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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  

1


 

 

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

2


 

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

3


 

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands
                                   
Three Months Ended Nine Months Ended
September 30, September 30,


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

4


 

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

5


 

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

6


 

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

7


 

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

8


 

$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.

9


 

      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.

10


 

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.

11


 

      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.

12


 

  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.

13


 

  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.

14


 

  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-

15


 

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.

16


 

  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.

17


 

      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.

18


 

      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.

19


 

      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.

20


 

      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.

21


 

  •  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

22


 

      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

23


 

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.

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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.

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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

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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
   

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I, Stephen R. Brown, certify that:

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

2.     Based on my knowledge, this 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/ Stephen R. Brown
Stephen R. Brown
Senior Executive Vice President, Chief
Operating Officer, Chief Financial Officer
   

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