HUDSON VALLEY HOLDING CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2004

Commission File No. 030525

HUDSON VALLEY HOLDING CORP.

(Exact name of registrant as specified in its charter)


NEW YORK		13-3148745
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21 Scarsdale Road, Yonkers, NY 10707

(Address of principal executive office with zip code)

914-961-6100

(Registrant’s telephone number including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes x No o

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


		Outstanding at
Class		August 2, 2004

Common stock, par value $0.20 per share		6,654,940

TABLE OF CONTENTS


PART 1 -- FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
	Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

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		12
	ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28
	ITEM 4 CONTROLS AND PROCEDURES		28

PART II — OTHER INFORMATION
	ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES		29
	ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K		30

SIGNATURES			31

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts



				Three Months Ended
				June 30,

				2004		2003

Interest Income:
	Loans, including fees			$	13,249	$	11,922
	Securities:
		Taxable			5,972		4,504
		Exempt from federal income taxes			2,238		1,991
	Federal funds sold				41		211
	Deposits in banks				3		5

			Total interest income		21,503		18,633

Interest Expense:
	Deposits				1,007		1,329
	Securities sold under repurchase agreements and other short-term borrowings				416		446
	Other borrowings				2,467		2,251

			Total interest expense		3,890		4,026

Net Interest Income					17,613		14,607
Provision for loan losses					214		27

Net interest income after provision for loan losses					17,399		14,580

Non Interest Income:
	Service charges				527		424
	Realized gain on security transactions, net				41		1,439
	Other income				165		231

			Total non interest income		733		2,094

Non Interest Expense:
	Salaries and employee benefits				4,894		4,842
	Occupancy				727		705
	Professional services				807		705
	Equipment				528		442
	Business development				400		354
	FDIC assessment				43		45
	Other operating expenses				1,201		1,194

			Total non interest expense		8,600		8,287

Income Before Income Taxes					9,532		8,387
Income Taxes					3,121		2,807

Net Income				$	6,411	$	5,580

Basic Earnings Per Common Share				$	0.97	$	0.86
Diluted Earnings Per Common Share				$	0.94	$	0.84

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts



				Six Months Ended
				June 30,

				2004		2003

Interest Income:
	Loans, including fees			$	25,897	$	23,762
	Securities:
		Taxable			11,884		9,696
		Exempt from federal income taxes			4,424		3,980
	Federal funds sold				59		378
	Deposits in banks				7		9

			Total interest income		42,271		37,825

Interest Expense:
	Deposits				1,964		2,658
	Securities sold under repurchase agreements and other short-term borrowings				942		881
	Other borrowings				4,718		4,480

			Total interest expense		7,624		8,019

Net Interest Income					34,647		29,806
Provision for loan losses					473		394

Net interest income after provision for loan losses					34,174		29,412

Non Interest Income:
	Service charges				1,014		845
	Realized gain on security transactions, net				41		5,406
	Other income				354		415

			Total non interest income		1,409		6,666

Non Interest Expense:
	Salaries and employee benefits				10,097		9,230
	Occupancy				1,459		1,416
	Professional services				1,551		1,587
	Equipment				1,044		913
	Business development				753		739
	FDIC assessment				86		92
	Other operating expenses				2,458		2,345

			Total non interest expense		17,448		16,322

Income Before Income Taxes					18,135		19,756
Income Taxes					5,762		6,538

Net Income				$	12,373	$	13,218

Basic Earnings Per Common Share				$	1.87	$	2.04
Diluted Earnings Per Common Share				$	1.83	$	1.99

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands



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

		2004			2003			2004			2003

Net Income		$	6,411		$	5,580		$	12,373		$	13,218
Other comprehensive income, net of tax:
	Unrealized holding gain (loss) on securities available for sale arising during the period		(22,178	)		1,319			(12,876	)		(1,345	)
	Income tax effect		8,507			(397	)		4,948			449

			(13,671	)		922			(7,928	)		(896	)

	Reclassification adjustment for net gain realized on securities available for sale		(41	)		(1,439	)		(41	)		(5,406	)
	Income tax effect		16			368			16			1,998

			(25	)		(1,071	)		(25	)		(3,408	)

	Unrealized holding loss on securities available for sale		(13,696	)		(149	)		(7,953	)		(4,304	)

	Minimum pension liability adjustment		2			(44	)		4			(88	)
	Income tax effect		(1	)		18			(2	)		35

			1			(26	)		2			(53	)

Other comprehensive loss			(13,695	)		(175	)		(7,951	)		(4,357	)

Comprehensive income (loss)		$	(7,284	)	$	5,405		$	4,422		$	8,861

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts


			June 30,			December 31,
			2004			2003

ASSETS
Cash and due from banks			$	51,645		$	42,558
Federal funds sold				24,500			6,000
Securities available for sale at estimated fair value (amortized cost of $847,430 in 2004 and $856,651 in 2003)				839,271			861,410
Securities held to maturity (estimated fair value of $73,131 in 2004)				73,332			—
Federal Home Loan Bank of New York (FHLB) Stock				13,307			11,157
Loans (net of allowance for loan losses of $11,866 in 2004 and $11,441 in 2003)				761,160			707,104
Accrued interest and other receivables				11,254			10,778
Premises and equipment, net				14,119			14,436
Deferred income taxes, net				10,942			5,760
Other assets				11,837			10,310

TOTAL ASSETS			$	1,811,367		$	1,669,513

LIABILITIES
Deposits:
	Non interest-bearing		$	561,094		$	484,956
	Interest-bearing			660,439			639,944

		Total deposits		1,221,533			1,124,900
Securities sold under repurchase agreements and other short-term borrowings				173,456			198,256
Other borrowings				258,132			188,144
Accrued interest and other liabilities				15,556			15,852

Total liabilities				1,668,677			1,527,152

STOCKHOLDERS’ EQUITY
Common stock, $0.20 par value; authorized 10,000,000 shares; outstanding 6,655,326 and 6,586,816 shares in 2004 and 2003, respectively				1,537			1,519
Additional paid-in capital				168,070			165,562
Retained earnings				8,035			1,304
Accumulated other comprehensive income (loss), net				(6,151	)		1,800
Treasury stock, at cost; 1,029,591 and 1,009,374 shares in 2004 and 2003, respectively				(28,801	)		(27,824	)

Total stockholders’ equity				142,690			142,361

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	1,811,367		$	1,669,513

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2004 and 2003

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, 2004			6,586,816		$	1,519	$	(27,824	)	$	165,562	$	1,304		$	1,800		$	142,361
	Net income												12,373						12,373
	Exercise of stock options		88,637			18					2,421								2,439
	Purchase of treasury stock		(28,357	)				(1,210	)										(1,210	)
	Sale of treasury stock		8,140					233			87								320
	Cash dividend												(5,642	)					(5,642	)
	Minimum pension liability adjustment															2			2
	Net unrealized loss on securities available for sale															(7,953	)		(7,953	)

Balance at June 30, 2004			6,655,236		$	1,537	$	(28,801	)	$	168,070	$	8,035		$	(6,151	)	$	142,690


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

Balance at January 1, 2003			5,887,600		$	1,366	$	(24,534	)	$	146,393	$	894		$	12,688		$	136,807
	Net income												13,218						13,218
	Exercise of stock options		73,857			14					2,019								2,033
	Purchase of treasury stock		(25,309	)				(998	)										(998	)
	Sale of treasury stock		3,167					83			46								129
	Cash dividend												(4,614	)					(4,614	)
	Minimum pension liability adjustment															(53	)		(53	)
	Net unrealized loss on securities available for sale															(4,304	)		(4,304	)

Balance at June 30, 2003			5,939,315		$	1,380	$	(25,449	)	$	148,458	$	9,498		$	8,331		$	142,218

See notes to consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands



		For the Six Months
		Ended June 30,

		2004			2003

Operating Activities:
Net income		$	12,373		$	13,218
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		473			394
	Depreciation		989			893
	Realized gain on security transactions, net		(41	)		(5,406	)
	Stock option expense		223			297
	Amortization of premiums on securities, net		2,454			1,382
	Deferred tax benefit		(220	)		(196	)
	Increase in deferred loan fees, net		324			229
(Increase) decrease in accrued interest and other receivables			(476	)		656
Increase in other assets			(1,527	)		(758	)
(Decrease) increase in accrued interest and other liabilities			(296	)		1,681
Other changes, net			6			17

Net cash provided by operating activities			14,282			12,407

Investing Activities:
Net increase in federal funds sold			(18,500	)		(73,807	)
(Increase) decrease in FHLB stock			(2,150	)		1,051
Proceeds from maturities and paydowns of securities available for sale			120,879			804,766
Proceeds from maturities and paydowns of securities held to maturity			549			—
Proceeds from sales of securities available for sale			—			129,747
Purchases of securities available for sale			(114,077	)		(947,251	)
Purchases of securities held to maturity			(73,874	)		—
Net increase in loans			(54,855	)		(12,877	)
Net purchases of premises and equipment			(672	)		(1,475	)

Net cash used in investing activities			(142,700	)		(99,846	)

Financing Activities:
Proceeds from issuance of common stock			2,216			1,736
Proceeds from sale of treasury stock			320			129
Net increase in deposits			96,633			83,754
Cash dividends paid			(5,642	)		(4,614	)
Repayment of other borrowings			(12	)		(10	)
Proceeds from other borrowings			70,000			—
Net increase (decrease) in securities sold under repurchase agreements and other short-term borrowings			(24,800	)		7,024
Purchase of treasury stock			(1,210	)		(998	)

Net cash provided by financing activities			137,505			87,021

Increase (decrease) in Cash and Due from Banks			9,087			(418	)
Cash and due from banks, beginning of period			42,558			48,350

Cash and due from banks, end of period		$	51,645		$	47,932

Supplemental Disclosures:
Interest paid		$	7,486		$	7,997
Income tax payments			5,515			6,135
Change in unrealized loss on securities available for sale — net of tax			(7,953	)		(4,304	)

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 15 branch offices in Westchester County, New York, 2 in Bronx County, New York and 2 in Manhattan, New York. The Bank opened its second Manhattan branch located at 233 Broadway, New York, New York on April 26, 2004. In addition, the Bank has two loan production offices, one located at 300 Westage Business Center Drive, Fishkill, New York (Dutchess County) and one located at 97-77 Queens Boulevard, Rego Park, New York. The Company and the Bank derive substantially all of their revenue and income from providing banking and related services to small and medium-sized businesses, professionals, municipalities, not-for-profit organizations and individuals located in Westchester County and, to a lesser but increasing extent, the Bronx and Manhattan.

The Company announced, on June 29, 2004, that the Bank had reached a definitive agreement, subject to regulatory approvals, to acquire A.R. Schmeidler & Co., Inc., a money management firm with more than $400 million in assets under management, located at 555 Fifth Avenue in Manhattan, New York. This acquisition is part of the Bank’s long-term strategic decision to diversify its revenue stream beyond the core business of taking deposits and making loans in its local communities. The acquisition will enable the Bank to expand its investment management capabilities and provide a valuable service to its customers.

2. Summary of Significant Accounting Policies

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 2004 and the results of its operations and comprehensive income for the three and six month periods ended June 30, 2004 and 2003, and cash flows and changes in stockholders’ equity for the six month periods ended June 30, 2004 and 2003. The results of operations for the three and six month periods ended June 30, 2004 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.

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

These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2003 and notes thereto.

Stock-Based Compensation — The Company has stock option plans that provide for the granting of options to directors, certain officers and to all eligible employees. SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. In December 2002, the Financial Accounting Standards

Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of SFAS No. 123 (“SFAS No. 148”).” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Prior to 2002, the Company accounted for stock-based employee compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost was recorded prior to 2002 as all employee options granted during those years had an exercise price equal to the market value of the underlying common stock on the dates of grant. Non-employee stock options were expensed as of the date of grant. Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123 prospectively for all stock options granted, modified or settled on or after January 1, 2002. Certain stock options under the Company’s plans vest over a five year period commencing one year from date of grant. Therefore, the cost related to stock-based employee compensation included in the determination of 2004 and 2003 net income is less than that which would have been recognized if the fair value method had been applied to all stock options granted since the original effective date of SFAS No. 123. Non-employee stock options are expensed as of the date of grant. The effect on net income and earnings per share for the three and six month periods ended June 30, 2004 and 2003 if the fair value based method had been applied to all outstanding and unvested awards in each period was not significant.

3. Earnings Per Share

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



			Three Months Ended				Six Months Ended
			June 30,				June 30

			2004		2003		2004		2003


			(000’s except share data)
Numerator:
	Net income available to common shareholders for basic and diluted earnings per share		$	6,411	$	5,580	$	12,373	$	13,218
Denominator:
	Denominator for basic earnings per common share — weighted average shares			6,637,078		6,546,563		6,622,488		6,491,929
	Effect of dilutive securities:
		Stock options		147,385		162,344		122,309		164,909

	Denominator for diluted earnings per common share — adjusted weighted average shares			6,784,463		6,708,907		6,744,797		6,656,838

Basic earnings per common share			$	0.97	$	0.86	$	1.87	$	2.04
Diluted earnings per common share			$	0.94	$	0.84	$	1.83	$	1.99

In December 2003, the Company declared a 10% stock dividend. Share and per share amounts for 2003 have been retroactively restated to reflect the issuance of the additional shares.

4. Benefit Plans

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



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

		2004		2003		2004		2003

Service cost		$	56	$	50	$	111	$	99
Interest cost			113		104		226		208
Amortization of transition obligation			23		23		45		45
Amortization of prior service cost			35		34		69		45
Amortization of net loss			16		56		77		80

	Net periodic pension cost	$	243	$	267	$	528	$	477

The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in it’s annual report on Form 10-K for the year ended December 31, 2003 that it expected to contribute $513 to the unfunded defined benefit plans during 2004. For the three and six months ended June, 2004, the Company contributed $128 and $257 to these plans. There has been no change to the estimate of total contributions for 2004 from the amount previously reported.

5. Recent Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, “Guarantors Accounting and Disclosure Requirement for Guarantees, including Indirect Guarantees of Indebtedness of Others,” (“FIN No. 45”). FIN No. 45 requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition, measurement and disclosure provisions do not encompass commercial letters of credit and other loan commitments because those instruments do not guarantee payment of a money obligation and do not provide for payment in the event of default by the counterparty. The adoption of FIN No. 45 by the Company on January 1, 2003 did not have a significant impact on its financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51” (“FIN No. 46”). FIN No. 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. It requires a business enterprise that has a controlling interest in a variable interest entity (as defined by FIN No. 46) to include the assets, liabilities, and results of the activities of the variable interest entity in the consolidated financial statements of the business enterprise. In October 2003, the FASB issued staff position FIN No. 46-6, “Deferral of Effective Date of FIN No. 46, Consolidation of Variable Interest Rate Entities” which deferred the effective date for applying the provisions of FIN No. 46 to periods ending after December 15, 2003. Subsequently, in December 2003, the FASB issued a revision of FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46, to address certain technical corrections and implementation issues that had arisen. Since the Company currently has no controlling or other interest in a variable interest entity, the adoption of FIN No. 46R by the Company on January 1, 2004 did not have any impact on its financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). The statement clarifies and amends financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). In general, SFAS No. 149 is effective for contracts entered into or

modified after June 30, 2003 and for derivative instruments designated as hedges after June 30, 2003. The adoption of SFAS No. 149 by the Company on July 1, 2003 did not have any impact on its financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity that have been presented either entirely as equity or as separate from the liabilities section and the equity section of the statement of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 by the Company did not have a significant impact on its financial position or results of operations.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132 revised”), that improves financial statement disclosures for defined benefits plans. SFAS No. 132 revised replaces existing disclosure requirements for pensions and other postretirement benefits but does not change the measurement of recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”. SFAS No. 132 revised retains the disclosure requirements contained in the original SFAS No. 132, but requires additional disclosures about the plan assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132 revised is effective for annual and interim periods with fiscal years ending after December 15, 2003. The Company has adopted the revised disclosure requirements.

In March 2004, the Emerging Issues Task Force (“EITF”) reached consensus on the guidance provided in EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides guidance that should be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impaired loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The recognition and measurement guidance is effective for reporting periods beginning after June 15, 2004. The Company believes that the adoption of the recognition and measurement guidance in EITF 03-1 will not have an effect on its consolidated financial statements given its current ability and intent to hold such securities until a forecasted recovery or maturity occurs. The application of EITF 03-1 in future reporting periods may cause the Company to recognize impairment losses in the Consolidated Statement of Income. Since fluctuations in the fair value of available-for-sale securities are already recorded in accumulated other comprehensive income, the application of EITF 03-1 is not expected to have a significant impact on stockholders’ equity.

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

This section presents discussion and analysis of the Company’s consolidated financial condition at June 30, 2004 and consolidated results of operations for the three and six month periods ended June 30, 2004 and June 30, 2003. 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 10-K.


	Overview of Management’s Discussion and Analysis

This overview is intended to highlight selected information included in this Quarterly Report on Form 10-Q. It does not contain sufficient information for a complete understanding of the Company’s financial condition and operating results, and, therefore, should be read in conjunction with the entire Quarterly Report on Form 10-Q and the 2003 Annual Report on Form 10-K.

The Company derives substantially all of its revenue from providing banking and related services to small and medium-sized businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and portions of New York City. The Company’s assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company’s basic strategy is to maintain and grow net interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. The Company’s primary market risk exposure is interest rate risk. Interest rate risk is the exposure of net interest income to changes in interest rates.

Net income for the three months ended June 30, 2004 was $6.4 million or $0.94 per diluted share, an increase of $0.8 million or 14.9 percent compared to $5.6 million or $0.84 per diluted share for the three months ended June 30, 2003. Net income for the six months ended June 30, 2004 was $12.4 million or $1.83 per diluted share, a decrease of $0.8 million or 6.4 percent compared to $13.2 million or $1.99 per diluted share for the six months ended June 30, 2003. The decrease in net income in the current year six month period compared to the prior year six month period was primarily due to $3.2 million of after tax realized gains on sales of securities available for sale, during the prior year six month period, conducted as part of the Company’s ongoing asset/liability management process, which reflected the Company’s efforts to effectively reposition it’s portfolios during a protracted period of declining interest rates. Excluding the aforementioned realized gains, net income for the three and six month periods ended June 30, 2004 increased $1.7 and $2.4 million compared to the same periods in the prior year. The Company achieved substantial growth in both of its core businesses, loans and deposits, during the six months ended June 30, 2004. In addition, the Company increased its long-term borrowings by $70 million during three months ended June 30, 2004 and invested the proceeds into mortgage-backed securities and obligations of state and political subdivisions in an effort to continue to effectively utilize its capital. Overall asset quality continued to be good as a result of the Company’s conservative underwriting and investment standards. The declining interest rate environment which began in 2001 and continued through the first half of 2003 stabilized during the remainder of 2003 and into the first half of 2004. As rates stabilized, the Company was able to redeploy short-term investments and maturing funds into longer term opportunities. As a result of the redeployment, core growth and additional leveraging, tax equivalent basis net interest income increased $3.1 million or 20.0 percent to $18.8 million for the three months ended June 30, 2004, compared to $15.7 million for the same period in the prior year, and increased $5.1 million or 15.9 percent to $37.0 million for the six months ended June 30, 2004, compared to $31.9 million for the same period in the prior year. The effect of adjustment to a tax equivalent basis was $1.2 million and $2.4 million for the three and six month periods ended June 30, 2004 and $1.1 million and $2.1 million for the three and six month periods ended June 30, 2003.

Non interest expense for the three months ended June 30, 2004 was $8.6 million, an increase of $0.3 million or 3.8 percent compared to $8.3 million for the three months ended June 30, 2003. Non interest expense for the six months ended June 30, 2004 was $17.4 million, an increase of $1.1 million or 6.9 percent compared to $16.3 million for the six months ended June 30, 2003. The increases reflect the Company’s continued investment in its branch network, technology and personnel to accommodate growth in both loans and deposits and the expansion of services and products available to new and existing customers.

The Company uses a simulation analysis to estimate the effect that specific movements in interest rates would have on net interest income. Excluding the effects of planned growth and anticipated new business, the simulation analysis at June 30, 2004 reflects minimal near term interest rate risk with the Company’s net interest income declining if rates fall.

The Company has established specific policies and operating procedures governing its liquidity levels to address future liquidity needs, including contingent sources of liquidity. The Company believes that its present liquidity and borrowing capacity is sufficient for its current business needs.

The Company and the Bank are subject to various regulatory capital guidelines. To be considered “well capitalized,” an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a Total capital ratio of 10 percent. Both the Company and the Bank exceeded all current regulatory capital requirements and were in the “well-capitalized” category at June 30, 2004. Management plans to conduct the affairs of the Company and the Bank so as to maintain a strong capital position in the future.

Critical Accounting Policies

Allowance for Loan Losses — The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Bank’s methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component, and an unallocated component. The specific component incorporates the results of measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Bank expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of the impaired loan is less than the related recorded amount, a specific valuation allowance is established within the allowance for loan losses or a writedown is charged against the allowance for loan losses if the impairment is considered to be permanent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans that are collectively evaluated for impairment such as the Bank’s portfolios of home equity loans, real estate mortgages, installment and other loans.

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

The appropriateness of the unallocated component is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Bank and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility of the loan portfolio. Senior management reviews

these conditions quarterly. Management’s evaluation of the loss related to these conditions is reflected in the unallocated component. Due to the inherent uncertainty in the process, management does not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits or portfolio segments.

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

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of June 30, 2004. There is no assurance that the Bank will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Bank’s service area, since the majority of the Bank’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments at the time of their examinations.

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

Securities — Securities are classified as either available for sale, representing securities the Bank may sell in the ordinary course of business, or as held to maturity, representing securities the Bank has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost (specific identification). There were no securities held to maturity at December 31, 2003. The amortization of premiums and accretion of discounts is determined by using the level yield method to the earlier of the call or maturity date. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method.

Results of Operations for the Three and Six Month Periods Ended June 30, 2004 and June 30, 2003

Summary of Results

The Company reported net income of $6.4 million for the three months ended June 30, 2004, an increase of $0.8 million or 14.9 percent compared to $5.6 million reported for the three months ended June 30, 2003. Net income for the six months ended June 30, 2004 was $12.4 million, a decrease of $0.8 million or 6.4 percent compared to $13.2 million for the six months ended June 30, 2003. Net income in the prior year three and six month periods included approximately $0.9 million and $3.2 million, respectively, of after tax realized gains on sales of securities available for sale, conducted as part of the Company’s ongoing asset/ liability management process, which reflected the Company’s efforts to effectively reposition its portfolios during a protracted period of declining interest rates. Excluding the aforementioned realized gains, net income for the three and six month periods ended June 30, 2004 increased $1.7 million and $2.4 million, respectively, compared to the prior year periods. These increases resulted from higher net interest income and higher non interest income, partially offset by higher non interest expense, higher income taxes and a higher provision for loan losses.

Diluted earnings per share were $0.94 for the three months ended June 30, 2004, an increase of $0.10 or 11.9 percent over the $0.84 reported for the three months ended June 30, 2003. Diluted earnings per share were $1.83 for the six months June 30, 2004, a decrease of $0.16 or 8.0 percent from the $1.99 reported for the six months ended June 30, 2003. Annualized returns on average equity and average assets, excluding the effects of unrealized gains and losses on securities available for sale, were 17.6 percent and 1.5 percent, respectively, for the three months ended June 30, 2004, compared to 17.1 percent and 1.5 percent, respectively, in the prior year period. Annualized returns on average equity and average assets, excluding the effects of unrealized gains and losses on securities available for sale, were 17.2 percent and 1.5 percent, respectively, for the six months ended June 30, 2004, compared to 20.6 percent and 1.8 percent, respectively, in the prior year period. Excluding realized gains on sales of securities available for sale, diluted earnings per share, annualized return on average equity and annualized return on average assets were $0.70, 14.5 percent and 1.2 percent, respectively, for the three months ended June 30, 2003, and $1.51, 15.6 percent and 1.3 percent, respectively, for the six months ended June 30, 2003.

Average Balances and Interest Rates

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the three month periods ended June 30, 2004 and June 30, 2003, 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 2004 and 2003.



				Three Months Ended June 30,


				2004							2003

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


				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	1,709	$	3		0.70	%	$	3,207	$	5		0.62	%
	Federal funds sold				16,305		41		1.01			74,713		211		1.13
	Securities:(1)
		Taxable			683,715		5,972		3.49			575,023		4,504		3.13
		Exempt from federal income taxes			194,870		3,443		7.07			168,158		3,063		7.29
	Loans, net(2)				756,656		13,249		7.00			651,756		11,922		7.32

			Total interest earning assets		1,653,255		22,708		5.49			1,472,857		19,705		5.35

Non interest earning assets:
	Cash and due from banks				41,320							37,497
	Other assets				42,646							33,053

			Total non interest earning assets		83,966							70,550

			Total assets	$	1,737,221						$	1,543,407

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	335,070	$	455		0.54	%	$	312,379	$	610		0.78	%
		Savings			69,501		31		0.18			63,374		62		0.39
		Time			167,266		466		1.11			169,726		584		1.38
		Checking with interest			103,748		55		0.21			96,075		73		0.30
	Securities sold under repurchase agreements and other short-term borrowings				173,115		416		0.96			147,249		446		1.21
	Other borrowings				214,288		2,467		4.61			188,163		2,251		4.79

			Total interest bearing liabilities		1,062,988		3,890		1.46			976,966		4,026		1.65

Non interest bearing liabilities:
	Demand deposits				512,388							425,778
	Other liabilities				16,272							9,946

			Total non interest bearing liabilities		528,660							435,724

Stockholders’ equity(1)					145,573							130,717

			Total liabilities and stockholders’ equity(1)	$	1,737,221						$	1,543,407

Net interest earnings						$	18,818						$	15,679

Net yield on interest earning assets									4.55	%						4.26	%


(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 $1,205 and $1,072 for the three month periods ended June 30, 2004 and June 30, 2003, respectively.

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the six month periods ended June 30, 2004 and June 30, 2003, 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 2004 and 2003.



				Six Months Ended June 30,


				2004							2003

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


				(000’s except percentages)
ASSETS
Interest earning assets:
	Deposits in banks			$	2,890	$	7		0.48	%	$	2,728	$	9		0.66	%
	Federal funds sold				11,890		59		0.99			66,255		378		1.14
	Securities:(1)
		Taxable			674,170		11,884		3.53			559,248		9,696		3.47
		Exempt from federal income taxes			191,322		6,806		7.11			167,527		6,123		7.31
	Loans, net(2)				740,845		25,897		6.99			648,104		23,762		7.33

			Total interest earning assets		1,621,117		44,653		5.51			1,443,862		39,968		5.54

Non interest earning assets:
	Cash and due from banks				39,991							38,144
	Other assets				40,673							32,650

			Total non interest earning assets		80,664							70,794

			Total assets	$	1,701,781						$	1,514,656

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
	Deposits:
		Money market		$	320,932	$	872		0.54	%	$	294,286	$	1,190		0.81	%
		Savings			69,031		62		0.18			62,884		123		0.39
		Time			164,900		920		1.12			170,153		1,205		1.42
		Checking with interest			103,830		110		0.21			90,012		140		0.31
	Securities sold under repurchase agreements and other short-term borrowings				190,509		942		0.99			146,181		881		1.21
	Other borrowings				201,214		4,718		4.69			188,166		4,480		4.76

			Total interest bearing liabilities		1,050,416		7,624		1.45			951,682		8,019		1.69

Non interest bearing liabilities:
	Demand deposits				493,353							425,230
	Other liabilities				14,487							9,633

			Total non interest bearing liabilities		507,840							434,863

Stockholders’ equity(1)					143,525							128,111

			Total liabilities and stockholders’ equity(1)	$	1,701,781						$	1,514,656

Net interest earnings						$	37,029						$	31,949

Net yield on interest earning assets									4.57	%						4.43	%


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

(2)	Includes loans classified as non-accrual

(3)	Effect of adjustment to a tax equivalent basis was $2,382 and $2,143 for the six month periods ended June 30, 2004 and June 30, 2003, respectively.

Interest Differential

The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three and six month periods ended June 30, 2004 and June 30, 2003.



				(000’s)


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

				Volume			Rate			Total(1)			Volume			Rate			Total

Interest Income:
	Deposits in banks			$	(2	)		—		$	(2	)	$	1		$	(3	)	$	(2	)
	Federal funds sold				(165	)	$	(5	)		(170	)		(310	)		(9	)		(319	)
	Securities:
		Taxable			851			617			1,468			1,992			196			2,188
		Exempt from federal income taxes(2)			487			(107	)		380			870			(187	)		683
	Loans, net				1,919			(592	)		1,327			3,400			(1,265	)		2,135

			Total interest income		3,090			(87	)		3,003			5,953			(1,268	)		4,685
Interest expense:
	Deposits:
		Money market			44			(199	)		(155	)		108			(426	)		(318	)
		Savings			6			(37	)		(31	)		12			(73	)		(61	)
		Time			(8	)		(110	)		(118	)		(37	)		(248	)		(285	)
		Checking with interest			6			(24	)		(18	)		21			(51	)		(30	)
	Securities sold under repurchase agreements and other short-term borrowings				78			(108	)		(30	)		267			(206	)		61
	Other borrowings				313			(97	)		216			311			(73	)		238

			Total interest expense		439			(575	)		(136	)		682			(1,077	)		(395	)

Increase in interest differential				$	2,651		$	488		$	3,139		$	5,271		$	(191	)	$	5,080


(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 2004 and 2003.

Net Interest Income

Net interest income, the difference between interest income and interest expense, is the most significant component of the Company’s consolidated earnings. For the three and six month periods ended June 30, 2004, net interest income, on a tax equivalent basis, increased $3.1 million or 20.0 percent to $18.8 million and $5.1 million or 15.9 percent to $37.0 million, respectively, compared to $15.7 million and $31.9 million in the prior year periods. Net interest income for the three months ended June 30, 2004 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $94.4 million or 19.0 percent to $590.3 million compared to $495.9 million in the prior year period, and an increase in the tax equivalent basis net interest margin to 4.55% in 2004 from 4.26% in the prior year period. Net interest income for the six months ended June 30, 2004 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $78.5 million or 16.0 percent to $570.7 million compared to $492.2 million in the prior year period, and an increase in the tax equivalent basis net interest margin to 4.57% in 2004 from 4.43% in the prior year period.

Interest income is determined by the volume of, and related rates earned on, interest earning assets. Interest income, on a tax equivalent basis, increased $3.0 million or 15.2 percent to $22.7 million and $4.7 million or 11.7 percent to $44.7 million, respectively, for the three and six month periods ended June 30, 2004, compared to $19.7 million and $40.0 million in the prior year periods. Average interest earning assets

increased $180.4 million or 12.2 percent to $1,653.3 million and $177.2 million or 12.3 percent to $1,621.1 million, respectively, for the three and six month periods ended June 30, 2004, compared to $1,472.9 million and $1,443.9 million in the prior year periods. Volume increases in taxable securities, tax-exempt securities and loans and slightly higher interest rates, partially offset by volume decreases in federal funds sold and interest bearing deposits, contributed to the higher interest income in the three months ended June 30, 2004 as compared to the same period in the prior year. Volume increases in interest bearing deposits, taxable securities, tax-exempt securities and loans, partially offset by volume decreases in federal funds sold and slightly lower interest rates, contributed to the higher interest income in the six months ended June 30, 2004 as compared to the same period in the prior year.

Average total securities, excluding average net unrealized gains on available for sale securities, increased $135.4 million or 18.2 percent to $878.6 million and $138.7 million or 19.1 percent to $865.5 million, respectively, for the three and six month periods ended June 30, 2004, compared to $743.2 million and $726.8 million for the same periods in the prior year. The increase in average total securities in the current year periods as compared to the prior year periods resulted from the gradual deployment, throughout the second half of 2003 and into the first quarter of 2004, of available free funds, deposit growth in excess of loan growth and increases in borrowings into fixed rate U.S. Agency bonds, fixed and variable rate mortgage-backed securities, and tax exempt securities as interest rates began to stabilize. Average tax equivalent basis yields on securities for the three and six month periods ended June 30, 2004 were 4.29 percent and 4.32 percent, respectively, compared to 4.07 percent and 4.35 percent in the prior year periods. As a result, tax equivalent basis interest income from securities was higher for the three months ended June 30, 2004, compared to the same period in the prior year, due to higher volume and higher interest rates and tax equivalent basis net interest income from securities was higher for the six months ended June 30, 2004, compared to the same period in the prior year primarily due to higher volume.

Average net loans increased $104.9 million or 16.1 percent to $756.7 million and $92.7 million or 14.3 percent to $740.8 million, respectively, for the three and six month periods ended June 30, 2004, compared to $651.8 million and $648.1 million for the same periods in the prior year. The increase in average net loans reflect the Company’s continuing emphasis on making new loans, expansion of loan production facilities and more effective market penetration. As a result of the current low interest rate environment, new loans were originated at generally lower interest rates resulting in a decrease in the average yield on loans to 7.00 percent and 6.99 percent, respectively, for the three and six month periods ended June 30, 2004 compared to 7.32 percent and 7.33 percent for the same periods in the prior year. As a result, interest income on loans was higher for the three and six month periods ended June 30, 2004, compared to the same periods in the prior year, due to higher volume, partially offset by 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 decreased $0.1 million or 3.4 percent to $3.9 million and $0.4 million or 4.9 percent to $7.6 million, respectively, for the three and six month periods ended June 30, 2004, compared to $4.0 million and $8.0 million for the same periods in the prior year. Average interest bearing liabilities increased $86.0 million or 8.8 percent to $1,063.0 million and $98.7 million or 10.4 percent to $1,050.4 million, respectively, for the three and six month periods ended June 30, 2004, compared to $977.0 million and $951.7 million for the same periods in the prior year. The increase in the average interest bearing liabilities resulted from volume increases in money market deposits, checking with interest, savings deposits and borrowed funds, partially offset by a slight volume decrease in time deposits. Deposits increased from new customers, existing customers and the continued growth resulting from the opening of new branches. The increase in average borrowed funds resulted from increases in short-term repurchase agreements with customers and brokers and a $70 million increase in long-term borrowings in May 2004 conducted as part of managements ongoing effort to effectively leverage the Company’s capital. 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. Average interest rates on deposits and borrowings were generally lower during the three and six month periods ended June 30, 2004, compared to the same periods in the prior year. As a result, interest expense was lower for the three and six month periods ended June 30, 2004, compared to the same periods in the prior year due to lower interest rates, partially offset by higher volume. Average non interest

bearing demand deposits increased $86.6 million or 20.3 percent to $512.4 million and $68.1 million or 16.0 percent to $493.3 million, respectively, for the three and six month periods ended June 30, 2004, compared to $425.8 million and $425.2 million for the same periods in the prior year. These deposits are an important component of the Company’s asset/liability management and have a direct impact on the determination of net interest income. Funds from increases in both interest bearing liabilities and non interest bearing demand deposits were invested in loans and securities.

The interest rate spread on a tax equivalent basis for the three and six month periods ended June 30, 2004 and 2003 is as follows:



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

		2004			2003			2004			2003

Average interest rate on:
	Total average interest earning assets		5.49	%		5.35	%		5.51	%		5.54	%
	Total average interest bearing liabilities		1.46			1.65			1.45			1.69
	Total interest rate spread		4.03			3.70			4.06			3.85

Interest rate spreads increased in the current year period, compared to the prior year period. The increase reflects the general stabilization of interest rates and the impact of full deployment of available funds into loans and investments. Management cannot predict what impact market conditions will have on its interest rate spread, and future compression in net interest rate spread may occur.

Provision for Loan Losses

The Bank recorded a provision for loan losses of $214,000 and $27,000 for the three month periods ended June 30, 2004 and 2003, and $473,000 and $394,000 for the six month periods ended June 30, 2004 and June 30, 2003. The provision for loan losses is charged to income to bring the Bank’s allowance for loan losses to a level deemed appropriate by management. See “Financial Condition” for further discussion.

Non Interest Income

Non interest income, excluding realized gains on sales of securities available for sale, for the three and six month periods ended June 30, 2004 increased 5.6 percent to $692,000 from $655,000 and 8.6 percent to $1,368,000 from $1,260,000, compared to the prior year periods.

Gains on calls or sales of securities available for sale were $41,000 and $1.4 million for the three month periods ended June 30, 2004 and 2003, and $41,000 and $5.4 million for the six month periods ended June 30, 2004 and 2003. See “Net Interest Income” for further discussion.

Service charges for the three and six month period ended June 30, 2004 increased 24.3 percent to $527,000 from $424,000 and 20.0 percent to $1,014,000 from $845,000 compared to the prior year periods. These increases reflect a higher level of fees charged and increased activity.

Other income for the three and six month periods ended June 30, 2004 decreased 28.6 percent to $165,000 from $231,000 and 14.7 percent to $354,000 from $415,000 compared to the prior year periods. Other income included an increase in the fair value of interest rate floor contracts and other non-recurring fee income for the three and six month periods ended June 30, 2003.

Non Interest Expense

Non interest expense for the three and six month periods ended June 30, 2004 increased 3.8 percent to $8.6 million from $8.3 million and 6.9 percent to $17.4 million from $16.3 million compared to the prior year periods. These increases reflect the overall growth of the Company and resulted from increases in salaries and employee benefits expense, occupancy expense, professional services expense, equipment expense, business development expense and other operating expenses partially offset by decreases in the FDIC assessment for the three month period ended June 30, 2004, as compared to the prior year period, and increases in salaries

and employee benefits expense, occupancy expense, equipment expense, business development expense and other operating expenses partially offset by decreases in professional services and the FDIC assessment for the six month period ended June 30, 2004, as compared to the prior year period.

Salaries and employee benefits, the largest component of non interest expense, for the three and six month periods ended June 30, 2004 was essentially unchanged and increased 9.4 percent to $10.1 million from $9.2 million, compared to prior year periods. The 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 six month period ended June 30, 2004 was essentially unchanged compared to prior year periods.

Professional services for the three month period ended June 30, 2004 increased 14.5 percent to $807,000 from $705,000 compared to the prior year period. The increase resulted from professionals engaged to assist in the implementation of the requirements of the Sarbanes-Oxley Act of 2002. Professional services for the six month period ended June 30, 2004 was essentially unchanged compared to prior year period.

Equipment expense for the three and six month period ended June 30, 2004 increased 19.5 percent to $528,000 from $442,000 and 14.3 percent to $1,044,000 from $913,000 compared to the prior year periods. The increases resulted from increased maintenance costs compared to the prior year periods.

Business development expense for the three month period ended June 30, 2004 increased 13.0 percent to $400,000 from $354,000 compared to the prior year period. The increase was due to increased promotion of bank products. Business development expense for the six month period ended June 30, 2004 was essentially unchanged compared to the prior year period.

The assessment of the Federal Deposit Insurance Corporation (FDIC) for the three and six month periods ended June 30, 2004 decreased 4.4 percent to $43,000 from $45,000 and 6.5 percent to $86,000 from $92,000 compared to the prior year periods. This decrease resulted from decreases in deposit assessment rate.

Significant changes, more than 5 percent, in other components of non interest expense for the three and six month periods ended June 30, 2004 compared to June 30, 2003, were due to the following:

• Increase of $40,000 (32.0%) and $90,000 (32.7%), respectively, in stationary and printing costs due increased costs of paper.

• Increase of $13,000 (56.5%) and $52,000 (113.0%), respectively, in other insurance expense resulting increases in banker’s professional insurance costs and automobile insurance costs partially offset by reductions in the estimates of the net cost of certain life insurance programs.

• Increase of $52,000 (22.8%) and $92,000 (20.6%), respectively, in communications expense due to added voice and data lines associated with the expansion of technology usage and growth in customer and business activity.

• Increase of $27,000 (18.5%) and $42,000 (14.1%), respectively, in courier costs due to increased branch and customer utilization of the service and increase service costs.

• Decrease of $64,000 (67.4%) and $62,000 (45.9%), respectively, in other loan costs due to decreased loan collection expenses.

• Increase of $64,000 (25.4%) and $107,000 (20.9%), respectively, in outside services costs due to increased data processing costs.

• Decrease of $53,000 (53.0%) and $106,000 (53.8%), respectively, in dues, meetings and seminar expense due to decreased participation in such events.


	Income Taxes

The effective combined income tax rate for the three and six month periods ended June 30, 2004 were 32.7 percent and 31.8 percent, respectively, as compared to 33.5 percent and 33.1 percent for the same periods

in the prior year. Current year periods effective rates were lower primarily due to the effects of a current year reduction in the mix of assets subject to Federal and New York State income taxes and tax related to gains on sales of securities available for sale in the prior year periods.

The New York State Department of Taxation and Finance has recently completed an audit of the Company’s New York State Corporation Tax Returns for the years 1996 through 1998 and has assessed additional tax, interest and penalties of approximately $1.5 million. The Company is contesting this assessment. The Company does not believe the resolution of this matter will have a significant impact on its financial position. Further, the New York State Department of Taxation and Finance has informed the Company that they will begin an audit, later in 2004, of tax years 1999 through 2001.

Financial Condition


	Assets

The Company had total assets of $1,811.4 million at June 30, 2004, an increase of $141.9 million or 8.5 percent from $1,669.5 million at December 31, 2003.


	Federal Funds Sold

Federal funds sold totaled $24.5 million at June 30, 2004, an increase of $18.5 million from $6.0 million at December 31, 2003. The increase resulted from timing differences in the redeployment of available funds into loans and longer term investments.


	Securities and FHLB Stock

The Company invests in stock of the Federal Home Loan Bank of New York (“FHLB”) and other securities which are rated with an investment grade by nationally recognized credit rating organizations and, on a limited basis, in non-rated securities. Non-rated securities totaled $7.6 million at June 30, 2004 comprised primarily of obligations of municipalities located within the Company’s market area.

Securities totaled $912.6 million at June 30, 2004, an increase of $51.2 million or 5.9 percent from $861.4 million at December 31, 2003. Securities classified as available for sale, which are recorded at estimated fair value, totaled $839.3 million at June 30, 2004, a decrease of $22.1 million or 2.6 percent from $861.4 million at December 31, 2003. Securities classified as held to maturity, which are recorded at amortized cost, totaled $73.3 million at June 30, 2004. There were no securities classified as held to maturity at December 31, 2003. The following table sets forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities at June 30, 2004:



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


		(000’s)
U.S. Treasury and government agencies		$	171,269	$	85	$	3,342	$	168,012
Mortgage-backed securities			434,124		1,047		9,264		425,907
Obligations of state and political subdivisions			192,271		5,490		2,419		195,342
Other debt securities			28,790		269		427		28,632

Total debt securities			826,454		6,891		15,452		817,893
Mutual funds and other equity securities			20,976		604		202		21,378

	Total	$	847,430	$	7,495	$	15,654	$	839,271



				Gross
				Unrealized
		Amortized						Estimated
Classified as Held to Maturity		Cost		Gains		Losses		Fair Value

Mortgage-backed securities		$	70,714	$	164	$	317	$	70,561
Obligations of states and political subdivisions			2,618		—		48		2,570

	Total	$	73,332	$	164	$	365	$	73,131

U.S. Treasury and government agency obligations classified as available for sale totaled $168.0 million at June 30, 2004, a decrease of $19.1 million or 10.2 percent from $187.1 million at December 31, 2003. The decrease was due to maturities and calls of $43.6 million and other decreases of $3.6 million partially offset by purchases of $28.1 million. The purchases and maturities included $8.1 million and $18.1 million, respectively, of short-term U.S. Treasury bills with maturities of less than 60 days at the time of purchase. These maturing funds were redeployed into higher yielding longer term investments and loans as part of the Company’s ongoing asset/ liability management. There were no U.S. Treasury or government agency obligations classified as held to maturity at December 31, 2003 or during the six months ended June 30, 2004.

Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $425.9 million at June 30, 2004, a decrease of $8.3 million or 1.9 percent from $434.2 million at December 31, 2003. The decrease was due to principal paydowns of $64.3 million and other decreases of $7.1 million partially offset by purchases of $63.1 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $70.6 million at June 30, 2004. There were no mortgage-backed securities classified as held to maturity at December 31, 2003. The increase was due to purchases of $71.3 million, partially offset by principal paydowns of $0.5 million and other changes of $0.2 million. The purchases consisted of fixed and variable rate mortgage-backed securities with average lives of five years or less at the time of purchase.

Obligations of state and political subdivisions classified as available for sale totaled $195.3 million at June 30, 2004, an increase of $4.6 million or 2.4 percent from $190.7 million at December 31, 2003. The increase was due to purchases of $21.9 million partially offset by maturities and calls of $12.8 million and other decreases of $4.5 million. Obligations of state and political subdivisions classified as held to maturity totaled $2.6 million at June 30, 2004. There were no obligations classified as held to maturity at December 31, 2003. The increase resulted from purchases of $2.6 million. The combined available for sale and held to maturity obligations at June 30, 2004 were comprised of approximately 65 percent of New York State political subdivisions and 35 percent of a variety of other states and their subdivisions all with diversified maturity dates. The Company considers such securities to have favorable tax equivalent yields.

Other debt securities, consisting primarily of corporate bonds and trust preferred securities, were essentially unchanged at June 30, 2004, compared to December 31, 2003. All other debt securities are classified as available for sale.

Mutual funds and other equity securities were also essentially unchanged at June 30, 2004, compared to December 31, 2003. All mutual funds and other equity securities are classified as available for sale.

The Bank, as a member of the FHLB, invests in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Bank must purchase additional shares of FHLB stock to obtain increases in such borrowings. Shares in excess of required amounts for outstanding borrowings are generally redeemed by the FHLB. The investment in FHLB stock totaled $13.3 million at June 30, 2004, compared to $11.2 million at December 31, 2003.

Except for securities of the U.S. Treasury and government agencies, there were no obligations of any single issuer which exceeded ten percent of stockholders’ equity at June 30, 2004 or December 31, 2003.


	Loans

Net loans totaled $761.2 million at June 30, 2004, an increase of $54.1 million or 7.6 percent from $707.1 million at December 31, 2003. The increase resulted principally from a $6.9 million increase in commercial and industrial loans, a $22.1 million increase in construction loans, a $28.0 million increase in residential real estate loans and a $3.2 million increase in loans to individuals, partially offset by a $5.0 million decrease in commercial real estate loans.

Major classifications of loans at June 30, 2004 and December 31, 2003 are as follows:


			June 30,			December 31,
			2004			2003


			(000’s)
Real Estate:
	Commercial		$	236,548		$	241,566
	Construction			82,951			60,892
	Residential			206,551			178,518
Commercial and industrial				225,067			218,130
Individuals				18,421			15,256
Lease financing				5,629			6,000

		Total		775,167			720,362
Deferred loan fees, net				(2,141	)		(1,817	)
Allowance for loan losses				(11,866	)		(11,441	)

		Loans, net	$	761,160		$	707,104

The following table summarizes the Company’s non-accrual loans, loans past due 90 days or more and still accruing as of June 30, 2004 and December 31, 2003:


	June 30,			December 31,
	2004			2003


	(000’s except percentages)
Non-accrual loans at period end	$	2,675		$	2,913
Loans past due 90 days or more and still accruing		4,325			1,431
Nonperforming assets to total assets at period end		0.39	%		0.17	%

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $142,000 and $188,000 for the three and six month periods ended June 30, 2004 and the year ended December 31, 2003, respectively. There was no interest income on nonperforming assets included in net income for the three and six month periods ended June 30, 2004 and the year ended December 31, 2003.

Allowance for Loan Losses

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

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


		June 30,		Change During			December 31,
		2004		Period			2003


		(000’s)
Specific component		$	1,879	$	347		$	1,532
Formula component			1,187		(122	)		1,309
Unallocated component			8,800		200			8,600

	Total allowance	$	11,866				$	11,441

Net change					425
Net chargeoffs					48

Provision amount				$	473

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

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

The determination of the unallocated component of the allowance for loan losses is the result of our consideration of other relevant factors affecting loan collectibility. Due to the inherent uncertainty in the process, we do not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. We periodically adjust the unallocated component to an amount that, when considered with the specific and formula components, represents our best estimate of probable losses in the loan portfolio as of each balance sheet date. The following factors affected the determination of the unallocated component for loan losses at June 30, 2004.

• Economic and business conditions — Continuation of the improvements in the overall economy which began during the second half of 2003, as evidenced by reduced unemployment and improvements in productivity and corporate profits, was less certain in the first half of 2004. Signs of increased inflation, such as the recent rise in energy costs, significant increases in local real estate taxes and the general expectation of near term rises in interest rates could have negative effects on the demand for real estate, the primary collateral for the Bank’s loans, and the ability of borrowers to repay their loans. Consideration of such events that trigger economic uncertainty is part of the determination of the unallocated component of the allowance.

• Concentration — Concentrations in construction loans increased to 10.7 percent of total loans at June 30, 2004 from 8.5 percent at December 31, 2003. These loans generally have a higher degree of risk than other types of loans which the Bank makes, since repayment of the loans is generally dependent on the borrowers ability to sell or lease completed properties in the case of construction loans. Increases in such concentrations, and the associated increase in risk, is not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in determining the loss factors. Therefore consideration of changes in concentrations is a part of the determination the unallocated component of the allowance.

• Credit quality — Delinquencies and nonperforming loans increased in the aggregate during the six months ended June 30, 2004. As a 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 introduced a low cost home equity product during the fourth quarter of 2002. Any probable losses with respect to this product are not reflected in the formula component of the allowance for loan losses since there is no loss history.

As a result of our detailed review process and consideration of the identified relevant factors, management determined that a $200,000 increase in the unallocated component of the allowance to $8.8 million reflects our best estimate of probable losses which have been incurred as of June 30, 2004.

Deposits

Deposits totaled $1,221.5 million at June 30, 2004, an increase of $96.6 million or 8.6 percent from $1,124.9 million at December 31, 2003. The following table presents a summary of deposits at June 30, 2004 and December 31, 2003:



	(000’s)

	June 30,		December 31,		Increase
	2004		2003		(Decrease)

Demand deposits	$	561,094	$	484,956	$	76,138
Money market accounts		318,430		297,332		21,098
Savings accounts		69,359		68,713		646
Time deposits of $100,000 or more		97,045		88,415		8,630
Time deposits of less than $100,000		65,012		70,247		(5,235	)
Checking with interest		110,593		115,237		(4,644	)

	$	1,221,533	$	1,124,900	$	96,633

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

Borrowings

Total borrowings were $431.6 million at June 30, 2004, an increase of $45.2 million or 11.7 percent from $386.4 million at December 31, 2003. The increase resulted from additions of $70 million of term FHLB borrowings and increases in short-term repurchase agreements, partially offset by a decrease in other short-term borrowings. Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital position and to manage interest rate risk.

Stockholders’ Equity

Stockholders’ equity totaled $142.7 million at June 30, 2004, an increase of $0.3 million or 0.2 percent from $142.4 million at December 31, 2003. Increases in stockholders’ equity resulted from net income of $12.4 million for the six months ended June 30, 2004, $2.4 million increases from stock options exercised and $0.3 million proceeds from treasury stock sales. Decreases in stockholders’ equity resulted from $5.6 million cash dividends paid on common stock, $1.2 million purchases of treasury stock and an $8.0 million decrease in accumulated comprehensive income, principally as a result of a decrease in the net unrealized value of securities available for sale.

The Company’s and the Bank’s capital ratios at June 30, 2004 and December 31, 2003 are as follows:


								Minimum for
								Capital
		June 30,			December 31,			Adequacy
		2004			2003			Purposes

Leverage ratio:
	Company		8.5	%		8.4	%		4.0	%
	Bank		8.4			8.4			4.0
Tier 1 capital:
	Company		15.4	%		15.6	%		4.0	%
	Bank		15.2			15.6			4.0
Total capital:
	Company		16.6	%		16.9	%		8.0	%
	Bank		16.4			16.9			8.0

The Company and the Bank exceed all current regulatory capital requirements. In addition, the Bank was in the “well capitalized” category at June 30, 2004 and December 31, 2003.

Liquidity

The Bank’s liquid assets, at June 30, 2004, include cash and due from banks of $51.6 million and Federal funds sold of $24.5 million. Other sources of liquidity at June 30, 2004 include maturities and principal payments on loans and securities, including approximately $125.6 million of loans, excluding installment loans to individuals, real estate loans other than construction loans and lease financing, maturing in one year or less, and approximately $35.2 million of securities, having contractual maturities, expected call dates or average lives of one year or less. In addition, at June 30, 2004, the Bank had available borrowing facilities of $200 million from a large New York based investment banking firm, $120 million from the FHLB, $30 million under three federal funds purchased lines and $110 million under Retail CD Brokerage Agreements. These facilities are subject to various terms and conditions including, in some cases, loan or securities collateral requirements. Based on the above facilities and additional collateral that could be sold under agreements to repurchase, the Bank’s available borrowing capacity was approximately $465 million at June 30, 2004.

Management considers the Company’s sources of liquidity to be adequate to meet any expected funding needs, to be responsive to changing interest rate markets and to fund the acquisition of A.R. Schmeidler & Co., Inc.

Forward-Looking Statements

The Company has made, and may continue to make, various forward-looking statements with respect to earnings, credit quality and other financial and business matters for periods subsequent to June 30, 2004. 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;

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

• 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, 2003 were previously reported in the Company’s Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at June 30, 2004 compared to December 31, 2003.

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 from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the six month period ended June 30, 2004. The Company had no derivative financial instruments in place at June 30, 2004.

The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at June 30, 2004 shows the Company’s net interest income increasing if rates rise and decreasing if rates fall.

The Company also prepares a static gap analysis which, at June 30, 2004, shows a negative cumulative static gap of $42.9 million in the one year time frame.

The Company’s policy limit on interest rate risk has remained unchanged since December 31, 2003. The following table illustrates the estimated exposure under a rising rate scenario and a declining rate scenario calculated as a percentage change in estimated net interest income assuming a gradual shift in interest rates for the next 12 month measurement period, beginning June 30, 2004.


		Percentage Change in
		Estimated Net Interest Income
Gradual Change in Interest Rates		from June 30, 2004			Policy Limit

	+200 basis points		0.8	%		(5.0	)%
	-100 basis points		(2.0	%)		(5.0	)%

As of June 30, 2004, a 100 basis point downward change in interest rates was substituted for the 200 basis downward scenario, as management believes that a 200 basis point downward change is not meaningful in light of current interest rate levels. The percentage change in estimated net interest income in the +200 and -100 basis points scenario is within the Company’s policy limits.

Item 4. Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2004. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2004, the Company’s disclosure controls and procedures are effective in bringing to their attention on a timely basis information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act. Also, during the quarter ended June 30, 2004, there have not been any significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 2.	*Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities*

The following table sets forth information with respect to purchases made by the Company of it’s common stock during the three months ended June 30, 2004.


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


April 2004(1)			12,620	$	42.23		12,620		—
May 2004(1)			264		37.25		264		—
May 2004(2)			700		50.00		—		74,736

	Total May 2004		964		46.51		264

June 2004(2)			3,482		47.80		2,482		72,254

Total			17,066	$	43.61		15,366		72,254

(1) In February 2004, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 75,000 of the Company’s shares at a price of $37.25 per share, or a price of $43.00 per share for transactions of at least 2,000 shares. This offer expired on May 25, 2004.

(2) In May 2004, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 75,000 of the Company’s shares at a price of $38.25 per share, or a price of $44.00 per share for transactions of at least 2,000 shares. This offer expires on August 31, 2004.

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

The Annual Meeting of Shareholders of the Company was held on May 20, 2004 for the purpose of considering and voting upon the following matter:

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

The results were as follows:


	For		Against		Abstentions

William E. Griffin		5,477,808		7,953		512
Stephen R. Brown		5,471,727		14,034		512
James M. Coogan		5,477,810		7,951		512
Gregory F. Holcombe		5,483,768		1,993		512
James J. Landy		5,471,659		14,102		512
Angelo R. Martinelli		5,485,759		2		512
William J. Mulrow		5,485,761		—		512
John A. Pratt Jr.		5,477,742		8,019		512
Cecile D. Singer		5,485,759		2		512
Craig S. Thompson		5,477,808		7,953		512

Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits

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

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

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

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

(B) Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K on April 28, 2004 in connection with its first quarter earnings release and the declaration of a cash dividend (Items 7 and 12).

The Registrant filed a Current Report on Form 8-K on May 25, 2004 in connection with a stock repurchase program (Items 5 and 7).

The Registrant filed a Current Report on Form 8-K on June 30, 2004 in connection with the signing of a definitive Acquisition Agreement with A.R. Schmeidler and Co, Inc (Items 5 and 7).

The Registrant filed a Current Report on Form 8-K on July 28, 2004 in connection with its six month earnings release and the declaration of a cash dividend (Items 7 and 12).

SIGNATURES

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

HUDSON VALLEY HOLDING CORP.

By: /s/ STEPHEN R. BROWN

Stephen R. Brown

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

August 6, 2004

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	•	Increase of $40,000 (32.0%) and $90,000 (32.7%), respectively, in stationary and printing costs due increased costs of paper.

	•	Increase of $13,000 (56.5%) and $52,000 (113.0%), respectively, in other insurance expense resulting increases in banker’s professional insurance costs and automobile insurance costs partially offset by reductions in the estimates of the net cost of certain life insurance programs.

	•	Increase of $52,000 (22.8%) and $92,000 (20.6%), respectively, in communications expense due to added voice and data lines associated with the expansion of technology usage and growth in customer and business activity.

	•	Increase of $27,000 (18.5%) and $42,000 (14.1%), respectively, in courier costs due to increased branch and customer utilization of the service and increase service costs.

	•	Decrease of $64,000 (67.4%) and $62,000 (45.9%), respectively, in other loan costs due to decreased loan collection expenses.

	•	Increase of $64,000 (25.4%) and $107,000 (20.9%), respectively, in outside services costs due to increased data processing costs.

	•	Decrease of $53,000 (53.0%) and $106,000 (53.8%), respectively, in dues, meetings and seminar expense due to decreased participation in such events.


	•	Economic and business conditions — Continuation of the improvements in the overall economy which began during the second half of 2003, as evidenced by reduced unemployment and improvements in productivity and corporate profits, was less certain in the first half of 2004. Signs of increased inflation, such as the recent rise in energy costs, significant increases in local real estate taxes and the general expectation of near term rises in interest rates could have negative effects on the demand for real estate, the primary collateral for the Bank’s loans, and the ability of borrowers to repay their loans. Consideration of such events that trigger economic uncertainty is part of the determination of the unallocated component of the allowance.

	•	Concentration — Concentrations in construction loans increased to 10.7 percent of total loans at June 30, 2004 from 8.5 percent at December 31, 2003. These loans generally have a higher degree of risk than other types of loans which the Bank makes, since repayment of the loans is generally dependent on the borrowers ability to sell or lease completed properties in the case of construction loans. Increases in such concentrations, and the associated increase in risk, is not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in determining the loss factors. Therefore consideration of changes in concentrations is a part of the determination the unallocated component of the allowance.

	•	Credit quality — Delinquencies and nonperforming loans increased in the aggregate during the six months ended June 30, 2004. As a 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 introduced a low cost home equity product during the fourth quarter of 2002. Any probable losses with respect to this product are not reflected in the formula component of the allowance for loan losses since there is no loss history.


	•	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;

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

	•	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.


(1)	In February 2004, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 75,000 of the Company’s shares at a price of $37.25 per share, or a price of $43.00 per share for transactions of at least 2,000 shares. This offer expired on May 25, 2004.

(2)	In May 2004, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 75,000 of the Company’s shares at a price of $38.25 per share, or a price of $44.00 per share for transactions of at least 2,000 shares. This offer expires on August 31, 2004.


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

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

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

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



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