FORM 10-Q

10-Q 1 y22844e10vq.htm FORM 10-Q FORM 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 June 30, 2006

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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

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


		Outstanding at
Class		August 1, 2006

Common stock, par value $0.20 per share		8,128,679

TABLE OF CONTENTS


PART 1 -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
EX-4.3: SPECIMEN STOCK RESTRICTION AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART 1 — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts


				Three Months Ended
				June 30,

				2006		2005

Interest Income:
	Loans, including fees			$	23,613	$	17,245
	Securities:
		Taxable			8,541		7,072
		Exempt from Federal income taxes			2,316		2,237
	Federal funds sold				196		156
	Deposits in banks				45		26

			Total interest income		34,711		26,736

Interest Expense:
	Deposits				3,998		1,989
	Securities sold under repurchase agreements and other short-term borrowings				2,869		1,077
	Other borrowings				2,935		2,869

			Total interest expense		9,802		5,935

Net Interest Income					24,909		20,801
Provision for loan losses					598		521

Net interest income after provision for loan losses					24,311		20,280

Non Interest Income:
	Service charges				921		1,103
	Investment advisory fees				1,814		1,011
	Other income				719		211

			Total non interest income		3,454		2,325

Non Interest Expense:
	Salaries and employee benefits				7,969		6,178
	Occupancy				1,413		870
	Professional services				1,260		1,091
	Equipment				650		613
	Business development				555		487
	FDIC assessment				96		44
	Other operating expenses				2,543		1,546

			Total non interest expense		14,486		10,829

Income Before Income Taxes					13,279		11,776
Income Taxes					4,578		3,913

Net Income				$	8,701	$	7,863

Basic Earnings Per Common Share				$	1.07	$	0.97
Diluted Earnings Per Common Share				$	1.04	$	0.95

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts


				Six Months Ended
				June 30,

				2006			2005

Interest Income:
	Loans, including fees			$	45,450		$	33,184
	Securities:
		Taxable			16,891			13,917
		Exempt from Federal income taxes			4,621			4,419
	Federal funds sold				453			233
	Deposits in banks				78			41

			Total interest income		67,493			51,794

Interest Expense:
	Deposits				7,803			3,575
	Securities sold under repurchase agreements and other short-term borrowings				4,936			2,022
	Other borrowings				5,842			5,704

			Total interest expense		18,581			11,301

Net Interest Income					48,912			40,493
Provision for loan losses					1,075			1,009

Net interest income after provision for loan losses					47,837			39,484

Non Interest Income:
	Service charges				2,269			2,043
	Investment advisory fees				3,354			2,072
	Realized (loss) gain on security transactions, net				(224	)		3
	Other income				1,173			417

			Total non interest income		6,572			4,535

Non Interest Expense:
	Salaries and employee benefits				16,118			12,241
	Occupancy				2,929			1,775
	Professional services				2,662			2,095
	Equipment				1,331			1,137
	Business development				1,168			957
	FDIC assessment				195			90
	Other operating expenses				5,093			3,087

			Total non interest expense		29,496			21,382

Income Before Income Taxes					24,913			22,637
Income Taxes					8,503			7,435

Net Income				$	16,410		$	15,202

Basic Earnings Per Common Share				$	2.02		$	1.88
Diluted Earnings Per Common Share				$	1.96		$	1.84

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands


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

		2006			2005			2006			2005

Net Income		$	8,701		$	7,863		$	16,410		$	15,202
Other comprehensive income, net of tax:
	Unrealized (loss) gain on securities available for sale arising during the period		(6,486	)		8,299			(13,365	)		(1,333	)
	Income tax effect		2,641			(3,427	)		5,463			542

			(3,845	)		4,872			(7,902	)		(791	)

	Reclassification adjustment for net (gain) loss realized on securities available for sale		(1	)		—			224			(3	)
	Income tax effect		1			—			(90	)		1

			—			—			134			(2	)

	Unrealized (loss) gain on securities available for sale		(3,845	)		4,872			(7,768	)		(793	)

	Minimum pension liability adjustment		(6	)		109			(11	)		218
	Income tax effect		1			(44	)		4			(88	)

			(5	)		65			(7	)		130

Other comprehensive (loss) income			(3,850	)		4,937			(7,775	)		(663	)

Comprehensive income		$	4,851		$	12,800		$	8,635		$	14,539

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts


			June 30,			December 31,
			2006			2005

ASSETS
Cash and due from banks			$	52,251		$	47,776
Federal funds sold				11,574			17,329
Securities available for sale at estimated fair value (amortized cost of $893,092 in 2006 and $843,200 in 2005)				870,623			833,874
Securities held to maturity at amortized cost (estimated fair value of $42,664 in 2006 and $49,633 in 2005)				44,198			50,119
Federal Home Loan Bank of New York (FHLB) Stock				15,632			13,672
Loans (net of allowance for loan losses of $15,883 in 2006 and $13,525 in 2005)				1,117,389			1,009,819
Accrued interest and other receivables				14,911			12,626
Premises and equipment, net				21,523			13,591
Deferred income taxes, net				15,452			12,036
Other assets				27,913			21,879

TOTAL ASSETS			$	2,191,466		$	2,032,721

LIABILITIES
Deposits:
	Non interest-bearing		$	624,989		$	576,032
	Interest-bearing			886,781			831,963

		Total deposits		1,511,770			1,407,995

Securities sold under repurchase agreements and other short-term borrowings				233,656			172,115
Other borrowings				254,384			263,097
Accrued interest and other liabilities				22,602			19,725

TOTAL LIABILITIES				2,022,412			1,862,932

STOCKHOLDERS’ EQUITY
Common stock, $0.20 par value; authorized 10,000,000 shares; outstanding 8,125,613 and 8,138,752 shares in 2006 and 2005, respectively				1,868			1,856
Additional paid-in capital				209,370			207,372
Retained earnings				10,017			1,431
Accumulated other comprehensive loss, net				(14,057	)		(6,282	)
Treasury stock, at cost; 1,213,912 and 1,142,699 shares in 2006 and 2005, respectively				(38,144	)		(34,588	)

Total stockholders’ equity				169,054			169,789

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	2,191,466		$	2,032,721

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2006 and 2005

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, 2006			8,138,752		$	1,856	$	(34,588	)	$	207,372	$	1,431		$	(6,282	)	$	169,789
	Net income												16,410						16,410
	Exercise of stock options		57,354			12					1,998								2,010
	Purchase of treasury stock		(70,493	)				(3,556	)										(3,556	)
	Cash dividend												(7,824	)					(7,824	)
	Minimum pension liability adjustment															(7	)		(7	)
	Net unrealized loss on securities available for sale															(7,768	)		(7,768	)

Balance at June 30, 2006			8,125,613		$	1,868	$	(38,144	)	$	209,370	$	10,017		$	(14,057	)	$	169,054


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

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

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

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands


		For the Six Months
		Ended June 30,

		2006			2005

Operating Activities:
Net income		$	16,410		$	15,202
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		1,075			1,009
	Depreciation and amortization		1,247			996
	Realized loss (gain) on security transactions, net		224			(3	)
	Amortization of premiums on securities, net		395			1,393
	Stock option expense and related tax benefits		623			193
	Deferred taxes (benefit)		1,961			(580	)
Increase (decrease) in deferred loan fees, net			284			(5	)
Increase in accrued interest and other receivables			(2,285	)		(719	)
Increase in other assets			(6,034	)		(654	)
Excess tax benefits from share-based payment arrangements			(233	)		(41	)
Increase in accrued interest and other liabilities			2,877			419
Other changes, net			(12	)		219

Net cash provided by operating activities			16,532			17,429

Investing Activities:
Net decrease (increase) in Federal funds sold			5,755			(43,124	)
(Decrease) increase in FHLB stock			(1,960	)		1,050
Proceeds from maturities and paydowns of securities available for sale			82,956			69,299
Proceeds from maturities and paydowns of securities held to maturity			5,973			10,587
Proceeds from sales of securities available for sale			45,405			—
Purchases of securities available for sale			(178,922	)		(103,061	)
Net increase in loans			(108,928	)		(72,337	)
Net purchases of premises and equipment			(9,179	)		(619	)

Net cash used in investing activities			(158,900	)		(137,539	)

Financing Activities:
Net increase in deposits			103,775			134,461
Net increase in securities sold under repurchase agreements and short-term borrowings			61,541			5,786
Repayment of other borrowings			(31,263	)		(12	)
Proceeds from other borrowings			22,550			—
Proceeds from issuance of common stock			1,387			1,245
Excess tax benefits from share-based payment arrangements			233			41
Proceeds from sale of treasury stock			—			61
Cash dividends paid			(7,824	)		(6,706	)
Acquisition of treasury stock			(3,556	)		(2,540	)

Net cash provided by financing activities			146,843			132,336

Increase in Cash and Due from Banks			4,475			12,226
Cash and due from banks, beginning of period			47,776			32,428

Cash and due from banks, end of period		$	52,251		$	44,654

Supplemental Disclosures:
Interest paid		$	17,761		$	10,659
Income tax payments			10,907			7,449
Change in unrealized loss on securities available for sale — net of tax			(7,768	)		(793	)

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in thousands, except per share and share amounts

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 subsidiaries, Hudson Valley Bank (“HVB”), a New York chartered commercial bank headquartered in Westchester County, New York and NYNB Bank (“NYNB”), a New York chartered commercial bank headquartered in Bronx County, New York (together with HVB, “the Banks”). HVB is an independent bank established in 1972. NYNB, an independent bank, is the successor to New York National Bank, a national banking association which the Company acquired effective January 1, 2006. HVB has 15 branch offices in Westchester County, New York, 3 in Manhattan, New York, 2 in Bronx County, New York, and 1 in Queens County, New York. NYNB has 3 branch offices in Manhattan, New York and 2 in Bronx County, New York.

The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a registered investment advisory firm, thereby generating fee income. ARS has offices at 555 Fifth Avenue in Manhattan, New York.

We derive substantially all of our revenue and income from providing banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals within our market area. Our principal customers are businesses, professionals, municipalities, not-for-profit organizations and individuals. Our strategy is to operate community-oriented banking institutions dedicated to providing personalized service to customers and focusing on products and services for selected segments of the market. We believe that our ability to attract and retain customers is due primarily to our focused approach to our markets, our personalized and professional services, our product offerings, our experienced staff, our knowledge of our local markets and our ability to provide responsive solutions to customer needs. We provide these products and services to a diverse range of customers and do not rely on a single large depositor for a significant percentage of deposits. We anticipate that we will continue to expand in our current market and surrounding area by acquiring other banks and related businesses, adding staff and continuing to open new branch offices and loan production offices.

2. Summary of Significant Accounting Policies

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 2006 and the results of its operations, comprehensive income, for the three and six month periods ended June 30, 2006 and 2005 and cash flows and changes in stockholders’ equity for the six month periods ended June 30, 2006 and 2005. The results of operations for the three and six month periods ended June 30, 2006 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”.) Certain information and note disclosures normally included in annual financial statements have been omitted.

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

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

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

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2005 and notes thereto.

Allowance for Loan Losses — The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The 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 Company 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 write-down 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 Company’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 Company 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 Company’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 June 30, 2006. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company 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. 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 Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost (specific identification). The amortization of premiums and accretion of discounts is determined by using the level yield method to the earlier of the call or maturity date. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method.

Goodwill and Other Intangible Assets — In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company’s impairment evaluations as of December 31, 2005 did not indicate impairment of its goodwill or identified intangible assets. The Company is not aware of any events during the six month period ended June 30, 2006 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, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Options are granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant. Stock options under the Company’s plans vest over various periods. Vesting periods range from immediate to five years from date of grant. Options expire ten years from the date of grant. Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which 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. Non-employee stock options are expensed as of the date of grant. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. See Note 6 herein for additional discussion.

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. Deferred tax benefits have been provided for the tax effect of temporary differences in the amortization periods of identified intangible assets for book and tax purposes. Also in connection with this acquisition, the Company recorded $4,492 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. In December 2005, the Company made the first of these additional payments in the amount of $1,572.

In connection with the acquisition of NYNB on January 1, 2006, the Company recorded a deposit premium intangible asset of $3,907 which has an amortization period of 7 years. The deferred tax liability related to this asset was also recorded as NYNB was acquired in a tax-free stock purchase transaction. Also in connection with this acquisition, the Company recorded $1,455 of goodwill.

The following table sets forth the gross carrying amount and accumulated amortization for each of the Company’s intangible assets subject to amortization as of June 30, 2006 and December 31, 2005.


	June 30, 2006				December 31, 2005

	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization

	(000’s)
Deposit Premium	$	3,907	$	279		—		—
Customer Relationships		2,470		333	$	2,470	$	237
Employment Related		516		130		516		92

Total	$	6,893	$	742	$	2,986	$	329

Intangible assets amortization expense was $206 and $411, respectively, for the three and six month periods ended June 30, 2006, and $65 and $132, respectively, for the three and six month periods ended June 30, 2005. The annual intangible assets amortization expense is estimated to be approximately $822 in each of the five years subsequent to December 31, 2005.

Goodwill totaled $7,519 and $6,064 at June 30, 2006 and December 31, 2005, respectively. Goodwill and other intangible assets are included in “Other assets” in the Company’s Consolidated Balance Sheets. The deferred income tax effects related to goodwill deductible for tax purposes and timing differences between the book and tax bases of identified intangible assets are included in net deferred tax assets in the Company’s Consolidated Balance Sheets.

4. Earnings Per Share

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


			Three Months Ended				Six Months Ended
			June 30,				June 30

			2006		2005		2006		2005

			(000’s except share data)
Numerator:
	Net income available to common shareholders for basic and diluted earnings per share		$	8,701	$	7,863	$	16,410	$	15,202
Denominator:
	Denominator for basic earnings per common share — weighted average shares			8,136,896		8,093,008		8,141,080		8,095,247
	Effect of dilutive securities:
		Stock options		253,779		198,496		245,657		182,713

	Denominator for diluted earnings per common share — adjusted weighted average shares			8,390,675		8,291,503		8,386,737		8,277,960
Basic earnings per common share			$	1.07	$	0.97	$	2.02	$	1.88
Diluted earnings per common share				1.04		0.95		1.96		1.84
Dividends declared per share				0.49		0.39		0.96		0.75

In December 2005, the Company declared a 10% stock dividend. Share and per share amounts for 2005 have been retroactively restated to reflect the issuance of the additional shares.

5. Benefit Plans

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


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

		2006		2005		2006		2005

Service cost		$	77	$	65	$	153	$	131
Interest cost			131		120		262		239
Amortization of transition obligation			13		18		26		36
Amortization of prior service cost			37		37		74		74
Amortization of net loss			52		38		105		83

	Net periodic pension cost	$	310	$	278	$	620	$	563

The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2005 Annual Report on Form 10-K that it expected to contribute $513 to the unfunded defined benefit plans during 2006. For the three and six month periods ended June 30, 2006, the Company contributed $128 and $256 to these plans.

6. Stock-Based Compensation

The Company has stock option plans that provide for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Options are granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant. Stock options under the Company’s plans vest over

various periods. Vesting periods range from immediate to five years from date of grant. Options expire ten years from the date of grant. Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which 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. From January 1, 2002 through the adoption of SFAS 123R, the Company followed the fair value recognition provisions for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS No. 148”). Therefore, the Company has utilized fair value recognition provisions for measurement of cost related to share-based transactions since 2002. Non-employee stock options are expensed as of the date of grant.

The following table summarizes stock option activity for the six month period ended June 30, 2006:


								Weighted
				Weighted		Aggregate		Average
				Average		Intrinsic		Remaining
				Exercise		Value(1)		Contractual
	Shares			Price		($000’s)		Term(Yrs)

Outstanding at December 31, 2005		773,868		$	26.87
Granted at fair value		180,275			42.01
Exercised		(57,354	)		24.16
Forfeited or Expired		(1,814	)		37.37

Outstanding at June 30, 2006		894,975			30.07	$	13,807		7.1

Exercisable at June 30, 2006		589,390			27.61		10,542		6.3

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2006. This amount changes based on changes in the market value of the Company’s stock.

The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following table illustrates the assumptions used in the valuation model for activity during the six month periods ended June 30, 2006 and 2005.


	Six Month
	Period Ended
	June 30,

	2006			2005

Weighted average assumptions:
Dividend Yield		4.4	%		4.8	%
Expected volatility		9.7	%		5.6	%
Risk-free interest rate		4.4	%		3.6	%
Expected lives (years)		5.0			4.8

The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience.

The weighted average fair values of options granted during the six month periods ended June 30, 2006 and 2005 was $2.60 per share and $0.72 per share, respectively. Net compensation expense of $109 and $390 related to the Company’s stock option plans was included in net income for the three and six month periods ended June 30, 2006, respectively. The total tax benefit related thereto was $34 and $115, respectively. Net compensation expense of $54 and $152 related to the Company’s stock option plans was included in net

income for the three and six month periods ended June 30, 2005, respectively. The total tax benefit related thereto was $16 and $40, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $396 at June 30, 2006. This expense is expected to be recognized over a weighted-average period of 2.1 years.

The following table presents a summary status of the Company’s non-vested options as of June 30, 2006, and changes during the six month period ended June 30, 2006:


				Weighted-
				Average
	Number of			Grant Date
	Shares			Fair Value

Non-vested at December 31, 2005		271,516		$	32.82
Granted		87,100			44.67
Vested		(51,217	)		31.50
Forfeited or Expired		(1,814	)		39.33

Non-vested at June 30, 2006		305,585			36.38

7. Recent Acquisition

Effective January 1, 2006, the Company acquired NYNB (formerly known as New York National Bank) which it operates as a New York State chartered commercial bank with five branch locations in the Bronx and Manhattan boroughs of New York City. The Company acquired NYNB in a tax free stock purchase transaction for approximately $13.5 million in cash. At the time of the acquisition, including the effects of purchase accounting, NYNB had total assets of $136.5 million, net loans of $59.9 million and total deposits of $117.7 million.

8. 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. The adoption of SFAS No. 154 by the Company as of January 1, 2006 did not have any impact on the Company’s consolidated financial statements.

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’s adoption of this guidance on January 1, 2006 did not have any impact on its consolidated financial statements.

Accounting for Uncertainty in Income Taxes — In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company intends to adopt this guidance on January 1, 2007. Management is in the process of evaluating the impact of the adoption of this guidance on its consolidated results of operations and financial condition.

Other — Certain 2005 amounts have been reclassified to conform to the 2006 presentation.


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

This section presents discussion and analysis of the Company’s consolidated financial condition at June 30, 2006 and consolidated results of operations for the three and six month periods ended June 30, 2006 and June 30, 2005. The Company is consolidated with its wholly-owned subsidiaries, Hudson Valley Bank, and its 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 “HVB”), and NYNB Bank and its subsidiary 369 East 149^th Street Corp. (collectively “NYNB”). NYNB Bank was acquired by the Company effective January 1, 2006 and its financial condition and results of operations are included as of and for the three and six month periods ended June 30, 2006. This discussion and analysis should be read in conjunction with the consolidated financial statements and supplementary financial information contained in the Company’s 2005 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 this entire Quarterly Report on Form 10-Q and the Company’s 2005 Annual Report on Form 10-K.

The Company derives substantially all of its revenue from providing banking and related services to 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 grow net interest income and non 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. 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.

Effective January 1, 2006, the Company acquired NYNB (formerly known as New York National Bank) which it operates as a New York State chartered bank with five branch locations in the Bronx and Manhattan boroughs of New York City. The Company acquired NYNB in a tax free stock purchase transaction for approximately $13.5 million. At the time of the acquisition, including the effects of purchase accounting, NYNB had total assets of $136.5 million, net loans of $59.9 million and total deposits of $117.7 million.

Net income for the three month period ended June 30, 2006 was $8.7 million or $1.04 per diluted share, an increase of $0.8 million or 10.1 percent compared to $7.9 million or $0.95 per diluted share for the three month period ended June 30, 2005. Net income for the six month period ended June 30, 2006 was $16.4 million or $1.96 per diluted share, an increase of $1.2 million or 7.9 percent compared to $15.2 million or $1.84 per diluted share for the six month period ended June 30, 2005. The Company achieved substantial growth in both of its core businesses, loans and deposits, during the six month period ended June 30, 2006, primarily as a result of the acquisition of NYNB, the addition of new customers and additional loans to existing customers, partially offset by declines in certain deposit balances related to a slowdown in the overall economy in general and, in particular, in activity related to the commercial real estate industry, a significant source of business for the Company. Overall asset quality continued to be good as a result of the Company’s conservative underwriting and investment standards. In addition, the Company continued to increase its fee based revenue through its subsidiary A.R. Schmeidler & Co., Inc., a registered investment advisory firm located in Manhattan, New York, which at June 30, 2006 had approximately $933 million in assets under management as compared to approximately $600 million at June 30, 2005.

Interest rates, particularly short-term interest rates, continued to rise gradually throughout 2005 and into the second quarter of 2006. 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. This

condition has put downward pressure on the Company’s 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 the rise in short-term interest rates, and the growth in the Company’s core businesses of loans and deposits, including the acquisition of NYNB, tax equivalent basis net interest income increased $4.2 million or 19.1 percent to $26.2 million for the three month period ended June 30, 2006, compared to $22.0 million for the same period in the prior year, and increased $8.5 million or 19.8 percent to $51.4 million for the six month period ended June 30, 2006, compared to $42.9 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $1.3 million and $2.5 million for the three and six month periods ended June 30, 2006 and $1.2 million and $2.4 million for the three and six month periods ended June 30, 2005.

Non interest income, excluding securities net gains, was $3.5 million for the three month period ended June 30, 2006, an increase of $1.2 million or 52.2 percent compared to $2.3 million for the same period in the prior year. Non interest income, excluding securities net gains, was $6.8 million for the six month period ended June 30, 2006, an increase of $2.3 million or 51.1 percent compared to $4.5 million for the same period in the prior year. The increases were primarily due to growth in the investment advisory fee income of A.R. Schmeidler & Co., Inc., growth in deposit activity and other service fees and increases in scheduled fees.

Non interest expense was $14.5 million for the three month period ended June 30, 2006, an increase of $3.7 million or 34.3 percent compared to $10.8 million for the same period in the prior year. Non interest expense was $29.5 million for the six month period ended June 30, 2006, an increase of $8.1 million or 37.9 percent compared to $21.4 million for the same period in the prior year. The increases reflect the Company’s continued investment in its branch network, technology and personnel to accommodate growth in both loans and deposits and the expansion of services and products available to new and existing customers, including approximately $2.3 million and $4.4 million, respectively, for the three and six month periods ended June 30, 2006, due to the addition of the operating expenses of NYNB and certain nonrecurring expenses related to the acquisition and operational integration of NYNB.

The Company uses a simulation analysis to estimate the effect that specific movements in interest rates would have on net interest income. Excluding the effects of planned growth and anticipated new business, the simulation analysis at June 30, 2006 reflects minimal near term interest rate risk with the Company’s net interest income decreasing slightly if rates rise or 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, HVB and NYNB 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. The Company, HVB, and NYNB each exceeded all current regulatory capital requirements to be considered in the “well capitalized” category at June 30, 2006. Management plans to conduct the affairs of the Company and its subsidiary banks so as to maintain a strong capital position in the future.

Critical Accounting Policies

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 Company 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 Company’s portfolios of home equity loans, real estate mortgages, installment and other loans.

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 accrual 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.

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.

Results of Operations for the Three and Six Month Periods Ended June 30, 2006 and June 30, 2005


	Summary of Results

The Company reported net income of $8.7 million for the three month period ended June 30, 2006, an increase of $0.8 million or 10.1 percent compared to $7.9 million reported for the three month period ended June 30, 2005. Net income for the six month period ended June 30, 2006 was $16.4 million, an increase of $1.2 million or 7.9 percent compared to $15.2 million for the six month period ended June 30, 2005. 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 six month periods ended June 30, 2006 included $0.2 million pretax gains on sales of $45.6 million of securities available for sale, conducted as part of the Company’s ongoing asset/liability management efforts.

Diluted earnings per share were $1.04 for the three month period ended June 30, 2006, an increase of $0.09 or 9.5 percent compared to $0.95 reported for the same period in the prior year. Diluted earnings per share were $1.96 for the six month period ended June 30, 2006, an increase of $0.12 or 6.5 percent compared to $1.84 reported for the same period in the prior year. Annualized returns on average equity and average assets, excluding the effects of net unrealized gains and losses on securities available for sale, were 19.3 percent and 1.6 percent, respectively, for the three month period ended June 30, 2006, compared to 19.2 percent and 1.6 percent, respectively, for the same period in the prior year. Annualized returns on average equity and average assets, excluding the effects of net unrealized gains and losses on securities available for sale, were 18.3 percent and 1.5 percent, respectively, for the six month period ended June 30, 2006, compared to 18.7 percent and 1.6 percent, respectively, for the same period in the prior year.

Average Balances and Interest Rates

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the three month periods ended June 30, 2006 and June 30, 2005, 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 Company’s federal statutory rate of 35 percent in 2006 and 2005.


				Three Months Ended June 30,

				2006							2005

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

				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	5,951	$	45		3.02	%	$	3,578	$	26		2.91	%
	Federal funds sold				15,758		196		4.98			21,642		156		2.88
	Securities:(1)
		Taxable			738,650		8,541		4.63			707,576		7,072		4.00
		Exempt from federal income taxes			215,757		3,563		6.61			200,565		3,441		6.86
	Loans, net(2)				1,106,648		23,613		8.53			915,236		17,245		7.54

			Total interest earning assets		2,082,764		35,958		6.91			1,848,597		27,940		6.05

Non interest earning assets:
	Cash and due from banks				44,025							42,996
	Other assets				79,258							53,472

			Total non interest earning assets		123,283							96,468

			Total assets	$	2,206,047						$	1,945,065

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	429,904	$	2,023		1.88	%	$	396,794	$	967		0.97	%
		Savings			100,238		160		0.64			75,393		110		0.58
		Time			232,737		1,650		2.84			181,896		826		1.82
		Checking with interest			125,707		165		0.53			129,041		86		0.27
	Securities sold under repurchase agreements and other short-term borrowings				244,439		2,869		4.69			163,022		1,077		2.64
	Other borrowings				263,068		2,935		4.46			263,111		2,869		4.36

			Total interest bearing liabilities		1,396,093		9,802		2.81			1,209,257		5,934		1.96

Non interest bearing liabilities:
	Demand deposits				594,962							551,441
	Other liabilities				34,215							20,274

			Total non interest bearing liabilities		629,177							571,715

Stockholders’ equity(1)					180,777							164,093

			Total liabilities and stockholders’ equity(1)	$	2,206,047						$	1,945,065

Net interest earnings						$	26,156						$	22,005

Net yield on interest earning assets									5.02	%						4.76	%


(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 $1,247 and $1,205 for the three month periods ended June 30, 2006 and June 30, 2005, respectively.

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the six month periods ended June 30, 2006 and June 30, 2005, 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 Company’s federal statutory rate of 35 percent in 2006 and 2005.


				Six Months Ended June 30,

				2006							2005

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

				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	4,157	$	78		3.75	%	$	3,170	$	41		2.59	%
	Federal funds sold				19,778		453		4.58			16,181		233		2.88
	Securities:(1)
		Taxable			737,935		16,891		4.58			703,532		13,917		3.96
		Exempt from federal income taxes			213,301		7,109		6.67			198,575		6,798		6.85
	Loans, net(2)				1,091,004		45,450		8.33			897,913		33,184		7.39

			Total interest earning assets		2,066,175		69,981		6.77			1,819,371		54,173		5.96

Non interest earning assets:
	Cash and due from banks				45,765							42,270
	Other assets				77,415							51,992

			Total non interest earning assets		123,180							94,262

			Total assets	$	2,189,355						$	1,913,633

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	427,146	$	3,732		1.75	%	$	373,127	$	1,650		0.88	%
		Savings			100,341		322		0.64			73,959		187		0.51
		Time			237,529		3,319		2.79			186,066		1,571		1.69
		Checking with interest			134,169		430		0.64			126,011		167		0.27
	Securities sold under repurchase agreements and other short-term borrowings				224,166		4,936		4.40			168,722		2,021		2.40
	Other borrowings				263,692		5,842		4.43			263,114		5,705		4.34

			Total interest bearing liabilities		1,387,043		18,581		2.68			1,190,999		11,301		1.90

Non interest bearing liabilities:
	Demand deposits				590,984							540,813
	Other liabilities				32,129							19,315

			Total non interest bearing liabilities		623,113							560,128

Stockholders’ equity(1)					179,199							162,508

			Total liabilities and stockholders’ equity(1)	$	2,189,355						$	1,913,633

Net interest earnings						$	51,400						$	42,872

Net yield on interest earning assets									4.98	%						4.71	%


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

(2)	Includes loans classified as non-accrual

(3)	Effects of adjustments to a tax equivalent basis were increases of $2,488 and $2,379 for the six month periods ended June 30, 2006 and June 30, 2005, respectively.

Interest Differential

The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three and six month periods ended June 30, 2006 and June 30, 2005.


				(000’s)

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

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

Interest Income:
	Deposits in banks			$	17		$	2		$	19	$	13	$	24		$	37
	Federal funds sold				(42	)		82			40		52		168			220
	Securities:
		Taxable			311			1,158			1,469		681		2,293			2,974
		Exempt from federal income taxes(2)			261			(139	)		122		504		(193	)		311
	Loans, net				3,607			2,761			6,368		7,136		5,130			12,266

			Total interest income		4,154			3,864			8,018		8,386		7,422			15,808

Interest expense:
	Deposits:
		Money market			81			975			1,056		239		1,843			2,082
		Savings			36			14			50		67		68			135
		Time			231			593			824		435		1,313			1,748
		Checking with interest			(2	)		81			79		11		252			263
	Securities sold under repurchase agreements and other short-term borrowings				538			1,254			1,792		664		2,250			2,914
	Other borrowings				—			66			66		13		125			138

			Total interest expense		884			2,883			3,867		1,429		5,851			7,280

Increase in interest differential				$	3,270		$	881		$	4,151	$	6,957	$	1,571		$	8,528


(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 2006 and 2005.


	Net Interest Income

Net interest income, the difference between interest income and interest expense, is the most significant component of the Company’s consolidated earnings. For the three and six month periods ended June 30, 2006, net interest income, on a tax equivalent basis, increased $4.2 million or 18.9 percent to $26.2 million and $8.5 million or 19.9 percent to $51.4 million, respectively, compared to $22.0 million and $42.9 million for the same periods in the prior year. Net interest income for the three month period ended June 30, 2006 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $47.4 million or 7.4 percent to $686.7 million compared to $639.3 million for the same period in the prior year, and an increase in the tax equivalent basis net interest margin to 5.02% in 2006 from 4.76% in the prior year period. Net interest income for the six month period ended June 30, 2006 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $50.7 million or 8.1 percent to $679.1 million compared to $628.4 million for the same period in the prior year, and an increase in the tax equivalent basis net interest margin to 4.98% in 2006 from 4.71% 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 $8.1 million or 28.7 percent to $36.0 million and $15.8 million or 29.2 percent to $70.0 million, respectively, for the three and six month periods ended June 30, 2006, compared to $27.9 million and $54.2 million for the same periods in the prior year. Average interest earning assets increased $234.2 million or 12.7 percent to $2,082.8 million and $246.8 million or 13.6 percent

to $2,066.2 million, respectively, for the three and six month periods ended June 30, 2006, compared to $1,848.6 million and $1,819.4 million for the same periods in the prior year. Volume increases in interest bearing deposits, taxable securities, tax-exempt securities and loans and generally higher interest rates, partially offset by a volume decrease in federal funds sold contributed to the higher interest income in the three month period ended June 30, 2006 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 six month period ended June 30, 2006 compared to the same period in the prior year.

Average total securities, excluding average net unrealized gains on available for sale securities, increased by $46.3 million or 5.1 percent to $954.4 million and by $49.1 million or 5.5 percent to $951.2 million, respectively, for the three and six month periods ended June 30, 2006, compared to $908.1 million and $902.1 million for the same periods in the prior year. The increases in average total securities in the three and six month periods ended June 30, 2006, compared to the same periods in the prior year, resulted primarily from the acquisition of NYNB. The average yields on securities were higher for the three and six month periods ended June 30, 2006 compared to the same periods in the prior year. Average tax equivalent basis yields on securities for the three and six month periods ended June 30, 2006 were 5.07 percent and 5.05 percent, respectively, compared to 4.63 percent and 4.59 percent for the same periods in the prior year. As a result, tax equivalent basis interest income from securities was higher for the three and six month periods ended June 30, 2006, compared to the same periods in the prior year, due to higher volume and higher interest rates.

Average net loans increased $191.4 million or 20.9 percent to $1,106.6 million and $193.1 million or 21.5 percent to $1,091.0 million, respectively, for the three and six month periods ended June 30, 2006, compared to $915.2 million and $897.9 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 capabilities and more effective market penetration, including the acquisition of NYNB. Average yields on loans were 8.53 percent and 8.33 percent, respectively, for the three and six month periods ended June 30, 2006 compared to 7.54 percent and 7.39 percent for the same periods in the prior year. As a result, interest income on loans was higher for the three and six month periods ended June 30, 2006, 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 $3.9 million or 65.2 percent to $9.8 million and $7.3 million or 64.4 percent to $18.6 million, respectively, for the three and six month periods ended June 30, 2006, compared to $5.9 million and $11.3 million for the same periods in the prior year. Average interest bearing liabilities increased $186.8 million or 15.5 percent to $1,396.1 million and $196.0 million or 16.5 percent to $1,387.0 million, respectively, for the three and six month periods ended June 30, 2006, compared to $1,209.3 million and $1,191.0 million for the same periods in the prior year. The increase in average interest bearing liabilities for the three month period ended June 30, 2006, compared to the same period in the prior year, resulted from volume increases in money market deposits, savings deposits, time deposits, securities sold under agreements to repurchase and other short-term borrowings, partially offset by a volume decreases in checking with interest and other borrowed funds. The increase in average interest bearing liabilities for the six month period ended June 30, 2006, compared to the same period in the prior year, resulted from volume increases in money market deposits, savings deposits, time deposits, checking with interest, securities sold under agreements to repurchase and other short-term borrowings and other borrowed funds. Deposits increased from new customers, existing customers and the continued growth resulting from the opening of new branches as well as increases arising from the acquisition of NYNB. The increase in average borrowed funds for the six month period ended June 30, 2006 resulted from a $1.3 million increase in long-term borrowings acquired part of the NYNB acquisition. Average interest rates on interest bearing liabilities were higher during the three and six month periods ended June 30, 2006, compared to the same periods in the prior year, due to higher average interest rates on deposits, short-term borrowings and long-term borrowings. As a result, interest expense was higher for the three and six month periods ended June 30, 2006, 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 $43.5 million or 7.9 percent to $595.0 million and $50.2 million or 9.3 percent to $591.0 million, respectively, for the three and six month periods ended June 30, 2006, compared to $551.5 million and $540.8 million for the same periods in the prior year. These deposits are an important component of the Company’s asset/liability management and have a direct impact on the determination of net interest income. Funds from increases in both interest bearing liabilities and non interest bearing demand deposits were invested in loans and securities.

The interest rate spread on a tax equivalent basis for the three and six month periods ended June 30, 2006 and 2005 is as follows:


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

		2006		2005		2006		2005

Average interest rate on:
	Total average interest earning assets		6.91%		6.05%		6.77%		5.96%
	Total average interest bearing liabilities		2.81%		1.96%		2.68%		1.90%
	Total interest rate spread		4.10%		4.09%		4.09%		4.06%

Interest rate spreads increased slightly in the current year periods, compared to the prior year periods. These increases reflect the general offset of increases in interest rates on earning assets and interest bearing liabilities between the periods. 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 Company recorded a provision for loan losses of $0.6 million and $0.5 million for the three month periods ended June 30, 2006 and 2005, respectively. The Company recorded a provision for loan losses of $1.1 million and $1.0 million for the six month periods ended June 30, 2006 and 2005, respectively. The provision for loan losses is charged to income to bring the Company’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 securities available for sale, was $3.5 million for the three month period ended June 30, 2006, an increase of $1.1 million or 48.5 percent from $2.3 million for the same period in the prior year. Non interest income, excluding net losses on available for sales securities, was $6.8 million for the six month period ended June 30, 2006, an increase of $2.3 million or 44.9 percent from $4.5 million for the same period in the prior year. The Company’s acquisition of NYNB contributed $0.4 million and $0.9 million to non interest income for the three and six month periods ended June 30, 2006, respectively.


	•	Service charges for the three and six month periods ended June 30, 2006 decreased 16.5 percent to $0.9 million from $1.1 million but increased 11.6 percent to $2.2 million from $2.0 million from the prior year periods. These increases reflect new fees, a higher level of fees charged and increased activity.

	•	Investment advisory fee income for the three and six month periods ended June 30, 2006 increased 79.4 percent to $1.8 million from $1.1 million and 61.9 percent to $3.4 million from $2.1 million as compared to the prior year periods. The increase was primarily due to increases in assets under management, resulting from net increases in assets from existing customers, addition of new customers and net increases in asset values.

	•	Other income for the three and six month periods ended June 30, 2006 increased 240.3 percent to $0.7 million from $0.2 million and 181.3 percent to $1.2 million from $0.4 million as compared to the prior year periods. The increase was primarily due to increases in miscellaneous customer services fees and the acquisition of NYNB.

Gains and losses on sales or redemptions of securities were not significant in either the current or prior year periods.

Non Interest Expense

Non interest expense for the three and six month periods ended June 30, 2006 increased 33.8 percent to $14.5 million from $10.8 million and 37.9 percent to $29.5 million from $21.4 million in the prior year periods. These increases reflect the overall growth of the Company, including the acquisition of NYNB, and resulted from increases in salaries and employee benefits expense, occupancy expense, professional services expense, equipment expense, business development expense and other operating expenses for both the three and six month periods ended June 30, 2006, as compared to the prior year periods.

Salaries and employee benefits, the largest component of non interest expense, for the three and six month periods ended June 30, 2006 increased 29.0 percent to $8.0 million from $6.2 million and 31.7 percent to $16.1 million from $12.2 million, as compared to prior year periods. The increase resulted from additional staff related to the acquisition of NYNB, additional staff to accommodate the growth in loans and deposits, new branch facilities, and merit increases. In addition, salaries and employee benefits increased as a result of higher costs of employee benefit plans and costs associated with related payroll taxes.

Occupancy expense for the three and six month periods ended June 30, 2006 increased 62.4 percent to $1.4 million from $0.5 million and 65.0 percent to $2.9 million from $1.8 million in the prior year periods. These increases reflected additional expenses due to the acquisition of NYNB, the opening of new branch facilities as well as rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.

Professional services for the three and six month periods ended June 30, 2006 increased 15.5 percent to $1.3 million from $1.1 million and 27.1 percent to $2.7 million from $2.1 million in the prior year periods. The increases were due to expenses related to the acquisition of NYNB and higher audit costs.

Equipment expense for the three and six month periods ended June 30, 2006 increased 6.0 percent to $0.7 million from $0.6 million and 17.6 percent to $1.3 million from $1.1 million in the prior year periods. The increases resulted from additional expense related to the acquisition of NYNB and increased maintenance costs compared to the prior year periods.

Business development expense for the three and six month periods ended June 30, 2006 increased 14.0 percent to $0.6 million from $0.5 million and 22.0 percent to $1.2 million from $1.0 million in the prior year. The increase was due to increased costs related to increased participation in public relations events and increased promotion of Bank products.

The assessment of the FDIC for the three and six month periods ended June 30, 2006 increased 118.2 percent to $96,000 from $44,000 and 116.7 percent to $0.2 million from $0.1 million in the prior year. This increase was primarily due to increases in deposits subject to assessment which resulted from the acquisition of NYNB.

Significant changes, more than 5 percent, in other components of non interest expense for the three and six month periods ended June 30, 2006 as compared to June 30, 2005, were due to the following (all items include the impact of the acquisition of NYNB):


	•	Increase of $62,000 (26.6%) and $155,000 (35.6%), respectively, in office supplies due to the acquisition of NYNB.

	•	Increase of $25,000 (2500.0%) and $96,000 (3200.0%), respectively, in other insurance expense resulting from increases in banker’s professional insurance costs and automobile insurance costs partially offset by reductions in the estimates of the net cost of certain life insurance programs.

	•	Decrease of $21,000 (20.2%) and $29,000 (16.7%), respectively, in other loan expenses due to decreases in residential mortgage recording fees partially offset by increased activity in credit reports and investigations.


	•	Increase of $388,000 (106.3%) and $777,000 (99.9%), respectively, in outside services costs due to increased data processing costs and additional expenses resulting from a service termination fee related to the acquisition of NYNB.

	•	Increase of $82,000 (44.8%) and $172,000 (48.5%), respectively, in courier expenses due to an increase in customer utilization and increased fuel costs.

	•	Decrease of $27,000 (18.1%) and $4,000 (1.6%), respectively, in dues, meetings and seminar expense due to decreased participation in such events.

	•	Increase of $66,000 (31.0%) and $77,000 (15.6%), 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 $4.6 million and $8.5 million, respectively, were recorded in the three and six month periods ended June 30, 2006, compared to $3.9 million and $7.4 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 34.5 percent and 34.1 percent, respectively, for the three and six month periods ended June 30, 2006, compared to 33.2 percent and 32.8 percent, respectively, for the same periods in the prior year. The increase in the overall effective tax rates for the 2006 periods, compared to the prior year periods, resulted from increases in the percentages of 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. During the second quarter of 2006, the Company reached final agreement with the New York State Department of Taxation and Finance with regard to all open audit issues for tax years 1996 through 2004. As previously reported, the settlement did not have a significant impact on the Company’s financial position or results of operations.

Financial Condition

Assets

The Company had total assets of $2,191.5 million at June 30, 2006, an increase of $158.7 million or 7.8 percent from $2,032.7 million at December 31, 2005.

Federal Funds Sold

Federal funds sold totaled $11.6 million at June 30, 2006, a decrease of $5.8 million or 33.2 percent from $17.3 million at December 31, 2005. The decrease 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 $9.2 million at June 30, 2006 comprised primarily of obligations of municipalities located within the Company’s market area.

Securities totaled $914.8 million at June 30, 2006, an increase of $30.8 million or 3.5 percent from $884.0 million at December 31, 2005. This increase resulted primarily from the acquisition of NYNB. Securities classified as available for sale, which are recorded at estimated fair value, totaled $870.6 million at June 30, 2006, an increase of $36.7 million or 4.4 percent from $833.9 million at December 31, 2005. Securities classified as held to maturity, which are recorded at amortized cost, totaled $44.2 million at June 30 2006, a decrease of $5.9 million or 11.8 percent from $50.1 million at December 31, 2005. The following table sets forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities at June 30, 2006:


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

		(000’s)
U.S. Treasury and government agencies		$	137,261	$	1	$	4,492	$	132,770
Mortgage-backed securities			489,532		42		17,444		472,130
Obligations of state and political subdivisions			207,982		2,516		3,142		207,356
Other debt securities			28,213		150		16		28,347

Total debt securities			862,988		2,709		25,094		840,603
Mutual funds and other equity securities			30,104		620		704		30,020

	Total	$	893,092	$	3,329	$	25,798	$	870,623

Classified as Held to Maturity

Mortgage-backed securities		$	39,068		—	$	1,451	$	37,617
Obligations of states and political subdivisions			5,130	$	1		84		5,047

	Total	$	44,198	$	1	$	1,535	$	42,664

U.S. Treasury and government agency obligations classified as available for sale totaled $132.8 million at June 30, 2006, an increase of $16.6 million or 14.3 percent from $116.2 million at December 31, 2005. The increase was due to purchases of $44.9 million partially offset by maturities and calls of $16.2 million, sales of $10.7 million and other decreases of $1.4 million. There were no U.S. Treasury or government agency obligations classified as held to maturity at June 30, 2006 or at December 31, 2005.

Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $472.1 million at June 30, 2006, an increase of $12.7 million or 2.8 percent from $459.4 million at December 31, 2005. The increase was due to purchases of $107.1 million partially offset maturities and principal paydowns of $51.2 million, sales of $34.7 million and other decreases of $8.5 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $39.1 million at June 30, 2006, a decrease of $5.9 million or 13.1 percent from $45.0 million at December 31, 2005. The decrease was due to maturities and principal paydowns of $6.0 million partially offset by other increases of $0.1 million. The purchases of available for sale securities consisted of fixed rate mortgage-backed securities with average lives of five years or less at the time of purchase.

Obligations of state and political subdivisions classified as available for sale totaled $207.4 million at June 30, 2006, an increase of $1.3 million or 0.6 percent from $206.1 million at December 31, 2005. The increase was due to purchases of $20.7 million, partially offset by maturities and calls of $15.6 million, sales of $0.2 million and other decreases of $3.6 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both June 30, 2006 and December 31, 2005. The combined available for sale and held to maturity obligations at June 30, 2006 were comprised of approximately 67 percent of New York State political subdivisions and 33 percent of a variety of other states and their subdivisions all with diversified maturity dates. The Company considers such securities to have favorable tax equivalent yields.

Other debt securities, consisting primarily of corporate bonds and trust preferred securities, totaled $28.3 million at June 30, 2006, a increase of $0.5 million or 1.8 percent from $27.8 million at December 31, 2005. The increase resulted from purchase of $0.4 million and other changes of $0.1 million. All other debt securities are classified as available for sale.

Mutual funds and other equity securities totaled $30.0 million at June 30, 2006, an increase of $5.7 million or 23.5 percent from $24.3 million at December 31, 2005. The increase resulted from purchases of $5.9 million partially offset by other decreases of $0.2 million. All mutual funds and other equity securities are classified as available for sale.

The Banks, as members of the FHLB, invest in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Banks 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 $15.6 million at June 30, 2006, and $13.7 million at December 31, 2005.

Except for securities of the U.S. Treasury and government agencies, there were no obligations of any single issuer which exceeded ten percent of stockholders’ equity at June 30, 2006 or December 31, 2005.


	*Loans*

Net loans totaled $1,117.4 million at June 30, 2006, an increase of $107.6 million or 10.7 percent from $1,009.8 million at December 31, 2005. The increase resulted principally from a $42.2 million increase in commercial and industrial loans, a $39.2 million increase in construction loans, a $15.4 million increase in commercial real estate loans, a $12.4 million increase in residential real estate loans, a $1.2 million increase in loans to individuals partially offset by a $0.2 million decrease in lease financing. The increase in loans reflect the Company’s continuing emphasis on making new loans, expansion of loan production capabilities, and more effective market penetration, including the acquisition of NYNB.

Major classifications of loans at June 30, 2006 and December 31, 2005 are as follows:


			June 30,			December 31,
			2006			2005

			(000’s)
Real Estate:
	Commercial		$	235,841		$	220,384
	Construction			217,929			178,731
	Residential			288,787			276,384
Commercial and industrial				359,109			316,907
Individuals				26,841			25,632
Lease financing				8,090			8,348

		Total		1,136,597			1,026,386
Deferred loan fees, net				(3,325	)		(3,042	)
Allowance for loan losses				(15,883	)		(13,525	)

		Loans, net	$	1,117,389		$	1,009,819

The following table summarizes the Company’s non-accrual loans and loans past due 90 days or more and still accruing as of June 30, 2006 and December 31, 2005:


	June 30,			December 31,
	2006			2005

	(000’s except percentages)
Non-accrual loans at period end	$	4,545		$	3,837
Loans past due 90 days or more and still accruing		2,336			3,522
Nonperforming assets to total assets at period end		0.21	%		0.19	%

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $247,000 and $283,000 for the six month period ended June 30, 2006 and the year ended December 31, 2005, respectively. There was no interest income on nonperforming assets included in net income for the three and six month periods ended June 30, 2006 and the year ended December 31, 2005.

Allowance for Loan Losses

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

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


		June 30,		Change During			December 31,
		2006		Period			2005

		(000’s)
Specific component		$	1,262	$	(38	)	$	1,300
Formula component			1,021		396			625
Unallocated component			13,600		2,000			11,600

	Total allowance	$	15,883				$	13,525

Net change					2,358
Amount acquired					1,529
Net chargeoffs					246

Provision amount				$	1,075

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

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

The determination of the unallocated component of the allowance for loan losses is the result of our consideration of other relevant factors affecting loan collectibility. Due to the inherent uncertainty in the process, we do not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. We periodically adjust the unallocated component to an amount that, when considered with the specific and formula components, represents our best estimate of probable losses in the loan portfolio as of each balance sheet date. The following factors affected the determination of the unallocated component for loan losses at June 30, 2006.


	•	Economic and business conditions — Indications of increased inflation, such as the pronounced rise in energy costs, increases in the cost of raw materials used in construction, significant increases in real estate taxes within the Company’s market area and the steady rise in short-term interest rates which began in the third quarter of 2004, continued throughout 2005 and into the first half of 2006. Continuation of such conditions could have negative effects on the demand for or value of real estate, the primary collateral for the Company’s loans, and the ability of borrowers to repay their loans. Consideration of such events that trigger economic uncertainty or possible slowing economic conditions are part of the determination of the unallocated component of the allowance.

	•	Concentration — Construction loans increased to $217.9 million or 19.2 percent of total loans at June 30, 2006 from $178.7 million or 17.4 percent of total loans at December 31, 2005. These loans generally have a higher degree of risk than other types of loans which the Company 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 increased both within the HVB portfolio and as a result of the acquisition of NYNB during the six months ended June 30, 2006. In addition, the dollar amount of

nonperforming loans increased, primarily due to the addition of a $1.0 million of nonperforming loans acquired with NYNB. Although the Company’s regular periodic loan review process noted continued strength in overall credit quality, which is believed to have been mainly attributable to the continued stability in real estate values in the Company’s primary market area, the continuation of recent trends of rising construction, energy and interest costs, as well as real estate taxes, or a decline in real estate values in the Company’s primary market area may negatively impact the borrowers’ ability to pay and collateral values. Certain loans were downgraded due to potential deterioration of collateral values, the borrower’s cash flows or other specific factors that negatively impact the borrower’s ability to meet their loan obligations. Certain of these loans 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 Company introduced a series of low cost home equity products since the fourth quarter of 2002. As of June 30, 2006, home equity loans represent approximately 7.4 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 $2.0 million increase in the unallocated component of the allowance to $13.6 million reflects our best estimate of probable losses which have been incurred as of June 30, 2006.

Deposits

Deposits totaled $1,511.8 million at June 30, 2006, an increase of $103.8 million or 7.4 percent from $1,408.0 million at December 31, 2005. The following table presents a summary of deposits at June 30, 2006 and December 31, 2005:


		(000’s)

		June 30,		December 31,		Increase
		2006		2005		(Decrease)

Demand deposits		$	624,989	$	576,032	$	48,957
Money market accounts			442,300		421,720		20,580
Savings accounts			97,565		73,028		24,537
Time deposits of $100,000 or more			148,237		149,231		(994	)
Time deposits of less than $100,000			63,240		57,217		6,023
Checking with interest			135,439		130,767		4,672

	Total Deposits	$	1,511,770	$	1,407,995	$	103,775

The increase in deposits resulted from the acquisition of NYNB, new account relationships, and increased account activity, partially offset by seasonal decreases in certain accounts consistent with activity experienced by the Company in prior years, as well as decreases in deposits associated with a decline in real estate related activity.


	Borrowings

Total borrowings were $488.0 million at June 30, 2006, an increase of $52.8 million or 12.1 percent from $435.2 million at December 31, 2005. The overall increase resulted primarily from a $16.4 million increase in short-term repurchase agreements and a $46.4 million increase in other short-term borrowings partially offset by a $10.0 million decrease in FHLB term borrowings. Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital and to manage interest rate risk.


	Stockholders’ Equity

Stockholders’ equity totaled $169.1 million at June 30, 2006, a decrease of $0.7 million or 0.4 percent from $169.8 million at December 31, 2005. Decreases in stockholders’ equity resulted from $7.8 million cash

dividends paid on common stock, $3.5 million purchases of treasury stock and a $7.8 million decrease in accumulated comprehensive income, principally as a result of a decrease in the net unrealized value of securities available for sale. Increases in stockholders’ equity resulted from net income of $16.4 million for the six month period ended June 30, 2006, and $2.0 million proceeds from stock options exercised.

The Company’s and the Banks’ capital ratios at June 30, 2006 and December 31, 2005 are as follows:


								Minimum for
								Capital
		June 30,			December 31,			Adequacy
		2006			2005			Purposes

Leverage ratio:
	Company		7.8	%		8.3	%		4.0	%
	HVB		7.8			8.3			4.0
	NYNB		7.5			—			4.0
Tier 1 capital:
	Company		12.7	%		13.8	%		4.0	%
	HVB		12.7			13.8			4.0
	NYNB		13.0			—			4.0
Total capital:
	Company		13.9	%		14.9	%		8.0	%
	HVB		13.8			14.9			8.0
	NYNB		14.3			—			8.0

The Company, HVB and NYNB each exceed all current regulatory capital requirements to be considered in the “well capitalized” category at June 30, 2006.

Liquidity

The Company’s liquid assets, at June 30, 2006, include cash and due from banks of $52.3 million and Federal funds sold of $11.6 million. Other sources of liquidity at June 30, 2006 include maturities and principal payments on loans and securities, including approximately $203.5 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 $126.4 million of securities having contractual maturities, expected call dates or average lives of one year or less. In addition, at June 30, 2006, the Banks had available borrowing facilities of $55 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 Banks’ available borrowing capacity was approximately $443 million at June 30, 2006.

Management considers the Company’s sources of liquidity to be adequate to meet any expected funding needs and to be responsive to changing interest rate markets.

Forward-Looking Statements

The Company has made in this Form 10-Q various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to earnings, credit quality and other financial and business matters for periods subsequent to June 30, 2006. 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;

	•	adverse changes in economic conditions especially those affecting real estate;

	•	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;

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

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

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

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

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, 2005 were previously reported in the Company’s 2005 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at June 30, 2006 compared to December 31, 2005.

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

All market risk sensitive instruments are classified either as available for sale or held to maturity with no financial instruments entered into for trading purposes. The Company from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the six month period ended June 30, 2006. The Company had no derivative financial instruments in place at June 30, 2006.

The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at June 30, 2006 shows the Company’s net interest income decreasing slightly if rates rise or fall.

The Company also prepares a static gap analysis which, at June 30, 2006, shows a negative cumulative static gap of $67.4 million in the one year time frame.

The Company’s policy limit on interest rate risk has remained unchanged since December 31, 2002. The following table illustrates the estimated exposure under a rising rate scenario and a declining rate scenario calculated as a percentage change in estimated net interest income assuming a gradual shift in interest rates for the next 12 month measurement period, beginning June 30, 2006.


		Percentage Change in
		Estimated Net Interest Income
Gradual Change in Interest Rates		from June 30, 2006			Policy Limit

	+200 basis points		(2.4	)%		(5.0	)%
	-200 basis points		(1.5	)%		(5.0	)%

Item 4. Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2006. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2006, the Company’s disclosure controls and procedures were effective in bringing to their attention on a timely basis information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act. Also, during the quarter ended June 30, 2006, there has not been any change that has affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1A.	*Risk Factors*

Our business is subject to various risks. Management believes there have been no material changes in the risk factors included in our 2005 Annual Report on Form 10-K.


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

The following table sets forth information with respect to purchase made by the Company of its common stock during the three month period ended June 30, 2006.


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

April 2006(1)		8,540	$	52.54		4,731
May 2006(1)		9,881	$	51.01		8,481
June 2006(2)		18,813	$	50.02		15,663		84,337

Total		37,234	$	50.99		28,875


(1)	In February 2006, 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 $42.75 per share, or a price of $51.25 per share for transactions of at least 2,500 shares. This offer expired on May 30, 2006.

(2)	In May 2006, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 100,000 of the Company’s shares at a price of $45.50 per share, or a price of $52.25 per share for transactions of at least 2,500 shares. This offer expires on August 29, 2006.


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

The Annual Meeting of Shareholders of the Company was held on May 11, 2006 for the purpose of considering and voting upon the following matter:


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

The results were as follows:


	For		Against		Abstentions

William E. Griffin		6,393,740		9,777		575
Stephen R. Brown		6,393,738		9,779		575
James M. Coogan		6,393,738		9,779		575
Gregory F. Holcombe		6,403,515		2		575
James J. Landy		6,393,659		9,858		575
Angelo R. Martinelli		6,403,517		—		575
William J. Mulrow		6,403,515		2		575
John A. Pratt Jr.		6,392,451		11,066		575
Cecile D. Singer		6,403,515		2		575
Craig S. Thompson		6,393,738		9,779		575

Item 6. Exhibits

(A) Exhibits


4.3	Specimen Stock Restriction Agreement Between the Company and a Shareholder who Acquired Shares from the Company or a Shareholder Subject to the Agreement (filed herewith).

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

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

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

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

SIGNATURES

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


	HUDSON VALLEY HOLDING CORP.


	By:	/s/ Stephen R. Brown



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

August 9, 2006


		nonperforming loans increased, primarily due to the addition of a $1.0 million of nonperforming loans acquired with NYNB. Although the Company’s regular periodic loan review process noted continued strength in overall credit quality, which is believed to have been mainly attributable to the continued stability in real estate values in the Company’s primary market area, the continuation of recent trends of rising construction, energy and interest costs, as well as real estate taxes, or a decline in real estate values in the Company’s primary market area may negatively impact the borrowers’ ability to pay and collateral values. Certain loans were downgraded due to potential deterioration of collateral values, the borrower’s cash flows or other specific factors that negatively impact the borrower’s ability to meet their loan obligations. Certain of these loans 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 Company introduced a series of low cost home equity products since the fourth quarter of 2002. As of June 30, 2006, home equity loans represent approximately 7.4 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.