HUDSON VALLEY HOLDING CORP - 10-Q Quarterly Report

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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, 2002

Commission File No. 030525

HUDSON VALLEY HOLDING CORP.

(Exact name of registrant as specified in its charter)


NEW YORK		13-3149845
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21 Scarsdale Road, Yonkers, NY 10707

(Address of principal executive office with zip code)

914-961-6100

(Registrant’s telephone number including area code)

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

Indicate 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, 2002

Common stock, par value $0.20 per share		5,340,998

TABLE OF CONTENTS


PART 1 -- FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II -- OTHER INFORMATION
	Item 4. Submission of matters to a vote of security holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-99.1: CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EX-99.2: CERTIFICATION OF CHIEF FINANCIAL OFFICER

FORM 10-Q

TABLE OF CONTENTS


		Page
		No.

PART I — FINANCIAL INFORMATION
	ITEM 1 FINANCIAL STATEMENTS		2
	ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		11
	ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		22

PART II — OTHER INFORMATION
	ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		23
	ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K		23

SIGNATURES			24

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts



				Three Months Ended
				June 30,

				2002		2001

Interest Income:
	Loans, including fees			$	12,282	$	11,980
	Securities:
		Taxable			7,204		8,745
		Exempt from federal income taxes			1,946		1,803
		Federal funds sold			450		238
		Deposits in banks			9		—

			Total interest income		21,891		22,766

Interest Expense:
	Deposits				2,128		5,358
	Securities sold under repurchase agreements and other short-term borrowings				618		1,495
	Other borrowings				2,532		2,074

			Total interest expense		5,278		8,927

Net Interest Income					16,613		13,839
Provision for loan losses					1,906		710

Net interest income after provision for loan losses					14,707		13,129

Non Interest Income:
	Service charges				385		295
	Realized gain on security transactions, net				39		5
	Other income				410		140

			Total non interest income		834		440

Non Interest Expense:
	Salaries and employee benefits				4,336		3,824
	Occupancy				629		571
	Professional services				803		644
	Equipment				509		605
	Business development				434		273
	FDIC assessment				40		42
	Other operating expenses				1,088		1,310

			Total non interest expense		7,839		7,269

Income Before Income Taxes					7,702		6,300
Income Taxes					2,439		2,100

Net Income				$	5,263	$	4,200

Basic Earnings Per Common Share				$	0.99	$	0.81
Diluted Earnings Per Common Share				$	0.97	$	0.79

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Dollars in thousands, except per share amounts



				Six Months Ended
				June 30,

				2002		2001

Interest Income:
	Loans, including fees			$	24,017	$	24,037
	Securities:
		Taxable			14,251		17,867
		Exempt from Federal income taxes			3,832		3,593
		Federal funds sold			816		386
		Deposits in banks			19		—

			Total interest income		42,935		45,883

Interest Expense:
	Deposits				4,328		11,734
	Securities sold under repurchase agreements and other short-term borrowings				1,221		3,742
	Other borrowings				5,035		3,528

			Total interest expense		10,584		19,004

Net Interest Income					32,351		26,879
Provision for loan losses					2,706		1,060

Net interest income after provision for loan losses					29,645		25,819

Non Interest Income:
	Service charges				748		579
	Realized gain on sales of securities, net				39		24
	Other income				660		467

			Total non interest income		1,447		1,070

Non Interest Expense:
	Salaries and employee benefits				8,103		7,198
	Occupancy				1,224		1,139
	Professional services				1,596		1,115
	Equipment				942		1,020
	Business development				683		531
	FDIC assessment				80		85
	Other operating expenses				2,116		2,250

			Total non interest expense		14,744		13,338

Income Before Income Taxes					16,348		13,551
Income Taxes					5,076		4,116

Net Income				$	11,272	$	9,435

Basic Earnings Per Common Share				$	2.13	$	1.81
Diluted Earnings Per Common Share				$	2.08	$	1.77

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands



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

		2002			2001			2002			2001

Net Income		$	5,263		$	4,200		$	11,272		$	9,435
Other comprehensive income, net of tax:
	Unrealized holding gain (loss) on securities available for sale arising during the period		11,326			(2,956	)		8,438			6,093
	Income tax effect		(4,167	)		1,228			(2,968	)		(2,527	)

			7,159			(1,728	)		5,470			3,566

	Reclassification adjustment for net gain realized on securities available for sale		(39	)		(5	)		(39	)		(24	)
	Income tax effect		16			1			16			9

			(23	)		(4	)		(23	)		(15	)

	Unrealized holding gain (loss) on securities available for sale		7,136			(1,732	)		5,447			3,551

	Minimum pension liability adjustment		7			—			7			—
	Income tax effect		(3	)		—			(3	)		—

			4			—			4			—
Other comprehensive income (loss)			7,140			(1,732	)		5,451			3,551

Comprehensive Income		$	12,403		$	2,468		$	16,723		$	12,986

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts


			June 30,			December 31,
			2002			2001

ASSETS
Cash and due from banks			$	53,064		$	29,821
Federal funds sold				113,600			76,300
Securities available for sale at estimated fair value (amortized cost of $628,408 in 2002 and $614,385 in 2001)				646,630			624,209
Federal Home Loan Bank of New York (FHLB) Stock				10,459			10,459
Loans (net of allowance for loan losses of $10,573 in 2002 and $8,018 in 2001)				616,875			600,377
Accrued interest and other receivables				9,181			8,976
Premises and equipment, net				12,549			12,129
Other real estate owned				1,926			2,021
Other assets				8,501			8,161

		TOTAL ASSETS	$	1,472,785		$	1,372,453

LIABILITIES
Deposits:
	Non interest-bearing		$	385,672		$	342,112
	Interest-bearing			577,924			546,265

		Total deposits		963,596			888,377
Securities sold under repurchase agreements and other short-term borrowings				152,855			143,529
Other borrowings				209,181			209,191
Deferred income taxes, net				4,886			3,958
Accrued interest and other liabilities				14,934			14,056

		TOTAL LIABILITIES		1,345,452			1,259,111

STOCKHOLDERS’ EQUITY
Common stock, $0.20 par value; authorized 10,000,000 shares; outstanding 5,327,224 and 5,260,158 shares in 2002 and 2001, respectively				1,250			1,232
Additional paid-in capital				126,982			125,057
Retained earnings				12,336			4,829
Accumulated other comprehensive income				10,466			5,015
Treasury stock, at cost				(23,701	)		(22,791	)

		Total stockholders’ equity		127,333			113,342

		TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,472,785		$	1,372,453

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2002 and 2001

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, 2002			5,260,158		$	1,232	$	(22,791	)	$	125,057	$	4,829		$	5,015	$	113,342
	Net income												11,272					11,272
	Exercise of stock options		87,188			18					1,850							1,868
	Purchase of treasury stock		(27,717	)				(1,079	)									(1,079	)
	Sale of treasury stock		6,602					169			75							244
	Stock dividend		993
	Cash dividend												(3,765	)				(3,765	)
	Minimum pension liability adjustment															4		4
	Net unrealized loss on securities available for sale															5,447		5,447

Balance at June 30, 2002			5,327,224		$	1,250	$	(23,701	)	$	126,982	$	12,336		$	10,466	$	127,333


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

Balance at January 1, 2001			4,702,660		$	1,114	$	(21,353	)	$	104,825	$	9,279		$	(520	)	$	93,345
	Net income												9,435						9,435
	Exercise of stock options		64,925			13					1,416								1,429
	Purchase of treasury stock		(30,863	)				(1,139	)										(1,139	)
	Sale of treasury stock		7,841					196			87								283
	Cash dividend												(3,088	)					(3,088	)
	Tax benefit from exercise of stock options										31								31
	Net unrealized gain on securities available for sale															3,551			3,551

Balance at June 30, 2001			4,744,563		$	1,127	$	(22,296	)	$	106,359	$	15,626		$	3,031		$	103,847

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands



		For the Six Months
		Ended June 30,

		2002			2001

Operating Activities:
Net income		$	11,272		$	9,435
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		2,706			1,060
	Depreciation		826			1,023
	Realized gain on security transactions, net		(39	)		(24	)
	Amortization of premiums on securities, net		1,072			285
Deferred tax benefit			(2,027	)		(643	)
Increase in deferred loan fees, net			(323	)		(265	)
(Increase) decrease in accrued interest and other receivables			(205	)		3,233
Increase in other assets			(340	)		(521	)
(Increase) decrease in accrued interest and other liabilities			878			(400	)
Other changes, net			251			67

Net cash provided by operating activities			14,071			13,250

Investing Activities:
Net decrease (increase) in short-term investments			(37,300	)		800
Proceeds from maturities of securities available for sale			129,161			127,721
Proceeds from sales of securities available for sale			758			3,682
Purchases of securities available for sale			(144,974	)		(153,033	)
Decrease in receivable for securities sold			—			44,326
Decrease in payable for securities purchased			—			(14,913	)
Net increase in loans			(18,881	)		(61,114	)
Purchases of premises and equipment			(1,246	)		(189	)

Net Cash used in investing activities			(72,482	)		(52,720	)

Financing Activities:
Proceeds from issuance of common stock			1,719			1,429
Proceeds from sale of treasury stock			244			283
Increase in deposits			75,219			7,088
Cash dividends paid			(3,765	)		(3,088	)
Repayment of other borrowings			(10	)		(9	)
Proceeds from other borrowings			—			71,250
Net increase (decrease) in securities sold under repurchase agreements and short-term borrowings			9,326			(33,650	)
Acquisition of treasury stock			(1,079	)		(1,139	)

Net cash provided by financing activities			81,654			42,164

Increase in Cash and Due from Banks			23,243			2,694
Cash and due from banks, beginning of period			29,821			30,420

Cash and due from banks, end of period		$	53,064		$	33,114

Supplemental Disclosures:
Interest paid		$	10,898		$	20,323
Income tax payments			6,325			4,711
Change in unrealized gain (loss) on securities available for sale — net of tax			5,447			3,551

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of Operations

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

The Company provides financial services through its wholly-owned subsidiary, Hudson Valley Bank (the “Bank”), a New York chartered commercial bank established in 1972. The Bank is an independent bank headquartered in Westchester County, New York. The Bank has 14 branch offices in Westchester County, 2 in Bronx County, New York and one in Manhattan, New York. The branch in Manhattan, New York opened on May 3, 2002. The Bank opened a new branch office at 21 Scarsdale Road, Yonkers, New York, on July 16, 2002. The Company and the Bank derive substantially all of their revenue and income from providing banking and related services to small and medium-sized businesses, professionals, municipalities, not-for-profit organizations and individuals located in Westchester County and, to a lesser extent, the Bronx.

2. Summary of Significant Accounting Policies

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 2002 and December 31, 2001 and the results of its operations and comprehensive income for the three and six month periods ended June 30, 2002 and 2001, and cash flows and changes in stockholders’ equity for the three and six month periods ended June 30, 2002 and 2001. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

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

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

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

These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2001 and notes thereto.

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

Interest Rate Contracts — The Company, from time to time, uses various interest rate contracts such as forward rate agreements, interest rate swaps, caps and floors, primarily as hedges against specific assets and liabilities. Statement of Financial Accounting (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS Statement No. 133”, which became effective on January 1, 2001, requires that all derivative instruments, including interest rate contracts, be recorded on the balance sheet at their fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company has two interest rate floor

contracts, one with a notional value of $25 million and a 4.5% strike rate and one with a notional value of $25 million and a 4.0% strike rate, which do not qualify for hedge accounting under SFAS No. 133. Accordingly, the contracts are accounted for at fair value with the resulting net gain of $225,000 and net loss of $39,000 included in other income for the three month periods ended June 30, 2002 and 2001, respectively and net gain of $297,000 and $146,000 for the six months periods ended June 30, 2002 and 2001, respectively.

3. 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,

			2002		2001		2002		2001


			(000’s except share data)
Numerator:
	Net income available to common shareholders for basic and diluted earnings per share		$	5,263	$	4,200	$	11,272	$	9,435
Denominator:
	Denominator for basic earnings per common share — weighted average shares			5,311,092		5,208,125		5,289,993		5,200,100
	Effect of diluted securities:
		Stock options		106,918		132,150		121,484		130,727

Denominator for dilutive earnings per common share — adjusted weighted average shares				5,418,009		5,340,275		5,411,477		5,330,828

Basic earnings per common share			$	0.99	$	0.81	$	2.13	$	1.81
Diluted earnings per common share			$	0.97	$	0.79	$	2.08	$	1.77

4. Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization as well as provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles and the identification of reporting units for purposes of assessing future impairments of goodwill. SFAS No. 142 also requires a transitional goodwill impairment test six months from the date of adoption. The adoption of SFAS No. 142 by the Company on January 1, 2002 did not have a significant impact on its financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (“SFAS No. 144”) which supersedes SFAS No. 121 and portions of APB Opinion No. 30. This statement addresses the recognition of an impairment loss for long-lived assets to be held and used, or disposed of by sale or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS No. 144 by the Company did not have a significant impact on the Company’s financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, (“SFAS No. 145”). This statement clarifies guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. The provisions of this statement relating to the extinguishment of debt become effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of this statement relating to lease modification are effective for transactions occurring after May 15, 2002. The Company does not believe that the adoption of SFAS No. 145 will have a significant impact on its financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, (“SFAS No. 146”). The Company does not believe that the adoption of SFAS No. 146 will have a significant impact on its financial position or results of operations.

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, 2002 and consolidated results of operations for the three and six month periods ended June 30, 2002 and June 30, 2001. The Company is consolidated with its wholly-owned subsidiary, Hudson Valley Bank, and the Bank’s subsidiaries, Hudson Valley Investment Corp., Grassy Sprain Real Estate Holdings, Inc., Sprain Brook Realty Corp. and HVB Leasing Corp. (collectively the “Bank”). This discussion and analysis should be read in conjunction with the consolidated financial statements and supplementary financial information contained in the Company’s Annual Report on Form 10K.

Critical Accounting Policies

The Company’s significant accounting policies are summarized in Note 1 to the consolidated financial statements included in the Company’s 2001 Annual Report on Form 10-K. Critical accounting policies, given the Company’s current business strategy and asset/liability structure, are the allowance for loan losses, income recognition on loans, and securities.

Results of Operations for the Three and Six Month Periods Ended June 30, 2002 and June 30, 2001

Summary of Results

The Company reported net income of $5.3 million and $11.3 million for the three and six month periods ended June 30, 2002, respectively. This compares to $4.2 million and $9.4 million for the three and six month periods ended June 30, 2001. The increase in net income in the three and six month periods ended June 30, 2002 compared to the same periods in the prior year was primarily due to higher net interest income and non interest income offset by higher non interest expense and a higher provision for loan losses.

Diluted earnings per share were $0.97 and $2.08 for the three and six month periods ended June 30, 2002, respectively. This compares to $0.79 and $1.77 of diluted earnings per share for the three and six month periods ended June 30, 2001. On this basis, diluted earnings per share increased $0.18 or 22.8 percent and $0.31 or 17.5 percent for the three and six months ended June 30, 2002. Annualized return on average equity (excluding the effects of unrealized gains and losses on securities available for sale) was 18.35 percent and 20.08 percent for the three and six month periods ended June 30, 2002, compared to 17.10 percent and 19.59 percent for the three and six month periods ended June 30, 2001, respectively. Annualized return on average assets (excluding the effects of unrealized gains and losses on securities available for sale) for the three and six month period ended June 30, 2002 was 1.47 percent and 1.61 percent, respectively. This compares to 1.28 percent and 1.46 percent for the three and six month period ended June 30, 2001, respectively.

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, 2002 and June 30, 2001, as well as total interest and corresponding yields and rates. The data contained in the table has been adjusted to a tax equivalent basis, based on the federal statutory rate of 35 percent in 2002 and 2001.



				Three Months Ended June 30,


				2002						2001

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


				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	3,013	$	9		1.19%	$	—	$	—		—	%
	Federal funds sold				101,834		450		1.77		21,393		238		4.45
	Securities:(1)
		Taxable			481,475		7,204		5.98		531,393		8,745		6.58
		Exempt from federal income taxes			160,997		2,993		7.44		146,480		2,774		7.58
		Loans, net(2)			616,314		12,282		7.97		552,974		11,980		8.67

			Total interest earning assets		1,363,633		22,938		6.73		1,252,240		23,737		7.58

Non interest earning assets:
	Cash and due from banks				33,839						32,373
	Other assets				32,996						28,233

			Total non interest earning assets		66,835						60,606

			Total assets	$	1,430,468					$	1,312,846

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	258,760	$	987		1.53%	$	148,424	$	1,090		2.94	%
		Savings			56,782		89		0.63		52,528		189		1.44
		Time			182,490		905		1.98		350,521		3,903		4.45
		Checking with interest			75,701		147		0.78		61,698		176		1.14
		Securities sold under repurchase agreements and other short-term borrowings			157,413		618		1.57		147,494		1,495		4.05
		Other borrowings			209,184		2,532		4.84		159,985		2,074		5.19

			Total interest bearing liabilities		940,330		5,278		2.25		920,650		8,927		3.88

Non interest bearing liabilities:
	Demand deposits				361,169						283,606
	Other liabilities				14,214						10,327

			Total non interest bearing liabilities		375,383						293,933

Stockholders’ equity(1)					114,755						98,263

			Total liabilities and stockholders’ equity(1)	$	1,430,468					$	1,312,846

Net interest earnings						$	17,660					$	14,810

Net yield on interest earning assets									5.18%						4.73	%


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

(2)	Includes loans classified as non-accrual

(3)	Effect of adjustment to a tax equivalent basis was $1,047 and $971 for the three months ended June 30, 2002 and June 30, 2001, respectively.

Average Balances and Interest Rates

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the six month periods ended June 30, 2002 and June 30, 2001, as well as total interest and corresponding yields and rates. The data contained in the table has been adjusted to a tax equivalent basis, based on the federal statutory rate of 35 percent.



				Six Months Ended June 30,


				2002							2001

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


				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	2,946	$	19		1.29	%	$	—	$	—		—	%
	Federal funds sold				92,543		816		1.76			16,087		386		4.79
	Securities:(1)
		Taxable			474,549		14,251		6.01			532,300		17,867		6.71
		Exempt from Federal income taxes			158,824		5,895		7.42			145,733		5,528		7.59
		Loans, net(2)			607,978		24,017		7.90			533,613		24,037		9.01

			Total interest earning assets		1,336,840		44,998		6.73			1,227,733		47,818		7.79

Non interest earning assets:
	Cash and due from banks				33,446							31,139
	Other assets				32,079							36,485

			Total non interest earning assets		65,525							67,624

			Total assets	$	1,402,365						$	1,295,357

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	235,837	$	1,848		1.57	%	$	146,783	$	2,062		2.81	%
		Savings			55,597		173		0.62			52,287		386		1.48
		Time			197,630		2,028		2.05			357,101		8,900		4.98
		Checking with interest			72,259		279		0.77			60,503		386		1.28
		Securities sold under repurchase agreements and other short-term borrowings			154,001		1,221		1.59			156,624		3,742		4.78
		Other borrowings			209,186		5,035		4.81			134,205		3,528		5.26

			Total interest bearing liabilities		924,510		10,584		2.29			907,503		19,004		4.19
Non interest bearing liabilities:
	Demand deposits				350,940							276,498
	Other liabilities				14,634							15,023

			Total non interest bearing liabilities		365,574							291,521

Stockholder’s equity(1)					112,281							96,333

			Total liabilities and stockholders’ equity(1)	$	1,402,365						$	1,295,357

Net interest earnings						$	34,414						$	28,814

Net yield on interest earning assets									5.15	%						4.69	%


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

(2)	Includes loans classified as non-accrual

(3)	Effect of adjustment to a tax equivalent basis was $2,063 and $1,935 for the six months ended June 30, 2002 and June 30, 2001, 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, 2002 and June 30, 2001.



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

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


				(000’s)									(000’s)
Interest Income:
	Deposits in banks			$	—		$	19		$	19		$	9		$	—		$	9
	Federal funds sold				1,835			(1,405	)		430			355			(143	)		212
	Securities:
		Taxable			(1,938	)		(1,678	)		(3,616	)		(747	)		(794	)		(1,541	)
		Exempt from federal income taxes(2)			497			(130	)		367			270			(51	)		219
		Loans, net			3,350			(3,370	)		(20	)		1,262			(960	)		302

			Total interest income		3,744			(6,564	)		(2,820	)		1,149			(1,948	)		(799	)

Interest expense:
	Deposits:
		Money market			1,251			(1,465	)		(214	)		421			(525	)		(104	)
		Savings			24			(237	)		(213	)		7			(107	)		(100	)
		Time			(3,974	)		(2,898	)		(6,872	)		(833	)		(2,164	)		(2,997	)
		Checking with interest			75			(182	)		(107	)		27			(56	)		(29	)
		Securities sold under repurchase agreements and other short-term borrowings			(63	)		(2,458	)		(2,521	)		39			(916	)		(877	)
		Other borrowings			1,971			(464	)		1,507			596			(138	)		458

			Total interest expense		(716	)		(7,704	)		(8,420	)		257			(3,906	)		(3,649	)

Increase in interest differential				$	4,460		$	1,140		$	5,600		$	892		$	1,958		$	2,850


(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 2002 and 2001.

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, 2002, net interest income, on a tax equivalent basis, increased 19.2 percent to $17.7 million from $14.8 million, and 19.4 percent to $34.4 million from $28.8 million, compared to the prior year periods. Net interest income rose because of the increase in the excess of average interest earning assets over average interest bearing liabilities for the three and six month periods ended June 30, 2002 to $423.3 million from $331.6 million, and to $412.3 million from $320.2 million compared to the prior year periods. In addition, the net interest margin on a tax equivalent basis for the three and six month periods ended June 30, 2002 increased to 5.2 percent from 4.7 percent and to 5.2 percent from 4.7 percent, compared to the prior year periods.

Interest income is determined by the volume of, and related rates earned on, interest earning assets. Volume increases in federal funds sold, tax-exempt securities and loans during the three and six month periods ended June 30, 2002, partially offset by lower volume in taxable securities and overall lower interest rates, contributed to the lower interest income in the current year period as compared to the same periods in the prior year. For the three and six month periods ended June 30, 2002, average interest earning assets increased 8.9 percent to $1,363.6 million from $1,252.2 million and 8.9 percent to $1,336.8 million from $1,227.7 million, compared to the prior year periods. Interest income, on a tax equivalent basis, for the three and six

month periods ended June 30, 2002, decreased 3.4 percent to $22.9 million from $23.7 million, and 5.9 percent to $45.0 million from $47.8 million compared to the prior year periods.

Average total securities, excluding average unrealized gains on available for sale securities, decreased $35.4 million, or 5.2 percent to $642.5 and $44.6 million, or 6.6 percent to $633.4, million for the three and six month periods ended June 30, 2002 compared to the prior year periods. This decrease in average total securities in the current year periods, as compared to the same periods in the prior year, was principally the result of management not fully redeploying maturing funds into longer term investments due to the current interest rate environment. The decrease in average total securities in 2002 compared to 2001 is offset by an increase in short-term Federal funds. Interest income on securities decreased in the current year periods due to lower volume and lower aggregate rates.

Average net loans increased $63.3 million, or 11.5 percent to $616.3 million and increased by $74.4 million, or 13.9 percent to $608.0 million for the three and six month periods ended June 30, 2002 compared to the prior year periods. These increases in average net loans reflect management’s greater emphasis on making new loans and more effective market penetration. Interest income on net loans remained essentially the same in the current year periods as compared to the prior year with the increased volume offset by the impact of lower 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 for the three and six month periods ended June 30, 2002 decreased 40.9 percent to $5.3 million from $8.9 million, and 44.3 percent to $10.6 million from $19.0 million compared to the prior year periods. For the three and six months ended June 30, 2002, average balances in money market, checking with interest and savings deposits increased and average balances in time deposits decreased compared to the prior year period. Deposits increased from existing customers, new customers and the continued growth resulting from the opening of new branches. The decrease in time deposits resulted primarily from a decrease in short-term jumbo certificates of deposit from municipal customers which are acquired on a bid basis. This decrease was partially offset by an increase in other borrowed funds which offered attractive rates and terms. These funds were invested in loans and securities. The average amount of non interest bearing demand deposits, increased 27.3 percent to $361.2 million from $283.6 million, and 26.9 percent to $350.9 million from $276.5 million compared to the prior year periods. These deposits are an important component of the Company’s liability management and for the three and six months periods ended June 30, 2002, have a direct impact on the determination of net interest income. Interest rates paid on average deposits and borrowings, decreased in the current year period compared to the prior year periods due to a significantly lower interest rate environment.

The interest rate spread on a tax equivalent basis for the three and six month periods ended June 30, 2002 and 2001 is as follows:



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

		2002			2001			2002			2001

Average interest rate on:
	Total average interest earning assets		6.73	%		7.58	%		6.73	%		7.79	%
	Total average interest bearing liabilities		2.25			3.88			2.29			4.19
	Total interest rate spread		4.48			3.70			4.44			3.60

Interest rate spreads increased in the current year periods compared to the prior year periods. These increases resulted primarily from the growth in loans, the highest yielding asset category, as a component of total earning assets. Management cannot predict what impact market conditions will have on the Company’s interest rate spread and compression in net interest rate spread may occur.

Provision for Loan Losses

The Bank recorded a provision for loan losses of $1,906,000 and $710,000 for the three month periods ended June 30, 2002 and 2001, respectively and $2,706,000 and $1,060,000 for the six month period ended June 30, 2002 and June 30, 2001, respectively. The provision for loan losses is charged to income to bring the

Bank’s allowance for loan losses to a level deemed appropriate by management. See “Financial Condition” for further discussion.

Non Interest Income

Non interest income for the three and six month periods ended June 30, 2002 increased 89.6 percent to $834,000 from $440,000, and 35.2 percent to $1.4 million from $1.1 million compared to the prior year periods.

Service charges for the three and six month periods ended June 30, 2002 increased 30.5 percent to $385,000 from $295,000 and 29.2 percent to $748,000 from $579,000, compared to the prior year periods. This increase reflects a higher level of fees charged and increased activity.

Other income for the three and six month periods ended June 30, 2002 increased 192.9 percent to $410,000 from $140,000 and 41.3 percent to $660,000 from $467,000, compared to the prior year periods. Other income included an increase in the fair value of interest rate floor contracts of $297,000 and decrease of $39,000 for the three month periods ended June 30, 2002 and 2001, respectively and an increase of $297,000 and $146,000 for the six month periods ended June 30, 2002 and 2001, respectively.

Non Interest Expense

Non interest expense for the three and six month periods ended June 30, 2002 increased 7.8 percent to $7.8 million from $7.3 million and 10.5 percent to $14.7 million from $13.3 million, compared to the prior year periods. This increase reflects the overall growth of the Company and resulted from increases in professional services expense, business development expense, salary and employee benefits expense, occupancy expense, and other operating expense, partially offset by decreases in equipment expense and the FDIC assessment in the three and six month periods ended June 30, 2002 compared to the same periods in the prior year.

Salaries and employee benefits, the largest component of non interest expense, for the three and six month periods ended June 30, 2002 increased 13.4 percent to $4.3 million from $3.8 million and 12.6 percent to $8.1 million from $7.2 million, compared to prior year periods. This increase resulted from additional staff to accommodate the growth in loans and deposits; the opening of new branch facilities, as well as 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, 2002 increased 10.2 percent to $629,000 from $571,000 and 7.6 percent to $1.2 million from $1.1 million, compared to prior year periods. This increase reflected the opening of two 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, 2002 increased 24.7 percent to $803,000 from $644,000, and 43.0 percent to $1.6 million from $1.1 million, compared to prior year periods. The increase resulted from higher pension expense, higher audit costs, higher legal costs and professionals engaged to assist in the expansion of the Company’s management information services.

Equipment expense for the three and six month periods ended June 30, 2002 decreased 15.9 percent to $509,000 from $605,000 and 7.6 percent to $0.9 million from $1.0 million compared to prior year periods. This decrease resulted from the early retirement of equipment in 2001 partially offset by additional equipment necessary to support the new branch facilities in the Bronx and Manhattan which opened in the first and second quarters of 2002.

Business development expense for the three and six month periods ended June 30, 2002 increased 59.0 percent to $434,000 from $273,000 and 28.6 percent to $683,000 from $531,000 compared to prior year periods. This increase was the result of increased promotion of the Company’s services and promotion of the two new branch offices which opened in 2002.

The assessment of the Federal Deposit Insurance Corporation (FDIC) for the three and six month periods ended June 30, 2002 decreased 4.8 percent to $40,000 from $42,000 and 5.9 percent to $80,000 from

$85,000, compared to the prior year periods. This decrease resulted from a decrease in the Bank’s deposits subject to FDIC assessment.

Significant changes, more than 5 percent, in other components of non interest expense for the three and six month periods ended June 30, 2002 compared to June 30, 2001, were due to the following:

• Increase of $32,000 (26.7%) and $55,000 (23.3%), respectively in stationery and printing costs due to higher business volume and an increase in office supplies necessary to support the new branches.

• Increase of $23,000 (12.0%) and $53,000 (14.4%), respectively in communications expense, due to added voice and data lines associated with the expansion of technology usage, additional branch offices and growth in customers and business activity.

• Increase of $13,000 (11.7%) and $19,000 (8.8%), respectively in courier service due to increased customer utilization of the service and increased service costs.

• Increase of $3,000 (3.4%) and $22,000 (13.2%), respectively in dues, meetings and seminars expense, due to increased participation in such events.

• Decrease of $29,000 (107.4%) and $93,000 (109.4%), respectively in other insurance expense resulting from reductions in the estimates of the net cost of certain life insurance programs, partially offset by higher banker’s professional insurance costs and automobile insurance costs.

• Decrease of $22,000 (30.6%) and $42,000 (35.3%), respectively in other loan costs due to recoveries of prior years loan collection expenses.

• Increase of $10,000 (5.1%) and $29,000 (7.4%), respectively in outside services costs due to increased data processing costs and higher correspondent bank service charges.

Income Taxes

Income taxes for the three and six month periods ended June 30, 2002 increased 16.1 percent to $2.4 million from $2.1 million and 23.3 percent to $5.1 million from $4.1 million, compared to the prior year periods. The effective tax rate was 31.0 percent for the current year periods compared to 30.4 percent in the prior year periods. The increase in the effective tax rate reflects an increase in income subject to tax.

Financial Condition

At June 30, 2002, the Company had total assets of $1,472.8 million, an increase of $100.3 million, or 7.3 percent, from $1,372.5 million at December 31, 2001.

Federal funds sold totaled $113.6 million and $76.3 million at June 30, 2002 and December 31, 2001, respectively. The increase resulted from an excess of growth in deposits over increases in the loan and investment portfolios. The Company has chosen not to redeploy these funds into longer term securities due to the current interest rate environment.

The securities portfolio consists of securities available for sale of $646.6 million and $624.2 million at June 30, 2002 and December 31, 2001, respectively. The portfolio also includes Federal Home Loan Bank of New York (FHLB) stock, which totaled $10.5 million at June 30, 2002 and December 31, 2001, respectively.

The following table sets forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities classified as available for sale at June 30, 2002:



				Gross Unrealized
		Amortized						Estimated
		Cost		Gains		Losses		Fair Value


		(000’s)
U.S. Treasury and government agencies		$	106,855	$	1,287	$	128	$	108,014
Mortgage-backed securities			356,512		9,244		41		365,715
Obligations of state and political subdivisions			160,457		7,333		26		167,764
Other debt securities			3,708		139		1		3,846

Total debt securities			627,532		18,003		196		645,339
Equity securities			875		416		—		1,291

	Total	$	628,407	$	18,419	$	196	$	646,630

During the six months ended June 30, 2002, U.S. Treasury and government agency obligations increased $1.2 million to $108.0 million due to purchases of $38.1 million and other increases of $0.5 million, offset by maturities and calls of $37.4 million. The purchases were made based upon the attractive yield available in the market.

Mortgage-backed securities, including collateralized mortgage obligations (CMO’s), increased $12.9 million during the period to $365.7 million at June 30, 2002. The increase was due to purchases of $91.3 million and other increases of $3.3 million offset by principal paydowns and redemptions of $80.9 million and sales of $0.8 million. These purchases were fixed rate mortgage-backed securities with average lives of less than ten years at the time of purchase.

Obligations of state and political subdivisions increased $8.3 million during the period to $167.8 million due to purchases of $15.3 million and other increases of $3.5 million, offset by maturities of $10.5 million. The purchases were made for the attractive yields in the market and for their favorable income tax treatment.

The Company invests in FHLB stock 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 $5.4 million at June 30, 2002 comprised primarily of obligations of municipalities located within the Company’s market area.

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, 2002.

Total loans were $628.6 million at June 30, 2002 compared to $609.9 million at December 31, 2001, reflecting a $18.7 million increase. This increase resulted principally from a $5.4 million increase in commercial real estate loans, a $23.4 million increase in commercial and industrial loans, a $2.4 million increase in loans to individuals offset by a $1.6 million decrease in construction loans, a $7.0 million decrease in residential real estate loans and a decrease of $3.9 million in lease financing.

Major classifications of loans at June 30, 2002 and December 31, 2001 are as follows:


			June 30,			December 31,
			2002			2001


			(000’s)
Real Estate:
	Commercial		$	216,204		$	210,840
	Construction			50,883			52,496
	Residential			167,933			174,859
Commercial and industrial				164,024			140,573
Individuals				14,181			11,824
Lease financing				15,379			19,282

		Total		628,604			609,874
Deferred loan fees				(1,156	)		(1,479	)
Allowance for loan losses				(10,573	)		(8,018	)

		Loans, net	$	616,875		$	600,377

In March 2000, the Company ended its participation in an automobile leasing program due to the sale of the company that originated and serviced the leases and resulting changes to various aspects of the program. The balance of $13.8 million of such leases at June 30, 2002 will continue to decline as repayments of existing leases continue. The Company has not determined if it will seek to participate in a similar program in the future.

The following table summarizes the Company’s non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (OREO) as of June 30, 2002 and December 31, 2001:


		June 30,			December 31,
		2002			2001


		(000’s except percentages)
Non accrual loans at period end		$	2,101		$	3,523
OREO at period end			1,926			2,021

	Total nonperforming assets	$	4,027		$	5,544
Loans past due 90 days or more and still accruing			2,462			137
Nonperforming assets to total assets at period end			0.27	%		0.40	%

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $45,000, $35,000 and $511,000 for the three and six months ended June 30, 2002 and the year ended December 31, 2001, respectively. There was no interest income on nonperforming assets included in net income for the six month period ended June 30, 2002 and the year ended December 31, 2001.

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

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


		June 30,		Change During		December 31,
		2002		Period		2001


		(000’s)
Specific component		$	1,464	$	657	$	807
Formula component			1,109		598		511
Unallocated component			8,000		1,300		6,700

	Total allowance	$	10,573			$	8,018

Net change					2,555
Net chargeoffs					151

Provision amount				$	2,706

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, 2002.

• Economic and business conditions — The decline in the economy during the 6 months ended June 30, 2002 as evidenced by increased unemployment and increased bankruptcy filings throughout the country and in the Company’s market area has, in management’s judgement, caused a slowdown in economic and business activity within the Company’s primary market, caused a softening in demand for certain commercial real estate, which has negatively impacted valuations of the Company’s primary

collateral for loans, and has created greater uncertainty regarding the ability of borrowers to repay their loans. Therefore, consideration of events that trigger economic uncertainty is a part of the determination of the unallocated component of the allowance.

• Concentrations — Net loans increased $16.5 million to $616.9 million during the six months ended June 30, 2002 from $600.4 million as of December 31, 2001. This represented 41.9 percent of total assets as of June 30, 2002, down from 43.7 percent as of the prior year-end. Increases in such concentrations are not reflected in the formula component of the allowance due to the lag caused by using three-year historical losses in determining the loss factors. Therefore, consideration of increases in concentrations is a part of the determination of the unallocated component of the allowance. There were no significant changes in the Company’s loan concentrations during the six months ended June 30, 2002.

• Credit quality — Non-accrual loans and loans past due 90 days or more and still accruing increased at June 30, 2002 by $0.9 million, or 24.7 percent to $4.6 million from $3.7 million at December 31, 2001. Further, as the result of the Bank’s regular periodic loan review process, 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 Bank began financing business equipment leases during the fourth quarter of 2000. Any probable losses with respect to business equipment leases 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 an increase in the unallocated component of the allowance of $1.3 million reflects our best estimate of probable losses which have been incurred as of June 30, 2002.

Total deposits increased $75.2 million for the six month period ended June 30, 2002 to $963.5 million, or 8.5 percent from $888.4 million at December 31, 2001.

The following table presents a summary of deposits at June 30, 2002 and December 31, 2001.


	June 30,		December 31,		Increase
	2002		2001		(Decrease)

Demand deposits	$	385,672	$	342,112	$	43,560
Money market accounts		258,287		194,306		63,981
Savings accounts		58,180		53,998		4,182
Time deposits of $100,000 or more		113,649		155,650		(42,001	)
Time deposits of less than $100,000		66,821		77,644		(10,823	)
Checking with interest		80,987		64,667		16,320

	$	963,596	$	888,377	$	75,219

The increase in non interest bearing demand deposits reflects seasonal increases which have been consistent with activity experienced by the Company in prior years and the Company’s continuing emphasis on developing this funding source. The decrease in time deposits of $100,000 or more primarily resulted from a decrease in CDs from municipal customers which are acquired on a bid basis. The increase in checking with interest, money market accounts and savings accounts reflects new customer relationships and increased account activity.

Total borrowings increased $9.3 million to $362.0 million at June 30, 2002 from $352.7 million at December 31, 2001. This overall increase in borrowings resulted from management’s continuing efforts to effectively leverage the Bank’s capital position and to manage its interest rate risk.

Stockholders’ equity increased $14.0 million to $127.3 million at June 30, 2002 from $113.3 million at December 31, 2001. Increases in stockholders’ equity resulted from:

• Net income of $11.3 million for the six months ended June 30, 2002

• $1.9 million of stock options exercised

• $5.4 million unrealized gain on securities available for sale

• $0.3 million of treasury stock sales

Decreases in stockholders’ equity resulted from:

• $1.1 million of treasury stock purchases

• $3.8 million cash dividend paid on common stock

The Company’s and the Bank’s capital ratios at June 30, 2002 and December 31, 2001 are as follows:


								Minimum for
								Capital
		June 30,			December 31,			Adequacy
		2002			2001			Purposes

Leverage ratio:
	Company		8.1	%		7.9	%		4.0	%
	Bank		8.1			7.9			4.0
Tier 1 capital:
	Company		16.3			15.4			4.0
	Bank		16.3			15.3			4.0
Total capital:
	Company		17.5			16.5			8.0
	Bank		17.6			16.5			8.0

The Company and the Bank exceed all current regulatory capital requirements. In addition, the Bank was in the “well capitalized” category at June 30, 2002 and December 31, 2001.

The Bank’s liquid assets, at June 30, 2002, include cash and due from banks of $53.1 million and Federal funds sold of $113.6 million. Other sources of liquidity at June 30, 2002 include maturities and principal and interest payments on loans and securities, comprised of approximately $165.0 million of loans maturing in one year or less, and approximately $188.4 million of securities having contractual maturities or expected call dates or average lives of one year or less. In addition, at June 30, 2002, the Bank had an available borrowing capacity of approximately $120 million from the FHLB, $25 million under three federal funds purchased facilities, $110 million available under Retail CD Brokerage Agreements and had securities totaling approximately $59 million that could be sold under agreements to repurchase.

Forward-Looking Statements

The Company has made, and may continue to make, various forward-looking statements with respect to earnings, credit quality and other financial and business matters for periods subsequent to June 30, 2002. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements relating to subsequent periods increasingly are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements.

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

• competitive pressure on loan and deposit product pricing;

• other actions of competitors;

• changes in economic conditions;

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

• a loss of customer deposits;

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

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

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

Impact of Inflation and Changing Prices

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk at December 31, 2001 were previously reported in the Company’s Annual Report on Form 10K. There have been no material changes in the Company’s market risk exposure at June 30, 2002 compared to December 31, 2001.

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 continue to be classified as available for sale with no financial instruments entered into for trading purposes. The Company does not use derivative financial instruments extensively. However, two interest rate floor contracts with combined notional amount of $50 million were in place as of June 30, 2002 to manage the Company’s interest rate exposure. The Company did not enter into any new derivative financial instruments during the six months ended June 30, 2002.

The Company uses two methods to evaluate market risk to changes in interest rates, a “Static Gap” analysis and a simulation analysis of the impact of changes in interest rates on the Company’s net interest income. Both methods show the Company’s net interest income declining if interest rates gradually rise.

The Company’s “Static Gap” at June 30, 2002 was $64.5 million in the one year time frame.

The Company’s policy limit on interest rate risk has remained unchanged since December 31, 2001. 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, 2002.


		Percentage Change in
		Estimated Net Interest Income
Gradual Change in Interest Rates		from June 30, 2002			Policy Limit

	+200 basis points		1.5	%		(5.0	)%
	-200 basis points		(3.1)	%		(5.0	)%

The percentage change in estimated net interest income in the +200 and -200 basis points scenario is within the Company’s policy limits.

PART II — OTHER INFORMATION

Item 4. Submission of matters to a vote of security holders

The Annual Meeting of Shareholders of the Company was held on May 14, 2002 for the purpose of considering and voting upon the following matters:

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, Ronald F. Poe, John A. Pratt, Jr., Cecile D. Singer and Craig S. Thompson.

The results were as follows:


	For		Against		Abstentions		Broker Non-votes

William E. Griffin		4,306,563		811		—		—
Stephen R. Brown		4,306,563		811		—		—
James M. Coogan		4,306,563		811		—		—
Gregory F. Holcombe		4,306,565		809		—		—
James J. Landy		4,306,565		809		—		—
Angelo R. Martinelli		4,306,565		809		—		—
Ronald F. Poe		4,406,563		811		—		—
John A. Pratt Jr.		4,306,563		811		—		—
Cecile D. Singer		4,306,563		811		—		—
Craig S. Thompson		4,306,563		811		—		—

The proposal to adopt the 2002 Stock Option Plan was approved with 4,263,245 shares voting for, 11,844 shares voting against, 32,285 shares abstaining and 0 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits

99.1 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).

99.2 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).

(B) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the quarter ended June 30, 2002.

SIGNATURES

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

HUDSON VALLEY HOLDING CORP.

By: /s/ STEPHEN R. BROWN

Senior Executive Vice President, Chief Operating Officer, Chief Financial Officer

August 14, 2002

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	•	Increase of $32,000 (26.7%) and $55,000 (23.3%), respectively in stationery and printing costs due to higher business volume and an increase in office supplies necessary to support the new branches.

	•	Increase of $23,000 (12.0%) and $53,000 (14.4%), respectively in communications expense, due to added voice and data lines associated with the expansion of technology usage, additional branch offices and growth in customers and business activity.

	•	Increase of $13,000 (11.7%) and $19,000 (8.8%), respectively in courier service due to increased customer utilization of the service and increased service costs.

	•	Increase of $3,000 (3.4%) and $22,000 (13.2%), respectively in dues, meetings and seminars expense, due to increased participation in such events.

	•	Decrease of $29,000 (107.4%) and $93,000 (109.4%), respectively in other insurance expense resulting from reductions in the estimates of the net cost of certain life insurance programs, partially offset by higher banker’s professional insurance costs and automobile insurance costs.

	•	Decrease of $22,000 (30.6%) and $42,000 (35.3%), respectively in other loan costs due to recoveries of prior years loan collection expenses.

	•	Increase of $10,000 (5.1%) and $29,000 (7.4%), respectively in outside services costs due to increased data processing costs and higher correspondent bank service charges.


	•	Economic and business conditions — The decline in the economy during the 6 months ended June 30, 2002 as evidenced by increased unemployment and increased bankruptcy filings throughout the country and in the Company’s market area has, in management’s judgement, caused a slowdown in economic and business activity within the Company’s primary market, caused a softening in demand for certain commercial real estate, which has negatively impacted valuations of the Company’s primary


		collateral for loans, and has created greater uncertainty regarding the ability of borrowers to repay their loans. Therefore, consideration of events that trigger economic uncertainty is a part of the determination of the unallocated component of the allowance.

	•	Concentrations — Net loans increased $16.5 million to $616.9 million during the six months ended June 30, 2002 from $600.4 million as of December 31, 2001. This represented 41.9 percent of total assets as of June 30, 2002, down from 43.7 percent as of the prior year-end. Increases in such concentrations are not reflected in the formula component of the allowance due to the lag caused by using three-year historical losses in determining the loss factors. Therefore, consideration of increases in concentrations is a part of the determination of the unallocated component of the allowance. There were no significant changes in the Company’s loan concentrations during the six months ended June 30, 2002.

	•	Credit quality — Non-accrual loans and loans past due 90 days or more and still accruing increased at June 30, 2002 by $0.9 million, or 24.7 percent to $4.6 million from $3.7 million at December 31, 2001. Further, as the result of the Bank’s regular periodic loan review process, 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 Bank began financing business equipment leases during the fourth quarter of 2000. Any probable losses with respect to business equipment leases are not reflected in the formula component of the allowance for loan losses since there is no loss history.


	•	Net income of $11.3 million for the six months ended June 30, 2002

	•	$1.9 million of stock options exercised

	•	$5.4 million unrealized gain on securities available for sale

	•	$0.3 million of treasury stock sales


	•	$1.1 million of treasury stock purchases

	•	$3.8 million cash dividend paid on common stock


	•	competitive pressure on loan and deposit product pricing;

	•	other actions of competitors;

	•	changes in economic conditions;


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

	•	a loss of customer deposits;

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

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

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


99.1	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).

99.2	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).



	Senior Executive Vice President, Chief Operating Officer, Chief Financial Officer