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 September 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		November 1, 2002

Common stock, par value $0.20 per share		5,348,767

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		24
	ITEM 4 CONTROLS AND PROCEDURES		24

PART II — OTHER INFORMATION
	ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K		25

SIGNATURES			26

CERTIFICATIONS			27

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
				September 30,

				2002		2001

Interest Income:
	Loans, including fees			$	12,627	$	12,149
	Securities:
		Taxable			7,019		8,603
		Exempt from federal income taxes			1,964		1,816
		Federal funds sold			326		115
		Deposits in banks			10		—

			Total interest income		21,946		22,683

Interest Expense:
	Deposits				1,975		4,004
	Securities sold under repurchase agreements and other short-term borrowings				617		1,291
	Other borrowings				2,559		2,214

			Total interest expense		5,151		7,509

Net Interest Income					16,795		15,174
Provision for loan losses					813		1,404

Net interest income after provision for loan losses					15,982		13,770

Non Interest Income:
	Service charges				428		304
	Realized gain (loss) on security transactions, net				9		(226	)
	Other income				633		909

			Total non interest income		1,070		987

Non Interest Expense:
	Salaries and employee benefits				4,176		3,776
	Occupancy				629		579
	Professional services				780		725
	Equipment				464		424
	Business development				294		215
	FDIC assessment				39		41
	Other operating expenses				1,251		1,017

			Total non interest expense		7,633		6,777

Income Before Income Taxes					9,419		7,980
Income Taxes					3,026		2,858

Net Income				$	6,393	$	5,122

Basic Earnings Per Common Share				$	1.20	$	0.98
Diluted Earnings Per Common Share				$	1.17	$	0.95

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts



				Nine Months Ended
				September 30,

				2002		2001

Interest Income:
	Loans, including fees			$	36,644	$	36,186
	Securities:
		Taxable			21,270		26,470
		Exempt from Federal income taxes			5,796		5,409
		Federal funds sold			1,142		501
		Deposits in banks			29		—

			Total interest income		64,881		68,566

Interest Expense:
	Deposits				6,303		15,738
	Securities sold under repurchase agreements and other short-term borrowings				1,838		5,033
	Other borrowings				7,594		5,742

			Total interest expense		15,735		26,513

Net Interest Income					49,146		42,053
Provision for loan losses					3,519		2,464

Net interest income after provision for loan losses					45,627		39,589

Non Interest Income:
	Service charges				1,176		883
	Realized gain (loss) on sales of securities, net				48		(202	)
	Other income				1,293		1,376

			Total non interest income		2,517		2,057

Non Interest Expense:
	Salaries and employee benefits				12,279		10,974
	Occupancy				1,853		1,718
	Professional services				2,376		1,840
	Equipment				1,406		1,444
	Business development				977		746
	FDIC assessment				119		126
	Other operating expenses				3,367		3,267

			Total non interest expense		22,377		20,115

Income Before Income Taxes					25,767		21,531
Income Taxes					8,102		6,974

Net Income				$	17,665	$	14,557

Basic Earnings Per Common Share				$	3.33	$	2.79
Diluted Earnings Per Common Share				$	3.26	$	2.72

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Net Income		$	6,393		$	5,122		$	17,665		$	14,557
Other comprehensive income, net of tax:
	Unrealized holding gain on securities available for sale arising during the period		5,329			11,317			13,767			17,410
	Income tax effect		(2,099	)		(4,708	)		(5,067	)		(7,235	)

			3,230			6,609			8,700			10,175

	Reclassification adjustment for net (gain) loss realized on securities available for sale		(9	)		226			(48	)		202
	Income tax effect		4			(94	)		20			(85	)

			(5	)		132			(28	)		117

	Unrealized holding gain on securities available for sale		3,225			6,741			8,672			10,292

	Minimum pension liability adjustment		8			—			15			—
	Income tax effect		(3	)		—			(6	)		—

			5			—			9			—
Other comprehensive income			3,230			6,741			8,681			10,292

Comprehensive Income		$	9,623		$	11,863		$	26,346		$	24,849

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts


			September 30,			December 31,
			2002			2001

ASSETS
Cash and due from banks			$	48,324		$	29,821
Federal funds sold				85,900			76,300
Securities available for sale at estimated fair value (amortized cost of $682,257 in 2002 and $614,385 in 2001)				705,800			624,209
Federal Home Loan Bank of New York (FHLB) Stock				10,459			10,459
Loans (net of allowance for loan losses of $11,310 in 2002 and $8,018 in 2001)				624,240			600,377
Accrued interest and other receivables				9,511			8,976
Premises and equipment, net				12,746			12,129
Other real estate owned				1,878			2,021
Other assets				8,792			8,161

		TOTAL ASSETS	$	1,507,650		$	1,372,453

LIABILITIES
Deposits:
	Non interest-bearing		$	399,463		$	342,112
	Interest-bearing			599,977			546,265

		Total deposits		999,440			888,377
Securities sold under repurchase agreements and other short-term borrowings				142,785			143,529
Other borrowings				209,176			209,191
Deferred income taxes, net				6,180			3,958
Accrued interest and other liabilities				14,581			14,056

		TOTAL LIABILITIES		1,372,162			1,259,111

STOCKHOLDERS’ EQUITY
Common stock, $0.20 par value; authorized 10,000,000 shares; outstanding 5,345,007 and 5,260,158 shares in 2002 and 2001, respectively				1,255			1,232
Additional paid-in capital				127,962			125,057
Retained earnings				16,753			4,829
Accumulated other comprehensive income				13,696			5,015
Treasury stock, at cost				(24,178	)		(22,791	)

		Total stockholders’ equity		135,488			113,342

		TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,507,650		$	1,372,453

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 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												17,665					17,665
	Exercise of stock options		115,739			23					2,811							2,834
	Purchase of treasury stock		(39,742	)				(1,589	)									(1,589	)
	Sale of treasury stock		7,859					202			94							296
	Stock dividend		993
	Cash dividend												(5,741	)				(5,741	)
	Minimum pension liability adjustment															9		9
	Net unrealized gain on securities available for sale															8,672		8,672

Balance at September 30, 2002			5,345,007		$	1,255	$	(24,178	)	$	127,962	$	16,753		$	13,696	$	135,488


															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												14,557						14,557
	Exercise of stock options		93,229			18					2,426								2,444
	Purchase of treasury stock		(36,472	)				(1,363	)										(1,363	)
	Sale of treasury stock		12,282					307			154								461
	Cash dividend												(4,707	)					(4,707	)
	Net unrealized gain on securities available for sale															10,292			10,292

Balance at September 30, 2001			4,771,699		$	1,132	$	(22,409	)	$	107,405	$	19,129		$	9,772		$	115,029

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands



		For the Nine Months
		Ended September 30,

		2002			2001

Operating Activities:
Net income		$	17,665		$	14,557
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		3,519			2,464
	Depreciation		1,259			1,429
	Realized (gain) loss on security transactions, net		(48	)		202
	Amortization of premiums on securities, net		1,275			641
Deferred tax benefit			(2,831	)		(1,505	)
Increase in deferred loan fees, net			(108	)		(182	)
(Increase) decrease in accrued interest and other receivables			(535	)		3,890
Increase in other assets			(631	)		(602	)
Increase in accrued interest and other liabilities			525			1,304
Other changes, net			158			57

Net cash provided by operating activities			20,248			22,255

Investing Activities:
Net decrease (increase) in short-term investments			(9,600	)		4,000
Increase in FHLB stock			—			(499	)
Proceeds from maturities of securities available for sale			315,057			233,890
Proceeds from sales of securities available for sale			775			45,842
Purchases of securities available for sale			(384,931	)		(277,954	)
Decrease in receivable for securities sold			—			44,326
Decrease in payable for securities purchased			—			(14,913	)
Net increase in loans			(27,274	)		(80,971	)
Purchases of premises and equipment			(1,876	)		(274	)

Net cash used in investing activities			(107,849	)		(46,553	)

Financing Activities:
Proceeds from issuance of common stock			2,834			2,444
Proceeds from sale of treasury stock			296			461
Increase (decrease) in deposits			111,063			(12,852	)
Cash dividends paid			(5,741	)		(4,707	)
Repayment of other borrowings			(15	)		(13	)
Proceeds from other borrowings			—			91,250
Net decrease in securities sold under repurchase agreements and short-term borrowings			(744	)		(47,751	)
Purchase of treasury stock			(1,589	)		(1,363	)

Net cash provided by financing activities			106,104			27,469

Increase in Cash and Due from Banks			18,503			3,171
Cash and due from banks, beginning of period			29,821			30,420

Cash and due from banks, end of period		$	48,324		$	33,591

Supplemental Disclosures:
Interest paid		$	15,966		$	27,639
Income tax payments			10,271			6,660
Change in unrealized gain on securities available for sale — net of tax			8,672			10,292

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, New York, 2 in Bronx County, New York and one in Manhattan, New York. The branch in Manhattan, New York opened in May, 2002. The Bank opened a new branch office at 21 Scarsdale Road, Yonkers, New York, in July, 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 but increasing extent, the Bronx and Manhattan.

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 September 30, 2002 and December 31, 2001 and the results of its operations and comprehensive income for the three and nine month periods ended September 30, 2002 and 2001, and cash flows and changes in stockholders’ equity for the nine month periods ended September 30, 2002 and 2001. The results of operations for the three and nine month periods ended September 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 Standard (“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 $413,000 and

$775,000 included in other income for the three month periods ended September 30, 2002 and 2001, respectively and net gain of $801,000 and $921,000 for the nine months periods ended September 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				Nine Months Ended
			September 30,				September 30,

			2002		2001		2002		2001


			(000’s except share data)
Numerator:
	Net income available to common shareholders for basic and diluted earnings per share		$	6,393	$	5,122	$	17,665	$	14,557
Denominator:
	Denominator for basic earnings per common share — weighted average shares			5,336,771		5,242,346		5,305,757		5,212,298
	Effect of diluted securities:
		Stock options		113,410		137,151		118,763		132,892

Denominator for dilutive earnings per common share — adjusted weighted average shares				5,450,181		5,379,497		5,424,520		5,345,190

Basic earnings per common share			$	1.20	$	0.98	$	3.33	$	2.79
Diluted earnings per common share			$	1.17	$	0.95	$	3.26	$	2.72

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 adoption of the effective provisions of SFAS No. 145 did not have a significant impact on the Company’s financial position or results of operations and the Company does not believe that the adoption of the remaining provisions 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.

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions” (“SFAS No. 147”) which is effective October 1, 2002. SFAS No. 147 removes acquisitions of financial institutions from the scope of SFAS No. 72, “Accounting for Certain Acquisitions of Banking of Thrift Institutions” and FASB Interpretation No. 9, “Applying AFB Options No. 16 and 17” “When a Savings and Loan Association of Similar Association is Acquired in a Business Combination Accounting for by the Purchase Method” and requires that those transactions be accounted for in accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. In addition, SFAS No. 147 amends SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets”, to include in its scope long-term customer relationship intangible assets of financial institutions. The Company does not believe that the adoption of SFAS No. 147 on October 1, 2002 will have a significant effect on the Company’s 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 September 30, 2002 and consolidated results of operations for the three and nine month periods ended September 30, 2002 and September 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., HVB Employment Corp., HVB 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

Allowance for Loan Losses — The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Bank’s methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component, and an unallocated component. The specific component incorporates the results of measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the 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.

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

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

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

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 30, 2002. 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 Bank’s service area, since the majority of the Bank’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments at the time of their examinations.

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

Securities — Securities are classified as either available for sale, representing securities the Bank may sell in the ordinary course of business, or as held for investment, representing securities the Bank has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held for investment are stated at amortized cost (specific identification). There were no securities held for investment at September 30, 2002 and December 31, 2001. 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 Nine Month Periods Ended September 30, 2002 and

September 30, 2001

Summary of Results

The Company reported net income of $6.4 million and $17.7 million for the three and nine month periods ended September 30, 2002, respectively. This compares to $5.1 million and $14.6 million for the three and nine month periods ended September 30, 2001. The increase in net income in the three month period ended September 30, 2002 compared to the same period in the prior year was primarily due to higher net interest income, higher non interest income and a lower provision for loan losses offset by higher non interest expense. The increase in net income in the nine month period ended September 30, 2002 compared to the same period in the prior year was primarily due to higher net interest income and higher non interest income offset by higher non interest expense and a higher provision for loan losses.

Diluted earnings per share were $1.17 and $3.26 for the three and nine month periods ended September 30, 2002, respectively. This compares to $0.95 and $2.72 of diluted earnings per share for the three and nine month periods ended September 30, 2001. On this basis, diluted earnings per share increased $0.22 or 23.2 percent and $0.54 or 19.9 percent for the three and nine month periods ended September 30, 2002. Annualized return on average equity (excluding the effects of unrealized gains and losses on securities available for sale) was 22.3 percent and 20.6 percent for the three and nine month periods ended September 30, 2002, compared to 20.8 percent and 20.1 percent for the three and nine month periods ended September 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 nine month periods ended September 30, 2002 was 1.79 percent and 1.66 percent, respectively. This compares to 1.56 percent and 1.50 percent for the three and nine month periods ended September 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 September 30, 2002 and September 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 September 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			$	3,701	$	10		1.08%		—		—		—
	Federal funds sold				76,741		326		1.70	$	12,891	$	115		3.57	%
	Securities:(1)
		Taxable			519,050		7,019		5.41		531,393		8,603		6.48
		Exempt from federal income taxes			162,826		3,022		7.42		148,773		2,794		7.51
		Loans, net(2)			626,897		12,627		8.06		575,269		12,149		8.45

			Total interest earning assets		1,389,215		23,004		6.62		1,268,326		23,661		7.46

Non interest earning assets:
	Cash and due from banks				35,578						31,256
	Other assets				31,754						26,588

			Total non interest earning assets		67,332						57,844

			Total assets	$	1,456,547					$	1,326,170

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	260,165	$	914		1.41%	$	156,103	$	977		2.50	%
		Savings			59,180		96		0.65		53,654		143		1.07
		Time			171,413		817		1.91		305,855		2,737		3.58
		Checking with interest			81,060		148		0.73		61,032		147		0.96
		Securities sold under repurchase agreements and other short-term borrowings			152,075		617		1.62		154,102		1,291		3.35
		Other borrowings			209,152		2,559		4.89		172,024		2,214		5.15

			Total interest bearing liabilities		933,045		5,151		2.21		902,770		7,509		3.33

Non interest bearing liabilities:
	Demand deposits				391,376						304,814
	Other liabilities				14,162						14,867

			Total non interest bearing liabilities		405,538						319,681

Stockholders’ equity(1)					117,964						103,719

			Total liabilities and stockholders’ equity(1)	$	1,456,547					$	1,326,170

Net interest earnings						$	17,853					$	16,152

Net yield on interest earning assets									5.14%						5.09	%


(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 $1,058 and $978 for the three months ended September 30, 2002 and September 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 nine month periods ended September 30, 2002 and September 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.



				Nine Months Ended September 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			$	3,200	$	29		1.21	%		—		—		—
	Federal funds sold				87,218		1,142		1.75		$	15,010	$	501		4.45	%
	Securities:(1)
		Taxable			489,546		21,270		5.79			530,421		26,470		6.65
		Exempt from Federal income taxes			160,172		8,917		7,42			146,757		8,322		7.56
		Loans, net(2)			614,354		36,644		7.95			547,651		36,186		8.81

			Total interest earning assets		1,354,490		68,002		6.69			1,239,839		71,479		7.69

Non interest earning assets:
	Cash and due from banks				34,165							31,178
	Other assets				31,969							34,723

			Total non interest earning assets		66,134							65,901

			Total assets	$	1,420,624						$	1,305,740

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	244,035	$	2,762		1.51	%	$	149,925	$	3,039		2.70	%
		Savings			56,805		269		0.63			52,747		529		1.34
		Time			188,795		2,845		2.01			339,831		11,637		4.57
		Checking with interest			75,225		427		0.76			60,681		533		1.17
		Securities sold under repurchase agreements and other short-term borrowings			153,352		1,838		1.60			155,774		5,033		4.31
		Other borrowings			209,174		7,594		4.84			146,950		5,742		5.21

			Total interest bearing liabilities		927,386		15,735		2.26			905,908		26,513		3.90
Non interest bearing liabilities:
	Demand deposits				364,567							286,040
	Other liabilities				14,475							14,970

			Total non interest bearing liabilities		379,042							301,010

Stockholder’s equity(1)					114,196							98,822

			Total liabilities and stockholders’ equity(1)	$	1,420,624						$	1,305,740

Net interest earnings						$	52,267						$	44,966

Net yield on interest earning assets									5.15	%						4.84	%


(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 $3,121 and $2,913 for the nine months ended September 30, 2002 and September 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 nine month periods ended September 30, 2002 and September 30, 2001.



				Nine 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				—		$	29		$	29		$	10			—		$	10
	Federal funds sold			$	2,410			(1,769	)		641			271		$	(60	)		211
	Securities:
		Taxable			(2,040	)		(3,160	)		(5,200	)		(104	)		(1,480	)		(1,584	)
		Exempt from federal income taxes(2)			761			(166	)		595			261			(33	)		228
		Loans, net			4,407			(3,949	)		458			1,040			(562	)		478

			Total interest income		5,538			(9,015	)		(3,477	)		1,478			(2,135	)		(657	)

Interest expense:
	Deposits:
		Money market		$	1,908		$	(2,185	)	$	(277	)	$	366		$	(429	)	$	(63	)
		Savings			41			(301	)		(260	)		9			(56	)		(47	)
		Time			(5,172	)		(3,620	)		(8,792	)		(641	)		(1,279	)		(1,920	)
		Checking with interest			128			(234	)		(106	)		37			(36	)		1
		Securities sold under repurchase agreements and other short-term borrowings			(78	)		(3,117	)		(3,195	)		(8	)		(666	)		(674	)
		Other borrowings			2,431			(579	)		1,852			454			(109	)		345

			Total interest expense		(742	)		(10,036	)		(10,778	)		217			(2,575	)		(2,358	)

Increase in interest differential				$	6,280		$	1,021		$	7,301		$	1,261		$	440		$	1,701


(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 nine month periods ended September 30, 2002, net interest income, on a tax equivalent basis, increased 10.5 percent to $17.9 million from $16.2 million, and 16.2 percent to $52.3 million from $45.0 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 nine month periods ended September 30, 2002 to $456.2 million from $365.6 million, and to $427.1 million from $333.9 million compared to the prior year periods. In addition, the net interest margin on a tax equivalent basis for the three and nine month periods ended September 30, 2002 remained at 5.1 percent and increased to 5.2 percent from 4.8 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 nine month periods ended September 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 nine month periods ended September 30, 2002, average interest earning assets increased 9.5 percent to $1,389.2 million from $1,268.3 million and 9.2 percent to $1,354.5 mil-

lion from $1,239.8 million, compared to the prior year periods. Interest income, on a tax equivalent basis, for the three and nine month periods ended September 30, 2002, decreased 3.0 percent to $23.0 million from $23.7 million, and 4.9 percent to $68.0 million from $71.5 million compared to the prior year periods.

Average total securities, excluding average unrealized gains on available for sale securities, increased $1.7 million, or 0.3 percent to $681.9 million and decreased $27.5 million, or 4.1 percent to $649.7 million for the three and nine month periods ended September 30, 2002 compared to the prior year periods. The change 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. These funds were reinvested in short-term Federal Funds and, beginning in July 2002, in short-term U.S. Treasury and Agency securities which are included in available for sale securities. This resulted in the slight increase in average total securities for the three month period ended September 30, 2002 and a decrease for the nine month period ended September 30, 2002 compared to the prior year periods. Interest income on securities decreased for the three month period ended September 30, 2002 compared to 2001 due to slightly higher volume offset by significantly lower aggregate rates. Interest income on securities decreased for the nine month period ended September 30, 2002 compared to 2001 due to lower volume and significantly lower aggregate rates.

Average net loans increased $51.6 million, or 9.0 percent to $626.9 million and increased by $66.7 million, or 12.2 percent to $614.4 million for the three and nine month periods ended September 30, 2002 compared to the prior year periods. These increases in average net loans reflect management’s continuing emphasis on making new loans and more effective market penetration. Interest income on net loans increased slightly in the current year periods as compared to the prior year due to increased volume significantly 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 nine month periods ended September 30, 2002 decreased 31.4 percent to $5.2 million from $7.5 million, and 40.7 percent to $15.7 million from $26.5 million compared to the prior year periods. For the three and nine month periods ended September 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 periods. 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 average other borrowed funds which were acquired to manage interest rate risk. These funds were invested in loans and securities. For the three and nine month periods ended September 30, 2002, the average amount of non interest bearing demand deposits increased 28.4 percent to $391.4 million from $304.8 million and 27.5 percent to $364.6 million from $286.4 million compared to the prior year periods. These deposits are an important component of the Company’s liability management and have a direct impact on the determination of net interest income. Interest rates paid on average deposits and borrowings decreased in the current year periods 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 nine month periods ended September 30, 2002 and 2001 is as follows:



		Three Month						Nine Month
		Period Ended						Period Ended
		September 30,						September 30,

		2002			2001			2002			2001

Average interest rate on:
	Total average interest earning assets		6.62	%		7.46	%		6.69	%		7.69	%
	Total average interest bearing liabilities		2.21			3.33			2.26			3.90
	Total interest rate spread		4.41			4.13			4.43			3.79

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 $813,000 and $1,404,000 for the three month periods ended September 30, 2002 and 2001, respectively, and $3,519,000 and $2,464,000 for the nine month periods ended September 30, 2002 and September 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 nine month periods ended September 30, 2002 increased 8.4 percent to $1,070,000 from $987,000, and 22.4 percent to $2.5 million from $2.1 million compared to the prior year periods.

Service charges for the three and nine month periods ended September 30, 2002 increased 40.8 percent to $428,000 from $304,000 and 33.2 percent to $1,176,000 from $883,000, compared to the prior year periods. This increase reflects a higher level of fees charged and increased activity.

Other income for the three and nine month periods ended September 30, 2002 decreased 30.4 percent to $633,000 from $909,000 and 6.0 percent to $1,293,000 from $1,376,000, compared to the prior year periods. Other income included an increase in the fair value of interest rate floor contracts of $413,000 and $775,000 for the three month periods ended September 30, 2002 and 2001, respectively, and an increase of $801,000 and $921,000 for the nine month periods ended September 30, 2002 and 2001, respectively.

Non Interest Expense

Non interest expense for the three and nine month periods ended September 30, 2002 increased 12.6 percent to $7.6 million from $6.8 million and 11.2 percent to $22.4 million from $20.1 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 nine month periods ended September 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 nine month periods ended September 30, 2002 increased 10.6 percent to $4.2 million from $3.8 million and 11.9 percent to $12.3 million from $11.0 million, compared to prior year periods. This increase resulted from additional staff to accommodate the growth in loans and deposits, the opening of three 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 nine month periods ended September 30, 2002 increased 8.6 percent to $629,000 from $579,000 and 7.9 percent to $1.9 million from $1.7 million, compared to prior year periods. This increase reflected the opening of new branch facilities as well as rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.

Professional services for the three and nine month periods ended September 30, 2002 increased 7.6 percent to $780,000 from $725,000, and 29.1 percent to $2.4 million from $1.8 million, compared to prior year periods. The increase resulted from 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 nine month periods ended September 30, 2002 increased 9.4 percent to $464,000 from $424,000 but decreased 2.6 percent to $1,406,000 from $1,444,000 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 which opened in the first and second quarters of 2002.

Business development expense for the three and nine month periods ended September 30, 2002 increased 36.7 percent to $294,000 from $215,000 and 31.0 percent to $977,000 from $746,000 compared to prior year periods. This increase was the result of increased promotion of the Company’s services and promotion of the three new branch offices which opened in 2002.

The assessment of the Federal Deposit Insurance Corporation (FDIC) for the three and nine month periods ended September 30, 2002 decreased 4.9 percent to $39,000 from $41,000 and 5.9 percent to $119,000 from $126,000, compared to the prior year periods. This decrease resulted from a decrease in the Bank’s FDIC assessment rate.

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

• Increase of $57,000 (50.0%) and $112,000 (32.0%), 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 $36,000 (18.1%) and $89,000 (15.7%), 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 $34,000 (29.6%) and $54,000 (16.4%), respectively in courier service due to increased customer utilization of the service and increased service costs.

• Decrease of $13,000 (14.6%) and an increase of $8,000 (3.2%), respectively in dues, meetings and seminars expense, due to increased participation in such events in the first and second quarters of 2002.

• No change and a decrease of $93,000 (83.4%), 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 $15,000 (20.8%) and $57,000 (29.6%), respectively in other loan costs due to recoveries of prior years loan collection expenses.

• Increase of $14,000 (6.8%) and $42,000 (7.0%), 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 nine month periods ended September 30, 2002 increased 5.9 percent to $3.0 million from $2.9 million and 15.7 percent to $8.1 million from $7.0 million, compared to the prior year periods. The effective tax rate was 31.4 percent for the current year periods compared to 32.4 percent in the prior year periods. The decrease in the effective tax rate reflects a reduction in state income tax rates.

Financial Condition

At September 30, 2002, the Company had total assets of $1,507.7 million, an increase of $135.2 million, or 9.9 percent, from $1,372.5 million at December 31, 2001.

Federal funds sold totaled $85.9 million and $76.3 million at September 30, 2002 and December 31, 2001, respectively. The increase resulted from an excess of growth in deposits over increases in the loan and securities 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 $705.8 million and $624.2 million at September 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 September 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 September 30, 2002:



				Gross Unrealized
		Amortized						Estimated
		Cost		Gains		Losses		Fair Value


		(000’s)
U.S. Treasury and government agencies		$	184,576	$	1,353	$	192	$	185,737
Mortgage-backed securities			330,118		10,729		17		340,830
Obligations of state and political subdivisions			162,885		10,964		2		173,847
Other debt securities			3,708		275		1		3,982

Total debt securities			681,287		23,321		212		704,396
Equity securities			970		434		—		1,404

	Total	$	682,257	$	23,755	$	212	$	705,800

During the nine month period ended September 30, 2002, U.S. Treasury and government agency obligations increased $78.9 million to $185.7 million due to purchases of $238.0 million and other increases of $0.8 million, offset by maturities and calls of $159.9 million. The purchases were made based upon the attractive yield available in the market. Purchases and maturities included $200.0 million and $100.0 million, respectively, of short-term U.S. Treasury and government agency obligations with remaining maturities of less than 60 days at the time of purchase. Management has increased the amount of short-term investments as part of it’s ongoing asset/ liability management strategy during the current low interest rate environment.

Mortgage-backed securities, including collateralized mortgage obligations (CMO’s), decreased $11.9 million during the period to $340.8 million at September 30, 2002. The decrease was due to purchases of $125.7 million and other increases of $4.3 million offset by principal paydowns and redemptions of $141.1 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 $14.3 million during the period to $173.8 million due to purchases of $20.9 million and other increases of $7.1 million, offset by maturities of $13.7 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 $5.7 million at September 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 September 30, 2002.

Total loans were $636.9 million at September 30, 2002 compared to $609.9 million at December 31, 2001, reflecting a $27.0 million increase. This increase resulted principally from a $9.4 million increase in commercial real estate loans, a $34.9 million increase in commercial and industrial loans, a $0.5 million increase in loans to individuals offset by a $11.1 million decrease in residential real estate loans and a decrease of $6.7 million in lease financing.

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


			September 30,			December 31,
			2002			2001


			(000’s)
Real Estate:
	Commercial		$	220,184		$	210,840
	Construction			52,575			52,496
	Residential			163,752			174,859
Commercial and industrial				175,510			140,573
Individuals				12,328			11,824
Lease financing				12,573			19,282

		Total		636,922			609,874
Deferred loan fees				(1,372	)		(1,479	)
Allowance for loan losses				(11,310	)		(8,018	)

		Loans, net	$	624,240		$	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 $10.0 million of such leases at September 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 September 30, 2002 and December 31, 2001:


		September 30,			December 31,
		2002			2001


		(000’s except percentages)
Non accrual loans at period end		$	2,032		$	3,523
OREO at period end			1,878			2,021

	Total nonperforming assets	$	3,910		$	5,544
Loans past due 90 days or more and still accruing			2,983			137
Nonperforming assets to total assets at period end			0.26	%		0.40	%

The increase in loans past due 90 days or more and still accruing as of September 30, 2002 as compared to the prior year end resulted primarily from increased delinquency in construction and home equity loans. These delinquent loans are secured by real estate.

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $35,000, $116,000 and $511,000 for the three and nine month periods ended September 30, 2002 and the year ended December 31, 2001, respectively. There was no interest income on nonperforming assets included in net income for the nine month period ended September 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:


		September 30,		Change During			December 31,
		2002		Period			2001


		(000’s)
Specific component		$	1,234	$	427		$	807
Formula component			1,176		665			511
Unallocated component			8,900		2,200			6,700

	Total allowance	$	11,310				$	8,018

Net change					3,292
Net chargeoffs					(227	)

Provision amount				$	3,519

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

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

The determination of the unallocated component of the allowance for loan losses is the result of our consideration of other relevant factors affecting loan collectibility. Due to the inherent uncertainty in the process, we do not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. We periodically adjust the unallocated component to an amount that, when considered with the specific and formula components, represents our best estimate of probable losses in the loan portfolio as of each balance sheet date. The following factors affected the determination of the unallocated component for loan losses at September 30, 2002.

• Economic and business conditions — The decline in the economy during the nine month period ended September 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.

• Concentration — Concentration in commercial and industrial loans increased to 27.6 percent of the portfolio from 23.1 percent at the prior year end, an increase of $34.9 million. These types of loans generally have a higher degree of risk than other types of loans which the Bank makes since repayment of the loans is largely dependent on the borrowers’ ability to successfully operate their businesses. An increase in such concentration, and the associated increase in risk, is 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 concentration is a part of the determination of the unallocated component of the allowance.

• Credit quality — Non-accrual loans and loans past due 90 days or more and still accruing increased at September 30, 2002 by $1.3 million, or 35.1 percent to $5.0 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 $2.2 million reflects our best estimate of probable losses which have been incurred as of September 30, 2002.

Total deposits increased $111.0 million for the nine month period ended September 30, 2002 to $999.4 million, or 12.5 percent from $888.4 million at December 31, 2001.

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


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

Demand deposits	$	399,463	$	342,112		57,351
Money market accounts		293,668		194,306		99,362
Savings accounts		59,442		53,998		5,444
Time deposits of $100,000 or more		101,606		155,650		(54,044	)
Time deposits of less than $100,000		69,594		77,644		(8,050	)
Checking with interest		75,667		64,667		11,000

	$	999,440	$	888,377	$	111,063

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 decrease in time deposits of less than $100,000 resulted from the effects of the current low interest rate environment, and is partially offset by increases in money market and other interest bearing demand deposits. The increase in checking with interest, money market accounts and savings accounts reflects new customer relationships and increased account activity.

Total borrowings remained essentially unchanged at $352.0 million at September 30, 2002 compared to $352.7 million at December 31, 2001. Borrowings are utilized as part of management’s continuing efforts to effectively leverage the Bank’s capital position and to manage its interest rate risk.

Stockholders’ equity increased $22.2 million to $135.5 million at September 30, 2002 from $113.3 million at December 31, 2001. Increases in stockholders’ equity resulted from:

• Net income of $17.7 million for the nine month period ended September 30, 2002

• $2.8 million of stock options exercised

• $8.7 million unrealized gain on securities available for sale

• $0.3 million of treasury stock sales

Decreases in stockholders’ equity resulted from:

• $1.6 million of treasury stock purchases

• $5.7 million cash dividends paid on common stock

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


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

Leverage ratio:
	Company		8.5	%		7.9	%		4.0	%
	Bank		8.5			7.9			4.0
Tier 1 capital:
	Company		16.9			15.4			4.0
	Bank		16.9			15.3			4.0
Total capital:
	Company		18.2			16.5			8.0
	Bank		18.2			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 September 30, 2002 and December 31, 2001.

The Bank’s liquid assets, at September 30, 2002, include cash and due from banks of $48.3 million and Federal funds sold of $85.9 million. Other sources of liquidity at September 30, 2002 include maturities and principal and interest payments on loans and securities, including approximately $144.0 million of loans maturing in one year or less, and approximately $365.8 million of securities having contractual maturities, expected call dates or average lives of one year or less. In addition, at September 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 $73 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 September 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 September 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 a combined notional amount of $50 million were in place as of September 30, 2002 as part of the Company’s management of its interest rate risk. The Company did not enter into any new derivative financial instruments during the nine month period ended September 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 September 30, 2002 was $159.3 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 September 30, 2002.


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

	+200 basis points		2.9	%		(5.0	)%
	-200 basis points		(4.1	)%		(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.

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

Hudson Valley Holding Corp. evaluated the design and operation of its disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision and with the participation of management, including Hudson Valley Holding Corp.’s principal executive officer and principal financial officer within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q. The principal executive officer and principal financial officer have concluded, based on their review, that Hudson Valley Holding Corp.’s disclosure controls and procedures, as defined at Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c), are effective to ensure that information required to be disclosed by Hudson Valley Holding Corp. in reports that it files under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. No significant changes were made to Hudson Valley Holding Corp.’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II — OTHER INFORMATION

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 September 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

November 14, 2002

CERTIFICATIONS

I, James J. Landy, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002


/s/ James J. Landy James J. Landy President and Chief Executive Officer

I, Stephen R. Brown, certify that:

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 14, 2002


/s/ Stephen R. Brown Stephen R. Brown Senior Executive Vice President, Chief Operating Officer, Chief Financial Officer


	•	Increase of $57,000 (50.0%) and $112,000 (32.0%), 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 $36,000 (18.1%) and $89,000 (15.7%), 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 $34,000 (29.6%) and $54,000 (16.4%), respectively in courier service due to increased customer utilization of the service and increased service costs.

	•	Decrease of $13,000 (14.6%) and an increase of $8,000 (3.2%), respectively in dues, meetings and seminars expense, due to increased participation in such events in the first and second quarters of 2002.

	•	No change and a decrease of $93,000 (83.4%), 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 $15,000 (20.8%) and $57,000 (29.6%), respectively in other loan costs due to recoveries of prior years loan collection expenses.

	•	Increase of $14,000 (6.8%) and $42,000 (7.0%), 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 nine month period ended September 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.

	•	Concentration — Concentration in commercial and industrial loans increased to 27.6 percent of the portfolio from 23.1 percent at the prior year end, an increase of $34.9 million. These types of loans generally have a higher degree of risk than other types of loans which the Bank makes since repayment of the loans is largely dependent on the borrowers’ ability to successfully operate their businesses. An increase in such concentration, and the associated increase in risk, is 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 concentration is a part of the determination of the unallocated component of the allowance.

	•	Credit quality — Non-accrual loans and loans past due 90 days or more and still accruing increased at September 30, 2002 by $1.3 million, or 35.1 percent to $5.0 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 $17.7 million for the nine month period ended September 30, 2002

	•	$2.8 million of stock options exercised

	•	$8.7 million unrealized gain on securities available for sale

	•	$0.3 million of treasury stock sales


	•	$1.6 million of treasury stock purchases

	•	$5.7 million cash dividends 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