Notes to Stock Ownership Table:

(a)

AllThe number of our directorsshares and executive officers use our Company address whichpercentage stated above is 250 Glen Street, Glens Falls, New York 12801.

(b)

The use of an asterisk (“*”) denotes a percentage of less than 1%.

(c)

Includes 1,912 shares held directly by Mr. Carpenter, 6,551 shares held in Mr. Carpenter’s Stock Purchase Plan (“SPP”) account, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(d)

Includes 6,721 shares held directly by Mr. Carusone, 4 shares held in Mr. Carusone’s SPP account, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

4

(e)

Includes 2,161 shares held directly by Mr. Clarke, 17,300 shares held directly by Mr. Clarke’s wife in a revocable trust, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(f)

Includes 5,209 shares held directly by Mr. Dake, 7,634 shares held in Mr. Dake’s SPP account, and 216 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(g)

Includes 100 shares held in Mr. DeMarco’s SPP account, 12,668 shares held in Mr. DeMarco's account under the Company’s Employee Stock Ownership Plan (“ESOP”), and 15,656 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(h)

Includes 7,274 shares held directly by Mrs. FitzGerald, 644 shares held in Mrs. FitzGerald’s SPP account, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(i)

Includes 1,115 shares held directly by Mr. Goodemote, 248 shares held as custodian for his children, 907 shares held in Mr. Goodemote’s SPP account, 5,890 shares held in Mr. Goodemote’s account under the ESOP, and 7,710 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(j)

Includes 94,794 shares held directly by Mr. Hoy, 139 shares held in Mr. Hoy’s SPP account, 673 shares held in Mr. Hoy’s Simplified Employee Pension Plan account, 2,717 shares held directly by Mr. Hoy’s wife, 2,274 shares held by Mr. Hoy’s wife in an Individual Retirement Account, 39,212 shares held in Mr. Hoy’s account under the ESOP, 3,094 shares held in a Hoyfamily irrevocable trust as to which Mr. Hoy is grantor and 73,003 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(k)

Includes 4,078 shares held directly by Mr. Kruczlnicki, 9,898 shares held in Mr. Kruczlnicki’s SPP account, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(l)

Includes 6,944 shares held directly by Senator Little, 1,052 shares held in Senator Little’s SPP account, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(m)

Includes 19,285 shares held directly by Mr. Moynehan, 5,137 shares held in Mr. Moynehan’s SPP account, 5,852 shares held jointly by Mr. Moynehan with his wife, and 257 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(n)

Includes 14,022 shares held directly by Mr. John Murphy, 28,865 shares held jointly by Mr. J. Murphy with his wife, and 45,527 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(o)

Includes 1,519 shares held in Mr. Thomas Murphy’s SPP account, 457 shares held in Mr. T. Murphy's account under the ESOP, and 2,351 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(p)

Includes 24,433 shares held directly by Mr. O'Conor, 843 shares held in Mr. O'Conor’s SPP account, 17,325 shares held in Mr. O'Conor's account under the ESOP, and 28,677 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(q)

Includes 10,289 shares held directly by Dr. Reisman, 7,735 shares held in Dr. Reisman’s SPP account, 410 shares held directly by Dr. Reisman’s wife, and 243 shares subject to exercisable options within sixty (60) days awarded under the Company’s long-term incentive compensation plan.

(r)

Includes an aggregate of 175,182 shares subject to exercisable options.

(s)

Basedbased solely upon a Schedule 13G, Amendment No. 1, filed on January 29, 2010February 2, 2011 with the Securities and Exchange Commission in which BlackRock, Inc. reported that as of December 31, 2009,2010, it had sole and dispositive voting power over all of these shares. On December 1, 2009, BlackRock, Inc. completed its acquisition

(b)

The number of Barclays Global Investors from Barclays Bank PLC. Asshares and the percentage stated above is based solely upon a result, Barclays Global Investors, NA and certain of its affiliates are now included as subsidiaries of BlackRock, Inc. for purposes of Schedule 13G filings. BlackRock,filed on February 10, 2011 with the Securities and Exchange Commission in which The Vanguard Group, Inc. reported that as of December 31, 2010, in its capacity as an investment adviser, it had sole voting and its affiliates provide assetshared dispositive power with respect to 14,191 of these shares and investment management services.sole dispositive power over 549,146 of these shares.

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Our subsidiary banks, Glens Falls National Bank and Trust Company ("GFNB") and Saratoga National Bank and Trust Company (“SNB)(“SNB”), in their capacity as fiduciary of numerous accounts in their respective Trust Departments, including as trustee of our Employee Stock Ownership Plan ("ESOP"), held 1,522,9631,604,782 shares of our common stock, or 13.82%13.69% of the total shares outstanding and entitled to vote on our March 1, 20102011 record date. GFNB and SNB were the beneficial owners of only a relatively small number of these shares. Other persons, such as the individual ESOP participants, had the sole power to vote and/or direct the disposition of most of these shares. As a result, neither GFNB nor SNB were the beneficial owners of more than 5% of the shares of our common stock outstanding and entitled to vote on the March 1, 20102011 record date.

5

Compensation Discussion and Analysis

ITEM 1 — ELECTION OF DIRECTORSIntroduction

Under our Certificate of IncorporationThe Compensation Discussion and Bylaws, the Board of Directors is divided into three classes, one class to be elected each year for a term of three years. Under our Bylaws, the total number of directors is as specified from time-to-time by our Board of Directors. We currently have eleven (11) directors on our Board.

The first Item to be acted upon at the meeting is the election of four (4) directors to Class C (the class whose term expires at this meeting)Analysis (CD&A) portion of our Board of Directors,Proxy Statement is an opportunity for us to three-year terms to expire in 2013. The only nominees areprovide the four (4) individuals nominated by the Board of Directors. Upon recommendation by the Board’s Governance Committee, the Board nominated Herbert O. Carpenter, Gary C. Dake, Mary-Elizabeth T. FitzGerald and Thomas L. Hoy for election to Class C of the Board of Directors, each to hold office for a term of three years or until his or her successor shall be duly elected and qualified. Each of the nominees is currently serving as a director and each was previously elected by our shareholders to his or her position, most recently at our 2007 Annual Meeting of Shareholders.

Under applicable law, directors are elected by a plurality of the shares voted at the meeting, meaning the nominees receiving the most “FOR” votes for the available seats will be elected. Because at this year’s meeting there are only as many nominees as there are directors to be elected, each nominee is assured of election as long as he or she receives any “FOR” votes, regardless of how many negative votes (“WITHHOLD AUTHORITY”) the nominee receives. However, under the Majority Voting Policy in our Corporate Governance Guidelines, if an election of directors is uncontested, as will be the case at this year’s meeting, any nominee for director who receives a negative vote (“WITHHOLD AUTHORITY”) from the holders of a number of shares exceeding fifty percent (50%) of the total number of shares that are outstanding and entitled to vote in such election, must tender his or her resignation as director following the meeting, even though the nomi nee has technically been elected a director. Under this policy, the Governance Committee of the Board is then required to evaluate the tendered resignation and make a recommendation to the full Board on appropriate action. The Board may take such action on the resignation as it deems appropriate, taking into account the best interests of the Company with an explanation and its shareholders.

All proxies whichsummary of our compensation package for the Named Executive Officers of our Company. This year, shareholders are given the opportunity to approve our compensation package, in proper forman advisory resolution, and received timely by the Corporate Secretary priorto communicate to the election of directors atCompany how often you would like to have this opportunity. These votes are called the meeting,“say on pay” vote and which have not been revoked, will be voted “FOR” the Board’s nominees described above, unless any nominee is unable to serve or, for good cause, refuses to serve, subject to any specific voting instructions received with any proxy, including the direction to “WITHHOLD AUTHORITY” to vote for any one or more nominees.

Each of the nominees has consented to being named in this proxy statement and to serve if elected. The Board knows of no reason to believe that any nominee will decline or be unable to serve if elected.“say on pay frequency” vote. We address these two advisory votes specifically beginning on page 33.

VOTE RECOMMENDATION:Our goal with this year’s CD&A is to present our shareholders, a clear, concise and understandable overview of our executive compensation practices so that you can make a more informed analysis of our executive compensation plan. This is not the first year that we have provided you with this analysis of our compensation package. However, it is the first year that you have the opportunity to consider it by advisory vote. Our CD&A analysis is presented in the following five sections:

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES FOR ELECTION AS DIRECTOR (ITEM 1 ON THE PROXY CARD).1.

Overview of the 2010 Business Environment and the Company’s 2010 Performance

2.

The Company’s 2010 Compensation Philosophy and Program

63.

The Process for Determining Compensation for Named Executive Officers

4.

Considerations in Making 2010 and 2011 Executive Compensation Decisions

5.

Information regarding Director NomineesOther Compensation Policies and our Continuing Board of DirectorsConsiderations

The following table sets forth each director and director nominee and includes such person’s name, age as of the date of the Shareholders Meeting, April 28,persons are our Named Executive Officers in 2010, the year he or she first became a director, the year in which his or her term will expire, such person’s principal occupation or employment for the last five years and current status with respect to being an independent member of the Board of Directors. All current directors of the Company also serve as directors of its principal subsidiary bank, Glens Falls National Bank and Trust Company, except for Mr. Carusone and Mr. Dake who also serve as directors of the Company’s other subsidiary bank, Saratoga National Bank and Trust Company.

7

Notes to Director Information Table:

(a)

The business experience of each nominee and director during the past five years was that typical of a person engaged in the principal occupation or business listed for each such person during that period.

(b)

Mr. Hoy is not independent due to his position as our Chief Executive Officer. Mr. J. Murphy is not independent due to his prior service as our Chief Financial Officer and his continuing service as a consultant to the Company.

(c)

No family relationship exists between any two or more of the nominees, directors or executive officers of the Company or its subsidiaries, except that the wives of Mr. Moynehan and Mr. J. Murphy, our former Executive Vice President, Treasurer & Chief Financial Officer of the Company, are sisters.

Qualifications of the Board of Directors

In accordance with the policies and principles of the Governance Committee charter, the Governance Committee reviews and considers the experience, qualifications, attributes and skills, taken as a whole, in its selection of directors and nominees for its Board of Directors. For more information on the director nomination process, see“Director Nomination Process”on page 11. The Governance Committee has set no specific minimum qualification for a nominee to the Board of Directors, although under our Bylaws, no person may stand for election as director after attaining age 75. Generally, the Governance Committee focused on the information discussed in each of the directors’ individual biographies as set forth in the table on page 7. In particular, the Board of Directors, on the recommendation and input of the Governance Committee, considered the following attributes of our nominees and continuing directors in its assessment:

·

With regard to Mr. Carpenter, the Board considered his extensive business experience with a manufacturing company with multi–facility operations as well as his former and current broad based civic and community service and his experience as a member of the Board of Directors of the Company’s principal subsidiary, Glens Falls National Bank and Trust Company (“GFNB”) beginning in 2004.

·

With regard to Mr. Dake, the Board considered his extensive business experience with a vertically integrated, multi-state convenience store chain as well as his background in economics.

·

With regard to Mrs. FitzGerald, the Board considered her educational background as well as her background in professional standards and multi-board trustee experience.

·

With regard to Mr. Hoy and Mr. J. Murphy, the Board consideredincluding their expertise in the banking, investment and financial industries, and long tenures of thirty-five-plus years for both Mr. Hoy and Mr. J. Murphy, serving in various capacities with the Company and its subsidiary banks during that time, including Mr. J. Murphy’s experience as a member of the Board of Directors of the Company’s principal subsidiary, GFNB, beginning in 2003.

·

With regard to Senator Little, the Board considered her organizational leadership skills and community involvement as a state politician as well as her experience on numerous state commissions and councils.

·

With respect to Dr. Reisman, Mr. Carusone, and Mr. Moynehan, the Board considered their educational backgrounds, their current executive experience and their expertise in the banking and financial industries.

·

With regard to Mr. Clarke, the Board considered his experience as an executive at several private companies, his finance background and his long-standing historical knowledge of the Company, including his previous experience serving on our Board from 1988 through 1999, prior to his relocation out of the area.

·

With regard to Mr. Kruczlnicki, the Board considered his experience as a health care executive with finance and human resources experience as well as his extensive directorship experience at numerous private and regional organizations.

OTHER EXECUTIVE OFFICERS

The following information,titles, as of the record date, March 1, 2010, pertains to the Company’s named executive officers and executive officers who are not directors of the Company.2011:

§

Thomas L. Hoy, Chairman, President and Chief Executive Officer

§

Terry R. Goodemote, CPA,has served as our Senior Vice President, Treasurer and Chief Financial Officer and as the Executive

§

David S. DeMarco, Senior Vice President Treasurer and Chief Financial Officer of Glens Falls National Bank and Trust Company (“GFNB”) since 2008. Mr. Goodemote was first appointed Chief Financial Officer and Treasurer of the Company and GFNB on January 1, 2007. Prior to becoming Chief Financial Officer, Mr. Goodemote served as

§

Raymond F. O’Conor, Senior Vice President

§

Thomas J. Murphy, Vice President and Head of the Accounting Division of GFNB. Mr. Goodemote started with the Company in 1992 and is 46.Corporate Secretary

David S. DeMarco has served as our Senior Vice President since May 1, 2009. Mr. DeMarco also serves as our Executive Vice President and Head of the Branch, Corporate Development, Financial Services & Marketing Division of GFNB since January 1, 2003 and as Chairman of Capital Financial Group, Inc., a subsidiary of GFNB since January 1, 2007. Mr. DeMarco started with the Company in 1987 and is 48.

8

Raymond F. O’Conor has served as our Senior Vice President since May 1, 2009. Mr. O’Conor also serves as the Chairman, President andOur Chief Executive Officer, Mr. Hoy, is also a Director.  Please refer to his biography on page four under the “Nominee and Director Biographies” section of Saratoga National Bank and Trust Company (“SNB”) since April 2007. Prior to that, Mr. O’Conor was President and Chiefthis Proxy Statement. See “Named Executive Officer of SNB since January 1, 1996. Mr. O’Conor started withOfficers” beginning on page 8 for information regarding the Company in 1985 and is 54.

Thomas J. Murphy, CPAhas served as our Vice President & Corporate Secretary since May 1, 2009. Prior to that, Mr. T. Murphy was Assistant Corporate Secretary of the Company beginning in 2008. Mr. T. Murphy also serves as Senior Vice President (2008) and Senior Trust Officer (2010), Corporate Secretary (2009), Cashier (2009) and Manager of the Personal Trust Department (2004) of GFNB. Mr. T. Murphy was hired as a Vice President and Manager of the Personal Trust Department of GFNB in 2004. Mr. T. Murphy is 51.

CORPORATE GOVERNANCE’s Other Named Executive Officers.

1.

Board IndependenceOverview of the 2010 Business Environment and the Company’s 2010 Performance

Our Board of Directors currently is comprised of eleven (11) directors. Under the National Association of Securities Dealers Automated Quotation (“NASDAQ”^®) stock market listing standards, a majority of the members of the full Board must qualify as “independent” as defined in those standards. Based on the information available to it, the Board of Directors has determined that the following nine (9) directors qualify as independent directors: Directors Carpenter, Carusone, Clarke, Dake, FitzGerald, Kruczlnicki, Little, Moynehan and Reisman. Each of the independent directors is either up for reelection at this meeting or will continue in office after the meeting. Therefore, the Company’s Board satisfies the NASDAQ requirement that a majority of the Board be independent. Mr. Hoy is not independent due to his position as our Chief Executive Officer. Mr. J. Murphy is not independent due to his prior service as our Chief Financial Officer and his conti nuing service as a consultant to the Company. Mr. J. Murphy provides consulting services to the Company under a Consulting Agreement with the Company. See “Compensation of Directors” on page 30 and “Mr. J. Murphy Consulting Agreement” on page 33.

In making independence determinations for individual directors, the Board considers transactions and relationships between the Company or its subsidiaries with the director and his or her immediate family or with any business that is controlled by the director. The purpose of this review is to determine 1) whether any such transactions or relationships may cause the director not to meet the objective requirements for independence established under the NASDAQ listing standards or the applicable SEC rules or, 2) whether any such transactions or relationships are otherwise sufficiently material such that the Board, in its subjective judgment, is unable to conclude that the director is independent. The types of transactions and relationships that might cause a director not to qualify as independent under the NASDAQ standards or not to be deemed independent by the Board in the exercise of its subjective judgment are not necessarily the same types of transactions and relationships that are re quired to be disclosed elsewhere in this proxy statement or in other reports filed with the SEC.

In making determinations about the independence of directors, the Governance Committee and the Board consider the objective standards that directors must meet under the NASDAQ standards as well as a variety of subjective factors. These subjective factors include particular or unique relationships between the Company and the director or the director’s interests, even if such relationships do not exceed the specific dollar or other thresholds that would disqualify the director from being independent. Therefore, in assessing the independence of Mr. Dake and determining that Mr. Dake was independent, the Governance Committee and the Board considered the business transactions in 2009 between Glens Falls National Bank and Trust Company and/or Saratoga National Bank and Trust Company and Stewart’s Shops Corp., of which Mr. Dake is President, and determined that these transactions were below the objective dollar threshold established by NASDAQ for determining when a director ceases to be independent, and that the transactions were not material to either the Company, its subsidiary banks, or Stewart’s, and did not compromise the independence of Mr. Dake. In assessing the independence of Mr. Carusone the Governance Committee and the Board consideredpayments made in 2009 to Mr. Carusone’s law firm for legal services rendered by the firm to or on behalf of Saratoga National Bank and Trust Company and determined that those payments were below the NASDAQ objective limit for independence, and that they were not material in amount and did not compromise the independence of Mr. Carusone. In assessing the independence of director Herbert O. Carpenter, the Governance Committee and the Board considered payments made in 2009 by Glens Falls National Bank and Trust Company to Northeast Printing and Distribution Co., of which Mr. Carpenter is the Chairman, for printing and advertising services, and determined that those payments were below the NASDAQ objective limit for independence, a nd that they were not material in amount and did not compromise the independence of Mr. Carpenter. See “Transactions with Directors, Officers and Associated Persons” on page 34 for further information on these transactions.

Audit Committee Independence and Financial Experts

The Board of Directors has determined, based on the information available to it, that Directors Clarke and Kruczlnicki each qualify as an "Audit Committee Financial Expert" as defined in the rules of the SEC. The Board of Directors has also determined, based on the information available to it, that Directors Clarke, FitzGerald, Kruczlnicki and Reisman each qualify as independent, both under the listing standards of NASDAQ and under the SEC’s more rigorous independence requirements for Audit Committee.

9

Board Leadership Structure and Role in Risk Oversight

The positions of Chairman of the Board and Chief Executive Officer are currently held by Mr. Thomas L. Hoy. Since 2005, when Mr. Hoy assumed the role of Chairman following the retirement of our prior Chairman, the Company has operated using the traditional U.S. board leadership structure under which the Chief Executive Officer also serves as Chairman of the Board of Directors. The Board believes that the Company has been well-served by this leadership structure and that this structure continues to be the optimal structure for our Company and our shareholders. The Board believes that this structure demonstrates to our employees, customers and shareholders strong leadership, with a single person having primary responsibility for managing the Company's operations. In balance, the Company has a Board comprised largely of independent Directors (nine of eleven), who meet regularly in executive session, and has designated a Lead Director to chair meetings of the independent Directors.

The Lead Director serves as a liaison between the Chairman and the independent Directors. The Lead Director's functions include facilitating executive sessions of the independent Directors as well as setting the agenda for and presiding at executive sessions. The Lead Director will also report developments to the full Board, as needed, with respect to the determinations and deliberations of the independent Directors. The Board, on an annual basis, will continue as part of its review of corporate governance and succession planning, to evaluate the Board's leadership structure to ensure that it remains best suited for our Company and our shareholders.

Our Board of Directors has responsibility for the oversight of risk management. Our Board of Directors, either as a whole or through its committees, regularly discusses with management areas of material risk exposures, their potential impact on the Company, the steps we take to monitor risk exposure and controls to mitigate such exposures.

While the Board is ultimately responsible the oversight of risk management at our Company, our Board committees assist the Board in fulfilling its oversight responsibilities. In particular, the Audit Committee reviews financial risk exposures through monitoring the independence and performance of the Company’s auditors and the quality and integrity of the Company’s financial reporting process and systems of internal controls. The Governance Committee focuses on the management of risks associated with Board organization, membership and structure, through the nomination process and independence assessment, and the organizational and governance structure of the Company, through periodic review of Board practices and policies concerning corporate governance and the performance of the Board. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs, through a review of compensation to executive officers, directors and employees in general. Finally, the Directors receive periodic reports from the Company’s Enterprise Risk Management Committee chaired by our Chief Financial Officer.

Board Committees

The Audit Committee, currently consisting of Directors Clarke, FitzGerald, Kruczlnicki and Reisman, met four (4) times during 2009. Mr. Clarke serves as Chairman of this committee. The Audit Committee’s primary duties and responsibilities are to monitor the independence and performance of the Company’s independent auditors and internal audit department, monitor the quality and integrity of the Company’s financial reporting process and systems of internal controls regarding financial, accounting and legal compliance, and provide a means of communication among the independent auditors, management, the internal audit department and the Board of Directors. In accordance with applicable rules, the Audit Committee must specifically approve in advance all services performed by the independent auditor, including audit and audit-related services and non-audit services. For additional information, see“Report of the Audit Committee” on page 33.

The Compensation Committee, currently consisting of Directors Carusone, Clarke, Dake, Kruczlnicki and Reisman, met five (5) times during 2009. Mr. Carusone serves as Chairman of the Compensation Committee. The Compensation Committee’s principal responsibility is to review and approve, not less often than annually, all aspects of the compensation arrangements and benefit plans covering our executive officers, including the Chief Executive Officer. The Compensation Committee also periodically reviews the compensation of our Board of Directors and makes recommendations to the full Board with respect to the types and amounts of compensation payable to the directors for service on the Board and Board committees. The Compensation Committee also consults with management and provides general oversight of the compensation and benefit programs and policies for employees generally. For more information on the Compensation Committee’s involvement with executive compensation, see“ Compensation Discussion and Analysis”, beginning on page 12.

The Governance Committee, currently consisting of Directors Carpenter, Carusone, Dake, FitzGerald, Kruczlnicki and Little, met four (4) times during 2009. Mr. Kruczlnicki serves as Chairman of the Governance Committee. The Governance Committee is specifically charged with the following responsibilities: (i) to establish procedures with respect to the director nomination process, to review and consider director nominees and make recommendations to the Board regarding nominees, (ii) to review and recommend practices and policies concerning corporate governance, (iii) to review annually and report to the Board considering the independence of our directors under applicable law, (iv) to review annually and report to the Board considering the performance of our Board of Directors, (v) to review and make recommendations regarding Company codes of conduct and ethics policies for our directors, executive officers and employees and with respect to our Committee charters, and (vi) to review direct or training initiatives. For more information on the

10

director nomination process and how a shareholder may participate in that process, see“Shareholder Submissions of Candidates” on page 12.

A copy of each of the current charters of the Audit Committee, Compensation Committee and Governance Committee is available on our website atwww.arrowfinancial.com under the link “Corporate Governance.”

In addition to regular Board and committee meetings, the independent members of the Board periodically meet in executive session to discuss any matters deemed relevant to the Company’s operation and condition. No current or former members of management are in attendance during these executive sessions. These sessions are chaired by the Lead Director, an independent director elected by the nine independent directors of the Board. Currently, the Lead Director is Mr. Moynehan. When held, executive sessions normally convene immediately following the regular Board of Directors meetings. The Lead Director will poll independent directors in attendance on their desire to meet in executive session and, if there is a consensus to do so, an ad hoc executive session will be held.

Meetings of the Board of Directors; Director Attendance at Meetings

When the Governance Committee evaluates incumbent directors in determining whether to recommend them for re-nomination, it takes into consideration their attendance record at meetings of the Board and committees of the Board on which they served, as well as at annual shareholders’ meetings. In 2009, the Board of Directors of the Company met seven (7) times and each committee met at least four (4) times. During 2009, each of the directors of the Company attended all seven meetings of the Board and all Board committee meetings on which the director served, i.e., there was 100% attendance of meetings during 2009. All directors are encouraged to attend our Annual Meeting of Shareholders, and in 2009 all but one of our directors did attend this meeting.

Communications with the Board of Directors

Shareholders may communicate to our Board of Directors or to an individual director or directors or to a particular committee of the Board any concerns they have as shareholders of the Company by submitting typed or handwritten communications to the following address:

Board of Directors – Shareholder Communications

c/o Corporate Secretary

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

The Corporate Secretary will review all communications and will timely advise the Board of any communication determined to be of a serious nature. Shareholder communications to a particular director or committee will be forwarded by the Corporate Secretary to the appropriate director or committee. The Corporate Secretary will periodically summarize all shareholder communications received and make all such communications available for the directors' review. In order to efficiently process all shareholder communications, the Corporate Secretary, with the Board's approval, may seek the assistance of appropriate Company employees and/or outside counsel or advisors to review and evaluate shareholder communications. In all cases, the complete text of shareholder communications will be made available for review by the directors.

Director Nomination Process

In accordance with the policies and principles of the Governance Committee charter, the Governance Committee is responsible for identifying and recommending to the full Board suitable nominees for directorship, including re-nomination of incumbent directors. The Governance Committee will consider nominee proposals received by it from shareholders under the procedures outlined below in“Shareholder Submissions of Candidates.” In reaching a decision on individual candidates, the Governance Committee evaluates whether the individual's knowledge, experience, skill and expertise may enhance the Board's oversight and direction of the business of the Company. The Governance Committee further assesses an individual’s understanding of the regulatory and policy environment in which the Company does business and the individual’s interest in the communities served by the Company. More generally, the Governance Committee considers other factors including an individual's pe rsonal character, integrity, financial acumen and prior experience as a director. The Governance Committee seeks a diversity of backgrounds, occupations, viewpoints and gender, as well as a balance among age groups and a connection with the communities served by the Company. Generally, the Governance Committee will not recommend a new candidate for nomination unless the individual has demonstrated notable leadership and accomplishment in business, the professions, higher education, politics or cultural endeavors. In the case of incumbent directors, the Governance Committee also considers the incumbent’s past performance as a director of the Company and/or its subsidiaries. As a general rule, the Governance Committee will not recommend for nomination individuals who are concurrently serving as a director of more than two other public companies.

The Governance Committee will employ its own search protocols to identify new candidates for director, as well as seek suggestions from management and review suggestions from shareholders. The Governance Committee applies the same screening process to all

11

suggested candidates, regardless of the source. The timing of the consideration of a candidate will depend upon the current and anticipated future structure of the Board. The Board of Directors will give substantial weight to the recommendations of the Governance Committee in selecting nominees for election as directors of the Company and in its appointment of interim directors. Under normal circumstances, the Board will not select nominees, including incumbent directors, who have not been recommended by a majority of the members of the Governance Committee.

Under our Certificate of Incorporation and Bylaws, the Board of Directors is divided into three classes, one class to be elected each year for a term of three years. Under our Bylaws, the total number of directors is as specified from time-to-time by our Board of Directors. The current number of directors is eleven (11).

Shareholder Submissions of Candidates. The Governance Committee has adopted a policy governing submissions by shareholders of candidates for the Governance Committee to consider in making its recommendations to the full Board on nominees for director. The policy also governs the Governance Committee's consideration of such candidates. Shareholder submissions must contain certain information about the candidate, which is described in detail in the Company’s Corporate Governance Guidelines. The Governance Committee may utilize appropriate Company employees and outside advisors to assist it in screening and analyzing shareholder submissions. All candidates properly submitted will be considered by the Governance Committee. In cases where the candidate is deemed not suitable, the consideration may be perfunctory and, even in cases where serious consideration is deemed warranted, that consideration may be deferred until a later date. All candidate submissions must be in writing an d addressed to the following address:

Board of Director Candidates

c/o Corporate Secretary

Arrow Financial Corporation

250 Glen Street

Glens Falls, New York 12801

The Corporate Governance Guidelines may be obtained from the Corporate Secretary at the same address.

Shareholders may also act directly to nominate their own candidates for director at annual or special meetings of shareholders. Such direct nominations by shareholders are subject to the procedures set forth in our Bylaws and the rules of the SEC, including minimum advance notice to the Board. For more information, see “Proposals by Shareholders” on page 3.

Section 16(a) Beneficial Ownership Reporting Compliance

The Company’s executive officers and directors, as well as any 10% shareholders of the Company, are required by Section 16(a) of the Securities Exchange Act of 1934 to file reports with the SEC regarding their ownership of our stock, including changes in their stock ownership. The Company receives and reviews copies of these reports and/or written statements received from officers and directors stating they are not required to file any such reports. Based solely on our review of these reports and statements, all but two (2) of our directors and executive officers filed on a timely basis all Section 16(a) reports required to be filed by them in 2009. Mr. Carusone filed one (1) late report, disclosing two (2) transactions and Mrs. FitzGerald filed one (1) late report, disclosing five (5) transactions.

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

Despite the challenging environment confronted by the financial services industry throughout 2009, we reported record earnings and continued growth of the franchise. Our concentration on the fundamentals has allowed the Company to achieve double-digit growth rates in several key balance sheet categories, resulting in record levels in period-end amounts for assets, deposits and capital levels. Furthermore, our asset quality remained strong at year-end, as measured by low levels of nonperforming assets and very low charge-off levels in spite of the difficulties currently experienced in the banking and financial markets. By most financial measures, we have exceeded our own performance expectations, as well as those of our industry and our peers. We have done this by maintaining our focus on fundamentals and prudent underwriting. As a regional banking company operating in northeastern New York State, we compete in a mature banking market characterized by intense competition and high consume rconsumer expectations regarding pricing and delivery of financial products. We believe a key element of our success is the ability of our senior managementExecutive Officers to formulate and execute strategic plans that enable us to achieve long-term profitability and growth within acceptable parameters of risk. Our executive compensation program is designed to attract, motivate and retain senior managementExecutive Officers who can lead our Company to achieve those objectives.

The past three years have been very difficult and challenging for our Management team to guide the Company as we faced an environment of frozen credit, plunging equity markets and a drop in consumer and investor confidence. This past year, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed into law in an attempt to restructure the financial system and its regulatory framework to reduce or eliminate systemic risk, avoid future taxpayer bailouts and protect consumers. We expect to face a significant increase in regulatory costs and staffing preparing for and reacting to this legislation and the regulations that are expected to follow. With the support of our Directors and through the hard work and determination of our employees and seasoned Management team, it was and continues to be our intention to overcome these challenges and continue to provide value to our customers, shareholders and the communities we serve. We do this with discipline, vision and a corporate culture that has endured for 160 years.

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Despite this challenging environment, we reported record earnings for a second straight year, while maintaining both strong asset quality and capital adequacy ratios. As measured by our extremely low levels of nonperforming assets and very low charge-off levels in spite of the difficulties currently experienced in the banking and financial markets, our asset quality remained strong. By most financial measures, we have exceeded the performance of our industry peers, by maintaining our focus on fundamentals and prudent underwriting. The following are select highlights of our financial, asset quality and shareholder performance results for the year ended December 31, 2010:

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Our net income for the year ended December 31, 2010 was a record $21.9 million and our diluted earnings per share reached a record $1.94.

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Cash dividends increased 3.2% to 98 cents per share and a 3% stock dividend was distributed to our shareholders during 2010.

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Our return on average assets was 1.16% for the year and our return on average equity was 14.56%.

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Shareholders’ equity and book value per share increased 8.1% and assets grew by $67 million or 3.6% to $1.908 billion.

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Our nonperforming assets were only 0.26% of total assets as of December 31, 2010, and net loan charge-offs represented just 0.06% of average loans outstanding for the year.

Please refer to the two performance graphs included in our 2010 Annual Report on Form 10-K for 5-year and 10-year comparisons of the total cumulative return (assuming reinvestment of dividends) for our common stock as compared to the Russell 2000 Index, the NASDAQ^® Banks Index and the Zacks $1B-$5B Bank Assets Index. These graphs show that the cumulative total return for our stock over both of these periods was greater than the average return for the three selected market indices.

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The Company’s 2010 Compensation Philosophy and Program

The generalpurpose of this section is to explain our compensation philosophy, define the various elements of our executive compensation and explain the importance of each element to our overall executive compensation program.

Compensation Philosophy

The purpose and goal of our executive compensation program is to attract and retain key executives and to motivate themour executives to helpimprove the Company maintain and improve’s long-term profitability within acceptable risk parameters. Year-to-yearAnnual determinations

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regarding executive compensation are based on corporate and individual performance taking into account compensation paid to executives at peer group banks.

Our totalexecutive compensation program consists of the following elements:  base salary, annual incentives, long-term incentives and benefits. We believe that these components work together in a holistic manner to create a total compensation program that aligns pay and performance. Our cash compensation consists of base salary and annual incentive/bonus compensation. Base salary recognizes executives based on their fundamental role and contributions to the Company while the annual bonus/incentive rewardsis designated to reward Company and individual performance relative to our annual performance goals. Long-termOur long-term incentive program, which historically has been the granting of stock options, is provided in the form of stockoptionsdesigned to align the goals of our executivesNamed Executive Officers with shareholders and as a reward for growth inthe goals of our stock price.shareholders. Together these components encourage managementour Named Executive Officers to maintain a balance between annual performance and long-term stock price growth, designed for the ultimate benefit of our shareholders.performance.

The objective of our executive benefit package program is to provide appropriate security and benefits for our executives. ExecutivesExecutive Officers. Executive Officers are eligible for the same general benefits package we offer all our full-time employees, who work a minimum of 1,000 hours per calendar year which includes medical, dental, life and long-term disability insurance and qualified retirement plans. Executive benefits may include employment and change-in-control agreements, supplemental executive life insurance, executive retirement plan participation, and two executive perquisites, a company automobile the only executive perquisite.and reimbursement of country club dues.

Our executive compensation program is periodically reviewed at least annually to ensure that the mix ofvarious considerations such as security versus performance, fixed versus variable, shortshort-term versus long-term, cash versus equity-based compensation and benefits provided, isare and remain appropriate in light of market trends and the Company’sCompany’s primary business objectives. Our policy and practice is to consider the Company’sCompany’s performance compared to peer and industry performance, as well as market compensation levels in making our short and long-term compensation decisions to ensure our compensation package effectively reflects performance.

Risk Oversight of the Company Compensation Program

The Company carefully monitors our compensation levelspurpose of this section is to ensure that they reflect an appropriate balance of pay-for-performance within acceptable risk parameters. Traditionally, banking organizations and supervisors relied on strong risk management, internal controls and corporate governance to help constrain risk-taking. However, the financial crisis has illustrated that the incentives created by poorly designed and implemented incentive compensation arrangements can be powerful enough to overcome risk controls. Performance awards under an incentive compensation program should be aligned with the institution’s overall business strategy and support the desired risk profile. Based on current and evolving best practices guidance and in consultation with our outside consultants, management conducted a compensation risk assessment ofdefine the various elements of its overall compensation program, including all incentive compensation programs. Management completed an inventory of compensatio n programs, including incentive compensation programs, evaluated the plans, determined the existence of management and committee oversight, considered appropriate risk mitigants and assigned a risk rating based on documentation to support these controls. We recognize that an effective incentive program should encourage and reward appropriate performance and requires an element of risk-taking which is in the long-term benefit of the Company and shareholders. Utilizing an approach consistent with our Company’s conservative philosophy, we have determined that the overall design of the compensation programs and its oversight is effective in mitigating risk. Based on our evaluation, we have determined that the Company’s compensation programs and policies do not create excessive and unnecessary risk taking. The Company and Compensation Committee will continue to ensure that proper policies are maintained to monitor ongoing risk management and assessment of compensation practices.

Oversight of the Executive Compensation Program

The Compensation Committee oversees our executive compensation policiesso that you understand each item and process andhow it is responsible for the final decisions on executive compensation for the Chiefdesigned to reward our Executive Officer and other executive officers. The Compensation Committee receives input from the Chief Executive Officer and the full Board of Directors on key compensation policy issues. The Compensation Committee is responsible for reviewing and approving, at least annually, all aspects of the compensation of our Chief Executive Officer and other executive officers. The Compensation Committee makes recommendations on the structure of our executive compensation program to facilitate our corporate goals and objectives. Elements of executive compensation reviewed by the Compensation Committee include base salary, bonus/incentive, long-term incentive compensation (stock-based awards), qualified and non-qualified retirement plans, qualified and non-qualified deferred compensation plans, severance arrangements, employment or other agreements, executive perquisites and other benefits. Five (5) members of our Board of Directors serve on the Compensation Committee, each of whom is independent under the NASDAQ listing requirements. Our Compensation Committee has a significant degree of tenure and stability in membership, which we believe enhances its ability to make informed, well-founded decisions that ensure a long-term view of pay and performance. The Compensation Committee met five (5) times during 2009. The Chair of the Compensation Committee reports on committee actions at meetings of our Board of Directors.Officers.

In order to carry out its duties, the Compensation Committee is authorized to seek the assistance and counsel of independent advisors, including compensation consultants, at the Company’s expense. These advisors are hired and directed by, and report directly to, the Compensation Committee. During 2009, the Compensation Committee retained the services of Pearl Meyer & Partners (“PM&P”), an independent outside consulting firm specializing in executive and board compensation to assist the Compensation Committee.·

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Base Salary

Services included conducting an executive compensation review and providing support with proxy disclosure. Since its work is conducted solely on behalf of the Compensation Committee, PM&P satisfies the independence requirements of the SEC.

Our Chief Executive Officer provides the Compensation Committee with an annual assessment of the performance of the Company as it relates to his own personal performance goals, as well as an assessment of the performance of our executives. Management also provides information and data to the Compensation Committee and outside advisors as requested. Based on best practices and trends in the banking industry provided by its consultants and other input and recommendations from its internal sources, the Compensation Committee has the basis to perform its duties regarding executive compensation.

The Compensation Committee periodically requests that oneIn setting or more members of management be present at committee meetings where Company and individual performance and executive compensation are discussed and evaluated. Although management provides insight and recommendations regarding executive compensation, only the Compensation Committee, comprised solely of independent members of the Board of Directors, votes on decisions regarding executive compensation. The Compensation Committee meets with our Chief Executive Officer to discuss his performance and compensation, but the decisions regarding his compensation package are made solely by the Compensation Committee in executive session, i.e., without management present. In making the compensation decisions regarding other executives, the Compensation Committee considers recommendations from our Chief Executive Officer, as well as input of its advisors, as requested.

Details on the Compensation Committee’s functions are more fully described in its charter which has been approved by the Board of Directors and is available on our website at,www.arrowfinancial.com under the link “Corporate Governance.”

Components of Our Compensation Program

Base Salary. Base salaries for senior management, including our named executive officers, are reviewed and approved annually by the Compensation Committee. While we target ouradjusting base salary levels at market competitive levels, factors considered in determining each executive’s salary include his/herfor our Executive Officers, we consider the following factors:  the executive’s position, individual performance, contribution to the Company’sCompany’s success, market salaries for similar positions, experience in that position, industry merit budgets, the Company’sCompany’s overall financial performance and the individual’sindividual’s role in that performance. Base salaries for the Named Executive Officers are reviewed and approved annually by the Compensation Committee, usually in January so that the Compensation Committee can take into account results from the prior fiscal year-end performance.  Other factors considered by the Compensation Committee include leadership and professional standing in the field of banking and financial services, commitment to the community, and current market pay position relative to market benchmarking.

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Annual Bonus/Incentive.

The Company’sCompany’s Short-Term Incentive Plan (“STIP”(“STIP”) is a discretionary program based on a comprehensive quantitative and qualitative assessment of both Company and individual performance. While theThe Compensation Committee considers multiple inputs including specific financial goals, but the final decision for awarding bonuses each year is intended to allow for the Compensation Committee’sCommittee’s complete discretion in assessing performance, including industry performance,and individual performance andor any other considerations the Compensation Committee determines are important to maintaining a proper pay-for-performance relationship. If circumstances arise such as major corporate transactions, unforeseen significant changes in the economy or industry-wide developments of an unexpected nature, the Compensation Committee may review and revise pre-established performance targets during the year. The Compensation Committee, in its sole discretion, will determine on a case- by-casecase-by-case basis whether an individual executiveExecutive will receive a bonus for the year and, if so, the amount of the bonus. Our STIP isAs a discretionary bonus program;program, no executive has a contractual right to a payment under the STIP. The

Each year, the Compensation Committee has generally taken a conservative approach and opted not to award discretionary bonuses in accordance with the plan, even whensets performance goals for the Company has met its annual threshold performance goals.

Awardsand target awards for the Named Executive Officers. Target awards are administered in a manner that encourages high performance. The Compensation Committee sets challenging annual goals that will result in payouts only in years of successful financial performance success forby the Company and its shareholders.Company. The target incentive that could be awarded to an individual isawards are defined as a percentage of that executive’sExecutive’s base salary. Assuming threshold performance of 90% ofThe pool for the annual bonus/incentive plan is generally designed based on the total target goalawards for that year, but may be adjusted up or down based on Company performance. This adjustment is achieved, actual awards can range from 50%generally 5% of the target award to a maximumfor each 1% difference from the Company performance goal, with the following limitations:

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There will be no target incentive payout if the Company performance is less than 90% of 100%target performance.

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If the Company performance is greater than 110% of the target award. If 110% or more ofmeasurement goal, the target goalincentive payout is attained, the actual awards can range from 50% of the target award to a maximum ofcapped at 150% of the target award. This design reflects our goal to reward only for strong performance.incentive award established that year.

For 2009,2010, the target incentive award targetsawards were 50%40% of base salary for Mr. Hoy, 20%25% of base salary for Messrs. Goodemote, DeMarco and O’Conor,O’Conor, and 10%15% of base salary for Mr. T.Thomas Murphy.

The determination of the annual incentive awards for the Named Executive Officers consists of a three-part process:

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Company Performance. The first part of the three-part process is assessing the Company’s performance on a weighted combination of five financial performance measures, which the Compensation Committee believes provide an appropriate portfolio of performance goals and a balanced perspective while ensuring sound risk management. The five measures are Internal NOE, Return on Equity (ROE), Efficiency Ratio, Non-Performing Loans and Net Charge-Offs.

The Compensation Committee uses an “Internal Net Operating Earnings” (Internal NOE) calculation to measure these goals. Internal NOE is calculated on a basis other than United States Generally Accepted Accounting Principles (“GAAP”), in that Internal NOE represents the net income of the Company before significant nonrecurring items, net of tax. The significant non-recurring items are reviewed by the Compensation Committee on a case-by-case basis to determine if the item would have a significant impact on the Company’s performance and therefore, have an impact on the annual incentive awards made to our Named Executive Officers. It is the intent of the Compensation Committee to ensure that decisions regarding annual incentive awards are not impacted by an item that is not deemed to be in the normal course of business operations, and that eliminating such nonrecurring items from the award review process eliminates any decision-making by Executive Officers merely to affect the year-end earnings for bonus purposes. In years where there are no significant nonrecurring items, the Company’s Internal NOE and GAAP net income will be the same. The following table shows the performance measure and goal weighting for 2010:

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Individual Performance. For the second part of the review, the Compensation Committee compares the Executive’s individual achievements to pre-established annual goals as well as an overall assessment of the Executive’s performance by the Compensation Committee. The Compensation Committee relies on input from the Chief Executive Officer for the Other Named Executive Officers.

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Relative Weighting of Corporate and Individual Performance. The third and final measurement is calculated using a separate formula, weighting the Company performance and the individual’s performance to gauge and reward the Executive based on his or her position with the Company. Mr. Hoy is evaluated totally on the Company’s performance, while Messrs. Goodemote, DeMarco and O’Conor are evaluated, 50% based on the Company’s performance and 50% on individual performance and Mr. Thomas Murphy is evaluated, 25% is based on Company performance and 75% on individual performance.

The Compensation Committee meets annually to determine awards for the past year and establish goals for the upcoming year. The awards are determined after year-end, when the Company’s actual performance is known and performance can be more accurately measured. Although there is a pre-determined formula for determining the amount of the annual awards, the Compensation Committee retains full discretion for making incentive awards to all our Named Executive Officers. There have been years in which awards would have been made based on the formula but were not made to the Executive Officers. Based on this discretion, we have presented the annual awards in the Bonus column, rather than in the Non-equity Incentive Plan Compensation column, in the Summary Compensation Table on page 22.

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Long-Term Incentive Compensation. Compensation.

Long-term incentive compensation is provided through the Company’sCompany’s 2008 Long-Term Incentive Plan (“LTIP”(“LTIP”) which was approved in 2008 by our shareholders.. The LTIP allows for multiple equity forms, such as restricted stock and stock options, althoughoptions. However, the Company has never issued restricted stock. Historically, long-term incentive compensation has been provided in the form of stock options, which only provide value to our executivesExecutive Officers if the Company’sCompany’s stock price increases. The value of the grants can result in little or no value to our executives if our stock price does not grow or decreases. As a result, we believe this form of incentive best aligns our executives with our shareholders.

Equity awards are typically reviewed at the meeting of the Compensation Committee held in January each year and considered in light of the prior year’s performance. The grant of options is made at the discretion of the Compensation Committee and is not guaranteed. In awarding option grants, the Compensation Committee considers the individual’s role and the contributions he or she has made to

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the Company’s success. The long-term incentive component of our compensation program is intended to recognize the team collaborations of managementExecutive collaboration and encouragedrive shareholder value creation, which encourages alignment with our shareholders through stock ownership.shareholders. Equity awards are discretionary and typically considered by the Compensation Committee at its January meeting in light of the Company and the individual’s prior year performance. The Compensation Committee considers the individual’s contributions made to the Company’s success. Options granted under our LTIP normally vest 25% per year over a four-year period, which reinforces the long-term nature of the grant and promotes retention of our top performers.

The exercise price for stock option awards is determined based onthe current market price of our common stock, that is, the market closing price of the Company’s common stock on the date of grant. The Company’s annual stock option awards are generally granted at the same time each year, in the month of January shortly after the close of the Company’s fiscal year. We strivehave these grant practices to avoid both the possibility andor the appearance that any of our option grants are being timed to take advantage of temporary downward fluctuations in the market price of our stock. TheFurthermore, the provisions of our LTIP do not allow “backdating”, “re-pricing”“backdating” or “re-loading”“reloading” of option grants. Repricing of our stock option grants is not permitted without shareholder approval.

Executive Benefits. ·

Ownership Guidelines

The overall compensation package provided bypurpose of the Company’s LTIP is to its executive group includes participationencourage those individuals who receive awards under the LTIP to acquire and maintain an interest in the standard benefit programs availableCompany, thereby aligning the interests of our employees with the interests of our shareholders. In order to all eligible full-time employees, e.g. retirementbetter align the interests of Executive Management with the interests of our shareholders, the Company recently adopted stock ownership requirements for our Executive Management. Under our Stock Ownership Guidelines, the Named Executive Officers of the Company are required to own a number of shares of the Company’s common stock based on a multiple of three times base salary for the CEO and health plans.one times base salary for the Other benefits available onlyNamed Executive Officers. Until the required ownership is attained, restrictions are placed on the ability to select executives include a nonqualified supplemental retirement plan, a salary deferral plan, and certain perquisites (“perks”). All formssell shares of executive benefits and perks are reviewed and approvedthe Company’s common stock obtained through the LTIP stock-option awards. This ownership requirement will be measured by the Compensation Committee. Committee at its June meeting each year, using the data as of December 31^st of the previous year. Common shares owned outright or shares held through benefits plans are currently counted toward the stock ownership

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requirement. Conversely, unvested awards or unexercised stock options do not count towards the stock ownership requirement. Individuals will have five years from appointment as an Executive Officer to meet these requirements.

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Executive Benefits

Our executive compensation elements are structured withprogram includes other benefits in furtherance of the goal of providing executivesExecutive Officers with a comprehensive and competitive compensation package, taking into consideration both market and best practices. The Executive Officers are eligible to participate in the standard benefit programs that are available to all eligible full-time employees. Other benefits available only to select Executive Officers include a nonqualified supplemental retirement plan, a salary deferral plan, and certain perquisites (“perks”). All forms of Executive benefits and perks are reviewed and approved by the Compensation Committee.

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Retirement and Select Retirement Plans. We provide

The Company provides a defined benefit, an Employee Stock Ownership Plan (“ESOP”) and a non-matching 401(k) qualified retirement planplans to all eligible full-time employees of the Company and a nonqualified Select Executive Retirement Plan (“SERP”(“SERP”) forto certain executives and senior officers. Under the SERP, participating executives and senior officers are eligible to receive supplemental retirement benefits.Executive Officers. There are two components of the SERP: 1)(1) a “makeup”“makeup” benefit that is designed to provide participants with a level of benefit that they would have received under the qualified plan if there were no limitations on eligible compensation in the Internal Revenue Code, and 2)(2) additional benefits that are granted by the Compensation Committee on a discretionary basis to provide retirement benefits that appropriately reflect the executive’sExecutive’s service and contribution to the Company. Of our current named executive officers,Named Executive Officers, Mr. Hoy participates in the “makeup”“makeup” benefit and additional SERP benefit and Mr. O 6;O’Conor participates in only the “makeup”“makeup” benefit. The Company’sCompany’s retirement plan and SERP are further discussed in“Pension Plans”Plans” on page 24.26.

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Deferred Compensation Plan.

The Company maintains a nonqualified deferred compensation plan for executives and senior officers,Executive Officers, under which they may elect to defer some or all of their salary and bonus until retirement. The deferred amounts accumulate interest at a rate equal to the highest rate currently being paid on individual retirement accounts by the Company’sCompany’s principal subsidiary, Glens Falls National Bank and Trust Company. The Compensation Committee oversees the structure and operation of this plan and is responsible for determining which executives and senior officers will be permitted to participate. Although all of the named executive officers areNamed Executive Officers were eligible to participate, Mr. Hoy was the only active participant of that group during 2009.2010. This deferral plan is further discussed in“Nonqualified Deferred Compensation Table”Table” on page 25.27.

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Executive Perquisites.

The only perkperks provided to our executivesExecutive Officers at this time isare the personal use of a company automobile, which is currently provided to Messrs. Hoy, Goodemote, O'Conor and DeMarco. The valueDeMarco and the reimbursement of this perk is less than $10,000 per person.country club dues, currently provided to Messrs. Goodemote, DeMarco and Thomas Murphy.

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Employment and OtherTermination Agreements with ExecutivesExecutive Officers

Historically, the Company has entered into an employment agreementagreements or a limited change-in-control agreementagreements with its executive officers.Executive Officers and renewed these agreements annually, if and to the extent appropriate. The employment agreement entered into with our Chief Executive Officer, Mr. Hoy, has a three-year term and contains standard terms relating to salary, position, duties, benefits and continuing cash payments following a change-in-control of the Company or a termination without cause or for good reason, accompanied by termination of employment.his employment or a termination of his employment by the Company without cause or by Mr. Hoy himself for good reason.  The Company has also entered into employment agreements with Messrs. Goodemote, DeMarco and O’Conor.O’Conor. Each of these employment agreements has a two-year term and otherwise contains the same sorts of standard terms relating to salary, position, duties, benefits and continuing cash payments following a change-in-control of the Company or a termination without cause orthat Mr. Hoy’s agreement contains, adjusted for good reason, accompanied by termination of employment.their positions.  The Compensation Committee reviews and approves the key terms of each of these employment agreements including sal ary, on an annual basis and, if approved, the agreement is renewed by the Compensation Committee annually for a like term. These employment agreements do not provide any right to receive a payment under the short-term incentive plan, to receive any amounts of stock awards under the long-term incentive plan, or to receive any additional retirement benefits under our retirement plan or SERP. The Compensation Committee and our Board will continue to review the appropriateness of employment agreements on a case-by-case basis. The employment agreements of Messrs. Hoy, Goodemote, DeMarco and O’ConorO’Conor are described in more detail in “Agreements with Executive Officers” on page 25.27.

The Company, from time-to-time, has also granted limited change-in-control protection to certain executives. These agreements provide that, in the event of a change-in-control and a subsequent termination of employment of that Executive, the executive, the executiveExecutive will receive continuing payments equal to a multiple of his or her base salary in the year of the change-in-control, usually one or two timestwotimes base salary. A change-in-control agreement is currently held by Mr. T. Murphy, and is further described in more detail in Thomas Murphy. See page 28 under “Agreements with Executive Officers” beginning on page 25.27.

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The Company occasionally has entered into agreements with former executives to benefit the CompanyExecutive Officers, such as a consulting arrangement with a retiring executiveExecutive, to ensure thea smooth transition of an operating function from the retiree to his or her successor and/or to ensure continuing access by the Company to the special expertise of the retiring executive.Executive. Mr. J.John Murphy, formerly the Company’sCompany’s former Chief Financial Officer, is currently serving under such a post-retirement arrangement. Under this arrangement, Mr. J. Murphy renders advice on financial and general corporate matters. This arrangement is further described in “Mr. J.John Murphy Consulting Agreement” on page 33.37.

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The Process for Determining Compensation for Named Executive Officers

Considerations in Making ExecutiveThe Role of the Compensation DecisionsCommittee, Independent Consultants, and Management

The major Compensation Committee oversees our executive compensation policies and process and is responsible for the final decisions on most components of executive compensation for the Chief Executive Officer (“CEO”) and the other Named Executive Officers and makes recommendations to the full Board on the other components such as employment agreements. The Committee is responsible for reviewing and approving all aspects of the compensation of our CEO and the other Named Executive Officers and receives input from the CEO and the full Board of Directors on key compensation policy issues. The five members of our Board of Directors that serve on the Compensation Committee are all independent under the NASDAQ^® listing requirements, with a significant degree of tenure and stability in membership that we believe enhances its ability to make informed, well-founded decisions regarding pay and performance. The Compensation Committee met three times during 2010 and the Chair of the Committee provides regular reports to our Board of Directors.

The Compensation Committee is authorized to seek the assistance of independent compensation consultants. These advisors are paid by the Company, but are hired by, directed by, and report directly to, the Compensation Committee. During 2010, the Compensation Committee retained the services of Pearl Meyer & Partners LLC (“PM&P”), an independent outside consulting firm specializing in executive and board compensation, to provide assistance with executive compensation review and support with compensation policies and proxy disclosure. PM&P provides no other consulting services for the Company.

Our CEO provides the Compensation Committee with an annual review of his own goals for the Company, including broad performance goals, and his personal goals, including compensation-related matters, as well as his assessment of the performance of the Other Named Executive Officers. Management also provides information and data on Company and individual performance and executive compensation to the Compensation Committee and outside advisors. Although our CEO provides insight and recommendations regarding executive compensation, only the Compensation Committee, comprised solely of independent members of the Board of Directors, votes on decisions regarding executive compensation. Although the Compensation Committee meets with our CEO to obtain his views, goals and assessments regarding compensation matters, as discussed above, the decisions regarding his compensation package are made solely by the Compensation Committee without the CEO or other Executive Officers present.

Setting Compensation Opportunities and Performance Targets

A keyelement the Compensation Committee considers in setting program targets and making compensation decisions is a strong understanding of the industry landscape using benchmarking and performance considerations. The Compensation Committee relies on a variety of data sources and information related to market practice for bank holding companies similar to the Company and engages independent compensation consultants on a periodic basis to conduct comprehensive competitive reviews. The Compensation Committee also reviews peer group data from the Executive Compensation Review for Banks and Thrifts prepared annually by SNL Financial (“SNL”(“SNL”), which provides data for executive compensation and performance relative to a peer group selected by SNL that reflects banks of similar size and region to the Company.

Benchmarking.

An in-depth review of our compensation program requires a review of the industry landscape to determine program targets and compensation decisions. In 2009, the Compensation Committee hired Pearl Meyer & Partners, LLC (“PM&P”),&P, to conduct a comprehensive review of its executive total compensation program. The purpose of this review was to provide an independent and objective analysis of all elements of compensation, individually and in aggregate, relative to market and peer group practices. Pay mix and an assessment of the pay-for-performance relationship were also reviewed and presented to the Compensation Committee in November 2009 to provide the foundational information to support them in making compensation decisions for the executive team.Executive Team.

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A primary data source used in setting the competitive market for the named executive officersNamed Executive Officers is the information publicly disclosed by a peer group of other publicly-traded banks. This peer group was developed by PM&P in coordination with managementManagement and the Compensation Committee using objective parameters that reflect bank holding companies of similar asset size and region. The peer group was approved by the Compensation Committee. In the future, the peer group will be reviewed and updated, as appropriate, since

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the comparable bank holding companies may change, depending on the current size of the Company, acquisitions and business focus of the Company or our peer institutions. Overall, the goal was to have 15-20 comparative bank holding companies that provide a market perspective for executive total compensation.

The 2009 peer group consisted of 1918 bank holding companies in Pennsylvania, Massachusetts, New Jersey, New York, Rhode Island, and Vermont, ranging from approximately $1.2 billion in assets to $3 billion in assets and positioning the Company at approximately the median for size ($1.8 billion in assets).

The following is the peer group used in the 2009 review conducted by PM&P:

In addition to the peer group data, PM&P used several other sources of data including PM&P’s&P’s Banking Compensation Survey Report and the Watson Wyatt Financial Institutions Benchmarking Survey. This data reflectSurvey, which reviewed bank holding companies of similar asset size and regions ofto that of the Company.

InformationTo supplement this comprehensive review from 2009, at year-end 2010 the competitive analysisCompensation Committee reviewed a regional and local financial institution compensation survey compiled by Management in 2010 from certain local and regional bank proxy statements which summarizes the compensation of the Named Executive Officers of those organizations. The Committee also reviewed the 2010 SNL Financial Executive Compensation Report for the Company, which was usedprepared by SNL Financial and included comparisons to a group of peer banks selected by SNL. The purpose of reviewing these two reports was to supplement the consultant2009 PM&P survey with additional and slightly more current information to provideassist the Committee on ascertaining market competitive guidelines, that support the Company’s total compensation philosophy. Guidelinesincluding guidelines for base salary, short and long-term incentive targets and estimated total direct compensation, are provided with ranges for performance. This allowsThe guidelines allowed the Compensation Committee to see the potential pay and range of pay for each executive role. These guidelinesrole and provided a framework for consideration by the Compensation Committee in setting targeted pay levels going forward.

Performance Analysis.

Given the Company’sCompany’s focus on “stretch”“stretch” performance and high standards, the Compensation Committee and Board also review the Company’sCompany’s performance relative to other bank holding companies in the form of the Federal Reserve Bank’s “BankBank’s “Bank Holding Company Performance Report”Report” that contains peer group data consisting of all U.S. Bank Holding Companies having between $1.0 and $3.0 billion in total assets. ShownSet forth below is a summarycomparison between the Company’s financial performance across several key performance metrics for the 12-month period ending December 31, 2010, and the performance across these same metrics of dataa peer group of bank holding companies for the 9-month period ending September 30, 2010, using peer group information derived from the Federal Reserve Bank’s “BankBank’s “Bank Holding

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Company Performance Report”Report” as of September 30, 2009,2010.  As the latest report available, comparing the Company’s performance to the average for peer bank holding companies for several key performance statistics. Overall,comparison demonstrates, in 2009,2010 the Company continued to be among the top performers in this broad peer group.

Note to Table:

(a)

Peer group data consisted of all U.S. Bank Holding Companies having between $1.0 and $3.0 billion in total assets, obtained from At the Federal Reserve Bank’s “Bank Holding Company Performance Report” as of September 30, 2009, the most recent data available fortime the Compensation Committee met in January to review atperformance, the timeSeptember 30, 2010 peer data was the latest information available:

The combination of its meeting.our targeted pay benchmarking, as well as our performance against internal plans and peer reference data provided a basis for determining compensation for Named Executive Officers in 2010 and 2011.

4.

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Considerations in Making 2010 and 2011 Executive Compensation Decisions

Compensation CommitteeBase Salary Decisions on Executive Officer Compensation– 2010 and 2011

Base Salary. ·

Decisions in January 2010

The Compensation Committee met in November, DecemberJanuary 2010 to review corporate and Januaryindividual executive performance for 2009. Please see last year’s Proxy Statement and our 2009 Annual Report on Form 10-K for a detailed review of the purpose of reviewing its fiscalCompany’s 2009 year-end results, year-end performance and setting base compensation for the executives for the next fiscal year. An executive’s base salary is intended to reflect the executive’s role, his or her contributions based on position, individual performance and his or her contribution to the Company’s success, market salaries for similar roles, industry merit budgets, and overall Company financial performance. Other factors considered by the Compensation Committee include leadership and professional standing in the field of banking and financial services, commitment to the community, and current market pay position relative to market benchmarking.

2009 Decisions. Based on its 2008 year-end review, the Compensation Committee approved Mr. Hoy’s recommendation to keep his base salary at the same level for 2009, $388,500, and renewed his three-year employment agreement. For 2009, Mr. Goodemote received a base salary increase of 13.8%, from $145,000 to $165,000, to reflect histhis performance, in 2008 and to adjust his base salary closer to the median base salary for peer bank chief financial officers. Messrs. DeMarco, O’Conor and T. Murphy were appointed executive officers of the Company effective May 1, 2009. For 2009, Mr. DeMarco and Mr. O’Conor received a base salary increase of 3.1% from $160,000 to $165,000 during their regular performance review as of January 1, 2009. There was no additional increase as a result of their appointment as executive officers of the Company. For 2009, Mr. T. Murphy received a base salary increase of 4.3% from $115,000 to $120,000 during his regular performance review as of Ja nuary 1, 2009. Upon his appointment to Vice President and Corporate Secretary of the Company, Mr. T. Murphy received an additional increase in his base salary of 8.3% from $120,000 to $130,000 to reflect the additional responsibilities of these positions. The change-in-control agreements of Messrs. Goodemote, DeMarco, O’Conor and T. Murphy were renewed effective January 1, 2009.

2010 Decisions. Based on its 2009 year-end review, noting record earnings of the Company and strong asset quality, as well as a review of the individual performance of the Named Executive Officers, the Compensation Committee approved athe base salary increaseincreases set forth in the following table for Mr. Hoy of 2.96% from $388,500 to $400,000,the five Named Executive Officers effective January 1, 2010. 2010:

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Decisions in January 2011

The Compensation Committee also reviewed Mr. Hoy’s employment agreementmet in January 2011 to review corporate and agreed to renew itindividual executive performance for three years. For2010. Please see the Company’s other named executive officers,above discussion beginning on page 11 and our 2010 Annual Report on Form 10-K (a portion of which is included with this Proxy Statement) for a detailed review of the Company’s 2010 performance.  Based on this performance, noting another year of record earnings and strong asset quality, the Compensation Committee approved the base salary increases set forth in the following table for the Named Executive Officers of 3.03% from $165,000 to $170,000 for Messrs. Goodemote, DeMarco and O'Conor and a base salary increase of 3.85% from $130,000 to $135,000 for Mr. T. Murphy. All salary increases werethe Company effective January 1, 2010. The Compensation Committee also approved employment agreements for Messrs. Goodemote, DeMarco and O’Conor and the renewal of the change-in-control agreement with Mr. T. Murphy. All agreements were effective January 1, 2010.2011:

Annual Bonus/Short-Term and Long-Term Incentive. Award Decisions – 2010 and 2011

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Considerations Underlying Decisions in Incentive Awards

In determining the short-term and long-term incentive awards for 2009,Executive Officers at any year-end, the Compensation Committee carefully consideredconsiders the recent financial performance of the Company, strategic results such as product and market expansion, as well as individual performance factors such as leadership and commitment to the community. Short-term incentive (bonus) amounts are principally determined based on the achievement of pre-established performance targets, both Company and individual. See “Compensation Program – Annual Bonus/Incentive” on page 13.

2009 Financial Performance Results. At its meeting onThe following is a discussion regarding the Committee’s decisions in January 27,2011 regarding the STIP bonuses paid to the Named Executive Officers for 2010 and the Compensation Committee reviewed’s decisions in January 2010 and discussedJanuary 2011 regarding LTIP option awards to the Company’s actual year-end 2009 financial results including the following:

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Named Executive Officers in those years.

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Diluted earnings per share for 2009 were 6.4% higher than the prior year,

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Net income grew by 6.6% to $21.8 million, representing a new record high for the Company in its 158 year history,

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Total assets at December 31, 2009 reached a record high of $1.842 billion, up 10.6% over the prior year balance,

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Deposit balances at December 31, 2009 of $1.444 billion, representing an increase of 13.2% over the prior year,

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Capital balances at December 31, 2009 of $140.8 million, representing an increase of 11.9% over the prior year,

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Capital ratios of the Company and each subsidiary bank which were substantially above the “well capitalized” regulatory standard,

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Book value per share increased 11.4%,

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Cash dividends paid to shareholders increased 3.2%,

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Continued strong asset quality with nonperforming assets of $4.8 million, representing only 0.26% of period-end assets,

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Continued strong loan quality with nonperforming loans of $4.7 million, representing 0.42% of period-end loans,

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Net loan losses for 2009, as a percentage of average loans outstanding, were 0.09%, very low by industry averages, and

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The Company’s allowance for loan losses amounted to $14.0 million at December 31, 2009, which represented 1.26% of loans outstanding.20

2009 STIP –Performance Results. In addition to considering overall Company performance,Decisions in January 2011 on Short-Term Incentive (Bonus) Awards

At a meeting in January 2011, the Compensation Committee reviewed the 2010 overall results of the 2009Company as well as the results of the 2010 STIP goals for the Company and its named executive officersNamed Executive Officers in determining 2009the amount of any 2010 annual

bonus/incentive payments. For 2009,payments to the Executive Officers. As noted in our STIP target was $20.0 million inabove review of the compensation program, the Compensation Committee uses an “Internal Net Operating Earnings (“internal NOE”” (“Internal NOE”). calculation to measure its performance goals. As noted, Internal NOE is a non-GAAP financial measure used by the Compensation Committee to evaluate Company performance. Internal NOE is preparedcalculated on a basis other than United States generally accepted accounting principles, Generally Accepted Accounting Principles (“GAAP”), in that internalInternal NOE represents the net income of the Company before significant nonrecurring items, net of tax. TheThis decision by the Compensation Committee considers,to eliminate nonrecurring items from the award review process could result in its discretion on a case-by-case basis, non-recurring items to determine if they should impact the annual bonus/incentive payments made to our named executive officers.an Internal NOE that is higher or lower than Net incomeIncome reported in conformity with GAAP.

In 2010, the Internal NOE was lower than GAAP includes the impact of these items which may have eit her a positive or negative impact on earnings. In 2009,Net Income: GAAP net income was $21.8$21.9 million while internalInternal NOE was $20.1$21.0 million, $1.7$0.9 million less,less. This was primarily as athe result of the exclusion of the net gaingains recognized by the Company on the sale of its merchant bankcard processing line of business.long-term investments.  The Compensation Committee determined that exclusion of thisthese net gaingains was appropriate for purposes of determining the annual bonus/incentive awards.awards and resulted in smaller annual awards to the Named Executive Officers than would have been the case without the exclusion.

In setting goals for 2009, Mr. Hoy recommended, and the Compensation Committee approved,The following table provides a higher target internal NOE goal of $20.5 million to provide additional stretch for him to achieve an award payout. Mr. Hoy’s incentive is based on goals for internal NOE, Return on Equity, Efficiency Ratio, Non-Performing Loans and Net Charge-Offs, as noted in the following table. The Compensation Committee believes these measures provide an appropriate portfolio of performance goals and provide a balanced perspective while also ensuring sound risk management.

Incentives for the other named executive officers consisted of a two-part review, 25% based on internal NOE for 2009, with a target goal of $20.0 million, and 75% based on individual performance, as reflected by achievements relative to pre-established goals and an overall assessment by the Chief Executive Officer and the Compensation Committee. At the endcomparison of the review process the Compensation Committee retains full discretion for making incentive awards to all our named executive officers.

Below is a summary of the 2009 Company’s 2010 target performance goals, andthe 2010 actual results. The Compensation Committee also consideredresults and peer data from the Federal Reserve Bank’s “BankBank’s Bank Holding Company Performance Report” as of September 30, 2009, the most recent data available forReport. The weighting used by the Compensation Committee to review at the time of its meeting.

Notes to Table:

(a)

in determining annual awards is described above. The Federal Reserve Bank Peer group dataGroup Data provided in this table consisted of all U.S. Bank Holding Companies having between $1.0 and $3.0 billion in total assets, obtained from the Federal Reserve Bank’s “Bank Holding Company Performance Report” as ofassets. The September 30, 2009,2010 peer group data was the most recent data available forto and used by the Compensation Committee toduring its review at the time of its January 2011 meeting.

(b)

ROE for this purpose is calculated using internal NOE as described above.

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2009 STIP – Individual Incentive Awards. The 2009As shown in the Performance Measure Table above, the 2010 Net Operating Earnings result ($20.1 million) exceededand ROE (Return on Equity) were both slightly below goal and the named executive officers’ internal NOE goal ($20.0 million) andEfficiency Ratio was slightly below Mr. Hoy’s internal NOE enhanced goal ($20.5 million). In aggregate, and in considerationabove goal. The amounts of the strong performance year, Mr. Hoy and the other named executive officers met or exceeded theirany potential awards for each individual goals for the year.were reduced accordingly. Based upon the attainment of the 2009actual 2010 Company and individual results toward the established 2010 goals, the Compensation Committee approved the following 20092010 STIP awards at its January 27, 2010 meeting.2011 meeting:

Equity·

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Decisions in January 2010 and January 2011 on Long-Term Incentive Awards. (Options)

The Compensation Committee considers long-term incentive awards to Executive Officers (typically, stock grantsoptions) in January of each year to better reflect performance of the prior year and ensure greater alignment between pay and performance. At its meeting on January 16, 2009, the Compensation Committee approved stock option awards for the named executive officers related to 2008 performance. The awards were allocated in accordance with our share guidelines which provide a recommended number of stock options according to the executive’s role. All of the stock options were issued at an exercise price of $22.59, the closing price of our common stock on the date of grant, January 21, 2009.

The Compensation Committee determined the 2009 equity awards at its January 27, 2010 meeting. At this meeting, the Compensation Committee approved stock option awards for the executive officers based on the Company’s strong 2009 performance. In awarding option grants to our Named Executive Officers in January 2010 and January 2011, the Compensation Committee considered the individual’sindividual’s role and the individual contributions he made to the Company’s success. All ofCompany’s success during the stockprevious year.  The Committee’s option awards to our Named Executive Officers in January 2010 were granted for performance in 2009 and the options that were awarded to them in January 2011 were granted for performance in 2010.

The following awards granted by the Compensation Committee at its January 2010 meeting were issued at an exercise price of $24.58, the closing price of our common stock on the date of grant, January 27, 2010.grant:

Ownership Guidelines. AlthoughThe following awards granted by the Company encourages ownershipCompensation Committee at its January 2011 meeting were issued at an exercise price of Company$25.47, the closing price of our common stock by its executive officers, including a stock purchase plan,on the Company does not currently have any stock ownership guidelines in place for its executive officers.date of grant:

Employment and Change-in-Control Agreement Decisions

As noted above in “The Company’s 2010 Compensation Philosophy and Program,” the Company currently has employment agreements with Messrs. Hoy, Goodemote, DeMarco and O’Conor and a change-in-control agreement with Mr. Thomas Murphy. These agreements are reviewed each year. At its January 2010 meeting, the Committee approved a renewal of each of the agreements effective January 1, 2010. At its January 2011 meeting, the Committee approved a renewal of each of the agreements effective February 1, 2011. The employment agreements of Messrs. Hoy, Goodemote, DeMarco and O’Conor and the change-in-control agreement currently held by Mr. Murphy are described in more detail in “Agreements with Executive Officers” beginning on page 27.

3.

Other Compensation Policies and Considerations

Risk Oversight of the Company Compensation Program

The Company carefully monitors our compensation levels to ensure that they reflect an appropriate balance of pay-for-performance within acceptable risk parameters. Traditionally, banking organizations relied on strong risk management, internal controls and corporate governance to help constrain risk-taking. However, the financial crisis has illustrated that the incentives created by poorly

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designed and implemented incentive compensation arrangements can be powerful enough to overcome risk controls. We believe that incentive compensation awards should be aligned with the institution’s overall business strategy and support the desired risk profile.

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To that end, Management conducted an internal compensation risk assessment to understand the various elements of its overall compensation program, including all incentive compensation programs. As part of the exercise, Management completed an inventory of our existing compensation programs, including incentive compensation programs, evaluated the plans, determined the existence of Management and committee oversight, considered appropriate risk mitigants and assigned a risk rating based on documentation to support these controls. We recognize that an effective incentive program should encourage and reward appropriate performance and requires an element of risk-taking which is in the long-term benefit of the Company and shareholders. Based on our evaluation, we have determined that the Company’s compensation programs and policies do not create excessive and unnecessary risk taking. Our determination is supported by the following key attributes that mitigate risk taking:

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Our compensation program contains an appropriate balance of fixed and variable compensation.

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We offer incentive compensation in multiple forms, including the award of stock options that are tied to multi-year performance.

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Our short-term incentive program contains both a threshold and maximum payment, protecting the Company from the extreme levels of risk that accompany unlimited upside incentive compensation programs and inappropriate pay and performance alignment.

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We have share ownership guidelines which further promote long-term thinking and Management “skin in the game.”

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Our benefits programs are competitive with the market and provide for reasonable base line levels of health, welfare and security, further enhancing the risk-mitigating aspects of our overall program.

The Company and Compensation Committee will continue to ensure that proper policies are maintained to monitor ongoing risk management and assessment of compensation practices.

Claw-back and Hedging Policies

Management and the Board of Directors, with the Compensation Committee’s input, embarked on a project this past year to consider and ultimately to implement Company specific claw-back and hedging policies for our Executive Officers. The enactment of the Dodd – Frank Wall Street Reform and Consumer Protection Act resulted in our decision to delay any specific policy implementation until final regulations, including specific language and technical requirements, have been issued. We determined this to be the best course given the uncertainty regarding the final rules and our desire to avoid having to revise the Company guidelines in reaction to the final rules.

Impact of Accounting and Tax on the Form of Compensation

The Compensation Committee and managementManagement consider the accounting and individual and corporate tax consequences of the compensation plans prior to making changes to the plans.

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The Compensation Committee has considered the impact of the expense, which will be recognized by the Company in accordance with FASB ASC TOPIC 718, on the Company’sCompany’s use of equity incentives as a key retention tool.

Section 162(m) of the Internal Revenue Code (“IRC”(“IRC”) limits deduction of compensation paid to named executive officersNamed Executive Officers to $1,000,000 unless the compensation is “performance-based”“performance-based”. In the Company’sCompany’s case, base salary is not considered a performance-based vehicle and would not be a deductible compensation expense. Based on the current salaries, the Company does not feel IRC Section 162(m) will be triggered for our ChiefNamed Executive Officer or other executive officers,Officers, but may consider this in future years.

COMPENSATION COMMITTEE REPORTCompensation Committee Report

The Compensation Committee of the Board of Directors has reviewed and discussed with senior managementSenior Management the Compensation Discussion and Analysis presented in this Proxy Statement beginning on page 1211 of this proxy statementProxy Statement as required by Item 402(b) of the SEC’sSEC’s Regulation S-K. Based on its review and discussion, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.Proxy Statement.

COMPENSATION COMMITTEE

John J. Carusone, Jr.,Chairman

Michael B. Clarke

David G. Kruczlnicki

Gary C. Dake

David G. Kruczlnicki

Richard J. Reisman, D.M.D.

Notwithstanding anything set forth in any of our previous or subsequent filings under theSecurities Act of 1933 or the Securities Exchange Act of 1934 that might incorporatefuture filings, including this proxy statement, in whole or in part, the precedingreport shall not be deemed incorporated by reference in any such filings.************************************************************************************************************

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Executive Compensation

In the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 11, we provide you with an explanation and summary of our compensation package for the Executive Officers of the Company. In this Executive Compensation section of the Proxy Statement, including several tables, we provide you details of the compensation actually paid and/or awarded to each of the Named Executive Officers of the Company for each of the last three fiscal years (or such shorter period during which the individual actually served as a Named Executive Officer):

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Summary Compensation Table (including the All Other Compensation Table)

EXECUTIVE COMPENSATION§

Grants of Plan-Based Awards Table

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Outstanding Equity Awards at Fiscal Year-End Table

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Option Exercises and Stock Vested Table

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Pension Benefits Table

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Nonqualified Deferred Compensation Table

The following table sets forth information concerning total compensation paid to and compensatory awards received in 2009 by the named executive officersNamed Executive Officers in each of the Company.relevant years:

SUMMARY COMPENSATION TABLESummary Compensation Table