HUDSON VALLEY HOLDING CORP.

10-Q 1 y10865e10vq.htm FORM 10-Q HUDSON VALLEY HOLDING CORP.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2005

Commission File No. 030525

HUDSON VALLEY HOLDING CORP.

(Exact name of registrant as specified in its charter)


NEW YORK		13-3148745
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21 Scarsdale Road, Yonkers, NY 10707

(Address of principal executive office with zip code)

914-961-6100

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Outstanding at
Class		August 1, 2005

Common stock, par value $0.20 per share		7,366,427

TABLE OF CONTENTS


PART 1 -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
SIGNATURES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART 1 — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts


				Three Months Ended
				June 30,

				2005		2004

Interest Income:
	Loans, including fees			$	17,245	$	12,841
	Securities:
		Taxable			7,072		5,972
		Exempt from Federal income taxes			2,237		2,238
	Federal funds sold				156		41
	Deposits in banks				26		3

			Total interest income		26,736		21,095

Interest Expense:
	Deposits				1,989		1,007
	Securities sold under repurchase agreements and other short-term borrowings				1,076		416
	Other borrowings				2,869		2,467

			Total interest expense		5,934		3,890

Net Interest Income					20,802		17,205
Provision for loan losses					521		214

Net interest income after provision for loan losses					20,281		16,991

Non Interest Income:
	Service charges				1,103		840
	Investment advisory fees				1,011		95
	Realized gain on security transactions, net				—		41
	Other income				211		165

			Total non interest income		2,325		1,141

Non Interest Expense:
	Salaries and employee benefits				6,176		4,894
	Occupancy				870		727
	Professional services				1,090		807
	Equipment				613		528
	Business development				487		400
	FDIC assessment				44		43
	Other operating expenses				1,549		1,201

			Total non interest expense		10,829		8,600

Income Before Income Taxes					11,777		9,532
Income Taxes					3,914		3,121

Net Income				$	7,863	$	6,411

Basic Earnings Per Common Share				$	1.07	$	0.88
Diluted Earnings Per Common Share				$	1.04	$	0.86

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts


				Six Months Ended
				June 30,

				2005		2004

Interest Income:
	Loans, including fees			$	33,184	$	25,200
	Securities:
		Taxable			13,917		11,884
		Exempt from Federal income taxes			4,419		4,424
	Federal funds sold				233		59
	Deposits in banks				41		7

			Total interest income		51,794		41,574

Interest Expense:
	Deposits				3,575		1,964
	Securities sold under repurchase agreements and other short-term borrowings				2,021		942
	Other borrowings				5,705		4,718

			Total interest expense		11,301		7,624

Net Interest Income					40,493		33,950
Provision for loan losses					1,009		473

Net interest income after provision for loan losses					39,484		33,477

Non Interest Income:
	Service charges				2,043		1,528
	Investment advisory fees				2,072		183
	Realized gain on security transactions, net				3		41
	Other income				418		354

			Total non interest income		4,536		2,106

Non Interest Expense:
	Salaries and employee benefits				12,236		10,097
	Occupancy				1,775		1,459
	Professional services				2,095		1,551
	Equipment				1,137		1,044
	Business development				957		753
	FDIC assessment				90		86
	Other operating expenses				3,092		2,458

			Total non interest expense		21,382		17,448

Income Before Income Taxes					22,638		18,135
Income Taxes					7,436		5,762

Net Income				$	15,202	$	12,373

Basic Earnings Per Common Share				$	2.07	$	1.70
Diluted Earnings Per Common Share				$	2.02	$	1.67

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2005			2004			2005			2004

Net Income		$	7,863		$	6,411		$	15,202		$	12,373
Other comprehensive income, net of tax:
	Unrealized gain (loss) on securities available for sale arising during the period		8,299			(22,178	)		(1,333	)		(12,876	)
	Income tax effect		(3,427	)		8,507			542			4,948

			4,872			(13,671	)		(791	)		(7,928	)

	Reclassification adjustment for net gain realized on securities available for sale		—			(41	)		(3	)		(41	)
	Income tax effect		—			16			1			16

			—			(25	)		(2	)		(25	)

	Unrealized gain (loss) on securities available for sale		4,872			(13,696	)		(793	)		(7,953	)

	Minimum pension liability adjustment		109			2			218			4
	Income tax effect		(44	)		(1	)		(88	)		(2	)

			65			1			130			2

Other comprehensive income (loss)			4,937			(13,695	)		(663	)		(7,951	)

Comprehensive income (loss)		$	12,800		$	(7,284	)	$	14,539		$	4,422

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts


			June 30,			December 31,
			2005			2004

ASSETS
Cash and due from banks			$	44,654		$	32,428
Federal funds sold				48,824			5,700
Securities available for sale at estimated fair value (amortized cost of $834,215 in 2005 and $801,915 in 2004)				835,218			804,253
Securities held to maturity at amortized cost (estimated fair value of $61,705 in 2005 and $71,810 in 2004)				60,352			70,867
Federal Home Loan Bank of New York (FHLB) Stock				13,156			14,206
Loans (net of allowance for loan losses of $12,748 in 2005 and $11,801 in 2004)				933,827			862,496
Accrued interest and other receivables				11,890			11,171
Premises and equipment, net				13,690			14,067
Deferred income taxes, net				7,851			6,816
Other assets				19,524			18,870

TOTAL ASSETS			$	1,988,986		$	1,840,874

LIABILITIES
Deposits:
	Non interest-bearing		$	607,045		$	512,790
	Interest-bearing			762,757			722,551

		Total deposits		1,369,802			1,235,341

Securities sold under repurchase agreements and other short-term borrowings				170,258			164,472
Other borrowings				263,109			263,121
Accrued interest and other liabilities				19,363			18,278

Total liabilities				1,822,532			1,681,212

STOCKHOLDERS’ EQUITY
Common stock, $0.20 par value; authorized 10,000,000 shares; outstanding 7,356,560 and 7,359,160 shares in 2005 and 2004, respectively				1,690			1,680
Additional paid-in capital				186,886			185,438
Retained earnings				9,988			1,492
Accumulated other comprehensive income, net				(298	)		365
Treasury stock, at cost; 1,092,883 and 1,040,046 shares in 2005 and 2004, respectively				(31,812	)		(29,313	)

Total stockholders’ equity				166,454			159,662

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	1,988,986		$	1,840,874

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2005 and 2004

Dollars in thousands, except share amounts


															Accumulated
		Number of								Additional					Other
		Shares			Common		Treasury			Paid-in		Retained			Comprehensive
		Outstanding			Stock		Stock			Capital		Earnings			Income (Loss)			Total

Balance at January 1, 2005			7,359,160		$	1,680	$	(29,313	)	$	185,438	$	1,492		$	365		$	159,662
	Net income												15,202						15,202
	Exercise of stock options		50,237			10					1,428								1,438
	Purchase of treasury stock		(54,267	)				(2,540	)										(2,540	)
	Sale of treasury stock		1,430					41			20								61
	Cash dividend												(6,706	)					(6,706	)
	Minimum pension liability adjustment															130			130
	Net unrealized loss on securities available for sale															(793	)		(793	)

Balance at June 30, 2005			7,356,560		$	1,690	$	(31,812	)	$	186,886	$	9,988		$	(298	)	$	166,454


															Accumulated
		Number of								Additional					Other
		Shares			Common		Treasury			Paid-in		Retained			Comprehensive
		Outstanding			Stock		Stock			Capital		Earnings			Income (Loss)			Total

Balance at January 1, 2004			6,586,816		$	1,519	$	(27,824	)	$	165,562	$	1,304		$	1,800		$	142,361
	Net income												12,373						12,373
	Exercise of stock options		88,637			18					2,421								2,439
	Purchase of treasury stock		(28,357	)				(1,210	)										(1,210	)
	Sale of treasury stock		8,140					233			87								320
	Cash dividend												(5,642	)					(5,642	)
	Minimum pension liability adjustment															2			2
	Net unrealized loss on securities available for sale															(7,953	)		(7,953	)

Balance at June 30, 2004			6,655,236		$	1,537	$	(28,801	)	$	168,070	$	8,035		$	(6,151	)	$	142,690

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands


		For the Six Months
		Ended June 30,

		2005			2004

Operating Activities:
Net income		$	15,202		$	12,373
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		1,009			473
	Depreciation and amortization		996			989
	Realized gain on security transactions, net		(3	)		(41	)
	Stock option expense and related tax benefits		193			223
	Amortization of premiums on securities, net		1,393			2,454
Deferred tax benefit			(580	)		(220	)
(Decrease) increase in deferred loan fees, net			(5	)		324
Increase in accrued interest and other receivables			(719	)		(476	)
Increase in other assets			(654	)		(1,527	)
Increase (decrease) in accrued interest and other liabilities			420			(296	)
Other changes, net			218			6

Net cash provided by operating activities			17,470			14,282

Investing Activities:
Net increase in Federal funds sold			(43,124	)		(18,500	)
Decrease (increase) in FHLB stock			1,050			(2,150	)
Proceeds from maturities and paydowns of securities available for sale			69,299			120,879
Proceeds from maturities and paydowns of securities held to maturity			10,587			549
Increase in payable for securities purchased			666			—
Purchases of securities available for sale			(103,061	)		(114,077	)
Purchases of securities held to maturity			—			(73,874	)
Net increase in loans			(72,337	)		(54,855	)
Net purchases of premises and equipment			(619	)		(672	)

Net cash used in investing activities			(137,539	)		(142,700	)

Financing Activities:
Net increase in deposits			134,461			96,633
Net increase (decrease) in securities sold under repurchase agreements and short-term borrowings			5,786			(24,800	)
Repayment of other borrowings			(12	)		(12	)
Proceeds from other borrowings			—			70,000
Proceeds from issuance of common stock			1,245			2,216
Proceeds from sale of treasury stock			61			320
Cash dividends paid			(6,706	)		(5,642	)
Acquisition of treasury stock			(2,540	)		(1,210	)

Net cash provided by financing activities			132,295			137,505

Increase in Cash and Due from Banks			12,226			9,087
Cash and due from banks, beginning of period			32,428			42,558

Cash and due from banks, end of period		$	44,654		$	51,645

Supplemental Disclosures:
Interest paid		$	10,659		$	7,486
Income tax payments			7,449			5,515
Change in unrealized loss on securities available for sale — net of tax			(793	)		(7,953	)

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of Operations

Hudson Valley Holding Corp. (the “Company”) is a New York corporation founded in 1982. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956.

The Company provides financial services through its wholly-owned subsidiary, Hudson Valley Bank (the “Bank”), a New York chartered commercial bank established in 1972. The Bank is an independent bank headquartered in Westchester County, New York. The Bank has 15 branch offices in Westchester County, New York, 2 in Bronx County, New York and 2 in Manhattan, New York. In addition, the Bank has an office, located at 97-77 Queens Boulevard, Rego Park, New York, which was converted from a loan production office to a full service branch location on July 14, 2005. The Bank also provides investment management services to its customers through its wholly-owned subsidiary A.R. Schmeidler & Co., Inc., a money management firm located at 555 Fifth Avenue, New York, New York. In July 2005, the Bank applied for regulatory approval to open a branch location at 350 Park Avenue, New York, New York. The Bank had received prior regulatory approval to open a branch location at 320 Park Avenue, New York, New York, but surrendered the authorization when it was unable to obtain a lease. The Company and the Bank derive substantially all of their revenue and income from providing banking and related services to small and medium-sized businesses, professionals, municipalities, not-for-profit organizations and individuals located in Westchester County and, to a lesser but increasing extent, the Bronx and Manhattan.

On December 23, 2004, the Company entered into an Agreement and Plan of Consolidation (the “Agreement”) with New York National Bank, a national banking association (“NYNB”), providing for the consolidation of NYNB with a subsidiary of the Company. Under the Agreement, the holders of NYNB stock will receive, at their option, either cash or preferred stock of the surviving corporation, which will operate as a New York state chartered bank subsidiary of the Company. The closing under the Agreement is subject to numerous conditions, including receipt of all required regulatory approvals for which the Company and NYNB have made application as well as approval by NYNB shareholders. The acquisition of NYNB is expected to further expand the Company’s presence in the Bronx and Manhattan, where NYNB currently operates 5 branch locations. The Company anticipates that the acquisition will close by November 30, 2005 subject to the receipt of regulatory approvals and the satisfaction of other conditions contained in the Agreement. The acquisition will not be significant from an accounting standpoint. The pro-forma effects of the pending acquisition need not be presented as it is not deemed a “significant subsidiary” as defined by Regulation S-X of the Securities and Exchange Commission.

2. Summary of Significant Accounting Policies

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 2005 and the results of its operations and comprehensive income for the three and six month periods ended June 30, 2005 and 2004, and cash flows and changes in stockholders’ equity for the six month periods ended June 30, 2005 and 2004. The results of operations for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices used within the banking industry. Certain information and note disclosures normally included in annual financial statements have been omitted.

In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and statements of income for the periods reported. Actual results could differ significantly from those estimates.

An estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management utilizes the work of professional appraisers for significant properties.

Intercompany items and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2004 and notes thereto.

Allowance for Loan Losses — The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Bank’s methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component, and an unallocated component. The specific component incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Bank expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of the impaired loan is less than the related recorded amount, a specific valuation allowance is established within the allowance for loan losses or a writedown is charged against the allowance for loan losses if the impairment is considered to be permanent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans that are collectively evaluated for impairment such as the Bank’s portfolios of home equity loans, real estate mortgages, consumer installment and other loans.

The formula component is calculated by applying loss factors to outstanding loans by type. Loss factors are based on historical loss experience. New loan types, for which there has been no historical loss experience, as explained further below, is one of the considerations in determining the appropriateness of the unallocated component.

The appropriateness of the unallocated component is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Bank and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of the loan portfolio. Senior management reviews these conditions quarterly. Management’s evaluation of the loss related to these conditions is reflected in the unallocated component. Due to the inherent uncertainty in the process, management does not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits or portfolio segments.

Actual losses can vary significantly from the estimated amounts. The Bank’s methodology permits adjustments to the allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the loan portfolio as of the evaluation date have changed.

agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments at the time of their examinations.

Income Recognition on Loans — Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectability of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.

Securities — Securities are classified as either available for sale, representing securities the Bank may sell in the ordinary course of business, or as held to maturity, representing securities the Bank has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost (specific identification). The amortization of premiums and accretion of discounts is determined by using the level yield method to the earlier of the call or maturity date. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method.

Goodwill and Other Intangible Assets — In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company’s impairment evaluations as of December 31, 2004 did not indicate impairment of its goodwill or identified intangible assets. The Company is not aware of any events during the six month period ended June 30, 2005 which would have required additional impairment evaluations.

Income Taxes — Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the change is enacted.

Stock-Based Compensation — The Company has stock option plans that provide for the granting of options to directors, certain officers and to all eligible employees. SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of SFAS No. 123 (“SFAS No. 148”).” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Prior to 2002, the Company accounted for stock-based employee compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost was recorded prior to 2002 as all employee options granted during those years had an exercise price equal to the market value of the underlying common stock on the dates of grant. Non-employee stock options were expensed as of the date of grant. Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123 prospectively for all stock options granted,

modified or settled on or after January 1, 2002. Certain stock options under the Company’s plans vest over a five year period commencing one year from date of grant. Therefore, the cost related to stock-based employee compensation included in the determination of 2005 and 2004 net income is less than that which would have been recognized if the fair value method had been applied to all stock options granted since the original effective date of SFAS No. 123. Non-employee stock options are expensed as of the date of grant. The effect on net income and earnings per share for the three and six month periods ended June 30, 2005 and 2004 if the fair value based method had been applied to all outstanding and unvested awards in each period was not significant.

3. Goodwill and Other Intangible Assets

In connection with the fourth quarter 2004 acquisition of A.R. Schmeidler & Co., Inc., the Company recorded customer relationship intangible assets of $2,470 and non-compete provision intangible assets of $516, which have amortization periods of 13 years and 7 years, respectively. Also in connection with the acquisition, the Company recorded $4,335 of goodwill. In accordance with the terms of the acquisition agreement, the Company may make additional performance-based payments over the five years subsequent to the acquisition. These additional payments would be accounted for as additional purchase price and, as a result, would increase goodwill related to the acquisition.

The following table sets forth the gross carrying amount and accumulated amortization for each of the Company’s intangible assets subject to amortization as of June 30, 2005 and December 31, 2004.


	June 30, 2005				December 31, 2004

	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization

Customer Relationships	$	2,470	$	143	$	2,470	$	47
Employment Related		516		55		516		18

Total	$	2,986	$	198	$	2,986	$	65

Goodwill, net of tax benefit, totaled $4,235 and $4,302 at June 30, 2005 and December 31, 2004, respectively. Goodwill and other intangible assets are included in “Other assets” in the June 30, 2005 and December 31, 2004 Consolidated Balance Sheets. Intangible assets amortization expense was $67 and $133 for the three and six month periods ended June 30, 2005. There was no intangible assets amortization expense in the three and six month periods ended June 30, 2004. The annual intangible assets amortization expense is estimated to be approximately $264 in each of the five years subsequent to December 31, 2004.

4. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for each of the periods indicated:


			Three Months Ended				Six Months Ended
			June 30,				June 30

			2005		2004		2005		2004

			(000’s except share data)
Numerator:
	Net income available to common shareholders for basic and diluted earnings per share		$	7,863	$	6,411	$	15,202	$	12,373
Denominator:
	Denominator for basic earnings per common share — weighted average shares			7,357,280		7,300,786		7,359,315		7,284,737
	Effect of dilutive securities:
		Stock options		180,451		162,124		166,103		134,540

	Denominator for diluted earnings per common share — adjusted weighted average shares			7,537,731		7,462,910		7,525,418		7,419,277

Basic earnings per common share			$	1.07	$	0.88	$	2.07	$	1.70
Diluted earnings per common share			$	1.04	$	0.86	$	2.02	$	1.67
Dividends declared per share			$	0.47	$	0.40	$	0.91	$	0.77

In December 2004, the Company declared a 10% stock dividend. Share and per share amounts for 2004 have been retroactively restated to reflect the issuance of the additional shares.

5. Benefit Plans

In addition to defined contribution pension and savings plans which cover substantially all employees, the Company provides additional retirement benefits to certain officers and directors pursuant to unfunded supplemental defined benefit plans. The following table summarizes the components of the net periodic pension cost of the defined benefit plans (dollars in thousands).


		Three Months				Six Months
		Ended				Ended
		June 30,				June 30,

		2005		2004		2005		2004

Service cost		$	65	$	56	$	131	$	111
Interest cost			120		113		239		226
Amortization of transition obligation			18		23		36		45
Amortization of prior service cost			37		35		74		69
Amortization of net loss			38		16		83		77

	Net periodic pension cost	$	278	$	243	$	563	$	528

The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2004 Annual Report on Form 10-K that it expected to contribute $513 to the unfunded defined benefit plans during 2005. For the three and six month periods ended June 30, 2005, the Company contributed $137 and $265 to these plans. The estimate of total contributions for 2005 has been revised to $522 from the amount previously reported.

6. Recent Accounting Pronouncements

Accounting Changes and Error Corrections — In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154.”) SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

Share-Based Payment — In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) SFAS No. 123R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. The Statement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The effective date for SFAS No. 123R is January 1, 2006. As discussed in Note 1 herein, as of January 1, 2002, the Company adopted the fair value recognition provisions for stock-based compensation in accordance with SFAS No. 123 as amended by SFAS No. 148. The Company expects to adopt SFAS No. 123R beginning on January 1, 2006. Since the Company already accounts for share-based payments under a fair value method, it does not anticipate any material impact to its financial position or results of operations as a result of the adoption of SFAS No. 123R.

Other-Than-Temporary Impairment of Investments — In October 2004, the FASB issued a proposed FASB Staff Position (“FSP”) EITF Issue No. 03-1-a “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The proposed staff position provides implementation guidance with respect to debt securities that are impaired solely because of interest rate and/or sector spread increases that are analyzed for impairment under paragraph 16 of EITF Issue No. 03-1. In June 2005, the FASB decided to issue EITF Issue No. 03-1-a as final. The final FSP, to be re-titled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, will supercede EITF Issue No. 03-1 and will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. Management will evaluate the impact of adoption of this guidance upon its issuance.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section presents discussion and analysis of the Company’s consolidated financial condition at June 30, 2005 and consolidated results of operations for the three and six month periods ended June 30, 2005 and June 30, 2004. The Company is consolidated with its wholly-owned subsidiary, Hudson Valley Bank, and the Bank’s subsidiaries, Hudson Valley Investment Corp., Grassy Sprain Real Estate Holdings, Inc., Sprain Brook Realty Corp., HVB Employment Corp., HVB Realty Corp., HVB Leasing Corp. and A.R. Schmeidler & Co., Inc. (collectively the “Bank”). This discussion and analysis should be read in conjunction with the consolidated financial statements and supplementary financial information contained in the Company’s 2004 Annual Report on Form 10-K.

Overview of Management’s Discussion and Analysis

This overview is intended to highlight selected information included in this Quarterly Report on Form 10-Q. It does not contain sufficient information for a complete understanding of the Company’s financial condition and operating results and, therefore, should be read in conjunction with the entire Quarterly Report on Form 10-Q and the Company’s 2004 Annual Report on Form 10-K.

The Company derives substantially all of its revenue from providing banking and related services to small and medium-sized businesses, professionals, municipalities, not-for-profit organizations and individuals within its market area, primarily Westchester County and portions of New York City. The Company’s assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company’s basic strategy is to maintain and grow net interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas, and by selectively acquiring other banks, branch offices and related businesses. The Company’s primary market risk exposure is interest rate risk. Interest rate risk is the exposure of net interest income to changes in interest rates.

Net income for the three month period ended June 30, 2005 was $7.9 million or $1.04 per diluted share, an increase of $1.5 million or 22.7 percent compared to $6.4 million or $0.86 per diluted share for the three month period ended June 30, 2004. Net income for the six month period ended June 30, 2005 was $15.2 million or $2.02 per diluted share, an increase of $2.8 million or 22.9 percent compared to $12.4 million or $1.67 per diluted share for the six month period ended June 30, 2004. The Company achieved substantial growth in both of its core businesses, loans and deposits, during the six month period ended June 30, 2005. In addition, during the second quarter of 2004 the Company increased its long-term borrowings by $75.0 million in an effort to continue to effectively utilize its capital. The proceeds were reinvested in mortgage-backed securities and obligations of state and political subdivisions. Overall asset quality continued to be good as a result of the Company’s conservative underwriting and investment standards. Also, during the fourth quarter of 2004, the Company took steps to expand its investment management services to customers and to increase its fee based revenue through the acquisition of A.R. Schmeidler & Co., Inc., a registered investment advisory firm located in Manhattan, New York which currently has more than $630 million in assets under management.

Short-term interest rates began to rise gradually throughout the second half of 2004 and continued to rise through the second quarter of 2005. The immediate effect of this rise in interest rates was positive to the Company, due to more assets than liabilities repricing in the near term. The rise in short-term rates, however, has not been accompanied with similar increases in longer term interest rates, resulting in a flattening yield curve. Continued flattening of the yield curve would put downward pressure on the Company’s future net interest income as liabilities continue to reprice at higher rates and maturing longer term assets reprice at similar or only slightly higher rates. As a result of the effects of higher short-term interest rates, core growth and the aforementioned additional leverage, tax equivalent basis net interest income increased $3.6 million or 19.5 percent to $22.0 million for the three month period ended June 30, 2005, compared to $18.4 million for the same period in the prior year, and increased $6.6 million or 18.0 percent to $42.9 million for the six month period ended June 30, 2005, compared to $36.3 million for the same period in the prior year. The effect of the

adjustment to a tax equivalent basis was $1.2 million and $2.4 million for the three and six month periods ended June 30, 2005 and $1.2 million and $2.4 million for the three and six month periods ended June 30, 2004.

Non interest income, excluding securities net gains, was $2.3 million for the three month period ended June 30, 2005, an increase of $1.2 million or 114.4 percent compared to $1.1 million for the same period in the prior year. Non interest income, excluding securities net gains, was $4.5 million for the six month period ended June 30, 2005, an increase of $2.4 million or 119.5 percent compared to $2.1 million for the same period in the prior year. The increases resulted primarily from the addition of investment advisory fees resulting from the acquisition of A.R. Schmeidler & Co., Inc., growth in deposit activity and other service fees and increases in scheduled fees.

Non interest expense for the three month period ended June 30, 2005 was $10.8 million, an increase of $2.2 million or 25.9 percent compared to $8.6 million for the same period in the prior year. Non interest expense for the six month period ended June 30, 2005 was $21.4 million, an increase of $3.9 million or 22.5 percent compared to $17.4 million for the same period in the prior year. The increases reflect the Company’s continued investment in its branch network, technology and personnel to accommodate growth in both loans and deposits and the expansion of services and products available to new and existing customers, including the addition of the operating expenses of A.R. Schmeidler & Co., Inc.

The Company uses a simulation analysis to estimate the effect that specific movements in interest rates would have on net interest income. Excluding the effects of planned growth and anticipated new business, the simulation analysis at June 30, 2005 shows the Company’s net interest income increasing if rates rise and decreasing if rates fall.

The Company has established specific policies and operating procedures governing its liquidity levels to address future liquidity needs, including contingent sources of liquidity. The Company believes that its present liquidity and borrowing capacity is sufficient for its current business needs.

The Company and the Bank are subject to various regulatory capital guidelines. To be considered “well capitalized,” an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a Total capital ratio of 10 percent. Both the Company and the Bank exceeded all current regulatory capital requirements and were in the “well capitalized” category at June 30, 2005. Management plans to conduct the affairs of the Company and the Bank so as to maintain a strong capital position in the future.

Critical Accounting Policies

Allowance for Loan Losses — The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Bank’s methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component, and an unallocated component. The specific component incorporates the results of measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Bank expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of the impaired loan is less than the related recorded amount, a specific valuation allowance is established within the allowance for loan losses or a writedown is charged against the allowance for loan losses if the impairment is considered to be permanent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans that are

collectively evaluated for impairment such as the Bank’s portfolios of home equity loans, real estate mortgages, installment and other loans.

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of June 30, 2005. There is no assurance that the Bank will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Bank’s service area, since the majority of the Bank’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments at the time of their examinations.

Income Recognition on Loans — Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectability of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.

Securities — Securities are classified as either available for sale, representing securities the Bank may sell in the ordinary course of business, or as held to maturity, representing securities the Bank has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost (specific identification). The amortization of premiums and accretion of discounts is determined by using the level yield method to the earlier of the call or maturity date. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method.

Goodwill and Other Intangible Assets — In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if

events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company’s impairment evaluations as of December 31, 2004 did not indicate impairment of its goodwill or identified intangible assets. The Company is not aware of any events during the six month period ended June 30, 2005 which would have required additional impairment evaluations.

Results of Operations for the Three and Six Month Periods Ended June 30, 2005 and June 30, 2004

Summary of Results

The Company reported net income of $7.9 million for the three month period ended June 30, 2005, an increase of $1.5 million or 22.6 percent compared to $6.4 million reported for the three month period ended June 30, 2004. Net income for the six month period ended June 30, 2005 was $15.2 million, an increase of $2.8 million or 22.9 percent compared to $12.4 million for the six month period ended June 30, 2004. The increases in net income in the current year periods compared to the prior year periods resulted from higher net interest income and higher non interest income, partially offset by higher non interest expenses, higher income taxes and higher provisions for loan losses.

Diluted earnings per share were $1.04 for the three month period ended June 30, 2005, an increase of $0.18 or 20.9 percent over the $0.86 reported for the three month period ended June 30, 2004. Diluted earnings per share were $2.02 for the six month period June 30, 2005, an increase of $0.35 or 21.0 percent from the $1.67 reported for the six month period ended June 30, 2004. Annualized returns on average equity and average assets, excluding the effects of unrealized gains and losses on securities available for sale, were 19.2 percent and 1.6 percent, respectively, for the three month period ended June 30, 2005, compared to 17.6 percent and 1.5 percent, respectively, for the same period in the prior year. Annualized returns on average equity and average assets, excluding the effects of unrealized gains and losses on securities available for sale, were 18.7 percent and 1.6 percent, respectively, for the six month period ended June 30, 2005, compared to 17.2 percent and 1.5 percent, respectively, for the same period in the prior year.

Average Balances and Interest Rates

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the three month periods ended June 30, 2005 and June 30, 2004, as well as total interest and corresponding yields and rates. The data contained in the table has been adjusted to a tax equivalent basis, based on the federal statutory rate of 35 percent in 2005 and 2004.


				Three Months Ended June 30,

				2005							2004

				Average				Yield/			Average				Yield/
				Balance		Interest(3)		Rate			Balance		Interest(3)		Rate

				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	3,578	$	26		2.91	%	$	1,709	$	3		0.70	%
	Federal funds sold				21,642		156		2.88			16,305		41		1.01
	Securities:(1)
		Taxable			707,576		7,072		4.00			683,715		5,972		3.49
		Exempt from federal income taxes			200,565		3,441		6.86			194,870		3,443		7.07
	Loans, net(2)				915,236		17,245		7.54			756,656		12,841		6.79

			Total interest earning assets		1,848,597		27,940		6.05			1,653,255		22,300		5.40

Non interest earning assets:
	Cash and due from banks				42,996							41,320
	Other assets				53,473							42,646

			Total non interest earning assets		96,469							83,966

			Total assets	$	1,945,066						$	1,737,221

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	396,794	$	967		0.97	%	$	335,070	$	455		0.54	%
		Savings			75,393		110		0.58			69,501		31		0.18
		Time			181,896		826		1.82			167,266		466		1.11
		Checking with interest			129,041		86		0.27			103,748		55		0.21
	Securities sold under repurchase agreements and other short-term borrowings				163,022		1,076		2.64			173,115		416		0.96
	Other borrowings				263,111		2,869		4.36			214,288		2,467		4.61

			Total interest bearing liabilities		1,209,257		5,934		1.96			1,062,988		3,890		1.46

Non interest bearing liabilities:
	Demand deposits				551,441							512,388
	Other liabilities				20,275							16,272

			Total non interest bearing liabilities		571,716							528,660

Stockholders’ equity(1)					164,093							145,573

			Total liabilities and stockholders’ equity(1)	$	1,945,066						$	1,737,221

Net interest earnings						$	22,006						$	18,410

Net yield on interest earning assets									4.76	%						4.45	%


(1)	Excludes unrealized gains (losses) on securities available for sale

(2)	Includes loans classified as non-accrual

(3)	Effects of adjustments to a tax equivalent basis were increases of $1,205 for both three month periods ended June 30, 2005 and June 30, 2004.

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the six month periods ended June 30, 2005 and June 30, 2004, as well as total interest and corresponding yields and rates. The data contained in the table has been adjusted to a tax equivalent basis, based on the federal statutory rate of 35 percent in 2005 and 2004.


				Six Months Ended June 30,

				2005							2004

				Average				Yield/			Average				Yield/
				Balance		Interest(3)		Rate			Balance		Interest(3)		Rate

				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	3,170	$	41		2.59	%	$	2,890	$	7		0.48	%
	Federal funds sold				16,181		233		2.88			11,890		59		0.99
	Securities:(1)
		Taxable			703,532		13,917		3.96			674,170		11,884		3.53
		Exempt from federal income taxes			198,575		6,798		6.85			191,322		6,806		7.11
	Loans, net(2)				897,913		33,184		7.39			740,845		25,200		6.80

			Total interest earning assets		1,819,371		54,173		5.96			1,621,117		43,956		5.42

Non interest earning assets:
	Cash and due from banks				42,270							39,991
	Other assets				51,992							40,673

			Total non interest earning assets		94,262							80,664

			Total assets	$	1,913,633						$	1,701,781

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	373,127	$	1,650		0.88	%	$	320,932	$	872		0.54	%
		Savings			73,959		187		0.51			69,031		62		0.18
		Time			186,066		1,571		1.69			164,900		920		1.12
		Checking with interest			126,011		167		0.27			103,830		110		0.21
	Securities sold under repurchase agreements and other short-term borrowings				168,722		2,021		2.40			190,509		942		0.99
	Other borrowings				263,114		5,705		4.34			201,214		4,718		4.69

			Total interest bearing liabilities		1,190,999		11,301		1.90			1,050,416		7,624		1.45

Non interest bearing liabilities:
	Demand deposits				540,813							493,353
	Other liabilities				19,315							14,487

			Total non interest bearing liabilities		560,128							507,840

Stockholders’ equity(1)					162,506							143,525

			Total liabilities and stockholders’ equity(1)	$	1,913,633						$	1,701,781

Net interest earnings						$	42,872						$	36,332

Net yield on interest earning assets									4.71	%						4.48	%


(1)	Excludes unrealized gains (losses) on securities available for sale

(2)	Includes loans classified as non-accrual

(3)	Effects of adjustments to a tax equivalent basis were increases of $2,379 and $2,382 for the six month periods ended June 30, 2005 and June 30, 2004, respectively.

Interest Differential

The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three and six month periods ended June 30, 2005 and June 30, 2004.


				(000’s)

				Three Month Period Increase									Six Month Period Increase
				(Decrease) Due to Change in									(Decrease) Due to Change in

				Volume			Rate			Total(1)			Volume			Rate			Total(1)

Interest Income:
	Deposits in banks			$	3		$	20		$	23		$	1		$	33		$	34
	Federal funds sold				13			102			115			21			153			174
	Securities:
		Taxable			208			892			1,100			518			1,515			2,033
		Exempt from federal income taxes(2)			101			(103	)		(2	)		258			(266	)		(8	)
	Loans, net				2,691			1,713			4,404			5,343			2,641			7,984

			Total interest income		3,016			2,624			5,640			6,141			4,076			10,217

Interest expense:
	Deposits:
		Money market			84			428			512			142			636			778
		Savings			3			76			79			4			121			125
		Time			41			319			360			118			533			651
		Checking with interest			13			18			31			23			34			57
	Securities sold under repurchase agreements and other short-term borrowings				(24	)		684			660			(108	)		1,187			1,079
	Other borrowings				562			(160	)		402			1,451			(464	)		987

			Total interest expense		679			1,365			2,044			1,630			2,047			3,677

Increase in interest differential				$	2,337		$	1,259		$	3,596		$	4,511		$	2,029		$	6,540


(1)	Changes attributable to both rate and volume are allocated between the rate and volume variances based upon their absolute relative weights to the total change.

(2)	Equivalent yields on securities exempt from federal income taxes are based on a federal statutory rate of 35 percent in 2005 and 2004.

Net Interest Income

Net interest income, the difference between interest income and interest expense, is the most significant component of the Company’s consolidated earnings. For the three and six month periods ended June 30, 2005, net interest income, on a tax equivalent basis, increased $3.6 million or 19.5 percent to $22.0 million and $6.6 million or 18.0 percent to $42.9 million, respectively, compared to $18.4 million and $36.3 million for the same periods in the prior year. Net interest income for the three month period ended June 30, 2005 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $49.1 million or 8.3 percent to $639.3 million compared to $590.3 million for the same period in the prior year, and an increase in the tax equivalent basis net interest margin to 4.76% in 2005 from 4.45% in the prior year period. Net interest income for the six month period ended June 30, 2005 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $57.7 million or 10.1 percent to $628.4 million compared to $570.7 million for the same period in the prior year, and an increase in the tax equivalent basis net interest margin to 4.71% in 2005 from 4.48% in the prior year period.

Interest income is determined by the volume of, and related rates earned on, interest earning assets. Interest income, on a tax equivalent basis, increased $5.6 million or 25.3 percent to $27.9 million and $10.2 million or 23.2 percent to $54.2 million, respectively, for the three and six month periods ended June 30, 2005, compared to $22.3 million and $44.0 million for the same periods in the prior year. Average interest

earning assets increased $195.3 million or 11.8 percent to $1,848.6 million and $198.3 million or 12.2 percent to $1,819.4 million, respectively, for the three and six month periods ended June 30, 2005, compared to $1,653.3 million and $1,621.1 million for the same periods in the prior year. Volume increases in interest bearing deposits, federal funds sold, taxable securities, tax-exempt securities and loans and generally higher interest rates contributed to the higher interest income in the three and six month periods ended June 30, 2005 compared to the same periods in the prior year.

Average total securities, excluding average net unrealized gains on available for sale securities, increased $29.6 million or 3.4 percent to $908.1 million and $36.6 million or 4.2 percent to $902.1 million, respectively, for the three and six month periods ended June 30, 2005, compared to $878.6 million and $865.5 million for the same periods in the prior year. The increase in average total securities in the current year period as compared to the prior year period resulted from the Company increasing it’s long-term borrowings by $75.0 million during the second quarter of 2004 and investing the proceeds into fixed rate mortgage-backed securities and obligations of state and political subdivisions, partially offset by a reduction of average short-term borrowings and a slight excess of average loan growth over average deposit growth. The increased investment in securities and the partial redeployment of maturing funds from existing securities were generally conducted at higher average yields and, therefore, the average yield on securities was higher for the three and six month periods ended June 30, 2005 compared to the same periods in the prior year. Average tax equivalent basis yields on securities for the three and six month periods ended June 30, 2005 were 4.63 percent and 4.59 percent, respectively, compared to 4.23 percent and 4.32 percent for the same periods in the prior year. As a result, tax equivalent basis interest income from securities was higher for the three and six month periods ended June 30, 2005, compared to the same periods in the prior year, due to higher volume and higher interest rates.

Average net loans increased $158.6 million or 21.0 percent to $915.2 million and $157.1 million or 21.2 percent to $897.9 million, respectively, for the three and six month periods ended June 30, 2005, compared to $756.7 million and $740.8 million for the same periods in the prior year. The increase in average net loans reflect the Company’s continuing emphasis on making new loans, expansion of loan production facilities and more effective market penetration. Average yields on loans were 7.54 percent and 7.39 percent, respectively, for the three and six month periods ended June 30, 2005 compared to 6.79 percent and 6.80 percent for the same periods in the prior year. As a result, interest income on loans was higher for the three and six month periods ended June 30, 2005, compared to the same periods in the prior year, due to higher volume and higher interest rates.

Interest expense is a function of the volume of, and rates paid for, interest bearing liabilities, comprised of deposits and borrowings. Interest expense increased $2.0 million or 52.5 percent to $5.9 million and $3.7 million or 48.2 percent to $11.3 million, respectively, for the three and six month periods ended June 30, 2005, compared to $3.9 million and $7.6 million for the same periods in the prior year. Average interest bearing liabilities increased $146.3 million or 13.8 percent to $1,209.3 million and $140.6 million or 13.4 percent to $1,191.0 million, respectively, for the three and six month periods ended June 30, 2005, compared to $1,063.0 million and $1,050.4 million for the same periods in the prior year. The increase in average interest bearing liabilities for the three and six month periods ended June 30, 2005, compared to the same periods in the prior year, resulted from volume increases in money market deposits, checking with interest, savings deposits, time deposits and borrowed funds, partially offset by a volume decrease in securities sold under agreements to repurchase and other short-term borrowings. Deposits increased from new customers, existing customers and the continued growth resulting from the opening of new branches. The increase in average borrowed funds resulted from a $75 million increase in long-term borrowings in the second quarter of 2004 conducted as part of management’s ongoing effort to effectively leverage the Company’s capital. Average interest rates on interest bearing liabilities were higher during the three and six month periods ended June 30, 2005, compared to the same periods in the prior year, due to higher average interest rates on deposits and short-term borrowings, partially offset by lower average interest rates on long-term borrowings. As a result, interest expense was higher for the three and six month periods ended June 30, 2005, compared to the same periods in the prior year due to higher volume and higher average interest rates. Average non interest bearing demand deposits increased $39.0 million or 7.6 percent to $551.4 million and $47.4 million or

9.6 percent to $540.8 million, respectively, for the three and six month periods ended June 30, 2005, compared to $512.4 million and $493.4 million for the same periods in the prior year. These deposits are an important component of the Company’s asset/liability management and have a direct impact on the determination of net interest income. Funds from increases in both interest bearing liabilities and non interest bearing demand deposits were invested in loans and securities.

The interest rate spread on a tax equivalent basis for the three and six month periods ended June 30, 2005 and 2004 is as follows:


		Three Month						Six Month
		Period Ended						Period Ended
		June 30,						June 30,

		2005			2004			2005			2004

Average interest rate on:
	Total average interest earning assets		6.05	%		5.40	%		5.96	%		5.42	%
	Total average interest bearing liabilities		1.96			1.46			1.90			1.45
	Total interest rate spread		4.09			3.94			4.06			3.97

Interest rate spreads increased in the current year periods, compared to the prior year periods. These increases reflect the general stabilization of interest rates and the impact of greater deployment of available funds into loans and investments. Management cannot predict what impact market conditions will have on its interest rate spread, and future compression in net interest rate spread may occur.


	Provision for Loan Losses

The Bank recorded a provision for loan losses of $521,000 and $214,000 for the three month periods ended June 30, 2005 and 2004, respectively. The Bank recorded a provision for loan losses of $1,009,000 and $473,000 for the six month periods ended June 30, 2005 and 2004, respectively. The provision for loan losses is charged to income to bring the Bank’s allowance for loan losses to a level deemed appropriate by management. See “Financial Condition” for further discussion.


	Non Interest Income

Non interest income for the three and six month periods ended June 30, 2005 increased 103.8 percent to $2.3 million from $1.1 million and increased 115.4 percent to $4.5 million from $2.1 million, compared to the prior year periods. The changes were due to the following:


	•	Service charges for the three and six month periods ended June 30, 2005 increased 31.3 percent to $1.1 million from $0.8 million and 33.7 percent to $2.0 million from $1.5 million compared to the prior year periods. These increases reflect new fees, a higher level of fees charged and increased activity.

	•	Investment advisory fee income for the three and six month periods ended June 30, 2005 increased 964.2 percent to $1.0 million from $95,000 and 1032.2 percent to $2.0 million from $0.2 million compared to the prior year periods. The increase was primarily due to the Bank’s acquisition of A.R. Schmeidler & Co., Inc., a money management firm, in October 2004.

	•	Other income for the three and six month periods ended June 30, 2005 increased 27.9 percent to $211,000 from $165,000 and 18.1 percent to $418,000 from $354,000 compared to the prior year periods. The increase was primarily due to an increase is miscellaneous customer service fees and ATM fees.


	Non Interest Expense

Non interest expense for the three and six month periods ended June 30, 2005 increased 25.9 percent to $10.8 million from $8.6 million and 22.5 percent to $21.4 million from $17.4 million compared to the prior year periods. These increases reflect the overall growth of the Company and resulted from increases in salaries and employee benefits expense, occupancy expense, professional services expense, equipment expense, business development expense and other operating expenses for both the three and six month periods ended June 30, 2004, as compared to the prior year periods. The increases also included additional expenses due to the Bank’s acquisition of A.R. Schmeidler & Co., Inc.

Salaries and employee benefits, the largest component of non interest expense, for the three and six month periods ended June 30, 2005 increased 26.2 percent to $6.2 million from $4.9 million and 21.2 percent to $12.2 million from $10.1 million, as compared to prior year periods. The increase resulted from additional staff related to the Bank’s acquisition of A.R. Schmeidler & Co, Inc., additional staff to accommodate the growth in loans and deposits, new branch facilities, and merit increases. In addition, salaries and employee benefits increased as a result of higher costs of employee benefit plans and costs associated with related payroll taxes.

Occupancy expense for the three and six month periods ended June 30, 2005 increased 19.7 percent to $0.9 million from $0.7 million and 21.7 percent to $1.8 million from $1.5 million, as compared to prior year periods. These increases reflected additional expenses due to the acquisition of A.R. Schmeidler & Co, Inc., the opening of new branch facilities as well as rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.

Professional services for the three and six month periods ended June 30, 2005 increased 35.1 percent to $1.1 million from $0.8 million and 35.1 percent to $2.1 million from $1.6 million, as compared to prior year periods. The increases were due to expense related to the pending acquisition of New York National Bank, an executive compensation survey and higher audit costs associated with requirements of the Sarbanes-Oxley Act of 2002.

Equipment expense for the three and six month periods ended June 30, 2005 increased 16.1 percent to $0.6 million from $0.5 million and 8.9 percent to $1.1 million from $1.0 million compared to the prior year periods. The increases resulted from additional expense related to the Bank’s acquisition of A.R. Schmeidler & Co. Inc., and increased maintenance costs compared to the prior year periods.

Business development expense for the three and six month periods ended June 30, 2005 increased 22.2 percent to $0.5 million from $0.4 million and 21.8 percent to $1.0 million from $0.8 million, as compared to the prior year periods. The increase was due to increased costs related to the annual report, increased participation in public relations events and increased promotion of bank products.

The assessment of the FDIC for the three and six month periods ended June 30, 2005 increased 2.3 percent to $44,000 from $43,000 and 4.7 percent to $90,000 from $86,000, as compared to the prior year periods. The increases resulted from an increase in the Bank’s deposits subject to assessment.

Significant changes, more than 5 percent, in other components of non interest expense for the three and six month periods ended June 30, 2005 compared to June 30, 2004, were due to the following:


	•	Increase of $67,000 (40.6%) and $70,000 (19.2%), respectively, in stationery and printing costs due increased costs of paper.

	•	Increase of $11,000 (110.0%) and decrease of $9,000 (150.0%), respectively, in other insurance expense resulting from increases in banker’s professional insurance costs and automobile insurance costs partially offset by reductions in the estimates of the net cost of certain life insurance programs.

	•	Decrease of $66,000 (23.6%) and $46,000 (8.5%), respectively, in communications expense due to added voice and data lines associated with the expansion of technology usage and growth in customer and business activity.

	•	Increase of $9,000 (5.2%) and $14,000 (4.1%), respectively, in courier costs due to increased branch and customer utilization of the service and increase service costs.

	•	Increase of $73,000 (235.5%) and $101,000 (138.4%), respectively, in other loan costs due to increased loan collection expenses.

	•	Increase of $48,000 (15.2%) and $160,000 (25.9%), respectively, in outside services costs due to increased data processing costs and additional expenses resulting from the acquisition of A.R. Schmeidler & Co, Inc.


	•	Increase of $102,000 (217.0%) and $162,000 (178.0%), respectively, in dues, meetings and seminar expense due to increased participation in such events.


	Income Taxes

Income taxes of $3.9 million and $7.4 million, respectively, were recorded in the three and six month periods ended June 30, 2005, compared to $3.1 million and $5.8 million, respectively, for the same periods in the prior year. The Company is currently subject to a statutory Federal tax rate of 35 percent, a New York State tax rate of 7.5 percent plus a 17 percent surcharge, and a New York City tax rate of 9 percent. The Company’s overall effective tax rates were 33.2 percent and 32.9 percent, respectively, for the three and six month periods ended June 30, 2005, compared to 32.7 percent and 31.8 percent, respectively, for the same periods in the prior year. The increase in the overall effective tax rates for the 2005 periods compared to the prior year periods, resulted primarily from increases in income subject to New York State and New York City taxes.

In the normal course of business, the Company’s Federal, New York State and New York City Corporation tax returns are subject to audit. The New York State Department of Taxation and Finance has completed an audit of the Company’s New York State Corporation Tax returns for the years 1996 through 1998, and is in the process of completing an audit of tax years 1999 through 2004. In January 2005, the Company reached a tentative agreement with New York State on all open issues for tax years 1996 through 2004. The Company does not believe the resolution of this matter will have a significant impact on its financial position or results of operations.

Financial Condition


	Assets

The Company had total assets of $1,989.0 million at June 30, 2005, an increase of $148.1 million or 8.0 percent from $1,840.9 million at December 31, 2004.


	Federal Funds Sold

Federal funds sold totaled $48.8 million at June 30, 2005, an increase of $43.1 million from $5.7 million at December 31, 2004. The increase resulted from timing differences in the redeployment of available funds into loans and longer term investments.


	Securities and FHLB Stock

The Company invests in stock of the Federal Home Loan Bank of New York (“FHLB”) and other securities which are rated with an investment grade by nationally recognized credit rating organizations and, on a limited basis, in non-rated securities. Non-rated securities totaled $9.9 million at June 30, 2005 comprised primarily of obligations of municipalities located within the Company’s market area.

Securities totaled $895.6 million at June 30, 2005, an increase of $20.5 million or 2.3 percent from $875.1 million at December 31, 2004. Securities classified as available for sale, which are recorded at estimated fair value, totaled $835.2 million at June 30, 2005, an increase of $31.0 million or 3.9 percent from $804.3 million at December 31, 2004. Securities classified as held to maturity, which are recorded at amortized cost, totaled $60.4 million at June 30, 2005, a decrease of $10.5 or 14.8 percent from $70.9 million at December 31, 2004. The following table sets forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities at June 30, 2005:


				Gross
				Unrealized
		Amortized						Estimated
Classified as Available for Sale		Cost		Gains		Losses		Fair Value

		(000’s)
U.S. Treasury and government agencies		$	164,748	$	3	$	2,281	$	162,470
Mortgage-backed securities			423,770		917		3,849		420,838
Obligations of state and political subdivisions			196,444		6,188		287		202,345
Other debt securities			28,036		244		212		28,068

Total debt securities			812,998		7,352		6,629		813,721
Mutual funds and other equity securities			21,217		587		307		21,497

	Total	$	834,215	$	7,939	$	6,936	$	835,218

Classified as Held to Maturity

Mortgage-backed securities		$	55,223	$	631	$	29	$	55,825
Obligations of states and political subdivisions			5,129		122		1		5,250

	Total	$	60,352	$	753	$	30	$	61,075

U.S. Treasury and government agency obligations classified as available for sale totaled $162.5 million at June 30, 2005, a decrease of $3.5 million or 2.1 percent from $166.0 million at December 31, 2004. The decrease was due to maturities and calls of $9.4 million and other decreases of $1.1 million, partially offset by purchases of $7.0 million. There were no U.S. Treasury or government agency obligations classified as held to maturity at June 30, 2005 or at December 31, 2004.

Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $420.8 million at June 30, 2005, an increase of $29.4 million or 7.5 percent from $391.4 million at December 31, 2004. The increase was due to purchases of $80.4 million partially offset maturities and principal paydowns of $49.2 million and other decreases of $1.8 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $55.2 million at June 30, 2005, a decrease of $10.5 million or 16.0 percent. The decreases was due to maturities and principal paydowns of $10.6 million partially offset by other increases of $0.1 million. The purchases of available for sale securities consisted of fixed rate mortgage-backed securities with average lives of five years or less at the time of purchase.

Obligations of state and political subdivisions classified as available for sale totaled $202.3 million at June 30, 2005, an increase of $6.1 million or 3.1 percent from $196.2 million at December 31, 2004. The increase was due to purchases of $15.5 million and other increases of $0.1 million, partially offset by maturities and calls of $9.5 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both June 30, 2005 and December 31, 2004. The combined available for sale and held to maturity obligations at June 30, 2005 were comprised of approximately 67 percent of New York State political subdivisions and 33 percent of a variety of other states and their subdivisions all with diversified maturity dates. The Company considers such securities to have favorable tax equivalent yields.

Other debt securities, consisting primarily of corporate bonds and trust preferred securities, totaled $28.1 million at June 30, 2005, a decrease of $1.1 million or 4.1 percent from $29.2 million at December 31, 2004. The decrease resulted from maturities and principal paydowns of $1.2 million partially offset by other increases of $0.1 million, All other debt securities are classified as available for sale.

Mutual funds and other equity securities totaled $21.5 million at both June 30, 2005 and December 31, 2004. All mutual funds and other equity securities are classified as available for sale.

The Bank, as a member of the FHLB, invests in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Bank must purchase additional shares of FHLB stock to obtain increases in such borrowings. Shares in excess of required amounts for outstanding borrowings are generally redeemed by the FHLB. The investment in FHLB stock totaled $13.2 million at June 30, 2005, compared to $14.2 million at December 31, 2004.

Except for securities of the U.S. Treasury and government agencies, there were no obligations of any single issuer, which exceeded ten percent of stockholders’ equity at June 30, 2005 or December 31, 2004.


	Loans

Net loans totaled $933.8 million at June 20, 2005, an increase of $71.3 million or 8.3 percent from $862.5 million at December 31, 2004. The increase resulted principally from a $37.3 million increase in construction loans, a $12.8 million increase in commercial and industrial loans, a $16.4 million increase in residential real estate loans, a $4.7 million increase in commercial loans and a $1.6 million increase in loans to individuals partially offset by a $0.4 million decrease in lease financing.

Major classifications of loans at June 30, 2005 and December 31, 2004 are as follows:


			June 30,			December 31,
			2005			2004

			(000’s)
Real Estate:
	Commercial		$	238,148		$	233,452
	Construction			153,328			116,064
	Residential			238,804			222,392
Commercial and industrial				289,763			277,013
Individuals				23,343			21,787
Lease financing				5,872			6,276

		Total		949,258			876,984
Deferred loan fees, net				(2,683	)		(2,687	)
Allowance for loan losses				(12,748	)		(11,801	)

		Loans, net	$	933,827		$	862,496

The following table summarizes the Company’s non-accrual loans and loans past due 90 days or more and still accruing as of June 30, 2005 and December 31, 2004:


	June 30,			December 31,
	2005			2004

	(000’s except percentages)
Non-accrual loans at period end	$	3,997		$	2,301
Loans past due 90 days or more and still accruing		2,079			3,227
Nonperforming assets to total assets at period end		0.20	%		0.13	%

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $98,000 and $243,000 for the six month period ended June 30, 2005 and the year ended December 31, 2004, respectively. There was no interest income on nonperforming assets included in net income for the three and six month periods ended June 30, 2005 and the year ended December 31, 2004.

Allowance for Loan Losses

The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of estimated losses. The Bank’s methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component and an unallocated component.

A summary of the components of the allowance for loan losses, changes in the components and the impact of charge-offs/ recoveries on the resulting provision for loan losses for the dates indicated is as follows:


		June 30,		Change During			December 31,
		2005		Period			2004

		(000’s)
Specific component		$	2,269	$	654		$	1,615
Formula component			579		(807	)		1,386
Unallocated component			9,900		1,100			8,800

	Total allowance	$	12,748				$	11,801

Net change					947
Net chargeoffs					(62	)

Provision amount				$	1,009

The change in the specific component of the allowance for loan losses is the result of our analysis of impaired and other problem loans and our determination of the amount required to reduce the carrying amount of such loans to estimated fair value.

The change in the formula component of the allowance for loan losses is the result of the application of historical loss experience to outstanding loans by type. Loss experience for each year is based upon average charge-off experience for the prior three year period by loan type.

The determination of the unallocated component of the allowance for loan losses is the result of our consideration of other relevant factors affecting loan collectibility. Due to the inherent uncertainty in the process, we do not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. We periodically adjust the unallocated component to an amount that, when considered with the specific and formula components, represents our best estimate of probable losses in the loan portfolio as of each balance sheet date. The following factors affected the determination of the unallocated component for loan losses at June 30, 2005.


	•	Economic and business conditions — Signs of increased inflation, such as the recent pronounced rise in energy costs, increases in the cost of raw materials used in construction, significant increases in real estate taxes within the Bank’s market area and the gradual rise in short-term interest rates, which began in the third quarter of 2004 and has continued through the second quarter of 2005, could have negative effects on the demand for or value of real estate, the primary collateral for the Bank’s loans, and the ability of borrowers to repay their loans. Consideration of such events that trigger economic uncertainty is part of the determination of the unallocated component of the allowance.

	•	Concentration — Concentration in construction loans increased to 16.2 percent of total loans at June 30, 2005 from 13.2 percent at December 31, 2004. These loans generally have a higher degree of risk than other types of loans which the Bank makes, since repayment of the loans is generally dependent on the borrowers’ ability to successfully construct and sell or lease completed properties. Increases in such concentrations, and the associated increase in risk, is not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in determining the loss factors. Therefore consideration of changes in concentrations is a part of the determination of the unallocated component of the allowance.

	•	Credit quality — Delinquencies improved substantially during the six month period ended June 30, 2005, however, the dollar amount of nonperforming loans increased, primarily due to the addition of a $1.6 million construction loan on which the Bank has been notified of a title issue on its collateral, apparently as a result of fraudulent satisfactions filed by the borrower on the Bank’s lien and a prior lien. Other than the aforementioned loan, the Bank’s regular periodic loan review process noted continued strength in overall credit quality which is believed to have been mainly attributable to the continued rise in real estate values in the Bank’s primary market area. However, continuation of recent trends of rising construction, energy and interest costs, as well as real estate taxes, may negatively impact the borrowers’ ability to pay and collateral values. Certain loans were downgraded due to potential

deterioration of collateral values, the borrower’s cash flows or other specific factors that negatively impact the borrower’s ability to meet their loan obligations. Certain of these loans, including the aforementioned $1.6 million loan, are also considered in connection with the analysis of impaired loans performed to determine the specific component of the allowance. However, due to the uncertainty of that determination, such loans are also considered in the process of determining the unallocated component of the allowance.

• New loan products — The Bank introduced a series of low cost home equity products since the fourth quarter of 2002. As of June 30, 2005, home equity loans represent approximately 7.8 percent of total loans. Any probable losses with respect to these products are not reflected in the formula component of the allowance for loan losses since there is no loss history.

As a result of our detailed review process and consideration of the identified relevant factors, management determined that a $1.1 million increase in the unallocated component of the allowance to $9.9 million reflects our best estimate of probable losses which have been incurred as of June 30, 2005.

Deposits

Deposits totaled $1,369.8 million at June 30, 2005, an increase of $134.5 million or 10.9 percent from $1,235.3 million at December 31, 2004. The following table presents a summary of deposits at June 30, 2005 and December 31, 2004:


	(000’s)

	June 30,		December 31,		Increase
	2005		2004		(Decrease)

Demand deposits	$	607,045	$	512,790	$	94,255
Money market accounts		386,152		364,778		21,374
Savings accounts		75,360		73,747		1,613
Time deposits of $100,000 or more		120,971		106,737		14,234
Time deposits of less than $100,000		60,549		62,780		(2,231	)
Checking with interest		119,725		114,509		5,216

	$	1,369,802	$	1,235,341	$	134,461

The increase in deposits resulted from new account relationships and increased account activity.

Borrowings

Total borrowings were $433.4 million at June 30, 2005, an increase of $5.8 million or 1.4 percent from $427.6 million at December 31, 2004. The overall increase resulted from a $16.8 million increase in short-term repurchase agreements, partially offset by a $11.0 million decrease in other short-term borrowings. Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital and to manage interest rate risk.

During the second quarter of 2004, the Company increased its long-term borrowings by $75 million reflecting management’s efforts to effectively leverage its capital and to manage interest rate risk. The additional borrowings had 5 year terms with 1 year call provisions and a weighted average interest rate of 3.25 percent.

Stockholders’ Equity

Stockholders’ equity totaled $166.5 million at June 30, 2005, an increase of $6.8 million or 4.3 percent from $159.7 million at December 31, 2004. Increases in stockholders’ equity resulted from net income of $15.2 million for the six months ended June 30, 2005, and $1.4 million proceeds from stock options exercised. Decreases in stockholders’ equity resulted from $6.7 million cash dividends paid on common stock, $2.5 million purchases of treasury stock and a $0.6 million decrease in accumulated comprehensive income, principally as a result of a decrease in the net unrealized value of securities available for sale.

The Company’s and the Bank’s capital ratios at June 30, 2005 and December 31, 2004 are as follows:


								Minimum for
								Capital
		June 30,			December 31,			Adequacy
		2005			2004			Purposes

Leverage ratio:
	Company		8.2	%		8.2	%		4.0	%
	Bank		8.2			8.1			4.0
Tier 1 capital:
	Company		14.0	%		14.5	%		4.0	%
	Bank		13.9			14.4			4.0
Total capital:
	Company		15.1	%		15.6	%		8.0	%
	Bank		15.0			15.5			8.0

The Company and the Bank exceed all current regulatory capital requirements. In addition, the Bank was in the “well capitalized” category at June 30, 2005 and December 31, 2004.

Liquidity

The Bank’s liquid assets, at June 30, 2005, include cash and due from banks of $44.7 million and Federal funds sold of $48.8 million. Other sources of liquidity at June 30, 2005 include maturities and principal payments on loans and securities, including approximately $193.4 million of loans, excluding installment loans to individuals, real estate loans other than construction loans and lease financing, maturing in one year or less, and approximately $113.2 million of securities having contractual maturities, expected call dates or average lives of one year or less. In addition, at June 30, 2005, the Bank had available borrowing facilities of $200 million from a large New York based investment banking firm, $120 million from the FHLB, $75 million under three federal funds purchased facilities and $110 million available under Retail CD Brokerage Agreements. These facilities are subject to various terms and conditions including, in some cases, loan or securities collateral requirements. Based on the above facilities and additional collateral that could be sold under agreements to repurchase, The Bank’s available borrowing capacity was approximately $501.4 million at June 30, 2005.

Management considers the Company’s sources of liquidity to be adequate to meet any expected funding needs, to be responsive to changing interest rate markets and to fund the proposed acquisition of New York National Bank, currently awaiting regulatory approval.

Forward-Looking Statements

The Company has made, and may continue to make, various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to earnings, credit quality and other financial and business matters for periods subsequent to June 30, 2005. These statements may be identified by such forward-looking terminology as “expect”, “may”, “will”, “anticipate”, “continue”, “believe” or similar statements or variations of such terms. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements relating to subsequent periods increasingly are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements.

In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward-looking statements:


	•	competitive pressure on loan and deposit product pricing;

	•	other actions of competitors;

	•	changes in economic conditions;

	•	the extent and timing of actions of the Federal Reserve Board;

	•	a loss of customer deposits;

	•	changes in customer’s acceptance of the Banks’ products and services;

	•	difficulties in integrating acquisitions, offering new services or expanding into new markets;

	•	increases in federal and state income taxes and/or the Company’s effective income tax rate; and

	•	the extent and timing of legislative and regulatory actions and reform.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts or estimated fair value without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk at December 31, 2004 were previously reported in the Company’s 2004 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at June 30, 2005 compared to December 31, 2004.

The Company’s primary market risk exposure is interest rate risk since substantially all transactions are denominated in U.S. dollars with no direct foreign exchange or changes in commodity price exposure.

All market risk sensitive instruments are classified either as available for sale or held to maturity with no financial instruments entered into for trading purposes. The Company from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the six month period ended June 30, 2005. The Company had no derivative financial instruments in place at June 30, 2005.

The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at June 30, 2005 shows the Company’s net interest income increasing if rates rise and decreasing if rates fall.

The Company also prepares a static gap analysis which, at June 30, 2005, shows a positive cumulative static gap of $151.1 million in the one year time frame.

The Company’s policy limit on interest rate risk has remained unchanged since December 31, 2002. The following table illustrates the estimated exposure under a rising rate scenario and a declining rate scenario calculated as a percentage change in estimated net interest income assuming a gradual shift in interest rates for the next 12 month measurement period, beginning June 30, 2005. The Company has reviewed the slight variance from policy limits in the declining rate scenario and has decided that no additional actions are required at this time.


		Percentage Change in
		Estimated Net Interest Income
Gradual Change in Interest Rates		from June 30, 2005			Policy Limit

	+200 basis points		2.4	%		(5.0	)%
	-200 basis points		(5.1	)%		(5.0	)%

Item 4. Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2005. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2005, the Company’s disclosure controls and procedures were effective in bringing to their attention on a timely basis information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act. Also, during the quarter ended June 30, 2005, there has not been any change that has effected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

On April 6, 2005 and April 19, 2005, the Company sold 250 shares and 514 shares, respectively, of its common stock to existing common shareholders for $10,813 and $22,230, respectively, in transactions that did not involve a public offering. In conducting the sales, the Company relied upon the exemption from registration provided by section 4(2) of the Securities Act of 1933. The proceeds from the sales were used for general corporate purposes.

The following table sets forth information with respect to purchase made by the Company of its common stock during the three month period ended June 30, 2005.


							Maximum
					Total number		number of
					of shares		shares that
					purchased as		may yet be
	Total number		Average		part of publicly		purchased
	of shares		price paid		announced		under the
Period	purchased		per share		programs		programs(2)

April 2005(1)		8,491	$	46.33		2,491		—
May 2005(1)		439		37.50		439		—
June 2005(2)		15,333		55.87		2,333		72,667

Total		24,263	$	52.20		5,263		72,667


(1)	In February 2005, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 75,000 of the Company’s shares at a price of $37.50 per share, or a price of $43.25 per share for transactions of at least 2,000 shares. This offer expired May 31, 2005.

(2)	In June 2005, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 75,000 of the Company’s shares at a price of $44.00 per share, or a price of $53.00 per share for transactions of at least 2,500 shares. This offer expires August 30, 2005.

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

The Annual Meeting of Shareholders of the Company was held on May 12, 2005 for the purpose of considering and voting upon the following matter:


	Election of the following directors, constituting all members of the Board of Directors, to a one-year term of office: William E. Griffin, Stephen R. Brown, James M. Coogan, Gregory F. Holcombe, James J. Landy, Angelo R. Martinelli, William J. Mulrow, John A. Pratt Jr., Cecile D. Singer and Craig S. Thompson.

The results were as follows:


	For		Against		Abstentions

William E. Griffin		6,138,817		—		267
Stephen R. Brown		6,138,817		—		267
James M. Coogan		6,138,817		—		267
Gregory F. Holcombe		6,138,817		—		267
James J. Landy		6,138,817		—		267
Angelo R. Martinelli		6,138,817		—		267
William J. Mulrow		6,138,817		—		267
John A. Pratt Jr.		6,138,817		—		267
Cecile D. Singer		6,138,817		—		267
Craig S. Thompson		6,138,817		—		267

Item 6. Exhibits

(A) Exhibits


31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

SIGNATURES

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


	HUDSON VALLEY HOLDING CORP.


	By:	/s/ Stephen R. Brown



	Stephen R. Brown
	Senior Executive Vice President,
	Chief Financial Officer and Treasurer

August 8, 2005


		deterioration of collateral values, the borrower’s cash flows or other specific factors that negatively impact the borrower’s ability to meet their loan obligations. Certain of these loans, including the aforementioned $1.6 million loan, are also considered in connection with the analysis of impaired loans performed to determine the specific component of the allowance. However, due to the uncertainty of that determination, such loans are also considered in the process of determining the unallocated component of the allowance.

	•	New loan products — The Bank introduced a series of low cost home equity products since the fourth quarter of 2002. As of June 30, 2005, home equity loans represent approximately 7.8 percent of total loans. Any probable losses with respect to these products are not reflected in the formula component of the allowance for loan losses since there is no loss history.