in all material respects the consolidated financial condition of AFC and its subsidiaries at their respective dates and the results of their operations and changes in financial position for the periods covered thereby, in each case in conformity with United States generally accepted accounting principles (subject to normal year-end adjustments and except that unaudited financial statements do not contain all footnotes required for audited financial statements).

Section 3.4. Consents and Approvals; No Violations . To the knowledge of GFN, AFC and Newco, except for the Required Regulatory Filings and Approvals (as defined in Section 2.5), no filing with or notice to and no permit, authorization, consent or approval of any Governmental Entity is necessary in connection with the execution and delivery by GFN, AFC or Newco of this Agreement or the Plan of Merger, to the extent that such entity is a party thereto, or in connection with the consummation by GFN, AFC or Newco of the transactions contemplated hereby or thereby. Neither the execution, delivery and performance by GFN, AFC and Newco of this Agreement or the Plan of Merger nor the consummation by such entities of the transactions contemplated hereby or thereby will (i) conflict with or result in a breach of any provision of the respective Certificate of Incorporation or Articles of Incorporation or By-Laws (or similar governing documents) of GFN, AFC and Newco; (ii) result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any material Contract to which GFN, AFC or Newco is a party or by which any of them or their respective properties or assets are bound; (iii) to the knowledge of GFN, AFC or Newco, result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any Contract (other than any material Contract) to which GFN, AFC or Newco is a party or by which any of them or their respective properties or assets are bound; or (iv) violate any order, writ, injunction or decree to which GFN, AFC or Newco is subject, or any law, statute, rule or regulation applicable to GFN, AFC or Newco or any of their respective properties or assets.

Section 3.5. No Default . None of GFN, AFC or Newco is in breach, default or violation (and no event has occurred that with notice or the lapse of time, or both, would constitute a material breach, default or violation) of any material term, condition or provision of (i) its Certificate of Incorporation or Articles of Incorporation or its By-Laws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, Contract, agreement or other instrument or obligation to which GFN, AFC or Newco is now a party or by which any of them or their respective properties or assets may be bound, or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to GFN, AFC or Newco or any of their respective properties or assets.

Section 3.6. Absence of Certain Changes . Except as set forth in Section 3.6 of the Buyer's Disclosure Schedule, since December 31, 2003, each of GFN and AFC has conducted its business in the ordinary course consistent with past practices and there has not occurred any material change, event or condition (whether or not covered by insurance) that has resulted in a Material Adverse Effect with respect to either.

Section 3.7. Litigation . Except as disclosed in the SEC Reports filed prior to the date hereof or as set forth in Section 3.7 of the Buyer's Disclosure Schedule, there are no suits, claims, actions, proceedings or investigations pending or, to the knowledge of GFN or AFC, threatened, against GFN or AFC before any governmental entity that, if decided adversely to GFN or AFC, would, individually or in the aggregate, have a Material Adverse Effect on GFN or AFC. Except as disclosed in the SEC Reports filed prior to the date hereof, neither GFN nor AFC is subject to any outstanding order, writ, injunction or decree of any Governmental Entity that would, individually or in the aggregate, result in a Material Adverse Effect on GFN or AFC.

Section 3.8. Compliance with Applicable Law . Each of GFN and AFC has complied with, is not in violation of, and has not received notices of violation with respect to, any law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except where such noncompliance or violation could not reasonably be expected to result in a Material Adverse Effect on such entity.

Section 3.9. Accuracy of Representations and Warranties. All representations and warranties of each of GFN, AFC and Newco set forth in this Agreement and the Plan of Merger and in any agreement, certificate or other document required to be delivered or given to Capital or Stockholder by GFN, AFC or Newco pursuant to this Agreement or the Plan of Merger or referred to in this Agreement or the Plan of Merger or in any such other agreement, certificate or document will be true and correct at the Effective Time with the same force and effect as if made at that time.

ARTICLE 4

COVENANTS

Section 4.1. Conduct of Business of Capital . Except as otherwise contemplated by this Agreement, Capital will conduct its operations in the ordinary course of business consistent with past practices and, to the extent consistent therewith, and with no less diligence and effort than would be applied in the absence of this Agreement, will seek to preserve intact its current business organization, keep available the service of its current officers and employees and preserve its relationships with customers and suppliers with the intention that its goodwill and ongoing businesses shall be unimpaired at the Effective Time. Stockholder will continue to serve as president and chief executive officer of Capital and to perform faithfully his duties in such positions in substantially the manner he has previously performed such duties. Without limiting the generality of the foregoing, during the period from the date hereof to the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, Capital will not (and Stockholder will use best efforts and exercise all requisite power and authority to ensure that Capital will not), without the express written consent of GFN:

(a)

amend its Certificate or Articles of Incorporation or By-Laws (or other similar governing document);

(b)

authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities (except bank loans) or equity equivalents (including any stock options or stock appreciation rights);

(c)

split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, make any other actual, constructive or deemed distribution in respect of its capital stock or otherwise make any payments to stockholders in their capacity as such, or redeem or otherwise acquire any of its securities;

(d)

alter through merger, liquidation, reorganization, restructuring or any other fashion the corporate structure or ownership of Capital;

(e)

(i) incur, assume or forgive any long-term or short-term debt or issue any debt securities except for borrowings under existing lines of credit in the ordinary course of business consistent with past practices or trade payables arising in the ordinary course of business consistent with past practices; (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, continently or otherwise) for the obligations of any other person; (iii) make any loans, advances or capital contributions to or investments in any other person (other than customary loans or advances to employees in each case in the ordinary course of business consistent with past practices); (iv) pledge or otherwise encumber shares of its capital stock; or (v) mortgage or pledge any of its material properties or assets, or create or suffer to exist any material Lien thereupon;

(f)

except as may be required by law, (i) enter into, adopt, amend in any manner or terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent or other compensatory plan, or any stock purchase agreement, (ii) enter into, adopt, amend or terminate any pension, retirement, deferred compensation, employment, health, life, or disability insurance, dependent care, severance or other employee benefit plan agreement, trust, fund or other arrangement for the benefit or welfare of any director, officer or employee, or (iii) increase in any manner or agree to increase the compensation or fringe benefits of any director, officer or employee or consultant or pay any benefit not required by any plan or arrangement as in effect as of the date hereof (including the granting of stock appreciation rights or performance units), except for normal increases in cash compensation in the ordinary course of business consistent with past practices;

(g)

other than activities in the ordinary course of business consistent with past practice, sell, lease, encumber, assign or otherwise dispose of, or agree to sell, lease, encumber, assign or otherwise dispose of, any of its material assets or properties or other rights or agreements;

(h)

unless required by a change in applicable law or in United States generally accepted accounting principles, change any of the accounting principles, practices or methods used by it;

(i)

make or rescind any express or deemed election relating to Taxes or settle or compromise any Tax liability or enter into any closing or other agreement with any Tax authority; or file or cause to be filed any amended Tax Return, file or cause to be filed any claim for refund of Taxes previously paid, or agree to an extension of a statute of limitations with respect to the assessment or determination of Taxes;

(j)

fail to file any Tax Returns when due, fail to cause such Tax Returns when filed to be true, correct and complete, prepare or fail to file any Tax Return in a manner inconsistent with past practices in preparing or filing similar Tax Returns in prior periods or, on any such Tax Return, take any position, make any election, or adopt any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods, in each case, except to the extent required by applicable law; or fail to pay any Taxes when due;

(k)

settle or compromise any pending or threatened suit, action or claim;

(l)

allow any insurance policy of Capital to be amended or terminated without replacing such policy with a policy providing at least equal coverage, insuring comparable risks and issued by an insurance company financially comparable to the prior insurance company;

(m)

take any action that is intended or may reasonably be expected to result in any of its representations or warranties set forth in this Agreement being or becoming untrue, or in any of the conditions to consummation of the Merger or the Stock Transfer as set forth in Article 5 not being satisfied;

(n)

take any action or enter into any agreement that could reasonably be expected to jeopardize or materially delay the filing or receipt of any of the Required Regulatory Filings and Approvals (as defined in Section 2.5); or

(o)

agree in writing or otherwise to take any of the actions described in Sections 4.1(a) through 4.1(n).

Section 4.2. Conduct of Business of GFN and AFC . Except as otherwise contemplated by this Agreement, neither GFN nor AFC shall, nor shall either permit any of its subsidiaries to:

(a)

take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue, or in any of the conditions to consummation of the Merger as set forth in Article 5 not being satisfied; or

(b)

take any action or enter into agreement that could reasonably be expected to jeopardize or materially delay the filing or receipt of any Required Regulatory Filings and Approvals.

Section 4.3. Approval of Merger and Related Agreements by Capital Shareholders and Newco Shareholders .

(a)

Stockholder will vote all shares of Capital Common Stock owned by Stockholder in favor of and "FOR" the Plan of Merger, the Merger provided for therein and any other transactions provided for herein relating to the Merger or Acquisition as to which action on the part of Capital shareholders is required or reasonably requested by any party hereto.

(b)

GFN, the sole shareholder of Newco, will vote all shares of the common stock of Newco owned by it in favor of and "FOR" the Plan of Merger, the Merger provided for therein and any other transactions provided for herein relating to the Merger or Acquisition as to which action on the part of Newco shareholders is required or reasonably requested by any party hereto.

(c)

The Board of Directors of each of Capital and Newco will act as soon as reasonably possible after the date hereof to put to a vote of the shareholders of such entity for their approval the Plan of Merger, the Merger provided for therein, and the other transactions provided for herein relating to the Merger or Acquisition as to which a vote of such shareholders is required or reasonably requested by any party hereto, or to obtain a written consent from the shareholder or shareholders of such entity approving such matters.

(d)

Stockholder will execute and deliver to AFC as soon as reasonably practicable an Investment Letter substantially in the form attached hereto as Exhibit I , and the Board of Directors of Capital and Stockholder will recommend and encourage any other person who is now or becomes before the Effective Time a Capital Shareholder to execute such an Investment Letter on or before such time.

Section 4.4. Stock Exchange Listing of AFC Common Stock . AFC will use all commercially reasonable efforts to cause the shares of AFC Common Stock to be issued in the Merger to be approved for quotation on the NASDAQ, subject to official notice of issuance, prior to the issuance of such shares pursuant to the terms of this Agreement and the Plan of Merger.

Section 4.5. Access to Information .

(a)

Between the date hereof and the earlier of the Closing Date or the date this Agreement is terminated in accordance with its terms, Capital and Stockholder will provide GFN, AFC and Newco and their authorized representatives with reasonable access to all employees, offices, and other facilities and to all books and records of Capital as GFN, AFC and Newco may reasonably require, and will cause its officers to furnish GFN, AFC and Newco and their authorized representatives with such financial and operating data and other information with respect to the business and properties of Capital as GFN, AFC and Newco may from time to time reasonably request.

(b)

Each of the parties hereto will hold, and will cause its consultants and advisers to hold, in confidence all documents and information furnished to it by or on behalf of any other party to this Agreement in connection with the transactions contemplated by this Agreement.

Section 4.6. Certain Filings; Reasonable Efforts . Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all commercially reasonable efforts to take or cause to be taken all action and to do or cause to be done all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Plan of Merger, including using all commercially reasonable efforts to do the following: (i) obtain consents of all third parties and Governmental Entities necessary, proper or advisable for the consummation of the transactions contemplated by this Agreement and the Plan of Merger, (ii) contest any legal proceeding instituted by any person not a party to this Agreement seeking to prevent consummation of the transactions provided for hereunder, and (iii) execute any additional instruments necessary to consummate the transactions contemplated hereby and thereby. If, at any time after the Closing Date, any further action is necessary to carry out the purposes of this Agreement and the Plan of Merger, the proper officers and directors of each party hereto and thereto shall take all such necessary action.

Section 4.7. Public Announcements . Subject to any requirement of applicable law or rules of the NASDAQ, all public announcements or similar publicity with respect to this Agreement or the Plan of Merger or the transactions contemplated hereby or thereby shall be issued prior to or on the Closing Date only with the consent of GFN and Capital (the "Disclosing Parties"). In the event any public announcement is required to be made by either Disclosing Party or its affiliates pursuant to any law, the two Disclosing Parties shall use reasonable efforts to agree on a mutually satisfactory text for such public announcement. Unless consented to by both Disclosing Parties in advance prior to the Closing Date, all parties hereto shall keep the provisions of this Agreement strictly confidential and make no disclosure thereof to any person, other than such parties' respective legal and financial advisors and appropriate regulatory authorities, subject to the requirements of applicable law or NASDAQ rules.

Section 4.8. Notification of Certain Matters . Capital shall provide prompt notice to GFN, AFC and Newco, and GFN, AFC and Newco shall provide prompt notice to Capital, of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which has caused or would be likely to cause any representation or warranty contained in this Agreement to become untrue or inaccurate such that the conditions to consummation of the Merger or Stock Transfer as set forth in Article 5, as applicable, would not be satisfied and (ii) any failure of Capital, Stockholder, GFN, AFC or Newco, as the case may be, to comply with or satisfy in any material respect any covenant, agreement or condition to be complied with or satisfied by it hereunder such that the conditions to consummation of the Merger as set forth in Article 5, as applicable, would not be satisfied; provided , however , that the delivery of any notice pursuant to this Section 4.8 shall not cure such breach or non-compliance or limit or otherwise affect the remedies available hereunder to the party receiving such notice.

Section 4.9. Termination of 401(k) Plan . Capital and each ERISA Affiliate that is a plan sponsor of a 401(k) plan agrees to adopt resolutions to terminate its 401(k) plan and fully vest plan participants immediately prior to the Closing Date, unless GFN, in its sole and absolute discretion, provides Capital with written notice at least seven (7) days before the Closing Date that any such 401(k) plan shall be continued after the Closing Date. Unless such notice is received, GFN shall receive from Capital evidence that the Board of Directors of Capital or the particular ERISA Affiliate, as appropriate, has adopted resolutions to terminate its 401(k) plan (the form and substance of which resolutions shall be subject to review and approval of GFN), effective as of the day immediately preceding the Closing Date but contingent on the Merger becoming effective.

Section 4.10. Lump Sum Distributions . In the event that Capital or any ERISA Affiliate terminates any 401(k) plan pursuant to Section 4.9, above, Capital and each ERISA Affiliate agrees to amend any Capital- or ERISA Affiliate-sponsored profit sharing plan that is intended to be qualified under Code Section 401(a), including any 401(k) plan, to provide that plan distributions shall be made solely in the form of a lump sum and any other forms of distribution shall cease to be available after the ninety (90) day period described in United States Income Tax Treasury Regulation section 1.411(e)(1)(ii)(A). Subject to the preceding sentence, such amendment shall be adopted pursuant to the same resolutions provided for under Section 4.9 and shall be contingent on the Merger becoming effective.

Section 4.11. Employee Benefits .

(a)

GFN agrees that it will provide individuals who are employees of Capital immediately before the Effective Time (other than any employees subject to collective bargaining agreements) and who continue to be employed by Capital or GFN or any affiliates of GFN, after the Effective Time ("Pre-Closing Capital Employees"), with compensation and employee benefits that are, in the aggregate, not less favorable than those provided to such employees by Capital before the Effective Time. The foregoing shall not be construed to prevent, following the Effective Time, the termination of employment of any Pre-Closing Capital Employee.

(b)

The provisions of this Section 4.11 are not intended to create rights of third party beneficiaries.

Section 4.12. Takeover Statutes . If any anti-takeover or similar statute or regulation is or may become applicable to the transactions contemplated hereby, the parties hereto and each of them shall use their respective reasonable best efforts to grant or secure any required consents or approvals and take all such actions as are reasonable and legally permissible so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to eliminate or minimize the effects (including any resulting delays) of any such statute or regulation on the transactions contemplated hereby.

Section 4.13. Tax Free Reorganization Each of Capital, Stockholder, GFN, AFC and Newco agrees to refrain from taking any action prior to, on, or after the Effective Time that might reasonably be expected to cause the Merger to fail to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code.

Section 4.14. Property Lease . Within thirty (30) days after the Closing Date, GFN, AFC and Capital shall enter into a lease agreement with Stockholder or an affiliate of Stockholder, providing for the lease to GFN, AFC and/or Capital of the premises constituting the present main office of Capital at 429 Saratoga Road in South Glens Falls, New York, on the terms and conditions set forth on Exhibit J attached hereto (the "Property Lease").

Section 4.15. Delivery of Seller's Disclosure Schedule . Within two (2) business days following the date of this Agreement, Capital and Stockholder agree to deliver to GFN and AFC the Seller's Disclosure Schedule referenced herein, containing the information required to be set forth therein as of the date of this Agreement or as of such other date as is specified therefor in this Agreement.

ARTICLE 5

CONDITIONS TO CONSUMMATION OF THE ACQUISITION

Section 5.1. Conditions to the Obligation of Each Party to the Merger to Effect the Merger . The obligation of each constituent entity to the Merger, such being Capital and Newco (each, a "Merger Party"; collectively, the "Merger Parties"), to effect the Merger, and the obligation of AFC to issue shares of AFC Common Stock at the Effective Time as Closing Consideration, is subject to the satisfaction at or prior to the Effective Time of the following conditions:

(a)

no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or other Governmental Entity having jurisdiction over a Merger Party or AFC that prohibits, restrains, enjoins or restricts the consummation of the Merger or the issuance of the Closing Consideration;

(b)

all regulatory approvals required to be received by one or more of the Merger Parties in order to consummate the Merger shall have been received and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired;

(c)

all other consents, approvals and waivers required to be received by one or more of the Merger Parties in order to consummate the Merger shall have been received and shall remain in full force and effect;

(d)

Capital and Newco shall have entered into the Plan of Merger, and AFC shall have joined in the Plan of Merger and the same shall be in full force and effect;

(e)

GFN, AFC, Newco, Capital and Stockholder shall have entered into the Post-Closing Payment Agreement and the same shall be in full force and effect;

(f)

GFN, AFC and Stockholder shall have entered into a certain Employment Agreement by and among GFN, AFC and Stockholder (the "Employment Agreement"), substantially in the form of Exhibit K attached hereto, and the same shall be in full force and effect;

(g)

the Certificate of Merger shall have been executed by the appropriate parties and the same shall have been accepted for filing with the Secretary of State of New York; and

(h)

no Capital shareholder shall have received or be entitled to receive any consideration in connection with the Merger, including any Post-Closing Consideration, in exchange for his or her shares of Capital in the Merger or in exercise of any rights of such a shareholder arising out of the Merger, except shares of AFC Common Stock and cash in lieu of any fractional share of AFC Common Stock otherwise receivable by such shareholder.

Section 5.2. Conditions to the Obligation of Capital to Effect the Merger . The obligation of Capital to effect the Merger is subject to the satisfaction at or prior to the Effective Time of the following conditions:

(a)

the representations and warranties of GFN, AFC and Newco contained in this Agreement and the Plan of Merger shall be true and correct in all material respects at and as of the Effective Time with the same effect as if made at and as of the Effective Time (except to the extent such representations specifically relate exclusively to an earlier date or dates, in which case such representations shall be true and correct in all material respects as of such earlier date or dates) and, on the Closing Date, GFN, AFC and Newco shall have delivered to Capital a certificate to that effect, executed by two (2) executive officers of each of GFN, AFC and Newco;

(b)

each of the covenants and obligations of GFN, AFC and Newco to be performed at or before the Effective Time pursuant to the terms of this Agreement and the Plan of Merger shall have been duly performed in all material respects at or before the Effective Time and, on the Closing Date, GFN, AFC and Newco shall have delivered to Capital a certificate to that effect, executed by two (2) executive officers of each of GFN, AFC and Newco;

(c)

the shares of AFC Common Stock issuable to Stockholder and any other Capital Shareholders as of the Effective Time pursuant to this Agreement and the Plan of Merger shall have been authorized for quotation on the NASDAQ upon official notice of issuance; and

(d)

there shall not have occurred and be continuing after the date of this Agreement a Material Adverse Effect on GFN or AFC.

Section 5.3. Conditions to the Obligation of Newco to Effect the Merger and AFC to Issue AFC Common Stock as Closing Consideration . The obligation of Newco to effect the Merger and of AFC to issue shares of AFC Common Stock as Closing Consideration are subject to the satisfaction at or prior to the Effective Time of the following conditions:

(a)

the representations and warranties of Capital and Stockholder contained in this Agreement and the Plan of Merger shall be true and correct in all material respects at and as of the Effective Time with the same effect as if made at and as of the Effective Time (except to the extent such representations specifically relate exclusively to an earlier date or dates, in which case such representations shall be true and correct in all material respects as of such earlier date or dates) and, on the Closing Date, Capital and Stockholder shall have delivered to GFN, AFC and Newco a certificate to that effect, executed by Stockholder in his capacity as an executive officer of Capital and individually;

(b)

each of the covenants and obligations of Capital and Stockholder to be performed at or before the Effective Time pursuant to the terms of this Agreement and the Plan of Merger shall have been duly performed in all material respects at or before the Effective Time and, on the Closing Date, Capital and Stockholder shall have delivered to GFN, AFC and Newco a certificate to that effect, executed by Stockholder in his capacity as an executive officer of Capital and individually;

(c)

there shall have not occurred and be continuing after the date of this Agreement a Material Adverse Effect on Capital; and

(d)

Stockholder and each other Capital Shareholder, if any, who is entitle to receive any shares of AFC Common Stock as of the Effective Time shall have delivered to AFC an executed Investment Letter substantially in the form attached hereto as Exhibit I dated as of the Closing Date.

ARTICLE 6

INDEMNIFICATION; REMEDIES

Section 6.1. Survival of Representations, Warranties and Covenants . The representations and warranties of the parties set forth in this Agreement, including information set forth in the Seller's Disclosure Schedule made as a part hereof, shall survive the Effective Time. No investigation by any party or its representatives prior to the Closing Date shall affect or limit the representations, warranties or covenants of any party set forth herein or be considered in determining whether any party shall have the right to be indemnified for any matter pursuant to this Agreement. The consummation by the parties hereto of the transactions contemplated hereby with knowledge of a breach of a representation, warranty, covenant or agreement by the other party shall not constitute a waiver of a claim for the non-breaching party's Damages (defined below), if any, with respect to such breach.

Section 6.2. Indemnification by Stockholder . Stockholder shall indemnify, defend and hold harmless GFN, AFC, Newco and their respective agents, representatives, employees, officers, directors, shareholders, controlling persons and affiliates (each, an "Indemnified Party" and collectively the "Indemnified Parties") from and against, and shall reimburse the Indemnified Parties for, any loss, liability, claim, damage or expense (including, but not limited to, costs of investigation and defense and reasonable attorneys' fees) incurred by the Indemnified Parties, or any of them, whether or not involving a third-party claim (collectively, "Damages"), arising from or in connection with (a) any inaccuracy in any of the representations and warranties of Capital or Stockholder in this Agreement or the Plan of Merger or in any agreement, certificate or other document delivered by Capital or Stockholder pursuant hereto or thereto, (b) any failure of Capital or Stockholder to perform or comply with any agreement to be performed or complied with by it under this Agreement or the Plan of Merger or any such other agreement, (c) any claim by any person for brokerage or finder's fees or similar payments in connection with any of the transactions contemplated hereunder as the result of brokers, finders or investment bankers retained by Capital or Stockholder, or (d) any claim by any direct or indirect holder or former holder of Capital Common Stock or other securities of Capital, other than Stockholder, arising out of the Acquisition, the Merger, the transactions relating thereto or negotiations leading thereto.

Section 6.3. Procedure for Indemnification – Third Party Claim . Promptly after receipt by an Indemnified Party of oral or written notice of a claim or the commencement of any proceeding against it, such Indemnified Party shall, if a claim in respect thereof is to be made against Stockholder under this Article 6, give written notice to Stockholder of the commencement thereof, but the failure to so notify Stockholder shall not relieve Stockholder of any liability that it may have to any Indemnified Party except to the extent Stockholder demonstrates that the defense of such action is prejudiced thereby. In case any such proceeding shall be brought against an Indemnified Party and it shall give notice to Stockholder of the commencement thereof, Stockholder shall be entitled to participate therein and, to the extent that it shall so desire (unless Stockholder is also a party to such proceeding and the Indemnified Party determines in good faith that joint representation would be inappropriate) to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party and, after notice from Stockholder to such Indemnified Party of its election so to assume the defense thereof, Stockholder shall not be liable to such Indemnified Party under Section 6.2 for any fees of other counsel or any other expenses with respect to the defense of such proceeding, in each case, subsequently incurred by such Indemnified Party in connection with the defense thereof. If Stockholder assumes the defense of such proceeding, (a) no compromise or settlement thereof may be effected by Stockholder without the Indemnified Party's consent (which shall not be unreasonably withheld) unless (i) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claims that may be made against the Indemnified Party and (ii) the sole relief provided is monetary Damages that are paid in full by Stockholder and (b) the Indemnified Party shall have no liability with respect to any compromise or settlement thereof effected without its consent. If notice is given to Stockholder of the commencement of any proceeding and Stockholder does not, within fifteen (15) business days after the Indemnified Party's notice is given, give notice to the Indemnified Party of Stockholder's election to assume the defense thereof, Stockholder shall be bound by any determination made in such action or any compromise or settlement thereof effected by the Indemnified Party. Notwithstanding the foregoing, if an Indemnified Party determines in good faith that (x) there is a conflict of interest between Stockholder and the Indemnified Party in the conduct of the defense of such third party claim or (y) there are specific defenses available to the Indemnified Party which are different from or additional to those available to Stockholder and which could be materially adverse to Stockholder, then the Indemnified Party shall have the right to assume and direct the defense of such claim. In such an event, (i) Stockholder shall not be bound by any determination of a proceeding so defended or any compromise or settlement thereof effected without the consent of Stockholder (which shall not be unreasonably withheld) and (ii) Stockholder shall pay the reasonable fees and disbursements of counsel of Stockholder and one counsel to all the Indemnified Parties. In any event, except as otherwise provided herein, the Indemnified Party and Stockholder may each participate, at the expense of each, in the defense of such claim. All indemnification obligations of Stockholder shall survive any termination of this Agreement pursuant to Article 7 hereof.

ARTICLE 7

TERMINATION; AMENDMENT; WAIVER

Section 7.1. Termination of Merger . This Agreement may be terminated and the Merger provided for herein and in the Plan of Merger may be abandoned at any time prior to the Closing Date:

(a)

by mutual written consent of GFN, AFC, Newco, Capital and Stockholder;

(b)

by either GFN or Capital, if (i) any court of competent jurisdiction or other governmental entity having jurisdiction over a party hereto shall have issued a final order, decree or ruling, or taken any other final action, permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action is or shall have become nonappealable or (ii) the Acquisition has not been completed by November 30, 2004 (the "Final Date"), provided, however, that no party may terminate this Agreement pursuant to this clause (ii) if such party's failure to fulfill any of its obligations under this Agreement or the Plan of Merger shall have been the reason that the Acquisition shall not have been completed on or before the Final Date;

(c)

by Capital, if (i) there shall have been a breach of any representation or warranty on the part of GFN, AFC or Newco set forth in this Agreement or the Plan of Merger, or if any such representation or warranty of GFN, AFC or Newco shall have become untrue, in either case, such that the condition set forth in Section 5.2(a) would be incapable of being satisfied by the Final Date, provided that neither Capital nor Stockholder has breached any of the obligations of such party hereunder or under the Plan of Merger in any material respect which breach shall be continuing at such time; or (ii) there shall have been a material breach by GFN, AFC or Newco of any of its covenants or obligations to be performed under this Agreement or the Plan of Merger, and GFN, AFC or Newco, as the case may be, has not cured such breach (if capable of being cured) within twenty (20) business days after notice by Capital thereof, provided that neither Capital nor Stockholder has breached any of the obligations of such party hereunder or under the Plan of Merger in any material respect which breach shall be continuing at such time.

(d)

by GFN, if (i) there shall have been a breach of any representation or warranty on the part of Capital or Stockholder set forth in this Agreement or the Plan of Merger, or if any such representation or warranty of Capital or Stockholder shall have become untrue, in either case, such that the condition set forth in Section 5.3(a) would be incapable of being satisfied by the Final Date, provided that none of GFN, AFC and Newco has breached any of its obligations hereunder or under the Plan of Merger in any material respect which breach shall be continuing at such time; or (ii) there shall have been a material breach by Capital or Stockholder of any of its covenants or obligations to be performed under this Agreement or the Plan of Merger, and Capital or Stockholder has not cured such breach (if capable of being cured) within twenty (20) business days after notice by GFN thereof, provided that none of GFN, AFC and Newco has breached any of its obligations hereunder or under the Plan of Merger in any material respect which breach shall be continuing at such time; or (iii) the Seller’s Disclosure Schedule delivered to GFN and AFC within two (2) business days following execution of this Agreement pursuant to Section 4.15 above, and setting forth certain information relating to Capital and Stockholder, reveals any change, event or condition relating to the business, results of operations, financial condition, assets, prospects, corporate structure or customer base of Capital or the financial condition, prospects or business of Stockholder not previously known to GFN or AFC or their agents, employees or representatives that, individually or in the aggregate, might reasonably be understood to constitute a materially adverse effect on any of the foregoing or to materially diminish the attractiveness of the Acquisition from the perspective of GFN and AFC.

Section 7.2. Effect of Termination . Upon the termination and abandonment of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and have no effect and there shall be no consequent liability under this Agreement on the part of any party hereto, or any of its respective affiliates, directors, officers or shareholders, to any other party hereto, or any of its respective affiliates, directors, officers or shareholders, and the provisions of this Agreement shall not survive such termination, other than the provisions of this Section 7.2, Sections 4.5(b) and 4.7, and all of Article 6, provided, however, that nothing contained in this Section 7.2 shall relieve any party from liability for any breach of this Agreement prior to such termination or for liability arising other than pursuant to this Agreement.

Section 7.3. Amendment. To the extent permitted by applicable law, this Agreement may be amended the parties hereto, by action taken by or on behalf of the respective Boards of Directors of Capital, GFN, AFC and Newco and with the approval of Stockholder. Any such amendment must be by an instrument in writing signed on behalf of all of the parties hereto.

Section 7.4. Waiver . Any provision of this Agreement may be waived at any time by the party or parties for whose benefit such provision was included. No such waiver shall be effective unless in writing and signed by such party or all such parties.

ARTICLE 8

MISCELLANEOUS

Section 8.1. No Registration of AFC Stock . Capital and Stockholder acknowledge and understand that (i) the offer and sale by AFC of the shares of AFC Common Stock to be issued pursuant to this Agreement and pursuant to the Post-Closing Payment Agreement to Stockholder and any other Capital Shareholders, or their successors and assigns, have not been and will not be registered under the Securities Act; (ii) the shares of AFC Common Stock to be issued at the Effective Time are being offered and sold by AFC in reliance upon an exemption from the Securities Act under Section 3(a)(11) and Rule 147 promulgated by the SEC pursuant thereto; (iii) there are substantial restrictions on the transferability of such shares of AFC Common Stock as a result of Section 3(a)(11) of the Securities Act and Rule 147 promulgated by the SEC pursuant thereto, including the requirement that during the period extending from the Closing Date until the date nine (9) months after the Closing Date, no such shares may be sold by Stockholder or any other person receiving or holding such shares to any other person who is not also a resident of the State of New York; (iv) the stock certificates issued by the Exchange Agent of AFC evidencing such shares will bear a legend setting forth the restriction on resale described in the preceding subsection (iii); (v) the shares will be subject to a stop transfer order entered on the books of the transfer agent of AFC Common Stock that will procure transfer thereof during the time period specified in subsection (iii) above, unless the restrictions identified therein are complied with; and (vi) certain other conditions and restrictions may apply to the sale or transfer of such shares, all as further provided in the Investment Letter.

Section 8.2. Entire Agreement; Assignment . This Agreement and the Plan of Merger, together with the Exhibits and Seller's Disclosure Schedules hereto and thereto and instruments and other documents and agreements referred to herein or therein, including the Post-Closing Payment Agreement, (i) constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all other prior agreements and understandings both written and oral between the parties with respect to the subject matter hereof, and (ii) shall not be assigned by operation of law or otherwise; provided , however , that Newco may assign any or all of its rights and obligations under this Agreement or the Plan of Merger to any other subsidiary of GFN, but no such assignment shall relieve Newco of its obligations hereunder or thereunder if such assignee does not perform such obligations.

Section 8.3. Validity . If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and to such end the provisions of this Agreement are agreed to be severable.

Section 8.4. Notices . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by facsimile or by registered or certified mail (postage prepaid, return receipt requested) to each other party as follows:

if to GFN, AFC or Newco:	Glens Falls National Bank and Trust Company 250 Glen Street Glens Falls, New York Attention: Chief Executive Officer Telephone: (518) 745-1000 Facsimile: (518) 761-0805
with a copy to:	Stinson Morrison Hecker LLP 100 South Fourth, 7 ^th Floor St. Louis, MO 63102 Attention: Thomas B. Kinsock, Esq. Telephone: (314) 259-4596 Facsimile: (314) 259-4599
if to Capital or Stockholder to:	Capital Financial Group, Inc. 429 Saratoga Road South Glens Falls, NY Attn: John Webber Telephone: (518) 793-2885 Facsimile: (518) 798-7502
with a copy to:	William L. Nikas 116 Oak Street P.O. Box 267 Hudson Falls, NY 12839 Telephone: (518) 747-4169 Facsimile: (518) 747-8459

or to such other name and address as the person to whom notice was initially to have been given may have previously furnished to the other parties in writing in the manner set forth above.

Section 8.5. Governing Law . This Agreement shall be governed by and construed in accordance with the National Bank Act (to the extent applicable), and otherwise the laws of the State of New York without regard to the principles of conflicts of law set forth therein.

Section 8.6. Descriptive Headings; Section References . The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. All references herein to Articles, Sections, subsections, paragraphs and clauses are references to Articles, Sections, subsections, paragraphs and clauses of this Agreement unless specified otherwise.

Section 8.7. Parties in Interest . This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns, including permitted assigns under Section 8.2 hereof, and, except as expressly provided herein, nothing in this Agreement is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement.

Section 8.8. Certain Definitions . For the purposes of this Agreement the term:

(a)

"affiliate" means (except as otherwise provided in Sections 2.20 and 4.12) a person that, directly or indirectly, through one or more intermediaries controls, is controlled by or is under common control with the first-mentioned person;

(b)

"business day" means any day other than a day on which banks in New York are required or authorized by law to be closed;

(c)

"capital stock" means common stock, preferred stock, partnership interests, limited liability company interests or other ownership interests entitling the holder thereof to vote with respect to general elections of directors of the issuer;

(d)

"Contract" means all written or oral contracts, agreements, notes, bonds, indentures, mortgages, guarantees, options, leases, licenses, sales and purchase orders, warranties, commitments and other instruments of any kind;

(e)

"knowledge" or "known" means, with respect to any matter in question, the actual knowledge of such matter of any executive officer of Capital, GFN, AFC or Newco as the case may be. Any such individual will be deemed to have actual knowledge of a particular fact, circumstance, event or other matter if (i) such fact, circumstance, event or other matter is reflected in one or more documents (whether written or electronic, including e-mails sent to or by such individual) in, or that have been in, such individual's possession, including personal files of such individual; or (ii) such fact, circumstance, event or other matter is reflected in one or more documents (whether written or electronic) contained in books and records of Capital (in the case of knowledge of Capital) or GFN, AFC or Newco (in the case of knowledge of GFN, AFC or Newco) that would reasonably be expected to be reviewed by an individual who has the duties and responsibilities of such individual in the customary performance of such duties and responsibilities.

(f)

"include" or "including" means "include, without limitation" or "including, without limitation," as the case may be, and the language following "include" or "including" shall not be deemed to set forth an exhaustive list;

(g)

"Lien" means, with respect to any asset (including any security), any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset; provided , however , that the term "lien" shall not include (i) statutory liens for Taxes, which are not yet due and payable or are being contested in good faith by appropriate proceedings and, with respect to Capital, are disclosed in Section 2.12(b) of the Seller's Disclosure Schedule, (ii) statutory or common law liens to secure landlords, lessors or renters under leases or rental agreements confined to the premises rented, (iii) deposits or pledges made in connection with, or to secure payment of, workers' compensation, unemployment insurance, old age pension or other social security programs mandated under applicable laws, (iv) statutory or common law liens in favor of carriers, warehousemen, mechanics and materialmen to secure claims for labor, materials or supplies and other like liens and (v) restrictions on transfer of securities imposed by applicable state and federal securities laws;

(h)

"Material Adverse Effect" means, with respect to any specified party to this Agreement, any event, change, condition, fact or effect which has or could reasonably be expected to have a material adverse effect on (i) the business, results of operations, or financial condition of such party and its subsidiaries taken as a whole or (ii) the ability of such party to consummate the transactions contemplated by this Agreement; and

(i)

"person" means an individual, corporation, partnership, limited liability company, association, trust, unincorporated organization or other legal entity, including any Governmental Entity.

Section 8.9. No Personal Liability . This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect shareholder, officer, director, employee, agent or representative of GFN, AFC or Newco or of any shareholder, officer, director, employee, agent or representative of Capital, except for (i) any personal liability or obligation arising under applicable law, and (ii) any personal liability or obligation of Stockholder as may arise under the express terms of this Agreement.

Section 8.10. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same Agreement.

Section 8.11. Rules of Construction . The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement, and, therefore, waive the application of any applicable law, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

Section 8.12. Arbitration . Any claim or dispute between the parties hereto arising out of or in connection with this Agreement or any of the provisions hereof, or the interpretation, meaning or effect hereof, or the transactions contemplated hereby, shall be submitted to and determined by arbitration in Glens Falls, New York in accordance with the procedures, rules and regulations of the American Arbitration Association as in effect at such time, subject to the procedures set forth below. Each of GFN (on behalf of itself and its affiliates) and Capital (on behalf of itself and Stockholder) shall select a person who, in the selecting party's sole discretion, it believes to be qualified to act as an arbitrator. The two arbitrators so chosen shall attempt to resolve any dispute by consensus. If the two arbitrators so chosen by the parties are unable to resolve the dispute, said arbitrators shall jointly select a third arbitrator and the dispute shall be resolved by the majority determination of the three arbitrators. The decision, findings or award of the arbitrator(s) in the matter determined as specified above shall be final and nonappealable and binding upon the parties (and their respective successors) with respect to the subject matter herein concerned, and judgment thereon may be entered in any court or forum having jurisdiction thereof.

Section 8.13. Expenses . Except as expressly otherwise provided herein, or as may subsequently be agreed by the parties involved, each party hereto shall bear its own expenses, in each case incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representatives, counsel and accountants and all filing fees in connection with filings made with Governmental Entities (as defined in Section 2.5).

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, each of the parties has executed this Agreement or caused this Agreement to be duly executed on its behalf as of the day and year first above written.

GLENS FALLS NATIONAL BANK AND TRUST COMPANY

By:

Name:

Title:

ARROW FINANCIAL CORPORATION

By:

Name:

Title:

429 SARATOGA ROAD CORPORATION

By:

Name:

Title:

CAPITAL FINANCIAL GROUP, INC.

By:

Name:

Title:

STOCKHOLDER

John Weber

Exhibit A

Plan of Merger

"B" Reorganization

_____________________________________________________________________________

PLAN OF MERGER

dated as of November 29, 2004

between

CAPITAL FINANCIAL GROUP, INC.

and

429 SARATOGA ROAD CORPORATION

and joined in by

ARROW FINANCIAL CORPORATION

"B" Reorganization

PLAN OF MERGER

This PLAN OF MERGER ("Plan of Merger") dated as of November 29, 2004, between CAPITAL FINANCIAL GROUP, INC., a New York corporation and licensed insurance agency ("Capital") and 429 SARATOGA ROAD CORPORATION ("Newco"), a New York corporation and a wholly owned subsidiary of Glens Falls National Bank and Trust Company, a national bank with its main office in Glens Falls, New York ("GFN") and joined in by ARROW FINANCIAL CORPORATION ("AFC"), parent holding company of GFN.

WHEREAS, the Boards of Directors of Capital and Newco have determined that it is in the best interests of their respective companies and the shareholders of each to consummate the merger of Newco with and into Capital (the "Merger"), in accordance with the terms and conditions set forth herein and in a certain Agreement and Plan of Reorganization, dated the date hereof (the "Acquisition Agreement"), by and among GFN, AFC, Newco, Capital, and John Weber, the beneficial owner of all of the outstanding shares of capital stock of Capital ("Stockholder"); and

WHEREAS, pursuant to the Merger, GFN will acquire one hundred percent (100%) of the outstanding stock of Capital; and

WHEREAS, the Board of Directors of AFC has determined that it is in the best interests of AFC that the Merger be consummated and that shares of the common stock of AFC be issued to the former shareholders of Capital, and their successors, upon and after consummation of the Merger, as the sole consideration for their shares of stock of Capital, and in this regard has determined that AFC will join in this Plan of Merger.

NOW, THEREFORE, in consideration of the mutual premises contained herein, the parties hereto agree as follows:

ARTICLE 9

THE MERGER

Section 9.1. Constituent Entities; Surviving Corporation . The name of the merging corporation is "429 Saratoga Road Corporation." The name of the receiving corporation is "Capital Financial Group, Inc." The name of the corporation surviving the Merger is the name of the receiving corporation, "Capital Financial Group, Inc."

Section 9.2. Effective Time; Closing Date . The Merger will become effective as of a time and date respectively, (the "Effective Time"; and the "Closing Date") and at a place to be agreed upon by the merging parties, which time and date shall be not later than 11:59 p.m. on the second business day after satisfaction of the last to occur of the conditions to effectiveness of the Merger set forth in the Acquisition Agreement and shall be specified in a Certificate of Merger relating to the Merger. The Certificate of Merger will be duly executed and acknowledged by the appropriate parties on the Closing Date and thereafter delivered to the Secretary of State of the State of New York for filing pursuant to Section 904 of the New York Business Corporation Law ("NYBCL").

Section 9.3. Effects of the Merger . The Merger shall have the effects set forth in Section 906 of the NYBCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of Capital and Newco shall vest in Capital, and all debts, liabilities and duties of Capital and Newco shall become the debts, liabilities and duties of Capital.

Section 9.4. Certificate of Incorporation and Bylaws . At the Effective Time, the Certificate of Incorporation of Capital as in effect immediately prior thereto shall continue as the Certificate of Incorporation of Capital, amended at such time as set forth in Exhibit A hereto. At the Effective Time, the By-Laws of Capital as in effect immediately prior thereto shall continue as the By-Laws of Capital, amended at such time to read in their entirety as set forth in Exhibit B hereto.

Section 9.5. Directors . As of the Effective Time, the directors of Capital shall become and consist exclusively of the five (5) individuals listed on Exhibit C hereto, each such director to hold office in accordance with the Certificate of Incorporation and By-Laws of Capital until such director's successor is duly elected or appointed and qualified.

Section 9.6. Officers . As of the Effective Time, the officers of Capital shall become and consist exclusively of the named individuals serving in the positions listed for each in Exhibit D hereto, each such officer to hold office in accordance with the Certificate of Incorporation and By-Laws of Capital until such officer's successor is duly elected or appointed and qualified.

ARTICLE 10

EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT ENTITIES

Section 10.1. Capital Stock of Capital . As of the date of this Plan of Merger, Capital has authorized capital stock of two hundred (200) shares, all of which are shares of common stock, stated value $10.00 per share ("Capital Common Stock"). One hundred (100) shares of Capital Common Stock are issued and outstanding; no such shares are held in the treasury of Capital.

Section 10.2. Capital Stock of Newco . As of the date of this Plan of Merger, Newco has authorized capital stock of one hundred (100) shares, all of which are shares of common stock, par value $100.00 per share ("Newco Common Stock"). Ten (10) shares of Newco Common Stock are issued and outstanding; no such shares are held in the treasury of Newco.

Section 10.3. Conversion of Shares; Distribution of Shares .

(a)

At the Effective Time, each share of Capital Common Stock issued and outstanding immediately prior thereto, except for any such shares held by AFC or affiliates of AFC ("Excluded Shares"), shall, by virtue of the Merger and without further action on the part of any party, be converted into and become (a) a number of fully paid and nonassessable shares of common stock, par value $1.00 per share, of AFC ("AFC Common Stock") equal to (i) one (1), multiplied by (ii) the Conversation Ratio, as defined in the ensuing sentence, and (b) the right to receive certain additional consideration after the Closing Date, including (I) a proportionate share of the Adjustment Amount, payable to former holders of Capital Common Stock pursuant to Section 2.3(e) below, and (II) if certain future conditions are satisfied, a proportionate share of certain Post-Closing Consideration, payable to former holders of Capital Common Stock or their successors pursuant to Section 2.3(f) below. The "Conversion Ratio" shall be that number, rounded to the nearest ten-thousandth (four decimal places), obtained by dividing "A" by "B", where "A" equals (x) the Closing Consideration, that is, One Million Nine Hundred Eight Thousand Twenty-seven Dollars ($1,908,027), divided by (y) the number of shares of Capital Common Stock issued and outstanding immediately prior to such time (excluding any Excluded Shares), and where "B" equals the AFC Stock Value, as defined in the ensuing sentence. The "AFC Stock Value" for purposes of this Plan of Merger shall equal the average daily closing price per share of AFC Common Stock as reported on the NASDAQ Stock Market ("NASDAQ") reporting system for the ten (10) consecutive trading days ending on and including the second trading day preceding the Closing Date, rounded to the nearest one-hundredth (1/100) of a cent.

(b)

At the Effective Time, each share of Capital Common Stock, if any, held held by AFC or any affiliate of AFC immediately prior thereto shall, by virtue of the Merger and without any further action on the part of any party, be canceled, retired and cease to exist, and no shares of AFC Common Stock or any other consideration shall be delivered with respect thereto.

(c)

At the Effective Time, each share of Newco Common Stock issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action on the part of any party, be converted into and become ten (10) shares of Capital Common Stock.

(d)

Following the Closing Date, each record holder of outstanding shares of Capital Common Stock, other than Excluded Shares, immediately prior to the Effective Time (each, a "Holder", collectively, the "Holders") shall, upon surrender to AFC's exchange agent ("Exchange Agent") of the certificate or certificates representing such Holder's shares of Capital Common Stock ("Capital Stock Certificates"), receive in exchange therefore from the Exchange Agent a certificate or certificates representing the shares of AFC Common Stock into which such Holder's shares of Capital Common Stock were converted at the Effective Time ("AFC Stock Certificates"), in accordance with Section 2.3(a) above. In lieu of the issuance to any Holder of fractional shares of AFC Common Stock, such Holder shall receive from the Exchange Agent an amount of cash (without interest) determined by multiplying the AFC Stock Value by the fractional share interest to which such Holder would otherwise be entitled. The parties acknowledge that payment of cash consideration in lieu of issuing fractional shares of AFC Common Stock was not separately bargained for consideration, but merely represents a mechanical rounding off for purposes of simplifying the corporate and accounting complexities that would otherwise be caused by the issuance of fractional shares. Holders of shares of Capital Common Stock will have no dissenters' or appraisal rights in connection with the Merger.

(e)

Following the Closing Date, there also shall be distributed to the Holder or Holders who have surrendered their Capital Stock Certificates and received in exchange therefor AFC Stock Certificates, pursuant to Section 2.3(d) above, (each, an "Exchanging Shareholder") a proportionate share of the Adjustment Amount payable to Exchanging Shareholders, based on the Closing Date, as defined under Section 1.6(c) of the Acquisition Agreement, which distribution shall be in the form of shares of AFC Common Stock, as provided in such Section 1.6(c).

(f)

In periods following the Closing Date, there also shall be distributed to each Exchanging Shareholder, or his or her successors, if Capital delivers certain financial targets in such periods, a proportionate share of distributions of Post-Closing Consideration payable to Exchanging Shareholders and their successors, as defined and provided for in a certain Post-Closing Payment Agreement, dated the date of the Acquisition Agreement, by and among GFN, AFC, Newco, Capital and Stockholder, which distributions shall be in the form of shares of AFC Common Stock, as provided in such Post-Closing Payment Agreement.

ARTICLE 11

REPRESENTATIONS AND WARRANTIES; COVENANTS

Section 11.1. Representations, Warranties and Covenants of the Parties . The representations, warranties and covenants of the parties hereto, including AFC, given by any of them to any other of them in Sections 2, 3, or 4 of the Acquisition Agreement are hereby given again by such party to each such other party as a part of this Plan of Merger, as of the date hereof and/or as of such other date or dates as such representations, warranties or covenants may be given by such party to such other parties in the Acquisition Agreement, and each such representation, warranty and covenant is incorporated by reference herein.

ARTICLE 12

CONDITIONS TO CLOSING

Section 12.1. Conditions to Each Party's Obligation To Effect the Merger . The conditions to the respective obligations of the parties hereto, including AFC, to effect the Merger shall be those conditions set forth in Sections 5.1, 5.2 and 5.3 of the Acquisition Agreement.

ARTICLE 13

GENERAL PROVISIONS

Section 13.1. Definitions . All capitalized terms used herein but not defined herein shall have the meanings set forth in the Acquisition Agreement.

Section 13.2. Survival of Representations, Warranties and Covenants . The representations, warranties and covenants in this Plan of Merger, whether set forth herein or incorporated herein by reference from the Acquisition Agreement, shall survive the Closing Date as provided herein or in the Acquisition Agreement, which survival terms contained in the Acquisition Agreement are also incorporated herein by reference.

Section 13.3. Counterparts . This Plan of Merger may be adopted, certified and executed in separate counterparts, which taken together shall be considered one and the same agreement, and this Plan of Merger shall become effective when all counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.

Section 13.4. Governing Law . This Plan of Merger shall be governed and construed in accordance with the laws of the State of New York without regard to any applicable conflicts of law.

Section 13.5. Binding Agreement; Assignment . This Plan of Merger shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns, including permitted assigns under the following sentence of this section. Neither this Plan of Merger nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of each other party hereto, except as specifically provided in Section 8.2 of the Acquisition Agreement, which provision is incorporated herein by reference.

IN WITNESS WHEREOF, the parties hereto, including AFC, have caused this Plan of Merger to be signed by their duly authorized officers as of the day and year first above written.

429 SARATOGA ROAD CORPORATION

By: _____________________________

Name:__________________________

Title:___________________________

CAPITAL FINANCIAL GROUP, INC.

By _____________________________

Name:__________________________

Title:___________________________

ARROW FINANCIAL CORPORATION

By _____________________________

Name:__________________________

Title:___________________________

EXHIBIT A

Certificate of Incorporation of Capital Financial Group, Inc.,

as Amended at the Effective Time of the Merger

[No change]

EXHIBIT B

By-Laws of Capital, as Amended

at the Effective Time of the Merger

[ No change]

EXHIBIT C

Directors of Capital

at the Effective Time of the Merger

Name

John Weber

John J. Murphy

David S. DeMarco

Gerard R. Bilodeau

Terry R. Goodenote

EXHIBIT D

Officers of Capital

at the Effective Time of the Merger

Name

Position with Capital Post-Closing

John Weber

President and CEO

John J. Murphy

Vice President and Assistant Secretary

David S. DeMarco

Vice President

Gerard R. Bilodeau

Secretary

Terry R. Goodenote

Treasurer

Kristy A. Laney

Vice President

Exhibit B

CERTIFICATE OF MERGER

______________________________________________________

AND

______________________________________________________

INTO

______________________________________________________

UNDER SECTION 904 OF THE BUSINESS CORPORATION LAW

(a) The name of the merging corporation is

(b) The name of the surviving corporation is

and following the merger its name shall be

As to each constituent corporation, the designation and number of outstanding shares of each class and series and the voting rights thereof as follows:

Name of Corporation

Designation and number of shares

in each class or

series outstanding

Class or series of shares entitled to vote

Shares entitled to vote as a class or series

(If the number of shares is subject to change prior to the effective date, state the manner in which such change may occur.)

The date when the certificate of incorporation of each constituent corporation was filed by the Department of State is as follows:

NAME OF CORPORATION

DATE OF INCORPORATION

The merger was adopted by each constituent corporation in the following manner:

(a) As to ___________________________________________________,

(name of corporation)

by the written consent of the shareholders given in accordance with Section 615 of the Business Corporation Law, written notice having been duly given to nonconsenting shareholders as and to the extent required by such Section.

and

(b) As to ___________________________________________________,

(name of corporation)

by the affirmative vote of * the holders of a majority of all outstanding shares* entitled to vote thereon.

The merger shall be effective on the __________ day of __________, ________.

[Repeat execution for each constituent corporation]

________________________________

(name of corporation)

________________________________

(signature)

________________________________

(type name and title of person signing)

Exhibit C

Certificate of Incorporation of Capital

(as amended at the Merger Effective Time)

[No change]

Exhibit D

By-Laws of Capital

(as amended at the Merger Effective Time)

[No change]

Exhibit E

Directors of Capital

(at the Merger Effective Time)

Name

John Weber

John J. Murphy

David S. DeMarco

Gerard R. Bilodeau

Terry R. Goodenote

Exhibit F

Officers of Capital

(at the Merger Effective Time)

Name

Position with Capital Post-Closing

John Weber

President and CEO

John J. Murphy

Vice President and Assistant Secretary

David S. DeMarco

Vice President

Gerard R. Bilodeau

Secretary

Terry R. Goodenote

Treasurer

Kristy A. Laney

Vice President

Exhibit G

Calculation of Balance Sheet Value at Closing Date

Calculation of Balance Sheet Value .

The "Balance Sheet Value of Capital" as of the close of business on the Closing Date, calculated pursuant to Section 1.2(f)(iii) of the Agreement , will consist of the line items set forth below:

Current Assets

Cash and Equivalents

Accounts Receivable

Other Current Assets

Total Current Assets

Current Liabilities

Premiums Payable

Other Current Liabilities

Total Current Liabilities

Working Capital Requirement ¹

Non-Operating Assets

_____________________________

¹ The working capital requirement will equal anticipated operation expenses for one month, such being [the average monthly operating expense for Capital for the 12-month period preceding the Closing Date].

The Balance Sheet Value of Capital will equal Total Current Assets minus Total Current Liabilities, minus Working Capital Requirement, plus Non-Operating Assets.

The Target Balance Sheet Value of Capital on the Closing Date is $_____________.

Exhibit H

Post Closing Payment Agreement

[Included with 10-K as a Separate Exhibit]

Exhibit I

Investment Letter

November 29, 2004

Board of Directors

Arrow Financial Corporation

250 Glen Street

Glens Falls, NY 12801

Attn:Mr. Gerard Bilodeau

Board of Directors

Glens Falls National Bank and Trust Company

250 Glen Street

Glens Falls, NY 12801

Attn:Mr. Gerard Bilodeau

In connection with my receipt of __________ shares (the "Shares") of the common stock, par value $1.00 per share, of Arrow Financial Corporation (the "Company"), in exchange for my shares of the common stock, no par value of Capital Financial Group, Inc. ("Capital"), upon consummation of the acquisition of Capital by the Company's wholly owned subsidiary, Glens Falls National Bank and Trust Company ("GFN"), on November 29, 2004 (the "Closing Date"), I represent to you that I am acquiring such Shares for investment for my own account and not with a view to distribute, resell or otherwise transfer such Shares. I understand the Shares have been issued to me by the Company without registration under the Securities Act of 1933, as amended (the "1933 Act") in reliance on the exemption from such registration set forth in Section 3(a)(11) of the 1933 Act and Rule 147 promulgated by the Securities and Exchange Commission thereunder (the "Exemption").

I represent to you that I am a bona fide resident of the State of New York. I also represent to you that if in the future I decide to sell or transfer any of the Shares, I will not sell or transfer or agree to sell or transfer any such Shares during the period extending from the Closing Date to the date nine (9) months after the Closing Date (the "Restriction Period") to any other person or entity, affiliated or unaffiliated with me ("Transferee"), unless (i) at the time of any such sale or transfer of any Shares ("Transferred Shares"), such Transferee, if an individual, is a bona fide resident of the State of New York, or if an entity, is incorporated and doing business within the State of New York within the meaning of the Exemption, (ii) such Transferee provides to the Company evidence to the Company, satisfactory to the Company, to substantiate such fact as well as a written affidavit certifying to such fact, and (iii) such Transferee executes an agreement with the Company, in the form of a letter or other agreement similar to this letter agreement, agreeing to restrictions on the subsequent sale or transfer by Transferee of the Transferred Shares to any subsequent transferee during the Restriction Period equivalent to the restrictions or sale or transfer of the Shares contained herein (the "Restrictions").

I agree that the Company may direct its stock transfer agent to enter on its books and records a stop transfer restriction on the Shares for the duration of the Restriction Period noting the Restrictions set forth herein, and that the Company may place a legend on the certificate or certificates evidencing the Shares stating that the Shares have not been registered under the 1933 Act in reliance on the Exemption and setting forth the Restrictions.

I further agree that any dispute or controversy that arises out of this letter agreement or any term, provision or condition hereto, shall comply with and be governed in accordance with the laws of the State of New York applicable to agreements made and performed entirely within the State of New York and shall be settled by an action in a court located within Glens Falls, New York.

I understand and agree that the Company is issuing the Shares to me in reliance on the representations by me contained in this letter.

_________________________

John Weber

Agreed and Accepted:

ARROW FINANCIAL CORPORATION

By:______________________

[print name]

Agreed and Accepted:

GLENS FALLS NATIONAL BANK AND TRUST COMPANY

By:________________________

[print name]

Exhibit J

Terms of Lease for the Premises

Located at 429 Saratoga Road, South Glens Falls, New York

Lessor :

Stockholder or affiliate of Stockholder

Lessee :

AFC, GFN and Capital

Use :

Office of Capital or successors.

Rent :

$54,000 for first year post-closing. Three percent (3%) increase annually for each subsequent year of rental.

Term :

One year, option in the sole discretion of Lessee to renew for three (3) additional one-year terms.

Exhibit K

Employment Agreement

[Included with 10-K as a Separate Exhibit]

"B" Reorganization

______________________________________________________________________________

POST-CLOSING PAYMENT AGREEMENT

dated as of November 22, 2004

by and among

GLENS FALLS NATIONAL BANK AND TRUST COMPANY,

429 SARATOGA ROAD CORPORATION,

CAPITAL FINANCIAL GROUP, INC.,

ARROW FINANCIAL CORPORATION,

and

JOHN WEBER

______________________________________________________________________________

POST-CLOSING PAYMENT AGREEMENT

POST-CLOSING PAYMENT AGREEMENT, dated as of November 22, 2004 (this "Agreement"), by and among GLENS FALLS NATIONAL BANK AND TRUST COMPANY, a national bank headquartered in Glens Falls, New York ("GFN"); 429 SARATOGA ROAD CORPORATION, a New York corporation and wholly owned subsidiary of GFN ("Newco"); CAPITAL FINANCIAL GROUP, INC., a New York corporation ("Capital"); ARROW FINANCIAL CORPORATION, a New York corporation and parent holding company for GFN ("AFC"); and JOHN WEBER, the beneficial owner of all of the outstanding shares of capital stock of Capital ("Stockholder").

WHEREAS, simultaneously with the execution of this Agreement, GFN, AFC, Newco, Capital and Stockholder have entered into an Agreement and Plan of Reorganization, dated the date hereof (the "Acquisition Agreement"), pursuant to which GFN will acquire all of the outstanding capital stock of Capital by way of a merger (the "Merger") of a newly-organized subsidiary of GFN, 429 Saratoga Road Corporation, a New York corporation ("Newco"), with and into Capital, as a result of which Merger Capital will become a wholly owned subsidiary of GFN; and

WHEREAS, Newco and Capital have also simultaneously herewith entered into a Plan of Merger, dated the date hereof (the "Plan of Merger"), providing for the Merger, and AFC has joined in such Plan of Merger; and

WHEREAS, upon effectiveness of the Merger, the outstanding shares of common stock of Capital will automatically be converted into a certain number of shares of the common stock of AFC, based upon the Conversion Ratio set forth in the Acquisition Agreement and the Plan of Merger (the "Closing Consideration"), and each holder of shares of common stock of Capital immediately prior to effectiveness of the Merger will receive one or more certificates representing the shares of common stock of AFC into which such holder's common stock of Capital was converted in the Merger, upon surrender by such holder of the certificate or certificates representing such holder's shares of common stock of Capital; and

WHEREAS, under the Acquisition Agreement and Plan of Merger, the holder or holders of common stock of Capital prior to the Merger also may receive in periods after consummation of the Merger, in addition to the Closing Consideration, additional consideration in the form of additional shares of the common stock of AFC (the "Post-Closing Consideration"), if certain conditions relating to the financial success of Capital after the Merger are met; and

WHEREAS, the parties to the Acquisition Agreement and the Plan of Merger have determined to set forth the terms and conditions relating to such Post-Closing Consideration in this Agreement, which is being executed simultaneously with the Acquisition Agreement and the Plan of Merger and is incorporated by reference into such agreements and deemed by the parties hereto and thereto as part of such agreements;

NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein and in the Acquisition Agreement and Plan of Merger, and intending to be legally bound hereby, GFN, Newco, Capital, AFC and Stockholder agree as follows:

Section 1.

Post-Closing Consideration . If the merger of Newco with and into Capital (the "Merger"), as specified and provided for under the Acquisition Agreement and the Plan of Merger, becomes effective, each holder of shares of the common stock, no par value, of Capital ("Capital Common Stock") whose shares are converted into shares of the common stock, par value $1.00 per share, of AFC ("AFC Common Stock") upon consummation of the Merger (each such, a "Holder;" collectively, the "Holders"), and the successors of such Holder (any such, a "Successor"), may also receive from GFN and AFC (collectively, the "Purchaser"), in periods following such consummation and in addition to the consideration received by the Holder upon such consummation (the "Closing Consideration"), certain additional consideration as provided in this Agreement (the "Post-Closing Consideration"), if the conditions set forth herein are satisfied during such subsequent periods.

Section 2.

Form of Post-Closing Consideration . Any and all Post-Closing Consideration paid by the Purchaser under this Agreement to Holders and their Successors (collectively, "Payees;" any such, a "Payee") shall be paid exclusively in the form of shares of AFC Common Stock, with the single exception set forth below in this Section 2 regarding payment of cash in lieu of fractional shares. For purposes of determining the number of shares of AFC Common Stock deliverable to a Payee in payment of any amount of Post-Closing Consideration hereunder (any such, a "Payment"), the dollar amount of such Payment, expressed in U.S. Dollars, shall be divided by the AFC Stock Value, as defined below, calculated as of the valuation date for such Payment (the "Valuation Date"). In lieu of issuing any fractional share of AFC Common Stock to a Payee in connection with any such Payment, the Purchaser shall pay to the Payee a dollar amount in cash (without interest) determined by multiplying the AFC Stock Value, as calculated for such Payment, by the fractional share to which the Payee would otherwise be entitled. The parties acknowledge that payment of the cash consideration in lieu of issuing fractional shares of AFC Common Stock was not separately bargained for consideration, but merely represents a mechanical rounding off for purposes of simplifying the corporate and accounting complexities that would otherwise be caused by issuance of fractional shares. The "AFC Stock Value" for purposes of any Payment of Post-Closing Consideration under this Agreement shall equal the average daily closing price per share of AFC Common Stock as reported on the NASDAQ Stock Market ("NASDAQ") reporting system for the ten (10) consecutive trading days ending on and including the second trading day preceding the Valuation Date for such Payment, rounded to the nearest one-hundredth (1/100) of a cent.

Section 3.

Payments .

(a)

Annual Payments . Subject to the other provisions of this Agreement, for each of the five one-year periods (each such period, a "Measurement Year") following the date on which the Merger becomes effective (the "Merger Closing Date"), if the consolidated earnings before interest, taxes, depreciation and amortization of Capital for such Measurement Year, calculated as provided in paragraph (d) of this Section 3 ("Actual EBITDA"), exceeds the target EBITDA of Capital for such Measurement Year ("Target EBITDA"), the Purchaser shall pay to the appropriate Payee or Payees, determined as provided in paragraph (e) of this Section 3, on or before the sixtieth (60th) calendar day after the last day of such Measurement Year and in the form specified in Section 2, above, a Payment in an aggregate amount equal to the Full Annual Payment for such Measurement Year, as defined below; provided, however, that if the Actual EBITDA of Capital for any such Measurement Year does not exceed the Target EBITDA of Capital for such year but does equal or exceed an amount equal to ninety-five percent (95.00%), rounded downward to the nearest one-one hundredth of a percent, of such Target EBITDA (such amount, the "Reduced Target EBITDA"), the Purchaser shall pay to the appropriate Payee or Payees, on or before the sixtieth (60th) calendar day after the last day of such Measurement Year and in the form specified in Section 2, above, a Payment in an aggregate amount equal to the Reduced Annual Payment for such Measurement Year, as defined below.

(i)

Full Annual Payment . The "Full Annual Payment" for any Measurement Year shall equal Ninety Thousand Dollars ($90,000), multiplied by the Cost-of-Money Factor for such Measurement Year. The "Cost-of-Money Factor" for any Measurement Year is equal to the sum of (A) one (1.0), plus (B) the closing yield of a U.S. Treasury instrument having a maturity equal to the number of whole years ("Number of Years to Maturity") contained in the period extending from the Merger Closing Date to and through the last day of such Measurement Year, as such yield is quoted in The Wall Street Journal on the second business day before the Merger Closing Date, with such sum, in the case of each Measurement Year after the first Measurement Year, then to be compounded annually over the Number of Years to Maturity. The amount of the Full Annual Payment for each of the five Measurement Years immediately following the Merger Closing Date, reflecting the Cost-of-Money Factor for each of these years as calculated on the Merger Closing Date, will be set forth on a schedule executed by GFN and Capital on the Merger Closing Date substantially in the form of Schedule 3A-1 attached hereto, which schedule will be incorporated in and deemed a part of this Agreement.

(ii)

Reduced Annual Payment . The "Reduced Annual Payment" for any Measurement Year shall equal (A) the Full Annual Payment calculated for such Measurement Year, assuming for purposes of such calculation only that a Full Annual Payment is payable for such Measurement Year, multiplied by (B) a fraction, the numerator of which equals the Actual EBITDA of Capital for such Measurement Year, and the denominator of which equals the Target EBITDA of Capital for such Measurement Year.

(Full Annual Payments and Reduced Annual Payments are sometimes collectively referred to as "Annual Payments," or any such individually, as an "Annual Payment.")

Notwithstanding the foregoing provisions of this Section 3(a) or any other section of this Agreement, in determining whether an Annual Payment is payable for the fifth of the Five Measurement Years following the Merger Closing Date and whether a Deferred Payment is payable following such fifth Measurement Year, the relevant EBITDA calculations shall be made based upon the financial results of Capital for the first nine (9) months of such fifth Measurement Year. As soon as practicable after the conclusion of such nine-month period, the Actual EBITDA of Capital for such nine-month period will be determined and such amount will then be used to project the Actual EBITDA of Capital for the full fifth Measurement Year (i.e., annualized). The resulting assumed Actual EBITDA for the full fifth Measurement Year will then be utilized to determine whether an Annual Payment shall be payable for such fifth Measurement Year, and if so, in what amount. Payment of any Annual Payment for such fifth Measurement Year, as thus calculated, shall be made on or before the sixtieth (60th) calendar day after the last day of such nine-month period. The last day of the first nine (9) months of the fifth Measurement Year will be deemed the last day of the fifth Measurement Year for all purposes under this Agreement. For purposes of calculating the number of shares of AFC Common Stock deliverable to the Payee or Payees in payment of any Annual Payment payable for any Measurement Year, the Valuation Date utilized will be the last day of such Measurement Year, even if the Annual Payment is not payable or paid until a date after such last day. GFN and Capital will execute on the Merger Closing Date a schedule setting forth the Target EBITDA and Reduced Target EBITDA amounts for Capital for each of the Five Measurement Years (the "Target EBITDA Schedule"), substantially in the form of Schedule 3A-2 attached hereto, which schedule will be incorporated in and deemed a part of this Agreement.

(b)

Additional Annual Payments . If for any Measurement Year other than the last Measurement Year in the Full Measurement Period, the Actual EBITDA of Capital exceeds the Target EBITDA of Capital, the Purchaser shall perform certain calculations as provided in this Section 3(b) to determine whether an additional Payment is then payable to the appropriate Payee or Payees, in addition to the Annual Payment payable for such Measurement Year as specified in Section 3(a), above, and if an additional Payment is payable, the Purchaser shall make such Payment. Any additional Payment hereunder shall consist of one or more Retroactive Annual Payments and/or an Early Deferred Payment, as defined in subparagraphs (i) and (ii) below. The existence and amount of any such additional Payment shall depend, among other things, upon the amount by which the Actual EBITDA of Capital for the Measurement Year in question (the "Excess Year") exceeds the Target EBITDA of Capital for such year (such amount, the "Excess EBITDA Amount"). In determining the existence and amount of any such additional Payment, the Purchaser shall first perform the calculations regarding possible Retroactive Annual Payments as provided under subparagraph (i) below, and then shall perform the calculation regarding a possible Early Deferred Payment under subparagraph (ii) below. The aggregate amount of any additional Payment ultimately determined to be payable shall be paid at the same time, to the same Payee or Payees, in the same form and as of the same Valuation Date, as the Annual Payment payable for the Excess Year.

(i)

Retroactive Annual Payments . If the Excess Year is not the first Measurement Year in the Measurement Period and if, for any one or more of the Measurement Years preceding the Excess Year, the Actual EBITDA of Capital is less than the Target EBITDA of Capital (any such preceding Measurement Year, a "Short-Fall Year"), the Purchaser shall perform the following calculations to determine whether any one or more Retroactive Annual Payments shall then be payable:

(A)

The Excess EBITDA Amount for the Excess Year shall be added to the Actual EBITDA of Capital for the first Short-Fall Year preceding the Excess Year.

(B)

If the sum calculated under (A) continues to be less than the Target EBITDA of Capital for such Short-Fall Year, the Actual EBITDA of Capital for such year shall be adjusted upward to equal such sum, which thereafter shall be treated solely for purposes of this paragraph 3(b) as the Actual EBITDA of Capital for such year, unless and until any subsequent additional upward adjustment to the Actual EBITDA of Capital for such year shall be made under this subparagraph (i) following a subsequent Measurement Year that also is an Excess Year.

(C)

If (w) the sum calculated under (A) above is greater than (x) the Target EBITDA of Capital for the Short-Fall Year in question, the Actual EBITDA of Capital for such year shall be adjusted upward to equal the Target EBITDA of Capital for such year, which thereafter shall be treated solely for purposes of this paragraph 3(b) as the Actual EBITDA of Capital for such year, and the amount by which (w) exceeds (x) (the "Remaining Excess EBITDA Amount") shall then be added to the Actual EBITDA of Capital for the second Short-Fall Year preceding the Excess Year, if there is any such. If so, the Purchaser shall then perform for such second preceding Short-Fall Year the same recalculation of Actual EBITDA as was performed for the first preceding Short-Fall Year under subparagraph (B) above or this subparagraph (C), utilizing the Remaining Excess EBITDA Amount instead of the Excess EBITDA Amount for purposes of determining the upward adjustment of the Actual EBITDA of such second preceding Short-Fall Year. If after performing such recalculation, there continues to be a Remaining Excess EBITDA Amount and there shall be a third preceding Short-Fall Year, the Purchaser shall perform the same recalculation of the Actual EBITDA for the third preceding Short-Fall Year. If, following the recalculation of the Actual EBITDA of Capital for all Short-Fall Years preceding the Excess Year, there continues to be a Remaining Excess EBITDA Amount for the Excess Year, such amount shall be treated as the Excess EBITDA Amount for purposes of calculating the amount of the Early Deferred Payment that also will be payable to appropriate Payee(s) under subparagraph (ii), below, together with the Retroactive Annual Payment(s).

(D)

After upwardly adjusting the Actual EBITDA of Capital for one or more preceding Short-Fall Years, as provided under (B) and (C) above, the Purchaser shall recalculate the amount of the Annual Payment payable for each such Short-Fall Year under Section 3(a) of this Agreement, based on the adjusted Actual EBITDA for such year. The amount, if any, by which the recalculated Annual Payment for each such Short-Fall Year exceeds (y) the amount of any Annual Payment previously distributed for such year, plus (z) the amount of any previous Retroactive Annual Payments for such year, shall be payable as a Retroactive Annual Payment for such year. If the amount of such Retroactive Annual Payment, when added to the amount(s) of any previous Annual Payment and/or Retroactive Annual Payment(s), equals the Full Annual Payment for such year, a Full Annual Payment shall be deemed to have been distributed for such year and such year shall no longer be deemed a Short-Fall Year.

(ii)

Early Deferred Payment . If (A) the Excess Year is the first Measurement Year in the Measurement Period, or (B) the Excess Year is not the first Measurement Year in the Measurement Period but the Actual EBITDA of Capital for each preceding Measurement Year equals or exceeds the Target EBITDA of Capital for such year (including any upward adjustment to the Actual EBITDA of Capital for any preceding Measurement Year resulting from calculations performed under subparagraph (i), above), there shall be payable to the appropriate Payee or Payees, in addition to any Retroactive Annual Payment(s) then payable under subparagraph (i) above, a Payment (an "Early Deferred Payment") equal to ten percent (10%) of the Excess EBITDA Amount for the Excess Year.

(c)

Deferred Payment . Subject to the other provisions of this Agreement, if the Total Actual EBITDA of Capital (as defined below) for the 5-year period ending on the last day of the fifth Measurement Year (the "Full Measurement Period") exceeds the Total Target EBITDA of Capital (as defined below), the Purchaser shall pay to the appropriate Payee or Payees, determined as provided in paragraph (e) of this Section 3, on or before the sixtieth (60th) calendar day after the last day of such Measurement Period and in the form specified in Section 2, above, a Payment in an aggregate amount determined as provided in the second ensuing sentence (the "Deferred Payment"), reduced by the amount of all Early Deferred Payments previously paid pursuant to subparagraph (b)(ii) of this Section 3 above. The Valuation Date for the Deferred Payment will be the last day of the Full Measurement Period. The aggregate amount of the Deferred Payment (before adjustment for any Early Deferred Payments previously paid under subparagraph (b)(ii) of this Section 3) will be calculated as follows:

(i)

if the Total Actual EBITDA for the Full Measurement Period exceeds the Total Target EBITDA of Capital for such period but does not exceed Three Million Five Hundred Thousand Dollars ($3,500,000), the aggregate amount of the Deferred Payment will be thirty-five percent (35%) of the excess of such Total Actual EBITDA over such Total Target EBITDA;

(ii)

if the Total Actual EBITDA for the Full Measurement Period exceeds Three Million Five Hundred Thousand Dollars ($3,500,000) but does not exceed Four Million Five Hundred Thousand Dollars ($4,500,000), the aggregate amount of the Deferred Payment will be Three Hundred Forty-Six Thousand Two Hundred Twenty-Three and 50/100 Dollars $311,223.50 plus forty-five percent (45%) of the excess of such Total Actual EBITDA over Three Million Five Hundred Thousand Dollars ($3,500,000); and

(iii)

if the Total Actual EBITDA for the Full Measurement Period exceeds Four Million Five Hundred Thousand Dollars ($4,500,000), the aggregate amount of the Deferred Payment will be Seven Hundred Ninety-Six Thousand Two Hundred Twenty-Three and 50/100 Dollars $761,223.50 plus fifty-five percent (55%) of the excess of such Total Actual EBITDA over Four Million Five Hundred Thousand Dollars ($4,500,000), provided, however, that in no event may the aggregate amount of such Deferred Payment exceed Two Million Five Hundred Thousand Dollars ($2,500,000)(the "Maximum Deferred Payment").

The "Total Actual EBITDA" of Capital for the Full Measurement Period is the sum of the Actual EBITDA amounts for the five Measurement Years included therein, without regard to any upward adjustments in the Actual EBITDA of Capital effected pursuant to the provisions of subparagraph (b)(i) of this Section 3. The "Total Target EBITDA" of Capital for the Full Measurement Period is the sum of the Target EBITDA amounts for the five Measurement Years included therein, as set forth on the Target EBITDA Schedule.

(d)

Computation of EBITDA for Measurement Years and Other Periods . For purposes of this Agreement, the Actual EBITDA of Capital will be determined for each Measurement Year, and for any other appropriate period as specifically provided in this Agreement, as soon as practicable following the conclusion of such year or period, in accordance with U.S. generally accepted accounting principles ("GAAP") and the past historical practices of Capital prior to the Acquisition (except to the extent such practices were not consistent with GAAP), adjusted as provided in Exhibit A attached hereto. The format of the income statement expected to be utilized in calculating the Actual EBITDA of Capital hereunder, before the adjustments referred to in Exhibit A , will be substantially that income statement format reflected in Exhibit B attached hereto.

(e)

Determination of Payees; Payee Registry . All Post-Closing Payments that may become payable under this Agreement are payable exclusively to, and shall be paid only to, the particular Holder or Holders who received AFC Common Stock as Closing Consideration in the Merger, or the Successor or Successors of any such Holder (any such, a "Payee"), as determined on the particular payment date for each Payment hereunder. If more than one Holder receives shares of AFC Common Stock as Closing Consideration, all Post-Closing Consideration payable hereunder will be divided between or among the several such Holders receiving Closing Consideration (including the Successor or Successors of any such Holder or Holders) in the same proportions as such Holders received shares of AFC Common Stock in payment of the Closing Consideration. For purposes of effecting payments of Post-Closing Consideration hereunder, AFC or its transfer agent will maintain, until expiration or termination of this Agreement, a registry of the names and addresses of the Holder or Holders, and any Successor or Successors to any such of which it has received proper notice (the "Payee Registry"), and will distribute from time to time to registered Payees forms on which any Payee or his or her representative may notify AFC or its transfer agent of any change of address of the Payee or of any Successor to such Payee, for notation in the Payee Registry. The sale or other transfer by any registered Payee of any or all of the shares of AFC Common Stock previously received by such registered Payee as payment of Closing Consideration or Post-Closing Consideration will not affect the right of the Payee (or any Successor thereto) to receive from AFC any subsequent payment of Post-Closing Consideration, which right will remain with such Payee (or any Successor thereto) unless and until there shall be a transfer of such right in accordance with Section 3(f), below.

(f)

Non-Transferability of Rights . The right of any Holder or Successor under this Agreement to receive any payment of Post-Closing Consideration, whether in shares of AFC Common Stock or cash in lieu of any fractional share, as of any date after the Merger Closing Date upon satisfaction of the conditions set forth herein, is non-transferable by such Holder or Successor except in the event of the death of such Holder or Successor, in which event such right will transfer by will or similar instrument or the laws of intestacy or succession to one or more successors to such Holder or Successor, as provided under such instrument or law. Any other transfer or attempt to transfer any such right will be void and of no consequence hereunder.

Section 4.

Change in Control of GFN, AFC or Capital . If a "Change in Control" of GFN, AFC, or Capital, as defined in Exhibit C attached hereto, occurs before the end of the Full Measurement Period, the provisions of this Agreement governing the distribution of Post-Closing Consideration shall be modified to provide for the distribution of an Adjusted Annual Payment (as defined below), if appropriate, and an Adjusted Deferred Payment (as defined below), if appropriate, no later than five (5) business days before the date of the Change in Control (the "Change in Control Date"). Any such payment shall be in the form specified in Section 3(b) and shall be delivered to the appropriate Payee or Payees as determined under Section 3(e). The Valuation Date for any such payment shall be the tenth (10 ^th ) business day preceeding the Change in Control Date. Such payments, if any, shall be the last payments of Post-Closing Consideration payable hereunder, and in the event of a Change in Control no other payments shall be payable hereunder by any party hereto or any successor to any party hereto.

(a)

Adjusted Annual Payment . In the event of a Change in Control, GFN and Capital will calculate the Actual EBITDA of Capital for that portion of the Measurement Year in which the Change in Control occurs (the "Change-in-Control Year") beginning on the first day of such year and ending on the tenth (10 ^th ) business day preceding the Change in Control Date as of which the EBITDA of Capital for such period may readily be calculated (such portion of the Change in Control Year, the "Partial-Year Period Preceding the Change in Control"). GFN and Capital will then calculate the assumed full-year EBITDA of Capital for the Change-in-Control Year (the "Assumed Full-Year EBITDA"), by multiplying the Actual EBITDA of Capital for the Partial-Year Period Preceding the Change in Control by a fraction, the numerator of which is 365 and the denominator of which is the number of calendar days in such Partial-Year Period. If the resulting Assumed Full-Year EBITDA exceeds the Target EBITDA of Capital for the Change in Control Year, AFC will deliver to the appropriate Payee or Payees on the Change in Control Date a payment (the "Adjusted Annual Payment") equal to (i) the aggregate amount of the Annual Payment that would be payable for the Change-in-Control Year, if any, under Section 3(a) of this Agreement if the Assumed Full-Year EBITDA of Capital were the Actual EBITDA of Capital for such year, multiplied by (ii) a fraction, the numerator of which is the number of calendar days in the Change in Control Year preceding the Change in Control Date, and the denominator of which is 365.

(b)

Adjusted Deferred Payment . In the event of a Change in Control, GFN and Capital also will calculate the Actual EBITDA of Capital for that portion of the Full Measurement Period beginning on the first day of the Full Measurement Period and ending on the tenth (10 ^th ) day of the Partial-Year Period Preceding the Change in Control, as defined in paragraph (a) of this Section 4, above (such portion of the Full Measurement Period, the "Partial Measurement Period"). The Actual EBITDA for the Partial Measurement Period will equal the sum of the Actual EBITDA amounts of Capital for each of the Measurement Years preceding the Change in Control Year (without regard to any upward adjustments in the Actual EBITDA of Capital effected pursuant to the provisions of subparagraph (i) of Section 3(b) above) plus the Actual EBITDA of Capital for the Partial Year Period Preceding the Change in Control. If the Actual EBITDA of Capital for the Partial Measurement Period exceeds the Adjusted Total Target EBITDA, as defined in the following sentence, the Purchaser will pay to the appropriate Payee or Payees on the Change in Control Date a payment (the "Adjusted Deferred Payment") equal to the aggregate amount of the Deferred Payment that would be deliverable under Section 3(c), above, if the Change in Control Date were the last day of the Full Measurement Period, but assuming exclusively for purposes of such calculation that the reference in the third sentence of such Section 3(c) to the "Total Actual EBITDA for the Full Measurement Period" means instead the Actual EBITDA of Capital for the Partial Measurement Period and that the reference therein to the "Total Target EBITDA of Capital" means instead the Adjusted Total Target EBITDA of Capital. For purposes of this paragraph (b), the "Total Target EBITDA of Capital" shall equal (i) sum of the Target EBITDA amounts for each of the Measurement Years preceding the Change in Control Year, plus (ii) an amount equal to (A) the Target EBITDA for the Change in Control Year, multiplied by (B) a fraction, the numerator of which is the number of days in the Partial Year Period Preceding the Change in Control and the denominator of which is 365.

Section 5.

Representations, Warranties and Covenants .

(a)

Incorporation of Representations and Warranties Given in Acquisition Agreement . The representations and warranties given by the parties hereto to the other parties hereto in the Acquisition Agreement are hereby given again by such parties as part of this Agreement, as of the date hereof and/or as of such other date or dates as such representations and warranties are given under the Acquisition Agreement, and each such representation and warranty is incorporated by reference herein.

(b)

Incorporation of Certain Covenants Given in Acquisition Agreement . Those covenants and agreements given by the parties hereto to the other parties hereto in the Acquisition Agreement that relate in whole or in part to time periods on or after the Merger Closing Date are hereby given again by such parties as part of this Agreement, and each such covenant and agreement is incorporated by reference herein.

(c)

Reservation of Shares for Issuance as Post-Closing Consideration . AFC shall take all appropriate action to reserve on its books, as and after the Merger Closing Date and until expiration or termination of this Agreement, an appropriate number of shares of AFC Common Stock for issuance hereunder in payment of Post-Closing Consideration.

(d)

Stock Exchange Listing . AFC shall use all commercially reasonable efforts to cause the shares of AFC Common Stock issuable as Post-Closing Consideration to be approved for quotation on the NASDAQ, subject to the official notice of issuance, prior to the issuance of such shares pursuant to the terms of this Agreement and the Acquisition Agreement.

(e)

Distribution of AFC Information to Prospective Payees . GFN and AFC will distribute or cause to be distributed to all persons who are listed in the Payee Registry maintained by AFC or its transfer agent from time to time all reports, statements, notices and other information distributed by AFC to holders of its equity securities, whether or not such persons listed in the Payee Registry currently hold any such equity securities.

(f)

Stockholder Investment Letter . As long as Stockholder continues to be listed in the Payee Registry as a person entitled to receive future Payments of Post-Closing Consideration, Stockholder will provide to AFC, upon the latter's request in connection with a proposed distribution of shares of AFC Common Stock of the type described in Section 7(a) hereof, an Investment Letter customary in form and content for such distributions.

Section 6.

Expiration, Termination, Amendment .

(a)

Duration; Expiration . This Agreement, unless earlier terminated, will remain in effect and will not expire until performance of the last act that is to be or may be performed hereunder by any party hereto or, if later, expiration of the Acquisition Agreement.

(b)

Termination . This Agreement may be terminated as follows:

(i)

Prior to the Merger Closing Date, this Agreement will automatically terminate upon any termination of the Acquisition Agreement or Plan of Merger.

(ii)

On and after the Merger Closing Date, this Agreement may be terminated by mutual agreement of GFN and all Payees then listed in the Payee Registry.

(c)

Amendment .

This Agreement may be amended as follows:

(i)

Prior to the Merger Closing Date, this Agreement may be amended by mutual agreement of all parties hereto.

(ii)

On and after the Merger Closing Date, this Agreement may be amended by mutual agreement of GFN and all Payees then listed in the Payee Registry.

Section 7.

Miscellaneous .

(a)

No Registration of Issuance of AFC Common Stock . Capital and Stockholder acknowledge that AFC does not intend to register the issuance and sale of shares of AFC Common Stock to be issued as Post-Closing Consideration under this Agreement under the Securities Act or any state securities laws, and that it intends to rely on one or more exemptions from such registration, possibly including Section 3(a)(11) of the Securities Act, Section 4(2) of the Securities Act and Regulation D thereunder, or similar exemptions. If so, it may be necessary for AFC to impose restrictions on the transferability of shares of AFC Stock issued to Payees hereunder and/or to seek representations from one or more such Payees, in the form of Investment Letters similar to the Investment Letter attached to the Acquisition Agreement as Exhibit I, stating their intention to hold such shares for investment or with respect to other matters.

(b)

Validity . If any provision of this Agreement or the application thereof to any Person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and to such end the provisions of this Agreement are agreed to be severable.

(c)

Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the principles of conflicts of law thereof.

(d)

Parties in Interest; Assignment . This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns, including permitted assigns under Section 7(d) hereof, and, except as expressly provided herein, nothing in this Agreement is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement and the rights, duties and obligations hereunder may not be assigned or delegated by any party without the prior written consent of the parties hereto. Any assignment or delegation of rights, duties or obligations hereunder made without the prior written consent of the other party or parties hereto shall be void and be of no effect. Rights of Payees to Payments hereunder may not be assigned except as provided in Section 3(d) of this Agreement.

(e)

No Fiduciary Duty . Stockholder acknowledges that (i) upon the closing of the Merger and related transactions as contemplated by the Acquisition Agreement and except as expressly provided to the contrary in this Agreement, GFN as the sole shareholder of Capital will have the right to exercise its ownership interest in Capital and GFN's other owned businesses in any way that GFN deems appropriate in GFN's sole discretion, (ii) GFN has no obligation to exercise its ownership interest in Capital so as to achieve the payment to the Holder or Holders of any Payment or Payments hereunder or to maximize the amount of any such Payment, (iii) all Payments hereunder are speculative and are subject to numerous factors outside the control of GFN or AFC, (iv) there is no assurance that Stockholder will receive any Payments hereunder and neither GFN nor AFC has promised or projected any Payments hereunder, and (v) neither GFN nor AFC owes any fiduciary duty or express or implied duty to any Holder or Holders, including their Successors, solely as a result of the fact that such Holder or Holders or their Successors may have a contractual right under this Agreement to receive one or more Payments hereunder if certain of the conditions set forth herein are satisfied during the Measurement Period.

(f)

Waiver . Any provision of this Agreement may be waived at any time by the party or parties which are entitled to the benefits thereof. No such waiver shall be effective unless in writing and signed by such party or parties.

(g)

Right of Set-Off . GFN shall have the right to withhold and set off against the amount of any Payments to any Payee hereunder, whether payable in shares of AFC Common Stock or cash in lieu of fractional shares, the amount of any claim against such Payee for indemnification or payment of damages to which GFN may be entitled under the Acquisition Agreement or any other agreement entered into pursuant to the Acquisition Agreement.

(h)

Arbitration . Any claim or dispute between the parties hereto arising out of or in connection with this Agreement or any of the provisions hereof, or the interpretation, meaning or effect hereof, or the transactions contemplated hereby, shall be submitted to and determined by arbitration in Glens Falls, New York in accordance with the procedures, rules and regulations of the American Arbitration Association as in effect at such time, subject to the procedures set forth below. Each party shall select a person who, in such party's sole discretion, it believes to be qualified to act as an arbitrator. The two arbitrators so chosen shall attempt to resolve any dispute by consensus. If the two arbitrators so chosen by the parties are unable to resolve the dispute, said arbitrators shall jointly select a third arbitrator and the dispute shall be resolved by the majority determination of the three arbitrators. The decision, findings or award of the arbitrator(s) in the matter determined as specified above shall be final and nonappealable and binding upon the parties (and their respective successors) with respect to the subject matter herein concerned, and judgment thereon may be entered in any court or forum having jurisdiction thereof.

(i)

Definitions . Capitalized terms used herein not otherwise defined herein will have the meanings given such terms in the Acquisition Agreement.

(j)

Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same Agreement.

[Remainder of Page Intentionally Left Blank]

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11/23/2004 10:16 AM

IN WITNESS WHEREOF, each of the parties has executed this Agreement or caused this Agreement to be duly executed on its behalf as of the day and year first above written.

GLENS FALLS NATIONAL BANK AND TRUST COMPANY

By:

Name/Title:

ARROW FINANCIAL CORPORATION

By:

Name/Title:

CAPITAL FINANCIAL GROUP

By:

Name/Title:

429 SARATOGA ROAD CORPORATION

By:

Name/Title:

JOHN WEBER

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11/23/2004 10:16 AM

EXHIBIT A

Adjustments to EBITDA of Capital

For purposes of calculating EBITDA for any period, there shall be added to the earnings of Capital for such period the following: any rental income or commission or fee income realized by GFN or any subsidiary or affiliate of GFN other than Capital, as a result of securities brokerage or other non-deposit investment business conducted by such entities directly or indirectly through third parties with customers whose business is handled on behalf of such entities or third parties by Stockholder, less any direct costs incurred by such entities in connection with such income, including commissions or salary directly attributable to such business paid to Stockholder or associates or designees of Stockholder.

Certain expenses directly incurred by Capital in the periods preceding Acquisition will be eliminated after the Acquisition and replaced by an allocation of costs incurred by AFC or GFN in behalf of or for the benefit of Capital. An allocation will be used when it is not practical or economical to directly identify such costs, which would include but are not limited to such expenses as pension and post-retirement actuarial fees, audit fees, payroll administration, income tax preparation, data processing and accounting support, insurance coverages, etc. The computation of the allocations will be consistent with the practices of AFC or GFN relating to their other subsidiaries and operations and shall be reviewed with the parties on a periodic basis.

Other expenses directly incurred by Capital in the periods preceding Acquisition will be eliminated and replaced by a specific, identifiable charge to Capital related to costs incurred by AFC or GFN in behalf of or for the benefit of Capital. An example of such costs would include but are not limited to such expenses as legal fees billed to AFC or GFN but attributable and separately identifiable as services rendered to Capital.

Certain expenses not incurred by Capital in the periods preceding Acquisition will be incurred and recognized by Capital during the Measurement Period as part of the ongoing costs incurred by all affiliates of AFC in order to comply with the organization's policies and programs. These charges may represent either direct or allocated expenses or both. Examples would include the cost of certain employee benefit programs which will be extended to Capital's employees that have not been part of the historical Capital benefit program.

If there is a material change in the business operations, or structure of Capital after the Acquisition made by or with the approval of AFC or GFN and any such change may reasonably be expected to have a material positive or negative effect on the EBITDA of Capital, the parties will act in good faith to make appropriate adjustments in the terms and provisions governing the conditions under which Post-Closing Consideration is payable under the Post-Closing Payment Agreement, such that the Holder or Holders and their Successors will have an equivalent opportunity to receive Post-Closing Consideration upon the achievement by Capital or its successors of overall levels of financial success following the Acquisition, equivalent to the overall levels of financial success established as thresholds for Post-Closing Consideration under the Agreement as initially executed. Without limiting the foregoing, levels of Target EBITDA and Reduced Target EBITDA, as set forth in the Target EBITDA Schedule, shall be subject to equitable adjustment from time to time as determined in good faith by AFC or GFN after consultation with the management of Capital or its successors, to reflect expansions or contractions of the operations of Capital or its successors resulting from acquisitions, divestitures and similar events, or from other similar transactions that may reasonably be expected to adversely affect the Actual EBITDA of Capital or its successors over relevant periods and, as a consequence, the amount of Payments under the Agreement, regardless of the quality of the business and operations of Capital at and after the Acquisition. In making any such revisions to counteract the negative effect of an unanticipated or unusual development, consideration will also be given to any countervailing positive effect of such development or the positive effects of other contemporaneous unanticipated or unusual developments.

EXHIBIT B

EXHIBIT C

Change in Control of AFC, GFN and Capital

A "Change in Control" of any of AFC, GFN or Capital (each, a "Company") shall occur on the earliest of:

(i)

the acquisition by any person or group of persons acting in concert of "beneficial ownership," as that term is defined under Section 13(d) of the Exchange Act and Rule 13d-3 promulgated by the SEC thereunder, of more than fifty percent (50%) of the Voting Interest (as defined below) of such Company, excluding any such acquisition by any entity controlling, controlled by or under common control with such Company prior to such acquisition (any such, an "AFC Affiliate");

(ii)

the completion of any business combination transaction pursuant to which

(A)

AFC is merged, consolidated or reorganized with or into any other entity and is not the surviving entity in such transaction,

(B)

GFN or Capital is merged, consolidated or reorganized with or into any other entity that is not an AFC Affiliate prior to such transaction and is not the surviving entity in such transaction, or

(C)

all or substantially all of the assets of AFC, GFN or Capital are sold to any entity that is not an AFC Affiliate, in one or a series of related transactions.

For purposes of this definition, the "Voting Interest" of a Company is one hundred percent (100%) of the votes eligible to be cast at any give time in a general election of directors of such Company, as a result of ownership of shares, units or other interests in such Company.

SCHEDULE 3A-1

Schedule of Full Annual Payments for the 5 Measurement Years

Measurement Year	Full Annual Payment
1	$90,000 x COMF (year 1)
2	$90,000 x COMF (year 2)
3	$90,000 x COMF (year 3)
4	$90,000 x COMF (year 4)
5	$90,000 x COMF (year 5)

The Full Annual Payment for any Measurement Year equals $90,000 x Cost of Money Factor ("COMF") for that Measurement Year, as calculated prior to the Closing Date. The COMF for each Measurement Year equals (x) one (1.0) + (y) closing yield of a U.S. Treasury instrument having a maturity equal to a number of whole years contained in the period extending from the Closing Date to and through the last day of such Measurement Year, as quoted in the Wall Street Journal on the second business day before the Closing Date, with the product to be compounded annually for the number of years to maturity.

SCHEDULE 3A-2

Target EBITDA Schedule for the Measurement Year

Measurement Year	Target EBITDA	Reduced Target EBITDA ¹
1	$383,392	$364,222
2	$442,177	$420,068
3	$507,176	$481,817
4	$579,139	$550,182
5	$658,906	$625,961
Total Target EBITA	$2,570,790

Reduced Target EBITDA for any Measurement Year equal 95% of the Target EBITDA for such year.

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into as of the 29 ^th day of November, 2004, between Arrow Financial Corporation, Glens Falls, New York, a registered bank holding company ("AFC"), and its wholly-owned subsidiaries, Glens Falls National Bank and Trust Company, a national association ("GFN "), and Capital Financial Group, a New York corporation ("Capital"), as party of the first part (collectively, AFC, GFN, Capital and any other affiliated entities of AFC are sometimes referred to as the "Company"), and John Weber, an individual ("Employee"), as party of the second part.

WHEREAS, AFC and Capital have entered into an Agreement and Plan of Reorganization (the "Plan of Reorganization"), dated November 22, 2004, as a result of which transaction (the "Acquisition") the surviving company, Capital, will become a wholly-owned subsidiary of GFN; and

WHEREAS, the parties hereto intend that upon and after effectiveness of the Acquisition Employee, who currently is the president and sole shareholder of Capital, will continue to be employed as the president by Capital, with the rights and subject and to the terms and conditions specified herein,

NOW THEREFORE, the parties hereto agree as follows:

Employment; Term . Capital will continue to employ Employee and Employee will continue to serve as an employee of Capital upon the terms and conditions set forth herein for a period of five (5) years from and after the date hereof unless such employment is earlier terminated as provided in Section 10.

Compensation . For all services rendered by Employee to Capital, Capital shall pay Employee a salary of two hundred thousand dollars ($200,000) per year, payable in arrears. Such salary shall be payable in accordance with the Company's general payroll practices. All payments made and benefits provided to Employee hereunder shall be subject to any applicable withholding and other applicable taxes.

Additional Benefits .

(a)

Employee shall be eligible for additional benefits, if any, by way of insurance, hospitalization and vacations normally provided to employees of the Company generally having responsibility commensurate to that of Employee, pursuant to the terms of those plans, programs and policies of the Company in effect during Employee's employment, and such additional benefits as may be from time to time agreed upon in writing between Employee and Capital or any other entity within the Company. Capital shall reimburse Employee for all ordinary and necessary out-of-pocket expenses incurred and paid by Employee in the course of the performance of Employee's duties pursuant to this Agreement (which obligation shall be guaranteed by AFC and GFN), such reimbursement to be consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, and subject to the Company's general requirements with respect to the manner of approval and reporting of such expenses.

(b)

Employee shall be entitled to use the automobile owned by Capital and used by the Employee as of the date hereof (the "Automobile") for a period of three (3) years from the date of the completion of the Acquisition. During this three (3) year period, the Company shall be responsible for all taxes and other expenses related to the Automobile, including, but not limited to, routine maintenance and necessary repairs not caused by the negligence of Employee. At the conclusion of the three (3) year period, title to the Automobile shall be transferred to Employee and the Company shall no longer have any obligations related to the Automobile

Duties . Employee agrees that so long as Employee is employed under this Agreement, Employee will (i) to the satisfaction of the Board of Directors of Capital (the "Board") devote Employee's best efforts and Employee's entire business time to properly further the interests of Capital and the Company, (ii) at all times perform Employee's responsibilities in a manner satisfactory to and subject to the direction of the Board with respect to Employee's activities on behalf of Capital, (iii) comply with all rules, orders, regulations, policies and practices applicable to Capital (including those applicable to all subsidiaries of AFC), (iv) truthfully and accurately maintain and preserve such records and make all reports as may be required, and (v) fully account for all monies and other property of Capital of which Employee may from time to time have custody and deliver the same to Capital or its designated agents whenever and however directed to do so.

Covenant Not to Disclose Confidential Information .

(a)

Employee acknowledges that, during the Employment Period, Employee may develop or have access to and knowledge of certain information and data that Capital or any entity within the Company considers confidential and that the release of such information or data to unauthorized persons or entities would be extremely detrimental to the Company. As a consequence, Employee hereby agrees and acknowledges that Employee owes a duty to Capital and its affiliated entities not to disclose, and agrees that, during and after the Employment Period, without the prior written consent of AFC, Employee will not communicate, publish or disclose to any person or entity anywhere or use (for Employee's own benefit or the benefit of others) any Confidential Information (as defined below) for any purpose other than carrying out Employee's duties as contemplated by this Agreement. Employee will use Employee's best efforts at all times to hold in confidence and to safeguard any Confidential Information to ensure that any unauthorized persons or entities do not gain possession of any Confidential Information and, in particular, will not permit any Confidential Information to be read, duplicated or copied. Employee will return to the Corporate Secretary of AFC all originals and copies of documents and other materials, whether in printed or electronic format or otherwise, containing or derived from Confidential Information in Employee's possession or under Employee's control within ten (10) days of the termination of Employee's Employment Period, for any or no reason, and will not retain any copies thereof. If requested by the President of AFC, Employee shall certify in writing as to the return or destruction of all Confidential Information. Employee acknowledges that Employee is obligated to protect the Confidential Information from disclosure or use even after termination of Employee's Employment Period. For purposes hereof, the term "Confidential Information" shall mean any information or data used by or belonging or relating to Capital or any entity within the Company, or any party to whom any of the foregoing owes a duty of confidentiality, that has not been disclosed or made available to the public generally or is not known generally to the industry in which Capital or such entity or party is or may be engaged in business, including, without limitation, any and all trade secrets, proprietary data and information relating to the Company or such entity or party, present or future business and products, price lists, customer lists, processes, procedures or standards, know-how, manuals, hardware, software, source code, business strategies, records, marketing plans, technical information, financial information, whether or not reduced to writing, or other information or data that the Company or such entity or party advises Employee should be treated as confidential information.

(b)

Employee will not disclose to any entity other than Capital, including any affiliate of Capital, or any employee or agent of any such entity who is not also an employee or agent of Capital, any confidential information that Employee previously acquired or hereafter acquires from a third party, including a customer, except in accordance with applicable law and the privacy policies applicable to Capital and such other entities. Furthermore, Employee will not use any proprietary information or technology of a third party in performing Employee's duties hereunder without the consent of such third party.

Legal Proceedings to Compel Disclosure . In the event that Employee is requested, pursuant to, or required by applicable law or regulation, or by legal process, to disclose any Confidential Information or Intellectual Property, Employee shall use Employee's best efforts to promptly notify the Corporate Secretary of AFC of such request and enable Capital or any other entity within the Company to seek an appropriate protective order. In the event that such a protective order or other protective remedy is not obtained, Employee shall furnish only that portion of the Confidential Information or Intellectual Property that is legally required, in the opinion of Capital's counsel, and will exercise Employee's best efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information or Intellectual Property.

Covenant Not to Compete . Employee acknowledges that during Employee's Employment Period hereunder, Employee, at the expense of Capital, will maintain or establish favorable relations with the customers, clients and accounts of Capital or other entities within the Company and will have access to Intellectual Property and Confidential Information of Capital or such other entities. Therefore, in consideration of Employee's employment hereunder and to further protect the Intellectual Property, trade secrets and Confidential Information of Capital and other entities within the Company, Employee agrees that during Employee's Employment Period hereunder and for the two (2) year period immediately following any early termination of Employee's employment hereunder as set forth in Section 10, but in no event beyond the fifth (5 ^th ) anniversary of the date of this Agreement, Employee will not, directly or indirectly, without the express written consent of the President of AFC or unless as expressly requested to do so by the President of AFC:

(a)

own, manage, operate, control or participate in the ownership, management, operation or control of, or have any interest, financial or otherwise, in or act as an officer, director, partner, principal, member, manager, shareholder, proprietor, employee, agent, representative, consultant or independent contractor of, or in any way assist any person or entity in the conduct of, any business located within a two hundred (200) mile radius of any business location of Capital or its successors that is then engaged or intends to become engaged in any line of business in which Capital or its successors is engaged or intends to become engaged at any time during Employee's Employment Period (any such, a "Competitive Line of Business"), including, but not limited to, the sale of those insurance products that Capital is selling as of the date hereof; provided, however, that notwithstanding the foregoing, Employee may at any time own up to, but not in excess of, five percent (5%) of the outstanding equity securities of any corporation or entity that is engaged in any such line of business, provided such securities are listed upon a national stock exchange or actively traded in the over-the-counter market; or

(b)

entice, induce or in any manner influence any person who is or shall be in the employ or service of Capital or any other entity within the Company to leave such employ or service for the purpose of engaging in a Competitive Line of Business for or on behalf of any other person or entity not within the Company.

Covenant Not to Solicit . Employee agrees that for a period of two (2) years from and after the termination of Employee's Employment Period hereunder, for any or no reason, including upon expiration of the 5-year term of this Agreement, Employee will not, directly or indirectly, without the express written consent of the President of AFC, solicit or divert or attempt to solicit or divert clients, customers or accounts of Capital or any other entity within the Company to or for any person or entity not within the Company (whether or not such clients, customers or accounts have done business with Employee prior to Employee's employment hereunder).

Disclosure and Assignment of Intellectual Property .

(a)

Employee agrees that Capital or its assignees shall become the owner of all inventions, discoveries, developments, ideas, writings, and expressions, including but not limited to any and all concepts, improvements, techniques, know-how, innovations, systems, processes, machines, current or proposed products, works, information, reports, papers, logos, computer programs, designs, marketing materials, and methods of manufacture, distribution, management or other methods (whether or not reduced to writing and whether or not patentable or protectable by copyright), that Employee conceives, develops, creates, makes, perfects or reduces to practice in whole or in part while employed under this Agreement (the "Employment Period") or within one (1) year after termination of the Employment Period for any or no reason, and that: (i) directly or indirectly relate to or arise out of Employee's job responsibilities or performance of his duties under this Agreement; (ii) result from research, development, or other activities of Capital or other entities within the Company; or (iii) relate or pertain in any way to the existing or reasonably anticipated scope, business or products of Capital or any other entities within the Company (hereinafter the "Intellectual Property"). All of the right, title and interest in and to the Intellectual Property shall become exclusively owned by Capital or its assignees or nominees of the foregoing, regardless of whether or not the conception, development, creation, making, perfection or reduction to practice of such Intellectual Property involved the use of the time, facilities or materials of Capital or such other entities and regardless of where such Intellectual Property may be conceived, made or perfected.

(b)

Employee agrees to promptly and fully disclose in writing to Capital and its Board all inventions, discoveries, developments, ideas, writings, and expressions conceived, developed, created, made, perfected or reduced to practice, in whole or in part, during the Employment Period hereunder or within one (1) year after termination of the Employment Period for any or no reason, regardless of whether Employee believes the invention, discovery, development, writing, expression or idea should be considered Intellectual Property under any provision of this Agreement, in order to enable Capital or such assignees to make a determination as to its or their rights with respect to the same.

(c)

Any and all information relating to Intellectual Property shall be considered Confidential Information and shall not be disclosed by Employee to any person or entity outside of the Company.

(d)

Any Intellectual Property that is the subject of copyright shall be considered a "work made for hire" within the meaning of the Copyright Act of 1976, as amended, and shall be the sole property of Capital, its assignees or their nominees, and, to the extent that the latter or any of them does not automatically own any such Intellectual Property as a work made for hire, Employee shall assign all right, title and interest in and to such Intellectual Property to Capital or its assignees. All right, title and interest in and to any other Intellectual Property, including patent, industrial design, trademark, trade dress and trade secret rights shall be assigned and is hereby assigned exclusively to Capital or its assignees or their nominees. Employee further agrees to execute and deliver all documents and do all acts that Capital or its assignees or their nominees shall deem necessary or desirable to secure to the latter the entire right, title and interest in and to the Intellectual Property, including executing applications for any United States and/or foreign patents or copyright registrations, disclosing relevant prior art, reviewing office actions and providing technical input to assist the latter in overcoming any rejections. Any document prepared and filed pursuant to this Section 9(d) shall be prepared and filed at the expense of Capital or its assignees. Employee further agrees to cooperate with the Capital and any assignees and their nominees as reasonably necessary to maintain or enforce the latter's rights in the Intellectual Property. Employee hereby irrevocably appoints the President of AFC as Employee's attorney-in-fact with authority to execute for Employee and on Employee's behalf any and all assignments, patent or copyright applications, or other instruments and documents required to be executed by Employee pursuant to this Section 9(d), if Employee is unwilling or unable to execute same.

(e)

Capital shall have no obligation to use, attempt to protect by patent or copyright, or promote any of the Intellectual Property.

10.

Termination .

(a)

Subject to the provisions Sections 10(b) and 10(c) regarding early termination, the term of Employee's employment under this Agreement shall be five (5) years from the date hereof. The "Employment Period" shall consist of such period of time when Employee is actually employed under this Agreement.

(b)

Notwithstanding Section 10(a), Employee's employment hereunder shall terminate immediately upon the death, disability or adjudication of legal incompetence of Employee, or upon Capital's ceasing to carry on its business without assigning this Agreement pursuant to Section 23 or becoming bankrupt. For purposes of this Agreement, Employee shall be deemed to be disabled when Employee has become unable, by reason of physical or mental disability, to satisfactorily perform Employee's essential job duties and there is no reasonable accommodation that can be provided to enable Employee to be a qualified individual with a disability under applicable law. Such disability shall be determined by, or to the reasonable satisfaction of, the Board.

(c)

Notwithstanding Section 10(a), the Board may terminate Employee's employment at any time for Cause or without Cause. "Cause" means (i) Employee has failed to perform Employee's duties or obligations under this Agreement in a material respect or to observe and abide by the Company's policies and decisions in material matters, after notice and an opportunity to cure; (ii) Employee has refused to comply with specific directions of the Board or the President of AFC in a material regard; (iii) Employee has engaged in misconduct that is materially injurious to Capital or the Company; (iv) Employee has been convicted of, or has entered a plea of nolo contendere to, any crime involving the theft or willful destruction of money or other property, any crime involving moral turpitude or fraud, or any crime constituting a felony; or (v) Employee has engaged in acts or omissions with respect to his employment hereunder or the business of Capital or the Company generally that constitutes dishonesty, breach of fiduciary obligation or intentional wrongdoing or misfeasance. Any termination of Employee's employment by the Board for Cause or other than for Cause, or termination by the Employee of his employment hereunder prior to the end of the 5-year term, shall be an "early termination" of employment under this Agreement.

(d)

In the event of a Change in Control, as defined in Section 11, Employee may, at any time within the one (1) year period following such Change in Control, elect to terminate his employment hereunder, which shall constitute an "early termination" subject to Section 10(e) hereof.

(e)

In the event that (x) the Board terminates Employee's employment hereunder for Cause or as a result of the death, disability, adjudication of legal incompetence of Employee or Capital's ceasing to carry on its business without assigning this Agreement pursuant to Section 23 or becoming bankrupt, or (y) Employee terminates Employee's employment hereunder for any or no reason, including following a Change in Control:

(i)

the obligations of AFC, GFN and Capital, pursuant to Section 2 regarding payment of compensation to Employee, shall apply to the period up to and including, but not beyond, the date of termination of employment; and

(ii)

the obligations of AFC, GFN and Capital pursuant to Section 3 regarding provisions of other benefits to Employee shall continue up to the date of termination of employment, but not beyond, except as required by applicable law and the provisions of the separate plan or agreement under which such other benefits are provided to Employee.

(f)

In the event that the Board terminates Employee's employment hereunder prior to completion of the five (5)-year term of this Agreement and such termination is without Cause, Capital shall provide to Employee:

(i)

payment (in a lump sum or in installments as the Company may determine) of the unpaid amount of Employee's salary for the remainder of such 5-year term, assuming no increases in pay over such period; and

(ii)

such other benefits, including medical and health insurance, as may be due Employee under applicable law relating to former employees, or as may be required to be extended to Employee under the particular plans or agreements under which Employee will receive such benefits prior to termination.

(g)

Immediately upon termination of Employee's employment, Employee will return to the Corporate Secretary of AFC all assets and property of Capital or any other entity in the Company, as well as all originals and copies of documents and other materials, whether in printed or electronic format or otherwise, relating to Capital or any other entity within the Company containing or derived from Confidential Information that are in Employee's possession or under Employee's control, and will not retain any copies thereof.

11.

Change in Control .

(a)

For the purposes of this Agreement, a "Change in Control" shall be deemed to have occurred as of the first date that (A) any individual, corporation, partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert (other than entities within the Company) becomes the "beneficial owner," as that concept is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more transactions, of securities of AFC possessing twenty-five percent (25%) or more of the Voting Power (as defined below) of AFC, (B) AFC shall have entered into a binding agreement for a Sale of AFC (as defined below) and shall have received all required corporate, regulatory and other approvals for consummating such Sale, and the consummation thereof shall be expected to occur within fifteen (15) days, or (C) “approved directors” shall constitute less than a majority of the entire board of directors of AFC, with “approved directors” defined to mean the members of such board as of the date hereof and any individuals who subsequently become members of such board (i) having been elected by shareholders after being nominated or approved by a majority of the approved directors on the board prior to such election, or (ii) having been appointed to the board to fill a vacancy with the approval of a majority of the approved directors on the board prior to such appointment.

(b)

For purposes of this Section 11, a "Sale of AFC" shall mean (i) any consolidation, merger or stock-for-stock-exchange involving AFC or the securities of AFC in which the holders of voting securities of AFC immediately prior to the consummation of such transaction own, as a group, immediately after such consummation, voting securities of AFC (or, if AFC does not survive such transaction, voting securities of the Surviving Corporation, as defined below) having less than fifty percent (50%) of the Voting Power of AFC (or the Surviving Corporation), excluding any securities received by any such holder or holders in connection with such transaction other than in exchange for securities of the entity held by them immediately prior to such transaction, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions), of all, or substantially all, of the assets of AFC to a party which is not controlled by or under common control with AFC prior to such transaction or series of transactions. For purposes of the preceding sentence, the “Surviving Corporation” in any transaction in which AFC does not survive shall mean the corporation that issues securities and/or other consideration to the shareholders of AFC in connection with such transaction, or, if such issuing corporation is controlled directly or indirectly by another corporation, the ultimate controlling corporation of such controlling corporation.

(c)

For purposes of this Section 11, the “Voting Power” of an entity at a given time shall mean the total number of votes entitled to be cast generally in an election of directors of such entity at such time by all holders of outstanding equity securities of such entity.

12.

Specific Performance . Recognizing that irreparable damage will result to Capital in the event of the breach or threatened breach of any of the foregoing covenants and assurances by Employee contained in this Agreement, and that the remedies of Capital, AFC and GFN at law for any such breach or threatened breach will be inadequate, each of Capital, AFC and GFN, in addition to such other remedies that may be available to it, shall be entitled to an injunction, including a mandatory injunction, to be issued by any court of competent jurisdiction ordering compliance with this Agreement or enjoining and restraining Employee, and each and every person or entity acting in concert or participation with Employee, from the continuation of such breach and, in addition thereto, Employee shall pay to Capital or its assignees all ascertainable damages, including costs and reasonable attorneys' fees, sustained by Capital, GFN or AFC by reason of the breach or threatened breach of said covenants and assurances. None of Capital, AFC or GFN shall be required to obtain a bond in an amount greater than One Thousand Dollars ($1,000). The covenants and obligations of Employee set forth in this Agreement are in addition to and not in lieu of or exclusive of any other obligations and duties of Employee hereunder or as an employee generally, whether express or implied in fact or in law.

13.

No Conflict . Employee represents and warrants to each of Capital, AFC and GFN that neither the execution nor delivery of this Agreement, nor the performance of Employee's obligations hereunder will conflict with, or result in a breach of, any term, condition, or provision of, or constitute a default under, any obligation, contract, agreement, covenant or instrument to which Employee is a party or under which Employee is bound, including, without limitation, the breach by Employee of a fiduciary duty to any former employers.

14.

Harassment Policy . Employee acknowledges that Employee has been provided a copy of the policy of AFC and its affiliated entities against discrimination and harassment in the workplace, which includes complaint reporting procedures, and agrees to comply with such policy and affirmatively support AFC's commitment to an equal opportunity work environment free from illegal harassment or discrimination.

15.

Waiver of Breach . Failure of Capital, AFC or GFN to demand strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of the term, covenant or condition, nor shall any waiver or relinquishment by any of such entities of any right or power hereunder at any one time or more times be deemed a waiver or relinquishment of the right or power at any other time or times.

16.

Entire Agreement; Amendment . This Agreement cancels and supersedes all previous agreements relating to the subject matter of this Agreement, written or oral, between the parties hereto and contains the entire understanding of the parties hereto with respect to the subject matter hereof and shall not be amended, modified or supplemented in any manner whatsoever except as otherwise provided herein or in writing signed by each of the parties hereto.

17.

Potential Unenforceability of Any Provision . If a final judicial determination is made that any provision of this Agreement is an unenforceable restriction against Employee including the provisions of Sections 7 and 8 regarding the obligation of Employee not to compete with, or solicit customers and accounts of Capital and its affiliated entities under certain circumstances, the provisions hereof shall be rendered void only to the extent that such judicial determination finds such provisions unenforceable, and such unenforceable provisions shall automatically be reconstituted and become a part of this Agreement, effective as of the date hereof, to the maximum extent in favor of Capital and its affiliated entities that is lawfully enforceable. A judicial determination that any provision of this Agreement is unenforceable shall in no instance render the entire Agreement unenforceable, but rather the Agreement will continue in full force and effect absent any unenforceable provision to the maximum extent permitted by law.

18.

Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions hereof.

19.

Governing Law . This Agreement and all rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within the State, including all matters of enforcement, validity and performance.

20.

Consent to Jurisdiction and Venue . Employee hereby submits to the exclusive jurisdiction of the Supreme Court for Warren County, New York or the United States District Court for the Northern District of New York in any action or proceeding arising out of or relating to this Agreement, including any appeal and any action for enforcement or recognition of any judgment relating thereto, and Employee hereby irrevocably agrees that all claims in respect of such action or proceeding may not be heard or determined in any court or before any panel other than the Supreme Court for Warren County, New York or the United States District Court for the Northern District of New York. Employee agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdictions by suit on the judgment or in any manner provided by law. Employee hereby irrevocably waives, to the fullest extent Employee may legally and effectively do so, any objection Employee may have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby in the Supreme Court for Warren County, New York or the United States District Court for the Northern District of New York. Employee hereby irrevocably waives, to the fullest extent Employee may legally and effectively do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding in any such court. Employee irrevocably consents to service of process in any such suit, action or proceeding in any manner provided by law.

21.

Arbitration of All Disputes, Including Claims of Discrimination .

(a)

Subject to Section 21(d), any dispute between any of the parties hereto or claim by a party against another party arising out of or in relation to this Agreement or in relation to any alleged breach thereof or arising out of the employment relationship, including, but not limited to, discrimination prohibited by federal, state or local law shall be finally determined by arbitration in accordance with the rules then in force of the American Arbitration Association. The arbitration proceedings shall take place in Glens Falls, New York, or such other location as the parties in dispute hereafter may agree upon; and such proceedings will be conducted in the English language and shall be governed by the laws of the State of New York as such laws are applied to agreements between residents of such State entered into and to be performed entirely within that State. No arbitration proceeding hereunder may be joined with any other lawsuit or arbitration or resolved on a class-wide basis.

(b)

The parties shall agree upon one arbitrator, who shall be a person skilled in the legal and business aspects of the subject matter of this Agreement and of the dispute. If the parties cannot agree upon one arbitrator, each party in dispute shall select one arbitrator and the arbitrators so selected shall select a third arbitrator. If the arbitrators cannot agree upon the selection of a third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association at the request of any of the parties in dispute. The arbitrators shall, if possible, be persons skilled in the legal and business aspects of the subject matter of this Agreement and of the dispute.

(c)

The decision rendered by the arbitrator or arbitrators shall be accompanied by a written opinion in support thereof, which opinion shall be in the English language. The decision shall be final and binding upon the parties in dispute without right of appeal. Judgment upon the decision may be entered into in any court having jurisdiction thereof, or application may be made to that court for a judicial acceptance of the decision and an order of enforcement. Costs of the arbitration shall be assessed by the arbitrator or arbitrators against any or all of the parties in dispute, and shall be paid within ten (10) days by the party or parties so assessed.

(d)

Notwithstanding anything in this Section 21 to the contrary, this Section 21 shall be void and of no effect with respect to the Company's remedies sets forth in Section 12, including, without limitation, the remedy of an injunction, which may be issued by any court of competent jurisdiction.

22.

Notice . Any notice, request, consent or communication under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified mail, return receipt requested, postage prepaid, (iii) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (iv) sent via facsimile transmission, with receipt confirmed, addressed as follows:

If to Capital, AFC or GFN:

250 Glen Street

Glens Falls, NY 12801

Attn: President

with a copy to:

Stinson Morrison Hecker LLP

100 South Fourth Street, Suite 700

St. Louis, MO 63102

Attn: Thomas B. Kinsock, Esq.

If to Employee:

John Weber

1646 State Route 9

P.O. Box 1265

South Glens Falls, NY 12803

or such other persons or to such other addresses as shall be furnished in writing by any party to the other party, and shall be deemed to have been given only upon its delivery in accordance with this Section 22.

23.

Assignment . This Agreement is personal and not assignable by Employee but it may be assigned and transferred by any of Capital, AFC or GFN, without notice to or consent of Employee, to, and shall thereafter be binding upon and enforceable by, any other entity within the Company or any person or entity that shall acquire or succeed to substantially all of the business or assets of any such assignor, such assignee thereafter to be deemed the equivalent of such assignor for all purposes under this Agreement, but is not otherwise assignable by any of Capital, GFN or AFC. Each of AFC, GFN and Capital will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that such entity would be required to perform it if no such succession had taken place.

24.

Survival of Obligations . All obligations of Employee that by their nature involve performance, in any particular, after the expiration or termination of this Agreement, or that cannot be ascertained to have been fully performed until after the expiration or termination of this Agreement, shall survive the expiration or termination of this Agreement.

25.

Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement that is binding upon each of the parties hereto, notwithstanding that all parties are not signatories to the same counterpart.

26.

Expenses . In the event that either party hereto brings any legal action or other proceeding to enforce or interpret any of the rights, obligations or provisions of this Agreement, or because of a dispute, breach or default in connection with any of the provisions of this Agreement, the prevailing party shall be entitled to recover from the non-prevailing party reasonable attorneys' fees and all other costs in such action or proceeding in addition to any other relief to which such prevailing party may be entitled.

27.

Right of Set-Off . Employee hereby grants to Capital the right to set-off any amount due from Employee to Capital, including, without limitation, any amount due under this Agreement, against any amounts due from Capital to Employee, provided that written notice of such set-off is given to Employee. In the event of such a set-off, the net compensation (after payroll deductions but before such set-offs) then payable by Capital to Employee shall be deemed to have been paid by Capital to Employee, and the amounts thus set-off shall be deemed to have been paid by Employee to Capital.

IN WITNESS WHEREOF, the parties have executed or caused this Employment Agreement to be duly executed as of the day and year first above written.

ARROW FINANCIAL CORPORATION

By:

Name:

Title:

GLENS FALLS NATIONAL BANK AND TRUST COMPANY

By:

Name:

Title:

CAPITAL FINANCIAL GROUP

By:

Name:

Title:

Name: John Weber

Exhibit 21

Arrow Financial Corporation

250 Glen Street

Glens Falls, NY 12801

Subsidiaries

December 31, 2004

Subsidiary	Percent of Common Stock Owned
Subsidiaries of Arrow Financial Corporation :
Glens Falls National Bank and Trust Company A Nationally Chartered Commercial Bank Headquarters: Glens Falls, NY	100
Saratoga National Bank and Trust Company A Nationally Chartered Commercial Bank Headquarters: Saratoga Springs, NY	100
GMB Asset Management, LLC A Vermont Corporation Headquarters: Glens Falls, NY	100
Arrow Capital Trust I A Non-deposit Trust Company Headquarters: Glens Falls, NY	100
Arrow Capital Statutory Trust II A Non-deposit Trust Company Headquarters: Glens Falls, NY	100
Arrow Capital Statutory Trust III A Non-deposit Trust Company Headquarters: Glens Falls, NY	100
Subsidiaries of Glens Fall National Bank and Trust Company:
Arrow Properties, Inc. A Real Estate Investment Trust (Glens Falls National Bank also holds approximately 82% of non-voting preferred stock) Headquarters: Glens Falls, NY	100
North Country Investment Advisers, Inc. A New York Corporation Headquarters: Glens Falls, NY	100
NC Financial Services, Inc. A New York Corporation Headquarters: Warrensburg, NY	90
Capital Financial Group, Inc. A New York Corporation Headquarters: South Glens Falls, NY	100
Subsidiaries of Saratoga National Bank and Trust Company:
NC Financial Services, Inc. A New York Corporation Headquarters: Warrensburg, NY	10

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Arrow Financial Corporation:

We consent to the incorporation by reference in the registration statements, Form S-3 (No. 333-47912), Form S-8 (No. 333-66192), Form S-8 (No. 333-62719), and Form S-8 (No. 333-110445) of Arrow Financial Corporation and subsidiaries of our reports dated March 7, 2005, with respect to the consolidated balance sheets of Arrow Financial Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of the internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004 annual report on Form 10-K of Arrow Financial Corporation.

Albany, NY

March 11, 2005

EXHIBIT 31.1

Certification of the Chief Executive Officer Pursuant to

Securities Exchange Act Rules 13a-14 and 15d-14

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas L. Hoy, certify that:

1. I have reviewed this report on Form 10-K of Arrow Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 11, 2005

By: /s/ Thomas L. Hoy

Thomas L. Hoy

Chief Executive Officer

EXHIBIT 31.2

Certification of the Chief Financial Officer Pursuant to

Securities Exchange Act Rules 13a-14 and 15d-14

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, John J. Murphy, certify that:

1. I have reviewed this report on Form 10-K of Arrow Financial Corporation;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 11, 2005

By: /s/ John J. Murphy

John J. Murphy

Chief Financial Officer

EXHIBIT 32

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Arrow Financial Corporation (the "Company") on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Thomas L. Hoy, Chief Executive Officer of the Company, and John J. Murphy, Chief Financial Officer of the Company, hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:

(a)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 11, 2005

/s/ Thomas L. Hoy

Thomas L. Hoy

Chief Executive Officer

/s/ John J. Murphy

John J. Murphy

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Arrow Financial Corporation and will be retained by Arrow Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request

Endnotes