10-Q

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 September 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 by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act.)  Yes  o  No  x

      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	November 1, 2005
Common stock, par value $0.20 per share	7,366,427

TABLE OF CONTENTS

EX-31.1: CERTIFICATION

EX-31.2: CERTIFICATION

EX-32.1: CERTIFICATION

EX-32.2: CERTIFICATION

1

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
				September 30,
				2005		2004
Interest Income:
	Loans, including fees			$	18,795	$	13,942
	Securities:
		Taxable			7,097		6,829
		Exempt from Federal income taxes			2,227		2,181
	Federal funds sold				225		51
	Deposits in banks				24		6
			Total interest income		28,368		23,009
Interest Expense:
	Deposits				2,344		1,035
	Securities sold under repurchase agreements and other short-term borrowings				1,347		578
	Other borrowings				2,896		2,857
			Total interest expense		6,587		4,470
Net Interest Income					21,781		18,539
Provision for loan losses					512		—
Net interest income after provision for loan losses					21,269		18,539
Non Interest Income:
	Service charges				958		888
	Investment advisory fees				1,133		106
	Realized gain on security transactions, net				—		1,059
	Other income				176		152
			Total non interest income		2,267		2,205
Non Interest Expense:
	Salaries and employee benefits				6,672		5,301
	Occupancy				937		796
	Professional services				1,068		851
	Equipment				598		490
	Business development				385		390
	FDIC assessment				43		43
	Other operating expenses				1,685		1,232
			Total non interest expense		11,388		9,103
Income Before Income Taxes					12,148		11,641
Income Taxes					4,123		3,794
Net Income				$	8,025	$	7,847
Basic Earnings Per Common Share				$	1.09	$	1.07
Diluted Earnings Per Common Share					1.05		1.05

See notes to consolidated financial statements

2

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts

				Nine Months Ended
				September 30,
				2005		2004
Interest Income:
	Loans, including fees			$	51,979	$	39,142
	Securities:
		Taxable			21,014		18,713
		Exempt from Federal income taxes			6,646		6,605
	Federal funds sold				458		110
	Deposits in banks				65		13
			Total interest income		80,162		64,583
Interest Expense:
	Deposits				5,919		2,999
	Securities sold under repurchase agreements and other short-term borrowings				3,368		1,520
	Other borrowings				8,601		7,575
			Total interest expense		17,888		12,094
Net Interest Income					62,274		52,489
Provision for loan losses					1,521		473
Net interest income after provision for loan losses					60,753		52,016
Non Interest Income:
	Service charges				3,001		2,416
	Investment advisory fees				3,205		289
	Realized gain on security transactions, net				3		1,100
	Other income				594		506
			Total non interest income		6,803		4,311
Non Interest Expense:
	Salaries and employee benefits				18,908		15,398
	Occupancy				2,712		2,255
	Professional services				3,163		2,402
	Equipment				1,735		1,534
	Business development				1,342		1,143
	FDIC assessment				133		129
	Other operating expenses				4,777		3,690
			Total non interest expense		32,770		26,551
Income Before Income Taxes					34,786		29,776
Income Taxes					11,559		9,556
Net Income				$	23,227	$	20,220
Basic Earnings Per Common Share				$	3.15	$	2.77
Diluted Earnings Per Common Share					3.07		2.72

See notes to consolidated financial statements

3

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2005			2004			2005			2004
Net Income		$	8,025		$	7,847		$	23,227		$	20,220
Other comprehensive income, net of tax:
	Unrealized gain (loss) on securities available for sale arising during the period		(7,103	)		13,109			(8,436	)		233
	Income tax effect		2,894			(4,997	)		3,436			(49	)
			(4,209	)		8,112			(5,000	)		184
	Reclassification adjustment for net gain realized on securities available for sale		—			(1,059	)		(3	)		(1,100	)
	Income tax effect		—			380			1			396
			—			(679	)		(2	)		(704	)
	Unrealized gain (loss) on securities available for sale		(4,209	)		7,433			(5,002	)		(520	)
	Minimum pension liability adjustment		109			3			327			7
	Income tax effect		(44	)		(1	)		(132	)		(3	)
			65			2			195			4
Other comprehensive income (loss)			(4,144	)		7,435			(4,807	)		(516	)
Comprehensive income		$	3,881		$	15,282		$	18,420		$	19,704

See notes to consolidated financial statements

4

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts

			September 30,			December 31,
			2005			2004
ASSETS
Cash and due from banks			$	48,701		$	32,428
Federal funds sold				110,866			5,700
Securities available for sale at estimated fair value (amortized cost of $833,886 in 2005 and $801,915 in 2004)				827,785			804,253
Securities held to maturity at amortized cost (estimated fair value of $55,007 in 2005 and $71,810 in 2004)				55,188			70,867
Federal Home Loan Bank of New York (FHLB) Stock				13,155			14,206
Loans (net of allowance for loan losses of $13,245 in 2005 and $11,801 in 2004)				946,326			862,496
Accrued interest and other receivables				11,787			11,171
Premises and equipment, net				13,576			14,067
Deferred income taxes, net				10,896			6,816
Other assets				19,836			18,870
TOTAL ASSETS			$	2,058,116		$	1,840,874
LIABILITIES
Deposits:
	Non interest-bearing		$	607,213		$	512,790
	Interest-bearing			834,465			722,551
		Total deposits		1,441,678			1,235,341
Securities sold under repurchase agreements and other short-term borrowings				166,598			164,472
Other borrowings				263,103			263,121
Accrued interest and other liabilities				19,626			18,278
Total liabilities				1,891,005			1,681,212
STOCKHOLDERS’ EQUITY
Common stock, $0.20 par value; authorized 10,000,000 shares; outstanding 7,380,374 and 7,359,160 shares in 2005 and 2004, respectively				1,702			1,680
Additional paid-in capital				189,320			185,438
Retained earnings				14,533			1,492
Accumulated other comprehensive (loss) income, net				(4,442	)		365
Treasury stock, at cost; 1,131,080 and 1,040,046 shares in 2005 and 2004, respectively				(34,002	)		(29,313	)
Total stockholders’ equity				167,111			159,662
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	2,058,116		$	1,840,874

See notes to consolidated financial statements

5

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 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												23,227						23,227
	Exercise of stock options		112,248			22					3,818								3,840
	Purchase of treasury stock		(98,507	)				(4,906	)										(4,906	)
	Sale of treasury stock		7,473					217			64								281
	Cash dividend												(10,186	)					(10,186	)
	Minimum pension liability adjustment															195			195
	Net unrealized loss on securities available for sale															(5,002	)		(5,002	)
Balance at September 30, 2005			7,380,374		$	1,702	$	(34,002	)	$	189,320	$	14,533		$	(4,442	)	$	167,111

															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												20,220						20,220
	Exercise of stock options		112,966			23					3,320								3,343
	Purchase of treasury stock		(40,796	)				(1,752	)										(1,752	)
	Sale of treasury stock		10,724					306			129								435
	Cash dividend												(8,575	)					(8,575	)
	Minimum pension liability adjustment															4			4
	Net unrealized loss on securities available for sale															(520	)		(520	)
Balance at September 30, 2004			6,669,710		$	1,542	$	(29,270	)	$	169,011	$	12,949		$	1,284		$	155,516

See notes to consolidated financial statements

6

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands

		For the Nine Months
		Ended September 30,
		2005			2004
Operating Activities:
Net income		$	23,227		$	20,220
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		1,521			473
	Depreciation and amortization		1,483			1,465
	Realized gain on security transactions, net		(3	)		(1,100	)
	Stock option expense and related tax benefits		489			273
	Amortization of premiums on securities, net		2,067			3,469
Deferred tax benefit			(775	)		(77	)
(Decrease) increase in deferred loan fees, net			(68	)		727
Increase in accrued interest and other receivables			(616	)		(520	)
Increase in other assets			(966	)		(1,763	)
Increase in accrued interest and other liabilities			1,348			140
Other changes, net			328			8
Net cash provided by operating activities			28,035			23,315
Investing Activities:
Net increase in Federal funds sold			(105,166	)		(47,700	)
Decrease (increase) in FHLB stock			1,051			(2,749	)
Proceeds from maturities and paydowns of securities available for sale			105,179			159,242
Proceeds from maturities and paydowns of securities held to maturity			15,804			2,291
Proceeds from sales of securities available for sale			—			29,144
Purchases of securities available for sale			(139,339	)		(133,888	)
Purchases of securities held to maturity			—			(76,373	)
Net increase in loans			(85,284	)		(116,244	)
Net purchases of premises and equipment			(992	)		(984	)
Net cash used in investing activities			(208,747	)		(187,261	)
Financing Activities:
Net increase in deposits			206,337			155,092
Net increase (decrease) in securities sold under repurchase agreements and short-term borrowings			2,126			(29,969	)
Repayment of other borrowings			(18	)		(17	)
Proceeds from other borrowings			—			70,000
Proceeds from issuance of common stock			3,351			3,070
Proceeds from sale of treasury stock			281			435
Cash dividends paid			(10,186	)		(8,575	)
Acquisition of treasury stock			(4,906	)		(1,752	)
Net cash provided by financing activities			196,985			188,284
Increase in Cash and Due from Banks			16,273			24,338
Cash and due from banks, beginning of period			32,428			42,558
Cash and due from banks, end of period		$	48,701		$	66,896
Supplemental Disclosures:
Interest paid		$	17,177		$	11,926
Income tax payments			11,697			9,437
Change in unrealized loss on securities available for sale — net of tax			(5,002	)		(520	)

See notes to consolidated financial statements

7

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

NOTES TO CONDENSED 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 August 2005, the Bank received regulatory approval to open a branch location at 350 Park Avenue, New York, New York. 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, Manhattan and Queens.

      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 December 31, 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 September 30, 2005 and the results of its operations and comprehensive income for the three and nine month periods ended September 30, 2005 and 2004, and cash flows and changes in stockholders’ equity for the nine month periods ended September 30, 2005 and 2004. The results of operations for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

      The unaudited condensed 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.

8

      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 condensed 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.

      Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 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

9

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. The effect of tax-deductible amortization of intangible assets not subject to amortization for book purposes is reflected as an adjustment to the carrying amount of the related intangible asset. 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 nine month period ended September 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-

10

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 nine month periods ended September 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 Company expects to make the first of the aforementioned payments in the fourth quarter of 2005 in an amount not anticipated to exceed $2.0 million.

      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 September 30, 2005 and December 31, 2004.

	September 30, 2005				December 31, 2004
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Customer Relationships	$	2,470	$	190	$	2,470	$	47
Employment Related		516		74		516		18
Total	$	2,986	$	264	$	2,986	$	65

      Goodwill, net of tax benefit, totaled $4,217 and $4,302 at September 30, 2005 and December 31, 2004, respectively. Goodwill and other intangible assets are included in “Other assets” in the September 30, 2005 and December 31, 2004 Consolidated Balance Sheets. Intangible assets amortization expense was $65 and $198 for the three and nine month periods ended September 30, 2005. There was no intangible assets amortization expense in the three and nine month periods ended September 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.

11

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				Nine Months Ended
			September 30,				September 30
			2005		2004		2005		2004
			(000’s except share data)
Numerator:
	Net income available to common shareholders for basic and diluted earnings per share		$	8,025	$	7,847	$	23,227	$	20,220
Denominator:
	Denominator for basic earnings per common share — weighted average shares			7,382,170		7,328,869		7,367,017		7,299,555
	Effect of dilutive securities:
		Stock options		228,608		135,732		187,167		134,940
	Denominator for diluted earnings per common share — adjusted weighted average shares			7,610,778		7,464,601		7,554,184		7,434,495
Basic earnings per common share			$	1.09	$	1.07	$	3.15	$	2.77
Diluted earnings per common share				1.05		1.05		3.07		2.72
Dividends declared per share				0.47		0.40		1.38		1.17

      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				Nine Months
		Ended				Ended
		September 30,				September 30,
		2005		2004		2005		2004
Service cost		$	65	$	56	$	196	$	167
Interest cost			120		113		359		339
Amortization of transition obligation			18		23		55		68
Amortization of prior service cost			37		35		110		104
Amortization of net loss			72		16		155		93
	Net periodic pension cost	$	312	$	243	$	875	$	771

      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 nine month periods ended September 30, 2005, the Company contributed $128 and $394 to these plans. The estimate of total contributions for 2005 has been revised to $522 from the amount previously reported.

12

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 — On November 3, 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The guidance in this FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The FSP is effective for reporting periods beginning after December 15, 2005. The Company intends to adopt this guidance on January 1, 2006. Management is in the process of evaluating the impact of the adoption of this guidance.

13

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 September 30, 2005 and consolidated results of operations for the three and nine month periods ended September 30, 2005 and September 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 consolidated 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 September 30, 2005 was $8.0 million or $1.05 per diluted share, an increase of $0.2 million or 2.3 percent compared to $7.8 million or $1.05 per diluted share for the three month period ended September 30, 2004. Net income for the nine month period ended September 30, 2005 was $23.2 million or $3.07 per diluted share, an increase of $3.0 million or 14.9 percent compared to $20.2 million or $2.72 per diluted share for the nine month period ended September 30, 2004. The Company achieved substantial growth in both of its core businesses, loans and deposits, during the nine month period ended September 30, 2005. In addition, during 2004, the Company increased its long-term borrowings by $75.0 million in an effort to continue to effectively utilize its capital. 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 $740 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 third 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 $3.3 million or 16.6 percent to $23.0 million for the three month period ended September 30, 2005, compared to $19.7 million for the same period in the prior year, and increased $9.4 million or 16.8 percent to $65.9 million for the nine month period ended September 30, 2005, compared to $56.4 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $1.2 million and $3.6 million for the three and nine

14

month periods ended September 30, 2005 and $1.2 million and $3.6 million for the three and nine month periods ended September 30, 2004.

      Non interest income, excluding securities net gains, was $2.3 million for the three month period ended September 30, 2005, an increase of $1.1 million or 97.8 percent compared to $1.1 million for the same period in the prior year. Non interest income, excluding securities net gains, was $6.8 million for the nine month period ended September 30, 2005, an increase of $3.6 million or 111.9 percent compared to $3.2 million for the same period in the prior year. The increases were primarily due to 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 September 30, 2005 was $11.4 million, an increase of $2.3 million or 25.1 percent compared to $9.1 million for the same period in the prior year. Non interest expense for the nine month period ended September 30, 2005 was $32.8 million, an increase of $6.2 million or 23.4 percent compared to $26.6 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 September 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 September 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.

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      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.

      Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 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. The effect of tax-deductible amortization of intangible assets not subject to amortization for book purposes is reflected as an adjustment to the carrying amount of the related intangible asset. 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

16

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 nine month period ended September 30, 2005 which would have required additional impairment evaluations.

Results of Operations for the Three and Nine Month Periods Ended September 30, 2005 and September 30, 2004

Summary of Results

      The Company reported net income of $8.0 million for the three month period ended September 30, 2005, an increase of $0.2 million or 2.5 percent compared to $7.8 million reported for the three month period ended September 30, 2004. Net income for the nine month period ended September 30, 2005 was $23.2 million, an increase of $3.0 million or 14.9 percent compared to $20.2 million for the nine month period ended September 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. In addition the three and nine month periods ended September 30, 2004 included $1.1 million pretax gains on sales of $29.1 million of securities available for sale, conducted as part of the Company’s ongoing asset/liability management efforts.

      Diluted earnings per share were $1.05 for the three month periods ended September 30, 2005 and 2004. Diluted earnings per share were $3.07 for the nine month period ended September 30, 2005, an increase of $0.35 or 12.9 percent from the $2.72 reported for the nine month period ended September 30, 2004. Annualized returns on average equity and average assets, excluding the effects of unrealized gains and losses on securities available for sale, were 19.0 percent and 1.6 percent, respectively, for the three month period ended September 30, 2005, compared to 20.9 percent and 1.7 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 18.8 percent and 1.6 percent, respectively, for the nine month period ended September 30, 2005, compared to 18.5 percent and 1.6 percent, respectively, for the same period in the prior year.

17

  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 September 30, 2005 and September 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 September 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			$	5,004	$	23		1.84	%	$	3,175	$	6		0.76	%
	Federal funds sold				24,885		225		3.62			14,105		51		1.45
	Securities:(1)
		Taxable			703,277		7,098		4.04			727,595		6,829		3.75
		Exempt from federal income taxes			202,281		3,427		6.78			194,540		3,356		6.90
	Loans, net(2)				943,911		18,795		7.96			797,644		13,942		6.99
			Total interest earning assets		1,879,358		29,568		6.29			1,737,059		24,184		5.57
Non interest earning assets:
	Cash and due from banks				41,358							41,103
	Other assets				51,805							44,838
			Total non interest earning assets		93,163							85,941
			Total assets	$	1,972,521						$	1,823,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	385,027	$	1,104		1.15	%	$	315,187	$	440		0.56	%
		Savings			75,651		101		0.53			70,686		37		0.21
		Time			180,309		1,041		2.31			163,232		493		1.21
		Checking with interest			123,962		98		0.32			119,451		65		0.22
	Securities sold under repurchase agreements and other short-term borrowings				173,015		1,347		3.11			190,627		578		1.21
	Other borrowings				263,105		2,896		4.40			258,129		2,857		4.43
			Total interest bearing liabilities		1,201,069		6,587		2.19			1,117,312		4,470		1.60
Non interest bearing liabilities:
	Demand deposits				582,251							536,844
	Other liabilities				20,248							18,362
			Total non interest bearing liabilities		602,499							555,206
Stockholders’ equity(1)					168,953							150,482
			Total liabilities and stockholders’ equity(1)	$	1,972,521						$	1,823,000
Net interest earnings						$	22,981						$	19,714
Net yield on interest earning assets									4.89	%						4.54	%

(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 $1,199 and $1,175 for the three month periods ended September 30, 2005 and September 30, 2004, respectively.

18

      The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the nine month periods ended September 30, 2005 and September 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.

				Nine Months Ended September 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			$	3,788	$	65		2.29	%	$	2,985	$	13		0.58	%
	Federal funds sold				19,114		458		3.19			12,634		110		1.16
	Securities:(1)
		Taxable			703,445		21,014		3.98			692,109		18,713		3.61
		Exempt from federal income taxes			199,824		10,225		6.82			192,403		10,162		7.04
	Loans, net(2)				913,414		51,979		7.59			759,916		39,142		6.87
			Total interest earning assets		1,839,585		83,741		6.07			1,660,046		68,140		5.47
Non interest earning assets:
	Cash and due from banks				41,963							40,365
	Other assets				51,927							42,071
			Total non interest earning assets		93,890							82,436
			Total assets	$	1,933,475						$	1,742,482
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	377,138	$	2,754		0.97	%	$	319,002	$	1,312		0.55	%
		Savings			74,529		288		0.52			69,587		99		0.19
		Time			184,126		2,612		1.89			164,340		1,413		1.15
		Checking with interest			125,320		265		0.28			109,075		175		0.21
	Securities sold under repurchase agreements and other short-term borrowings				170,168		3,368		2.64			190,549		1,520		1.06
	Other borrowings				263,111		8,601		4.36			220,324		7,575		4.58
			Total interest bearing liabilities		1,194,392		17,888		2.00			1,072,877		12,094		1.50
Non interest bearing liabilities:
	Demand deposits				554,777							507,956
	Other liabilities				19,627							15,788
			Total non interest bearing liabilities		574,404							523,744
Stockholders’ equity(1)					164,679							145,861
			Total liabilities and stockholders’ equity(1)	$	1,933,475						$	1,742,482
Net interest earnings						$	65,853						$	56,406
Net yield on interest earning assets									4.77	%						4.50	%

(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 $3,579 and $3,557 for the nine month periods ended September 30, 2005 and September 30, 2004, respectively.

19

  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 nine month periods ended September 30, 2005 and September 30, 2004.

				(000’s)
				Three Month Period Increase								Nine 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		$	15		$	18	$	3		$	49		$	52
	Federal funds sold				39			135			174		56			292			348
	Securities:
		Taxable			(228	)		496			268		307			1,994			2,301
		Exempt from federal income taxes(2)			134			(63	)		71		392			(329	)		63
	Loans, net				2,557			2,296			4,853		7,906			4,931			12,837
			Total interest income		2,505			2,879			5,384		8,664			6,937			15,601
Interest expense:
	Deposits:
		Money market			97			567			664		239			1,203			1,442
		Savings			3			61			64		7			182			189
		Time			52			496			548		170			1,029			1,199
		Checking with interest			2			31			33		26			64			90
	Securities sold under repurchase agreements and other short-term borrowings				(53	)		822			769		(163	)		2,011			1,848
	Other borrowings				55			(16	)		39		1,471			(445	)		1,026
			Total interest expense		156			1,961			2,117		1,750			4,044			5,794
Increase in interest differential				$	2,349		$	918		$	3,267	$	6,914		$	2,893		$	9,807

(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 nine month periods ended September 30, 2005, net interest income, on a tax equivalent basis, increased $3.3 million or 16.8 percent to $23.0 million and $9.4 million or 16.8 percent to $65.9 million, respectively, compared to $19.7 million and $56.4 million for the same periods in the prior year. Net interest income for the three month period ended September 30, 2005 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $58.5 million or 9.4 percent to $678.3 million compared to $619.7 million for the same period in the prior year, and an increase in the tax equivalent basis net interest margin to 4.89% in 2005 from 4.54% in the prior year period. Net interest income for the nine month period ended September 30, 2005 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $58.0 million or 9.9 percent to $645.2 million compared to $587.2 million for the same period in the prior year, and an increase in the tax equivalent basis net interest margin to 4.77% in 2005 from 4.50% 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 $5.4 million or 22.3 percent to $29.6 million and $15.6 million or 22.9 percent to $83.7 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $24.2 million and $68.1 million for the same periods in the prior year. Average interest earning assets increased $142.3 million or 8.2 percent to $1,879.4 million and $179.5 million or 10.8 percent to

20

$1,839.6 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $1,737.1 million and $1,660.0 million for the same periods in the prior year. Volume increases in interest bearing deposits, federal funds sold, tax-exempt securities and loans and generally higher interest rates, partially offset by a volume decrease in taxable securities contributed to the higher interest income in the three month period ended September 30, 2005 compared to the same period 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 nine month period ended September 30, 2005 compared to the same period in the prior year.

      Average total securities, excluding average net unrealized gains on available for sale securities, decreased slightly by $16.6 million or 1.8 percent to $905.6 million and increased slightly by $18.8 million or 2.1 percent to $903.3 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $922.1 million and $884.5 million for the same periods in the prior year. The slight decrease in average total securities in the three months ended September 30, 2005, compared to the same period in the prior year, resulted primarily from timing in redeploying maturing funds into longer-term investments due to the overall flatness of the yield curve. The increase in average total securities in the nine month period ended September 30, 2005, compared to the prior year period, resulted from the Company increasing it’s long-term borrowings by $75.0 million during 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 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 nine month periods ended September 30, 2005 compared to the same periods in the prior year. Average tax equivalent basis yields on securities for the three and nine month periods ended September 30, 2005 were 4.65 percent and 4.61 percent, respectively, compared to 4.42 percent and 4.35 percent for the same periods in the prior year. As a result, tax equivalent basis interest income from securities was higher for the three month period ended September 30, 2005, compared to the same period in the prior year, due to higher interest rates, partially offset by lower volume, and tax equivalent basis interest income from securities was higher for the nine month period ended September 30, 2005, compared to the same period in the prior year, due to higher volume and higher interest rates.

      Average net loans increased $146.3 million or 18.3 percent to $943.9 million and $153.5 million or 20.2 percent to $913.4 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $797.6 million and $759.9 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 7.96 percent and 7.59 percent, respectively, for the three and nine month periods ended September 30, 2005 compared to 6.99 percent and 6.87 percent for the same periods in the prior year. As a result, interest income on loans was higher for the three and nine month periods ended September 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 $2.1 million or 47.4 percent to $6.6 million and $5.8 million or 47.9 percent to $17.9 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $4.5 million and $12.1 million for the same periods in the prior year. Average interest bearing liabilities increased $83.8 million or 7.5 percent to $1,201.1 million and $121.5 million or 11.3 percent to $1,194.4 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $1,117.3 million and $1,072.9 million for the same periods in the prior year. The increase in average interest bearing liabilities for the three and nine month periods ended September 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

21

borrowings in 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 nine month periods ended September 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 nine month periods ended September 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 $45.4 million or 8.5 percent to $582.3 million and $46.8 million or 9.2 percent to $554.8 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $536.8 million and $508.0 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 nine month periods ended September 30, 2005 and 2004 is as follows:

		Three Month						Nine Month
		Period Ended						Period Ended
		September 30,						September 30,
		2005			2004			2005			2004
Average interest rate on:
	Total average interest earning assets		6.29	%		5.57	%		6.07	%		5.47	%
	Total average interest bearing liabilities		2.19			1.60			2.00			1.50
	Total interest rate spread		4.10			3.97			4.07			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 $512,000 for the three month period ended September 30, 2005. There was no provision for loan losses recorded for the three month period ended September 30, 2004. The Bank recorded a provision for loan losses of $1,521,000 and $473,000 for the nine month periods ended September 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, excluding net gains on sales of securities available for sale, was $2.3 million for the three month period ended September 30, 2005, an increase of $1.1 million or 97.8 percent compared to $1.1 million for the same period in the prior year. Non interest income, excluding securities net gains, was $6.8 million for the nine month period ended September 30, 2005, an increase of $3.6 million or 111.8 percent compared to $3.2 million for the same period in the prior year.

•  Service charges for the three and nine month periods ended September 30, 2005 increased 7.9 percent to $1.0 million from $0.9 million and 24.2 percent to $3.0 million from $2.4 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 nine month periods ended September 30, 2005 increased 968.9 percent to $1.1 million from $0.1 million and 1009.0 percent to $3.2 million from $0.3 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 nine month periods ended September 30, 2005 increased 15.8 percent to $176,000 from $152,000 and 17.4 percent to $594,000 from $506,000 compared to the prior year

22

periods. The increase was primarily due to an increase is miscellaneous customer service fees and ATM fees.

      Net gains on calls or sales of securities available for sale were $0 and $1.1 million for both the three and nine month periods ended September 30, 2005, and 2004. These sales were conducted as part of the Company’s ongoing asset/liability management process.

Non Interest Expense

      Non interest expense for the three and nine month periods ended September 30, 2005 increased 25.1 percent to $11.4 million from $9.1 million and 23.4 percent to $32.8 million from $26.6 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 nine month periods ended September 30, 2005, 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 nine month periods ended September 30, 2005 increased 25.9 percent to $6.7 million from $5.3 million and 22.8 percent to $18.9 million from $15.4 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 nine month periods ended September 30, 2005 increased 17.7 percent to $0.9 million from $0.8 million and 20.3 percent to $2.7 million from $2.3 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 nine month periods ended September 30, 2005 increased 25.6 percent to $1.1 million from $0.9 million and 31.7 percent to $3.2 million from $2.4 million, as compared to prior year periods. The increases were due to expenses 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 nine month periods ended September 30, 2005 increased 22.0 percent to $0.6 million from $0.5 million and 13.1 percent to $1.7 million from $1.5 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 month period ended September 30, 2005 was unchanged as compared to the prior year period. Business development expense for the nine month period ended September 30, 2005 increased 17.1 percent to $1.3 million from $1.1 million as compared to the prior year period. 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 month period ended September 30, 2005 was unchanged as compared to the prior year period. The assessment of the FDIC for the nine month period ended September 30, 2005 increased 3.1 percent to $133,000 from $129,000. The increase 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 nine month periods ended September 30, 2005 compared to September 30, 2004, were due to the following:

•  Increase of $71,000 (43.3%) and $141,000 (26.6%), respectively, in stationery and printing costs due increased costs of paper.

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•  Increase of $46,000 (766.6%) and increase of $54,000 (450.0%), 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.

•  Increase of $85,000 (177.1%) and $186,000 (153.7%), respectively, in other loan costs due to increased loan collection expenses.

•  Increase of $108,000 (36.9%) and $268,000 (29.4%), 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 $57,000 (126.7%) and $219,000 (161.0%), respectively, in dues, meetings and seminar expense due to increased participation in such events.

•  Decrease of $72,000 (25.3%) and $118,000 (14.3%), 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.

Income Taxes

      Income taxes of $4.1 million and $11.6 million, respectively, were recorded in the three and nine month periods ended September 30, 2005, compared to $3.8 million and $9.6 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 approximately 9 percent. The Company’s overall effective tax rates were 33.9 percent and 33.2 percent, respectively, for the three and nine month periods ended September 30, 2005, compared to 32.6 percent and 32.1 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 $2,058.1 million at September 30, 2005, an increase of $217.2 million or 11.8 percent from $1,840.9 million at December 31, 2004.

Federal Funds Sold

      Federal funds sold totaled $110.9 million at September 30, 2005, an increase of $105.2 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 and volatility in certain deposit types and relationships.

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 $9.8 million at September 30, 2005 comprised primarily of obligations of municipalities located within the Company’s market area.

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      Securities totaled $883.0 million at September 30, 2005, an increase of $7.9 million or 0.9 percent from $875.1 million at December 31, 2004. Securities classified as available for sale, which are recorded at estimated fair value, totaled $827.8 million at September 30, 2005, an increase of $23.5 million or 2.9 percent from $804.3 million at December 31, 2004. Securities classified as held to maturity, which are recorded at amortized cost, totaled $55.2 million at September 30, 2005, a decrease of $15.7 or 22.1 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 September 30, 2005:

				Gross
				Unrealized
		Amortized						Estimated
Classified as Available for Sale		Cost		Gains		Losses		Fair Value
		(000’s)
U.S. Treasury and government agencies		$	164,829		—	$	3,804	$	161,025
Mortgage-backed securities			421,939	$	458		7,560		414,837
Obligations of state and political subdivisions			197,802		5,340		752		202,390
Other debt securities			27,917		205		207		27,915
Total debt securities			812,487		6,003		12,323		806,167
Mutual funds and other equity securities			21,399		601		382		21,618
	Total	$	833,886	$	6,604	$	12,705	$	827,785
Classified as Held to Maturity
Mortgage-backed securities		$	50,059	$	45	$	292	$	49,812
Obligations of states and political subdivisions			5,129		73		7		5,195
	Total	$	55,188	$	118	$	299	$	55,007

      U.S. Treasury and government agency obligations classified as available for sale totaled $161.0 million at September 30, 2005, a decrease of $5.0 million or 3.0 percent from $166.0 million at December 31, 2004. The decrease was due to maturities and calls of $10.3 million and other decreases of $3.0 million, partially offset by purchases of $8.3 million. There were no U.S. Treasury or government agency obligations classified as held to maturity at September 30, 2005 or at December 31, 2004.

      Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $414.8 million at September 30, 2005, an increase of $23.4 million or 6.0 percent from $391.4 million at December 31, 2004. The increase was due to purchases of $109.0 million partially offset maturities and principal paydowns of $79.2 million and other decreases of $6.4 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $50.1 million at September 30, 2005, a decrease of $15.6 million or 23.7 percent. The decrease was due to maturities and principal paydowns of $15.8 million partially offset by other increases of $0.2 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 $202.4 million at September 30, 2005, an increase of $6.2 million or 3.2 percent from $196.2 million at December 31, 2004. The increase was due to purchases of $21.8 million, partially offset by maturities and calls of $14.4 million and other decreases of $1.2 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both September 30, 2005 and December 31, 2004. The combined available for sale and held to maturity obligations at September 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 $27.9 million at September 30, 2005, a decrease of $1.3 million or 4.5 percent from $29.2 million at December 31, 2004. The decrease resulted from maturities and principal paydowns of $1.3 million. All other debt securities are classified as available for sale.

      Mutual funds and other equity securities totaled $21.6 million at September 30, 2005, an increase of $0.1 million or 0.5 percent from $21.5 million at December 31, 2004. The increase resulted from purchases of

25

$0.3 million partially offset by other decreases of $0.2 million. 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 September 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 September 30, 2005 or December 31, 2004.

Loans

      Net loans totaled $946.3 million at September 30, 2005, an increase of $83.8 million or 9.7 percent from $862.5 million at December 31, 2004. The increase resulted principally from a $41.5 million increase in construction loans, a $9.0 million increase in commercial and industrial loans, a $34.9 million increase in residential real estate loans, a $4.4 million increase in loans to individuals, a $1.6 million increase in lease financing partially offset by a $6.3 million decrease in commercial real estate loans.

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

			September 30,			December 31,
			2005			2004
			(000’s)
Real Estate:
	Commercial		$	227,188		$	233,452
	Construction			157,592			116,064
	Residential			257,310			222,392
Commercial and industrial				286,018			277,013
Individuals				26,166			21,787
Lease financing				7,916			6,276
		Total		962,190			876,984
Deferred loan fees, net				(2,619	)		(2,687	)
Allowance for loan losses				(13,245	)		(11,801	)
		Loans, net	$	946,326		$	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 September 30, 2005 and December 31, 2004:

	September 30,			December 31,
	2005			2004
	(000’s except percentages)
Non-accrual loans at period end	$	4,692		$	2,301
Loans past due 90 days or more and still accruing		3,142			3,227
Nonperforming assets to total assets at period end		0.23	%		0.13	%

      Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $240,000 and $243,000 for the nine month period ended September 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 nine month periods ended September 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.

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      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:

		September 30,		Change During			December 31,
		2005		Period			2004
		(000’s)
Specific component		$	2,460	$	845		$	1,615
Formula component			585		(801	)		1,386
Unallocated component			10,200		1,400			8,800
	Total allowance	$	13,245				$	11,801
Net change					1,444
Net chargeoffs					77
Provision amount				$	1,521

      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 September 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 third 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 16.4 percent of total loans at September 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 nine month period ended September 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

27

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 September 30, 2005, home equity loans represent approximately 8.1 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 $1.4 million increase in the unallocated component of the allowance to $10.2 million reflects our best estimate of probable losses which have been incurred as of September 30, 2005.

     Deposits

      Deposits totaled $1,441.7 million at September 30, 2005, an increase of $206.3 million or 16.7 percent from $1,235.3 million at December 31, 2004. The following table presents a summary of deposits at September 30, 2005 and December 31, 2004:

		(000’s)
		September 30,		December 31,		Increase
		2005		2004		(Decrease)
Demand deposits		$	607,213	$	512,790	$	94,423
Money market accounts			408,355		364,778		43,577
Savings accounts			74,320		73,747		577
Time deposits of $100,000 or more			153,687		106,737		46,950
Time deposits of less than $100,000			60,033		62,780		(2,747	)
Checking with interest			138,070		114,509		23,561
	Total Deposits	$	1,441,678	$	1,235,341	$	206,337

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

     Borrowings

      Total borrowings were $429.7 million at September 30, 2005, an increase of $2.1 million or 0.5 percent from $427.6 million at December 31, 2004. The overall increase resulted from a $13.4 million increase in short-term repurchase agreements, partially offset by a $11.3 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 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 $167.1 million at September 30, 2005, an increase of $7.4 million or 4.7 percent from $159.7 million at December 31, 2004. Increases in stockholders’ equity resulted from net income of $23.2 million for the nine months ended September 30, 2005, and $3.8 million proceeds from stock options exercised. Decreases in stockholders’ equity resulted from $10.2 million cash dividends paid on common stock, $4.9 million purchases of treasury stock and a $4.8 million decrease in accumulated comprehensive income, principally as a result of a decrease in the net unrealized value of securities available for sale.

28

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

								Minimum for
								Capital
		September 30,			December 31,			Adequacy
		2005			2004			Purposes
Leverage ratio:
	Company		8.3	%		8.2	%		4.0	%
	Bank		8.3			8.1			4.0
Tier 1 capital:
	Company		14.1	%		14.5	%		4.0	%
	Bank		14.1			14.4			4.0
Total capital:
	Company		15.3	%		15.6	%		8.0	%
	Bank		15.2			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 September 30, 2005 and December 31, 2004.

     Liquidity

      The Bank’s liquid assets, at September 30, 2005, include cash and due from banks of $48.7 million and Federal funds sold of $110.9 million. Other sources of liquidity at September 30, 2005 include maturities and principal payments on loans and securities, including approximately $199.5 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 $110.9 million of securities having contractual maturities, expected call dates or average lives of one year or less. In addition, at September 30, 2005, the Bank had available borrowing facilities of $200 million from a large New York based investment banking firm, $100 million from the FHLB, $80 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 $481.8 million at September 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 September 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;

29

•  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;

•  regulatory delays or conditions imposed by regulators in connection with acquisitions or other expansion plans;

•  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 Condensed 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 September 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 nine month period ended September 30, 2005. The Company had no derivative financial instruments in place at September 30, 2005.

      The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at September 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 September 30, 2005, shows a positive cumulative static gap of $110.2 million in the one year time frame.

30

      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 September 30, 2005.

		Percentage Change in
		Estimated Net Interest Income
Gradual Change in Interest Rates		from September 30, 2005			Policy Limit
	+200 basis points		1.3	%		(5.0	)%
	-200 basis points		(4.7	)%		(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 September 30, 2005. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 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 September 30, 2005, there has not been any change that has affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

31

PART II — OTHER INFORMATION

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

      On August 4, 2005, the Company sold 6,043 shares of its common stock to existing common shareholders for $176,021 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 September 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)
July 2005(1)		1,426	$	44.00		1,426		—
August 2005(1)		18,289	$	51.34		18,289		—
September 2005(2)		24,525	$	55.65		4,525		70,475
Total		44,240	$	53.49		24,240		—

(1)	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 expired on August 30, 2005.
(2)	In August 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 $45.25 per share, or a price of $54.25 per share for transactions of at least 2,500 shares. This offer expires on December 9, 2005.

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).

32

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

November 8, 2005

33 EX-31.1 2 y12368exv31w1.htm EX-31.1: CERTIFICATION

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James J. Landy, certify that:

      1.     I have reviewed this quarterly report on Form 10-Q of Hudson Valley Holding Corp.;

      2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

      a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

      a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ James J. Landy

James J. Landy

President and Chief Executive Officer

Date:     November 8, 2005

EX-31.1

EX-31.1

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen R. Brown, certify that:

      1.     I have reviewed this quarterly report on Form 10-Q of Hudson Valley Holding Corp.;

      2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

      3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

      4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

      a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

      c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

      a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Stephen R. Brown

Stephen R. Brown

Senior Executive Vice President,

Chief Financial Officer and Treasurer

Date:     November 8, 2005

EX-32.1

EXHIBIT 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

      In connection with the Quarterly Report on Form 10-Q of Hudson Valley Holding Corp. (the “Company”) for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James J. Landy, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

      (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ James J. Landy

James J. Landy

President and Chief Executive Officer

Dated:     November 8, 2005

EX-32.2

EXHIBIT 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

      In connection with the Quarterly Report on Form 10-Q of Hudson Valley Holding Corp. (the “Company”) for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen R. Brown, Senior Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

      (1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2)     The information contained in this Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Stephen R. Brown

Stephen R. Brown

Senior Executive Vice President,

Chief Financial Officer and Treasurer

Dated:     November 8, 2005