Hudson Valley Holding 10Q 2011 Q1 Quarterly report

UNITED STATES

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 Quarterly Period Ended March 31, 2011

Commission FileNo. 001-34453

HUDSON VALLEY HOLDING CORP.

(Exact name of registrant as specified in its charter)


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

21 Scarsdale Road, Yonkers, NY 10707

(Address of principal executive office with zip code)

914-961-6100

(Registrant’s telephone number including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No o

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


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

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


		Outstanding at
		May 2,
Class		2011
Common stock, par value $0.20 per share		17,689,049

FORM 10-Q

TABLE OF CONTENTS


	Page
	No.

PART I — FINANCIAL INFORMATION
ITEM 1 CONDENSED FINANCIAL STATEMENTS		2
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		30
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		50
ITEM 4 CONTROLS AND PROCEDURES		51

PART II — OTHER INFORMATION
ITEM 1A RISK FACTORS		52
ITEM 6 EXHIBITS		52

SIGNATURES		53
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART 1 — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts


	Three Months Ended
	March 31,
	2011			2010

Interest Income:
Loans, including fees	$	26,332		$	27,564
Securities:
Taxable		2,950			3,687
Exempt from Federal income taxes		1,161			1,710
Federal funds sold		26			42
Deposits in banks		164			93

Total interest income		30,633			33,096

Interest Expense:
Deposits		2,274			3,335
Securities sold under repurchase agreements and othershort-term borrowings		47			77
Other borrowings		844			1,498

Total interest expense		3,165			4,910

Net Interest Income		27,468			28,186
Provision for loan losses		5,451			5,582

Net interest income after provision for loan losses		22,017			22,604

Non Interest Income:
Service charges		2,040			1,803
Investment advisory fees		2,606			2,225
Recognized impairment charge on securities available for sale (includes $773 and $1,757 of total losses in 2011 and 2010, respectively, less $612 of losses and $15 of gains on securities available for sale, recognized in other comprehensive income in 2011 and 2010, respectively,)		(161	)		(1,772	)
Realized gain on securities available for sale, net		—			68
Gains (losses) on sale of other real estate owned		127			(65	)
Other income		607			534

Total non interest income		5,219			2,793

Non Interest Expense:
Salaries and employee benefits		10,818			9,872
Occupancy		2,345			2,185
Professional services		1,453			1,315
Equipment		1,010			966
Business development		506			562
FDIC assessment		1,111			1,088
Other operating expenses		3,207			2,466

Total non interest expense		20,450			18,454

Income Before Income Taxes		6,786			6,943
Income Taxes		1,962			2,088

Net Income	$	4,824		$	4,855

Basic Earnings Per Common Share	$	0.27		$	0.28
Diluted Earnings Per Common Share	$	0.27		$	0.27

See notes to condensed consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands


	Three Months Ended
	March 31,
	2011			2010

Net Income	$	4,824		$	4,855

Other comprehensive gain (loss), net of tax:
Net change in unrealized (losses) gains:
Other-than-temporarily impaired securities available for sale:
Total (losses) gains		(773	)		(1,757	)
Losses recognized in earnings		161			1,772

(Losses) gains recognized in comprehensive income		(612	)		15
Income tax effect		251			(6	)

Unrealized holding (losses) gains on other-than-temporarily impaired securities available for sale, net of tax		(361	)		9

Securities available for sale not other-than-temporarily impaired:
(Losses) gains arising during the year		(2,533	)		3,214
Income tax effect		989			(1,266	)

		(1,544	)		1,948

Gains recognized in earnings		—			(68	)
Income tax effect		—			27

		—			(41	)

Unrealized holding (losses) gains on securities available for sale not other-than-temporarily- impaired , net of tax		(1,544	)		1,907

Unrealized holding (loss) gain on securities, net		(1,905	)		1,916

Minimum pension liability adjustment		81			102
Income tax effect		(32	)		(41	)

		49			61

Other comprehensive (loss) income		(1,856	)		1,977

Comprehensive Income	$	2,968		$	6,832

See notes to condensed consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts


	March 31,			December 31,
	2011			2010

ASSETS
Cash and due from banks	$	41,934		$	25,876
Interest earning deposits in banks		198,173			258,280
Federal funds sold		39,511			72,071
Securities available for sale at estimated fair value (amortized cost of $433,991 in 2011 and $440,792 in 2010)		433,721			443,667
Securities held to maturity at amortized cost (estimated fair value of $16,258 in 2011 and $17,272 in 2010)		15,252			16,267
Federal Home Loan Bank of New York (FHLB) Stock		5,378			7,010
Nonperforming loans held for sale		5,506			7,811
Loans (net of allowance for loan losses of $40,287 in 2011 and $38,949 in 2010)		1,774,679			1,689,187
Accrued interest and other receivables		15,158			16,396
Premises and equipment, net		27,233			28,611
Other real estate owned		4,810			11,028
Deferred income taxes, net		26,898			25,043
Bank owned life insurance		26,502			25,976
Goodwill		23,842			23,842
Other intangible assets		2,248			2,454
Other assets		14,428			15,514

TOTAL ASSETS	$	2,655,273		$	2,669,033

LIABILITIES
Deposits:
Non interest-bearing	$	814,755		$	756,917
Interest-bearing		1,428,858			1,477,495

Total deposits		2,243,613			2,234,412
Securities sold under repurchase agreements and other short-term borrowings		46,480			36,594
Other borrowings		51,492			87,751
Accrued interest and other liabilities		23,034			20,359

TOTAL LIABILITIES		2,364,619			2,379,116

STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value; authorized 15,000,000; no shares outstanding in 2011 and 2010, respectively		—			—
Common stock, $0.20 par value; authorized 25,000,000 shares; outstanding 17,686,063 and 17,665,908 shares in 2011 and 2010, respectively		3,797			3,793
Additional paid-in capital		347,166			346,750
Retained earnings (deficit)		(1,816	)		(3,989	)
Accumulated other comprehensive income (loss), net		(929	)		927
Treasury stock, at cost; 1,299,414 shares in both 2011 and 2010		(57,564	)		(57,564	)

Total stockholders’ equity		290,654			289,917

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,655,273		$	2,669,033

See notes to condensed consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended March 31, 2011 and 2010

Dollars in thousands, except share amounts


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

Balance at January 1, 2011		17,665,908	$	3,793	$	(57,564	)	$	346,750	$	(3,989	)	$	927		$	289,917
Net income											4,824						4,824
Stock option expense and exercises of stock options, net of tax		20,155		4					416								420
Cash dividends ($0.15 per share)											(2,651	)					(2,651	)
Accrued benefit liability adjustment														49			49
Net unrealized gain on securities available for sale:
Not other-than-temporarily impaired														(1,544	)		(1,544	)
Other-than-temporarily impaired (includes $773 of total losses less $161 of losses recognized in earnings, net of $251 tax)														(361	)		(361	)

Balance at March 31, 2011		17,686,063	$	3,797	$	(57,564	)	$	347,166	$	(1,816	)	$	(929	)	$	290,654


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

Balance at January 1, 2010		16,016,738	$	3,463	$	(57,564	)	$	346,297	$	2,294		$	(812	)	$	293,678
Net income											4,855						4,855
Stock option expense and exercises of stock options, net of tax		9,054		2					176								178
Cash dividends ($0.19 per share)											(3,686	)					(3,686	)
Accrued benefit liability adjustment														61			61
Net unrealized gain on securities available for sale:
Not other-than-temporarily impaired														1,907			1,907
Other-than-temporarily impaired (includes $1,757 of total losses less $1,772 of losses recognized in earnings, net of $(6) tax)														9			9

Balance at March 31, 2010		16,025,792	$	3,465	$	(57,564	)	$	346,473	$	3,463		$	1,165		$	297,002

See notes to condensed consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands


	For the Three Months
	Ended March 31,
	2011			2010

Operating Activities:
Net income	$	4,824		$	4,855
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,451			5,582
Depreciation and amortization		1,001			988
Recognized impairment charge on securities available for sale		161			1,772
Realized gain on security transactions, net		—			(68	)
(Gain) loss on other real estate owned		(127	)		65
Amortization of premiums on securities, net		666			383
Increase in cash value of bank owned life insurance		(267	)		(348	)
Amortization of intangible assets		206			206
Stock option expense and related tax benefits		47			50
Deferred tax benefit		(647	)		(1,688	)
Decrease (increase) in deferred loan fees, net		72			(560	)
Decrease (increase) in accrued interest and other receivables		1,238			(696	)
Decrease (increase) in other assets		1,086			(1,363	)
Excess tax benefits from share-based payment arrangements		(7	)		—
Decrease in accrued interest and other liabilities		2,675			4,301
Decrease in accrued benefit liability adjustment		49			63

Net cash provided by operating activities		16,428			13,542

Investing Activities:
Net decrease (increase) in Federal funds sold		32,560			(19,755	)
Decrease in FHLB stock		1,632			—
Proceeds from maturities and paydowns of securities available for sale		52,516			40,636
Proceeds from maturities and paydowns of securities held to maturity		1,015			1,658
Proceeds from sales of securities available for sale		—			4,942
Purchases of securities available for sale		(46,510	)		(58,657	)
Net (increase) decrease in loans		(88,710	)		11,642
Proceeds from sale of other real estate owned		6,345			2,209
Net dispositions (purchases) of premises and equipment		377			(245	)
Premiums paid on bank owned life insurance		(259	)		(51	)

Net cash used in investing activities		(41,034	)		(17,621	)

Financing Activities:
Net increase in deposits		9,201			112,323
Net decrease in securities sold under repurchase agreements and short-term borrowings		9,886			18,701
Repayment of other borrowings		(36,259	)		(6	)
Proceeds from exercise of stock options		373			128
Excess tax benefits from share-based payment arrangements		7			—
Cash dividends paid		(2,651	)		(3,686	)

Net cash (used in) provided by financing activities		(19,443	)		127,460

(Decrease) increase in Cash and Due from Banks and interest earning deposits		(44,049	)		123,381
Cash and due from banks and interest earning deposits, beginning of period		284,156			166,980

Cash and due from banks and interest earning deposits, end of period	$	240,107		$	290,361

Supplemental Disclosures:
Interest paid	$	3,537		$	5,087
Income tax payments		60			1,378
Transfer from loans held for sale back to loan portfolio		2,305			—

See notes to condensed consolidated financial statements

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in thousands, except per share and share amounts

1. Description of Operations

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

The Company provides financial services through its wholly-owned subsidiary, Hudson Valley Bank, N.A. (“HVB” or “the Bank”), a national banking association established in 1972, with operational headquarters in Westchester County, New York. The Bank has 18 branch offices in Westchester County, New York, 10 in New York City, New York, 1 in Rockland County, New York, 5 in Fairfield County, Connecticut and 1 in New Haven County, Connecticut.

The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a Manhattan, New York based money management firm.

We derive substantially all of our revenue and income from providing banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals within our market area, primarily Westchester County and Rockland County, New York, portions of New York City, Fairfield County and New Haven County, Connecticut.

Our principal executive offices are located at 21 Scarsdale Road, Yonkers, New York 10707.

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

2. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at March 31, 2011 and December 31, 2010 and the results of its operations, comprehensive income, cash flows and changes in stockholders’ equity for the three month periods ended March 31, 2011 and 2010. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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.

Estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of the fair value of securities available for sale, the determination ofother-than-temporary impairment of investments and the carrying amounts of goodwill and deferred tax assets. In

connection with the determination of the allowance for loan losses, management utilizes the work of professional appraisers for significant properties.

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

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2010 and notes thereto.

Securities —Securities are classified as either available for sale, representing securities the Company may sell in the ordinary course of business, or as held to maturity, representing securities that the Company has determined that it is more likely than not that it would not be required to sell prior to maturity or recovery of cost. 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. Interest income includes amortization of purchase premium and accretion of purchase discount. The amortization of premiums and accretion of discounts is determined by using the level yield method. 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. The Company regularly reviews declines in the fair value of securities below their costs for purposes of determining whether such declines areother-than-temporary in nature. In estimatingother-than-temporary impairment (“OTTI”), management considers adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer. The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Loans —Loans are reported at their outstanding principal balance, net of the allowance for loan losses, and deferred loan origination fees and costs. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the related loan or commitment as an adjustment to yield, or taken directly into income when the related loan is sold or commitment expires.

Allowance for Loan Losses —The Company maintains an allowance for loan losses to absorb probable losses incurred in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company’s methodology for assessing the appropriateness of the allowance consists of a specific component for identified problem loans, and a formula component which addresses historical loan loss experience together with other relevant risk factors affecting the portfolio. This methodology applies to all loan classes.

Risk characteristics of the Company’s portfolio classes include the following:

Commercial Real Estate Loans — In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loan. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan, or a decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignmentsand/or the guarantee of the operating company when the property is owner occupied. These types of loans may involve greater risks than other types of lending, because payments on such loans are often dependent upon the successful operation of the business involved, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions affecting the borrowers’ business.

Construction Loans — Construction loans are short-term loans (generally up to 18 months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Most non-residential construction loans require pre-approved permanent financing or pre-leasing by the company or another bank providing the permanent financing.

The Company funds construction of single family homes and commercial real estate, when no contract of sale exists, based upon the experience of the builder, the financial strength of the owner, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by a decline in general economic conditions.

Residential Real Estate Loans — Various loans secured by residential real estate properties are offered by the Company, including 1-4 family residential mortgages, multi-family residential loans and a variety of home equity line of credit products. Repayment of such loans may be negatively impacted should the borrower default, should there be a significant decline in the value of the property securing the loan or should there be a decline in general economic conditions.

Commercial and Industrial Loans — The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance the purchase of inventory, new or used equipment or other short or long-term working capital purposes. These loans are generally secured by corporate assets, often with real estate as secondary collateral, but are also offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source. Commercial loans are often larger and may involve greater risks than other types of loans offered by the Company. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.

Lease Financing and Other Loans — The Company originates lease financing transactions which are primarily conducted with businesses, professionals andnot-for-profit organizations and provide financing principally for office equipment, telephone systems, computer systems, energy saving improvements and other special use equipment. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business. The Company also offers installment loans and reserve lines of credit to individuals. Repayment of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an emphasis on originating these types of loans.

The specific component incorporates the results of measuring impaired loans as required by the “Receivables” topic of the FASB Accounting Standards Codification. 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 principaland/or interest are not collectible in accordance with the loan’s contractual terms. In addition, a loan which has been renegotiated with a borrower experiencing financial difficulties for which the terms of the loan have been modified with a concession that the Company would not otherwise have granted are considered troubled debt restructurings and are also recognized as impaired. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Company expects to collect all amounts due including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. If the fair value of an impaired loan is less than the related recorded amount, a specific valuation component is established within the allowance for loan losses or, if the impairment is considered to be permanent, a partial charge-off is recorded against the allowance for loan losses. Individual measurement of impairment does not apply to large groups of smaller balance homogenous loans that are collectively evaluated for impairment such as portions of the Company’s portfolios of home equity loans, real estate mortgages, installment and other loans.

The formula component is calculated by first applying historical loss experience factors to outstanding loans by type. The Company uses a three year average loss experience as the starting base for the formula component.

This component is then adjusted to reflect additional risk factors not addressed by historical loss experience. These factors include the evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, recent charge-off and delinquency experience, 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 each of these conditions is quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified with specific problem credits.

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of March 31, 2011. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examinations.

Income Recognition on Loans —Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed 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 collectibility 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.

Premises and Equipment —Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally 3 to 5 years for furniture, fixtures and equipment and 31.5 years for buildings. Leasehold improvements are amortized over the lesser of the term of the lease or the estimated useful life of the asset.

Other Real Estate Owned (“OREO”) —Real estate properties acquired through loan foreclosure are recorded at estimated fair value, net of estimated selling costs, at time of foreclosure establishing a new cost basis. Credit losses arising at the time of foreclosure are charged against the allowance for loan losses. Subsequent valuations are periodically performed by management and the carrying value is adjusted by a charge to expense to reflect any subsequent declines in the estimated fair value. Routine holding costs are charged to expense as incurred.

Goodwill and Other Intangible Assets — Goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the valuesand/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment.

Income Taxes —Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to

apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the change is enacted.

Stock-Based Compensation — On May 27, 2010, at the Company’s Annual Meeting of Shareholders, the Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan was approved. The purpose of the 2010 Plan is to provide additional incentive to directors, officers, key employees, consultants and advisors of the Company and its subsidiaries. Included in the provisions of the 2010 Plan, the Company may grant eligible employees, including directors, consultants and advisors, incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other types of awards. The 2010 Plan provides for the issuance of up to 1,210,000 shares of the Company’s common stock. Prior to the adoption of the 2010 Plan, the Company had stock option plans that provided for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Under the prior plans options were granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant, vested over various periods ranging from immediate to five years from date of grant, and had expiration dates of up to ten years from the date of grant.

Compensation costs relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Compensation costs related to share based payment transactions are expensed over their respective vesting periods. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. See Note 7 “Stock-Based Compensation” herein for additional discussion.

Earnings per Common Share —The “Earnings per Share,” topic of the FASB Accounting Standards Codification establishes standards for computing and presenting earnings per share. The statement requires disclosure of basic earnings per common share (i.e. common stock equivalents are not considered) and diluted earnings per common share (i.e. common stock equivalents are considered using the treasury stock method) on the face of the statement of income, along with a reconciliation of the numerator and denominator of basic and diluted earnings per share. Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per common share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, consisting of stock options, had been issued.


3.	Securities

The following tables set forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities classified as available for sale and held to maturity at March 31, 2011 and December 31, 2010 (in thousands):

March 31, 2011


			Gross Unrealized				Estimated Fair
	Amortized Cost		Gains		Losses		Value

Classified as Available for Sale
U.S. Treasury and government agencies	$	3,001	$	10		—	$	3,011
Mortgage-backed securities — residential		300,568		5,310	$	1,902		303,976
Obligations of states and political subdivisions		108,207		4,443		9		112,641
Other debt securities		12,144		2		8,562		3,584

Total debt securities		423,920		9,765		10,473		423,212
Mutual funds and other equity securities		10,071		556		118		10,509

Total	$	433,991	$	10,321	$	10,591	$	433,721


			Gross Unrecognized				Estimated Fair
	Amortized Cost		Gains		Losses		Value

Classified as Held to Maturity
Mortgage-backed securities — residential	$	10,116	$	682	$	1	$	10,797
Obligations of states and political subdivisions		5,136		325		—		5,461

Total	$	15,252	$	1,007	$	1	$	16,258

December 31, 2010


			Gross Unrealized				Estimated Fair
	Amortized Cost		Gains		Losses		Value

Classified as Available for Sale
U.S. Treasury and government agencies	$	3,001	$	11		—	$	3,012
Mortgage-backed securities — residential		303,479		6,648	$	587		309,540
Obligations of states and political subdivisions		111,912		4,170		1		116,081
Other debt securities		12,329		—		7,956		4,373

Total debt securities		430,721		10,829		8,544		433,006
Mutual funds and other equity securities		10,071		706		116		10,661

Total	$	440,792	$	11,535	$	8,660	$	443,667


			Gross Unrecognized				Estimated Fair
	Amortized Cost		Gains		Losses		Value

Classified as Held to Maturity
Mortgage-backed securities — residential	$	11,131	$	700	$	1	$	11,830
Obligations of states and political subdivisions		5,136		306		—		5,442

Total	$	16,267	$	1,006	$	1	$	17,272

Included in other debt securities are investments in six pooled trust preferred securities with amortized costs and estimated fair values of $11,578 and $3,016, respectively, at March 31, 2011. These investments represent trust preferred obligations of banking industry companies. The value of these investments has been severely negatively affected by the recent downturn in the economy and increased investor concerns about recent and potential future

losses in the financial services industry. These investments are rated below investment grade by Moody’s Investor Services at March 31, 2011 with ratings ranging from Caa1 to C. In light of these conditions, these investments were reviewed forother-than-temporary impairment.

In estimating OTTI losses, the Company considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuers, (3) whether the Company intends to sell or whether it is more likely than not that the Company would be required to sell the investments prior to recovery of cost and (4) evaluation of cash flows to determine if they have been adversely affected.

The Company uses a discounted cash flow (“DCF”) analysis to provide an estimate of an OTTI loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over-collateralization tests, interest coverage tests and other factors. Expected default and deferral rates were weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate was based upon the yield expected from the related securities. Significant inputs to the cash flow models used in determining credit related other-than-temporary impairment losses on pooled trust preferred securities as of March 31, 2011 included the following:



Annual prepayment		1.0%
Projected specific defaults/deferrals		27.1% - 73.6%
Projected severity of loss on specific defaults/deferrals		50.0% - 87.1%
Projected additional defaults:
Year 1		2.0%
Year 2		1.0%
Thereafter		0.25%
Projected severity of loss on additional defaults		85.0%
Present value discount rates		3m LIBOR + 1.60% - 2.25%

The following table summarizes the change in pretax OTTI credit related losses on securities available for sale for the three months ended March 31, 2011 and 2010 (in thousands):


	2011		2010
Balance at beginning of period:
Total OTTI credit related impairment charges beginning of period	$	9,110	$	6,557
Increase to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		161		1,615
Credit related impairment not previously recognized		—		158

Balance at end of period	$	9,271	$	8,330

During the three month period ended March 31, 2011, pretax OTTI losses of $82, $38, $24, $16 and $1, respectively, were recognized on five pooled trust preferred securities which prior to the 2011 charges had book values of $2,208, $949, $5,583, $2,180 and $656, respectively. These OTTI losses resulted from adverse changes in the expected cash flows of these securities which indicated that the Company may not recover the entire cost basis of these investments. Continuation or worsening of current adverse economic conditions may result in further impairment charges in the future.

The following tables reflect the Company’s investment’s fair value and gross unrealized loss, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of March 31, 2011 and December 31, 2010 (in thousands):

March 31, 2011


	Duration of Unrealized Loss
	Less than 12 Months				Greater than 12 Months				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss

Classified as Available for Sale
U.S. Treasuries and government agencies		—		—		—		—		—		—
Mortgage-backed securities — residential	$	104,979	$	1,898	$	2,354	$	4	$	107,333	$	1,902
Obligations of states and political subdivisions		1,630		9		—		—		1,630		9
Other debt securities		—		—		3,016		8,562		3,016		8,562

Total debt securities		106,609		1,907		5,370		8,566		111,979		10,473
Mutual funds and other equity securities		25		6		82		112		107		118

Total temporarily impaired securities	$	106,634	$	1,913	$	5,452	$	8,678	$	112,086	$	10,591

Classified as Held to Maturity
Mortgage-backed securities — residential	$	354	$	1		—		—	$	354	$	1

Total temporarily impaired securities	$	354	$	1		—		—	$	354	$	1

December 31, 2010


	Duration of Unrealized Loss
	Less than 12 Months				Greater than 12 Months				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss

Classified as Available for Sale
U.S. Treasuries and government agencies		—		—		—		—		—		—
Mortgage-backed securities — residential	$	72,105	$	587		—		—	$	72,105	$	587
Obligations of states and political subdivisions		461		1		—		—		461		1
Other debt securities		—		—	$	4,193	$	7,956		4,193		7,956

Total debt securities		72,566		588		4,193		7,956		76,759		8,544
Mutual funds and other equity securities		—		—		118		116		118		116

Total temporarily impaired securities	$	72,566	$	588	$	4,311	$	8,072	$	76,877	$	8,660

Classified as Held to Maturity
Mortgage-backed securities — residential	$	400	$	1		—		—	$	400	$	1

Total temporarily impaired securities	$	400	$	1		—		—	$	400	$	1

The total number of securities in the Company’s portfolio that were in an unrealized loss position was 115 and 90, respectively, at March 31, 2011 and December 31, 2010. The Company has determined that it does not intend to sell, or it is more likely than not that it will be required to sell, its securities that are in an unrealized loss position prior to the recovery of its amortized cost basis. With the exception of the investment in pooled trust preferred securities discussed above, the Company believes that its securities continue to have satisfactory ratings, are readily marketable and that current unrealized losses are primarily a result of changes in interest rates. Therefore, management does not consider these investments to beother-than-temporarily impaired at March 31, 2011. With

regard to the investments in pooled trust preferred securities, the Company has decided to hold these securities as it believes that current market quotes for these securities are not necessarily indicative of their value. The Company has recognized impairment charges on five of the pooled trust preferred securities. Management believes that the remaining impairment in the value of these securities to be primarily related to illiquidity in the market and therefore not credit related at March 31, 2011.

At March 31, 2011 and December 31, 2010, securities having a stated value of approximately $307,000 and $310,000, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

The contractual maturity of all debt securities held at March 31, 2011 is shown below. Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.


	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(000’s)

Contractual Maturity
Within 1 year	$	10,280	$	10,027		—		—
After 1 but within 5 years		33,505		35,123	$	5,136	$	5,461
After 5 years but within 10 years		64,265		67,258		—		—
After 10 years		15,302		6,828		—		—
Mortgage-backed Securities — residential		300,568		303,976		10,116		10,797

Total	$	423,920	$	423,212	$	15,252	$	16,258

4. Loans

The loan portfolio is comprised of the following:


	March 31,			December 31,
	2011			2010
	(000’s)

Real Estate:
Commercial	$	821,959		$	796,253
Construction		168,567			174,369
Residential		548,346			467,326
Commercial & Industrial		234,742			245,263
Lease Financing and other		45,539			49,040

Total		1,819,153			1,732,251
Deferred loan fees, net		(4,187	)		(4,115	)
Allowance for loan losses		(40,287	)		(38,949	)

Loans, net	$	1,774,679		$	1,689,187

The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment for the three month periods ended March 31, 2011 and 2010 (in thousands):


	March 31, 2011
																Lease
				Commercial						Residential			Commercial &			Financing
	Total			Real Estate			Construction			Real Estate			Industrial			& Other

Balance at beginning of year	$	38,949		$	16,736		$	7,140		$	9,851		$	4,290		$	932

Charge-offs		(5,255	)		(156	)		(736	)		(2,195	)		(2,168	)		—
Recoveries		1,142			238			139			554			205			6

Net Charge-offs		(4,113	)		82			(597	)		(1,641	)		(1,963	)		6
Provision for loan losses		5,451			(145	)		587			2,749			2,288			(28	)

Net change during the period		1,338			(63	)		(10	)		1,108			325			(22	)

Balance at end of period	$	40,287		$	16,673		$	7,130		$	10,959		$	4,615		$	910


	March 31, 2010
																Lease
				Commercial						Residential			Commercial &			Financing
	Total			Real Estate			Construction			Real Estate			Industrial			& Other

Balance at beginning of year	$	38,645		$	15,273		$	5,802		$	9,706		$	7,326		$	538

Charge-offs		(4,894	)		(114	)		(112	)		(4,396	)		(249	)		(23	)
Recoveries		30			—			—			6			18			6

Net Charge-offs		(4,864	)		(114	)		(112	)		(4,390	)		(231	)		(17	)
Provision for loan losses		5,582			1,671			1,258			3,456			(799	)		(4	)

Net change during the period		718			1,557			1,146			(934	)		(1,030	)		(21	)

Balance at end of year	$	39,363		$	16,830		$	6,948		$	8,772		$	6,296		$	517

Impaired loans as of March 31, 2011 and December 31, 2010 were as follows (in thousands):


	March 31, 2011						December 31, 2010
	Unpaid				Allowance for		Unpaid				Allowance for
	Principal		Recorded		Loan Losses		Principal		Recorded		Loan Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated

With no related allowance recorded:
Commercial	$	26,439	$	25,055		—	$	22,714	$	21,166		—
Construction		14,416		11,482		—		16,985		11,868		—
Residential		17,376		13,224		—		11,476		7,223		—
Commercial & industrial		7,703		5,523		—		5,543		4,538		—
Lease financing & other		645		388		—		651		393		—
With an allowance recorded:
Commercial		—		—		—		—		—		—
Construction		3,821		3,822	$	850		3,821		3,821	$	850
Residential		521		521		19		521		521		17
Commercial & industrial		289		289		68		25		25		25
Lease financing & other		—		—		—		—		—		—

Total loans	$	71,210	$	60,304	$	937	$	61,736	$	49,555	$	892

The Company classifies all loans considered to be troubled debt restructurings (“TDRs”) as impaired. Impaired loans as of March 31, 2011 and December 31, 2010 included $20,311 and $17,236, respectively, of loans considered to be TDRs. At March 31, 2011 and December 31, 2010, one TDR with a carrying amount of $5,871 was on accrual status and performing in accordance with its modified terms. All other TDRs as of March 31, 2011 and December 31, 2010 were on nonaccrual status. The carrying value of impaired loans was determined using either the fair value of the underlying collateral of the loan or by an analysis of the expected cash flows related to the loan.

The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2011 and December 31, 2010 (in thousands):


	March 31, 2011
											Lease
			Commercial				Residential		Commercial &		Financing
	Total		Real Estate		Construction		Real Estate		Industrial		& Other

Allowance for loan losses:
Ending balance attributed to loans:
Collectively evaluated for impairment	$	39,350	$	16,673	$	6,280	$	10,940	$	4,547	$	910
Individually evaluated for impairment		937		—		850		19		68		—

Total ending balance of allowance	$	40,287	$	16,673	$	7,130	$	10,959	$	4,615	$	910

Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	1,758,849	$	796,904	$	153,263	$	534,601	$	228,930	$	45,151
Individually evaluated for impairment		60,304		25,055		15,304		13,745		5,812		388

Total ending balance of loans	$	1,819,153	$	821,959	$	168,567	$	548,346	$	234,742	$	45,539


	December 31, 2010
											Lease
			Commercial				Residential		Commercial &		Financing
	Total		Real Estate		Construction		Real Estate		Industrial		& Other

Allowance for loan losses:
Ending balance attributed to loans:
Collectively evaluated for impairment	$	38,057	$	16,736	$	6,290	$	9,834	$	4,265	$	932
Individually evaluated for impairment		892		—		850		17		25		—

Total ending balance of allowance	$	38,949	$	16,736	$	7,140	$	9,851	$	4,290	$	932

Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	1,682,696	$	775,087	$	158,680	$	459,582	$	240,700	$	48,647
Individually evaluated for impairment		49,555		21,166		15,689		7,744		4,563		393

Total ending balance of loans	$	1,732,251	$	796,253	$	174,369	$	467,326	$	245,263	$	49,040

The following table presents the recorded investment in non-accrual loans and loans past due 90 days and still accruing by class of loans as of March 31, 2011 and December 31, 2010 (in thousands):


	March 31, 2011				December 31, 2010
			Past Due				Past Due
			90 Days				90 Days
			and Still				and Still
	Non-Accrual		Accruing		Non-Accrual		Accruing

Loans:
Commercial Real Estate:
Owner occupied	$	4,660		—	$	1,942	$	292
Non owner occupied		14,524		—		13,353		—
Construction:
Commercial		5,372		—		4,477		1,323
Residential		9,933		—		11,212		—
Residential:
Multifamily		5,429		—		1,437		—
1-4 family		5,092		—		4,649		—
Home equity		3,224		—		1,658		10
Commercial & Industrial		5,546		—		4,563		—
Other:
Lease financing and other		653		—		393		—
Overdrafts		—				—

Total	$	54,433		—	$	43,684	$	1,625

The following table presents the aging of the recorded investment in loans (including past due and non-accrual loans) as of March 31, 2011 and December 31, 2010 by class of loans (in thousands):


	March 31, 2011
							90 days
			31-59 Days		60-89 Days		or more		Total
	Total		Past Due		Past Due		Past Due		Past Due		Current

Loans:
Commercial Real Estate:
Owner occupied	$	316,746	$	2,496	$	2,013	$	3,328	$	7,837	$	308,909
Non owner occupied		505,213		3,610		—		14,524		18,134		487,079
Construction:
Commercial		102,048		—		1,792		3,580		5,372		96,676
Residential		66,519		—		—		9,933		9,933		56,586
Residential:
Multifamily		248,566		—		—		5,429		5,429		243,137
1- 4 family		181,900		445		985		5,007		6,437		175,463
Home equity		117,880		559		893		3,224		4,676		113,204
Commercial & Industrial		234,742		3,014		1,434		4,165		8,613		226,129
Other:
Lease financing and other		43,251		109		55		584		748		42,503
Overdrafts		2,288		—		—		—		—		2,288

Total	$	1,819,153	$	10,233	$	7,172	$	49,774	$	67,179	$	1,751,974


	December 31, 2010
							90 days
			31-59 Days		60-89 Days		or more		Total
	Total		Past Due		Past Due		Past Due		Past Due		Current

Loans:
Commercial Real Estate:
Owner occupied	$	317,926	$	100	$	3,204	$	2,234	$	5,538	$	312,388
Non owner occupied		478,327		4,199		7,014		8,899		20,112		458,215
Construction:
Commercial		104,466		—		2,913		5,799		8,712		95,754
Residential		69,903		—		3,821		7,390		11,211		58,692
Residential:
Multifamily		152,295		1,160		1,132		1,437		3,729		148,566
1-4 family		187,728		1,096		2,064		4,211		7,371		180,357
Home equity		127,303		721		1,240		1,657		3,618		123,685
Commercial & Industrial		245,263		2,258		738		2,414		5,410		239,853
Other:
Lease financing and other		45,096		219		70		323		612		44,484
Overdrafts		3,944		—		—		—		—		3,944

Total	$	1,732,251	$	9,753	$	22,196	$	34,364	$	66,313	$	1,665,938

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as; value of underlying collateral, current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans individually and classifies them as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings.

Special Mention — Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard — Loans classified as substandard asset are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful — Loans classified as doubtful have all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans not meeting the above criteria that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following table presents the risk category by class of loans as of March 31, 2011 and December 31, 2010 of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed (in thousands):


	March 31, 2011
					Special
	Total		Pass		Mention		Substandard		Doubtful

Commercial Real Estate:
Owner occupied	$	316,746	$	240,205	$	32,715	$	43,826		—
Non owner occupied		505,214		424,707		32,371		48,136		—
Construction:
Commercial		102,048		71,701		11,699		18,648		—
Residential		66,519		45,621		—		20,898		—
Residential:
Multifamily		248,566		230,130		8,498		9,938		—
1-4 family		89,521		67,451		9,750		12,320		—
Home equity		7,117		316		—		6,801		—
Commercial & Industrial		235,568		215,698		5,875		13,995		—
Other:
Lease Financing & Other		40,794		39,243		515		1,036		—

Total loans	$	1,612,093	$	1,335,072	$	101,423	$	175,598		—


	December 31, 2010
					Special
	Total		Pass		Mention		Substandard		Doubtful

Commercial Real Estate:
Owner occupied	$	317,926	$	247,210	$	25,164	$	45,552	$	—
Non owner occupied		478,327		406,949		42,552		25,826		3,000
Construction:
Commercial		104,466		79,861		5,426		19,179		—
Residential		69,903		48,777		—		21,126		—
Residential:
Multifamily		152,295		139,725		2,620		9,950		—
1-4 family		91,761		67,401		12,342		12,018		—
Home equity		12,135		6,715		249		5,171		—
Commercial & Industrial		245,262		218,088		11,559		15,615		—
Other:
Lease Financing & Other		43,570		41,502		332		1,736		—

Total loans	$	1,515,645	$	1,256,228	$	100,244	$	156,173	$	3,000

Loans not individually rated, primarily consisting of certain 1-4 family residential mortgages and home equity lines of credit, are evaluated for risk in groups of homogeneous loans. The primary risk characteristic evaluated on these pools is delinquency.

The following table presents the delinquency categories by class of loans as of March 31, 2011 and December 31, 2010 for loans evaluated for risk in groups of homogeneous loans (in thousands):


	March 31, 2011
							90 Days
			31-59 Days		60-89 Days		Or More		Total
	Total		Past Due		Past Due		Past Due		Past Due		Current

Residential:
1-4 family	$	92,379	$	163	$	894		—	$	1,057	$	91,322
Home equity		110,763		114		893		—		1,007		109,756
Other:
Other loans		1,630		—		—		—		—		1,630
Overdrafts		2,288		—		—		—		—		2,288

Total loans	$	207,060	$	277	$	1,787		—	$	2,064	$	204,996


	December 31, 2010
							90 Days
			31-59 Days		60-89 Days		Or More		Total
	Total		Past Due		Past Due		Past Due		Past Due		Current

Residential:
1-4 family	$	95,968	$	1,090	$	413		—	$	1,503	$	94,465
Home equity		115,167		342		—		—		342		114,825
Other:
Other loans		1,527		—		—		—		—		1,527
Overdrafts		3,944		—		—		—		—		3,944

Total loans	$	216,606	$	1,432	$	413		—	$	1,845	$	214,761

The following table presents the average recorded investment in impaired loans by portfolio segment and interest recognized on impaired loans for the three month periods ended March 31, 2011 and 2010 (in thousands):


											Lease
			Commercial				Residential		Commercial &		Financing
	Total		Real Estate		Construction		Real Estate		Industrial		& Other

Three months ended March 31, 2011:
Average recorded investment in impaired loans	$	54,929	$	23,111	$	15,497	$	10,742	$	5,188	$	391

Interest income recognized during impairment	$	59	$	59	$	—	$	—	$	—	$	—

Three months ended March 31, 2010:
Average recorded investment in impaired loans	$	60,138	$	25,625	$	13,762	$	16,687	$	2,407	$	1,657

Interest income recognized during impairment	$	—	$	—	$	—	$	—	$	—	$	—

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $836 and $2,468, respectively, for the three month periods ended March 31, 2011 and 2010.

5. 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
	March 31,
	2011		2010
	(000’s except share data)
Numerator:
Net income (loss) available to common shareholders for basic and diluted earnings per share	$	4,824	$	4,855
Denominator:
Denominator for basic earnings per common share — weighted average shares		17,678,554		17,624,056
Effect of dilutive securities:
Stock options		64,958		84,765

Denominator for diluted earnings per common share — adjusted weighted average shares		17,743,512		17,708,821

Basic earnings per common share	$	0.27	$	0.28
Diluted earnings per common share	$	0.27	$	0.27
Dividends declared per share	$	0.15	$	0.19

In November 2010, the Company declared a 10% stock dividend. Share and per share amounts for 2010 have been retroactively restated to reflect the issuance of the additional shares.

6. 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 (in thousands).


	Three Months
	Ended
	March 31,
	2011			2010

Service cost	$	95		$	64
Interest cost		147			139
Amortization of prior service cost		(58	)		(48	)
Amortization of net loss		139			150

Net periodic pension cost	$	323		$	305

The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2010 Annual Report onForm 10-K that it expected to contribute $612 to the unfunded defined benefit plans during 2011. For the three month period ended March 31, 2011, the Company contributed $196 to these plans.

7. Stock-Based Compensation

In accordance with the provisions of the Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan, approved by the Company’s shareholders on May 27, 2010, the Company may grant eligible employees, including directors, consultants and advisors, incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other types of awards. The 2010 Plan provides for the issuance of up to 1,210,000 shares of the Company’s common stock. Prior to the 2010 Plan, the Company had stock option plans that provided for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Under the prior plans, options were granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant, vested over various periods ranging from immediate to five years from date of grant, and had expiration dates up to ten years from the date of grant.

Compensation costs relating to stock-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Stock options are expensed over their respective vesting periods. There were no stock-based compensation awards granted under either the 2010 Plan or the prior plans during the three month period ended March 31, 2011.

The following table summarizes stock option activity for the three month period ended March 31, 2011:


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

Outstanding at December 31, 2010		700,070		$	23.93
Granted		—			—
Exercised		(20,155	)		18.51
Cancelled or Expired		(10,235	)		17.23

Outstanding at March 31, 2011		669,680			24.19	$	1,318		3.0

Exercisable at March 31, 2011		638,475			23.47	$	1,318		3.1

Available for future grant		1,210,000

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2011. This amount changes based on changes in the fair value of the Company’s stock.

The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted in the three month period ended March 31, 2011 or the year ended December 31, 2010.

Net compensation expense of $40 and $150 related to the Company’s stock option plans was included in net income for the three month periods ended March 31, 2011 and 2010, respectively. The total tax effect related thereto was $(1) and $1, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $193 at March 31, 2011. This expense is expected to be recognized over a remaining weighted average period of 1.1 years.


8.	Fair Value

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB Accounting Standards Codification which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, which is a Level 1 input, or matrix pricing, which is a mathematical technique widely used in the

industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, which is a Level 2 input.

The Company’s available for sale securities at March 31, 2011 and December 31, 2010 include several pooled trust preferred instruments. The recent severe downturn in the overall economy and, in particular, in the financial services industry has created a situation where significant observable inputs (Level 2) are not readily available. As an alternative, the Company combined Level 2 input of market yield requirements of similar instruments together with certain Level 3 assumptions addressing the impact of current market illiquidity to estimate the fair value of these instruments — See Note 3 “Securities” for further discussion of pooled trust preferred securities.

Assets and liabilities measured at fair value are summarized below:


	Fair Value Measurements at March 31, 2011 Using:
	Quoted Prices in		Significant		Significant
	Active Markets		Other		Unobservable
	for Identical		Observable Inputs		Inputs
	Assets (Level 1)		(Level 2)		(Level 3)		Total
	(000’s)

Measured on a recurring basis:
Available for sale securities:
U.S. Treasury and government agencies		—	$	3,011		—	$	3,011
Mortgage-backed securities — residential		—		303,976		—		303,976
Obligations of states and political subdivisions		—		112,641		—		112,641
Other debt securities		—		568	$	3,016		3,584
Mutual funds and other equity securities		—		10,509		—		10,509

Total assets at fair value		—	$	430,705	$	3,016	$	433,721

Measured on a non-recurring basis:
Impaired loans(1)		—		—	$	19,833	$	19,833
Loans held for sale(2)		—		—		5,506		5,506
Other real estate owned(3)		—		—		4,810		4,810

Total assets at fair value		—		—	$	30,149	$	30,149


(1)		Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 and Level 3 inputs which include independent appraisals and internally customized discounting criteria. The recorded investment in impaired loans subject to fair value reporting on March 31, 2011 was $20,770 for which a specific allowance of $937 has been established within the allowance for loan losses. The fair values were based on internally customized discounting criteria of the collateral and thus classified as Level 3 fair values.

(2)		Loans held for sale are reported at lower of cost or fair value. Fair value is based on average bid indicators received from third parties expected to participate in the loans sales.

(3)		Other real estate owned is reported at fair value less anticipated costs to sell. Fair value is based on third party or internally developed appraisals which, considering the assumptions in the valuation, are considered Level 2 or Level 3 inputs. The fair value of other real estate owned at March 31, 2011 was derived by management from appraisals which used various assumptions and were discounted as necessary, resulting in a Level 3 classification.


	Fair Value Measurements at December 31, 2010 Using:
	Quoted Prices in		Significant		Significant
	Active Markets		Other		Unobservable
	for Identical		Observable Inputs		Inputs
	Assets (Level 1)		(Level 2)		(Level 3)		Total
	(000’s)

Measured on a recurring basis:
Available for sale securities:
U.S. Treasury and government agencies		—	$	3,012		—	$	3,012
Mortgage-backed securities — residential		—		309,540		—		309,540
Obligations of states and political subdivisions		—		116,081		—		116,081
Other debt securities		—		686	$	3,687		4,373
Mutual funds and other equity securities		—		10,661		—		10,661

Total assets at fair value		—	$	439,980	$	3,687	$	443,667

Measured on a non-recurring basis:
Impaired loans(1)		—		—	$	18,594	$	18,594
Loans held for sale(2)		—		—		7,811		7,811
Other real estate owned(3)		—		—		11,028		11,028

Total assets at fair value		—	$	—	$	37,433	$	37,433


(1)	Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 and Level 3 inputs which include independent appraisals and internally customized discounting criteria. The recorded investment in impaired loans subject to fair value reporting on December 31, 2010 was $19,486 for which a specific allowance of $892 has been established within the allowance for loan losses. The fair values were based on internally customized discounting criteria of the collateral and thus classified as Level 3 fair values.

(2)	Loans held for sale are reported at lower of cost or fair value. Fair value is based on average bid indicators received from third parties expected to participate in the loan sales.

(3)	Other real estate owned is reported at lower of cost or fair value less anticipated costs to sell. Fair value is based on third party or internally developed appraisals which, considering the assumptions in the valuation, are considered Level 2 or Level 3 inputs. The fair value of other real estate owned at December 31, 2010 was derived by management from appraisals which used various assumptions and were discounted as necessary, resulting in a Level 3 classification.

The table below presents a reconciliation and income statement classification of gains and losses for securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2011 and 2010:


	Level 3 Assets Measured on a Recurring Basis
	For the three months
	ended March 31,
	2011			2010
	(000’s)

Balance at beginning of period	$	3,687		$	3,938
Transfers into (out of) Level 3		102			—
Net unrealized gain (loss) included in other comprehensive income		(612	)		1,634
Principal payments		—			—
Recognized impairment charge included in the statement of income		(161	)		(1,772	)

Balance at end of period	$	3,016		$	3,800

9. Fair Value of Financial Instruments

The Company follows the “Financial Instruments” topic of the FASB Accounting Standards Codification which requires the disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of March 31, 2011 and December 31, 2010 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.

Carrying amount and estimated fair value of financial instruments, not previously presented, at March 31, 2011 and December 31, 2010 were as follows:


	March 31, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In millions)

Assets:
Financial assets for which carrying value approximates fair value	$	279.6	$	279.6	$	356.2	$	356.2
Held to maturity securities, and accrued interest		15.3		16.3		16.3		17.3
FHLB Stock		5.4		N/A		7.0		N/A
Loans and accrued interest		1,803.4		1,830.0		1,717.8		1,759.8
Liabilities:
Deposits with no stated maturity and accrued interest		2,070.8		2,070.8		2,047.4		2,047.4
Time deposits and accrued interest		174.1		174.4		188.5		188.9
Securities sold under repurchase agreements and other short-term borrowing and accrued interest		46.5		46.5		36.6		36.6
Other borrowings and accrued interest		51.8		50.0		88.2		85.6

The estimated fair value of the indicated items was determined as follows:

Financial assets for which carrying value approximates fair value — The estimated fair value approximates carrying amount because of the immediate availability of these funds or based on the short maturities and current rates for similar deposits. Cash and due from banks as well as Federal funds sold are reported in this line item.

Held to maturity securities and accrued interest — The fair value of securities held to maturity was estimated based on quoted market prices or dealer quotations. Accrued interest is stated at its carrying amounts which approximates fair value.

FHLB Stock — It is not practicable to determine its fair value due to restrictions placed on its transferability.

Loans and accrued interest — The fair value of loans was estimated by discounting projected cash flows at the reporting date using current rates for similar loans. Accrued interest is stated at its carrying amount which approximates fair value.

Deposits with no stated maturity and accrued interest — The estimated fair value of deposits with no stated maturity and accrued interest, as applicable, are considered to be equal to their carrying amounts.

Time deposits and accrued interest — The fair value of time deposits has been estimated by discounting projected cash flows at the reporting date using current rates for similar deposits. Accrued interest is stated at its carrying amount which approximates fair value.

Securities sold under repurchase agreements and other short-term borrowings and accrued interest— The estimated fair value of these instruments approximate carrying amount because of their short maturities and variable rates. Accrued interest is stated at its carrying amount which approximates fair value.

Other borrowings and accrued interest — The fair value of callable FHLB advances was estimated by discounting projected cash flows at the reporting date using the rate applicable to the projected call date option. Accrued interest is stated at its carrying amount which approximates fair value.

10. Recent Accounting Pronouncements

In July 2010, the FASB issued Accounting Standards Update2010-20“Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This guidance has significantly expanded the disclosures that the Company must make about the credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide financial statement users with additional information about the nature of credit risks inherent in the Company’s financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses. The disclosures as of the end of the reporting period are effective for the Company’s interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update by the Company required enhanced disclosures and did not have a material effect on the Company’s financial condition or results of operations.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”The provisions of ASUNo. 2011-02 amend and clarify GAAP related to the accounting for debt restructurings. Specifically, ASUNo. 2011-02 requires that, when evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. In evaluating whether a concession has been granted, a creditor must evaluate whether (i) a debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt in order to determine if the restructuring would be considered to be at a below-market rate, indicating that the creditor has granted a concession, (ii) a temporary or permanent increase in the contractual interest rate as a result of a restructuring may be considered a concession because the new contractual interest rate on the restructured debt is still below the market interest rate for new debt with similar risk characteristics, and (iii) a

restructuring that results in a delay in payment is either significant and is a concession or is insignificant and is not a concession. In evaluating whether a debtor is experiencing financial difficulties, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification of the debt. The provisions of ASUNo. 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period of adoption.

Other —Certain 2010 amounts have been reclassified to conform to the 2011 presentation.


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

This section presents discussion and analysis of the Company’s consolidated financial condition at March 31, 2011 and December 31, 2010, and the consolidated results of operations for the three month periods ended March 31, 2011 and March 31, 2010. The Company is consolidated with its wholly owned subsidiaries Hudson Valley Bank, N.A. and its subsidiaries (collectively “HVB” or “the Bank”) and HVHC Risk Management Corp. This discussion and analysis should be read in conjunction with the financial statements and supplementary financial information contained in the Company’s 2010 Annual Report onForm 10-K.

Overview of Management’s Discussion and Analysis

This overview is intended to highlight selected information included in this Quarterly Report onForm 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 this entire Quarterly Report onForm 10-Q and the Company’s 2010 Annual Report onForm 10-K.

The Company derives substantially all of its revenue from providing banking and related services to businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and Rockland County, New York, portions of New York City and Fairfield County and New Haven County, Connecticut. The Company’s assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company’s basic strategy is to grow net interest income and non interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. Considering current economic conditions, the Company’s primary market risk exposures are interest rate risk, the risk of deterioration of market values of collateral supporting the Company’s loan portfolio, particularly commercial and residential real estate and potential risks associated with the impact of regulatory changes that may take place in reaction to the current crisis in the financial system. Interest rate risk is the exposure of net interest income to changes in interest rates. Commercial and residential real estate are the primary collateral for the majority of the Company’s loans.

The Company recorded net income for the three month period ended March 31, 2011 of $4.8 million or $0.27 per diluted share, a slight decrease of $0.1 million compared to net income of $4.9 million or $0.27 per diluted share for the same period in the prior year. The per share amount for the 2010 period has been adjusted to reflect the effects of the 10 percent stock dividend issued in December 2010. Earnings remained essentially unchanged in the first three months of 2011, compared to the same period in 2010; with little change in the provision for loan losses which totaled $5.5 million for the three month period ended March 31, 2011, compared to $5.6 million for the same period in the prior year. The provisions in both 2011 and 2010 are reflective of continued weakness in the overall economy necessitating the Company’s decision to follow a more aggressive strategy for problem asset resolution. As part of the revised resolution strategy, the Company continues to reevaluate each problem loan and make a determination of net realizable value based on management’s estimation of the most likely possible outcome considering the individual characteristics of each asset against the likelihood of resolution with the current borrower, expectations for resolution through the court system, or other available market opportunities.

Total loans increased $86.9 million during the three months ended March 31, 2011 compared to the prior year end. This increase resulted primarily from strong demand for local market multi-family loans and an increase in commercial real estate loans partially offset by decreased loan demand in other sectors of the market; charge-offs and pay downs of existing loans. The Company recognized $4.1 million of net charge-offs during the three month period ended March 31, 2011. The Company has continued to experience a slowdown in payments of certain loans, such as construction loans, whose repayment is often dependent on sales of completed properties, as well as additional increases in delinquent and nonperforming loans in other sectors of the loan portfolio, all of which have been adversely impacted by the economic downturn and decline in the real estate market. The Company, however, continues to provide lending availability to both new and existing customers.

Nonperforming assets increased to $64.7 million at March 31, 2011, compared to $64.1 million at December 31, 2010. Overall asset quality continued to be adversely affected by the current state of the economy and the

real estate market. Although there is growing evidence that the current economic downturn may have begun to slowly turn around, higher than normal levels of delinquent and nonperforming loans, slowdowns in repayments and declines in the loan-to-value ratios on existing loans continued during the first quarter of 2011.

Total deposits increased $9.2 million during the three month period ended March 31, 2011, compared to the prior year end. The Company continues to experience significant growth in new customers both in existing branches and new branches added during the last two years. Growth in the first quarter was partially offset by seasonal decreases in certain municipal deposit balances. Proceeds from deposit growth were used to fund loan growth, reduce maturing term borrowings or were retained in liquid investments, principally interest earning bank deposits.

The Company has continued to repay maturing long-term borrowings with liquidity provided primarily by core deposit growth. Additional liquidity from deposit growth was retained in the Company’s short-term liquidity portfolios, available to fund future loan growth. With interest rates remaining at historical low levels, this increase in liquidity contributed to margin compression. This compression has been virtually offset by reinvestment of available liquidity in new loans, primarily local market multi-family loans and a $72.2 million reduction of term borrowings since March 31, 2010, of which $36.3 million occurred in the first quarter of 2011.

As a result of the aforementioned activity in the Company’s core businesses of loans and deposits and other asset/liability management activities, net interest income declined slightly by $0.7 million or 2.5 percent to $27.5 million for the three month period ended March 31, 2011, compared to $28.2 million for the same period in the prior year. The net interest margin of 4.39 percent for the three month period ended March 31, 2011 was essentially unchanged from the 4.40 percent for the same period in the prior year. Tax equivalent basis net interest income declined slightly by $ 1.0 million or 3.4 percent to $28.1 million for the three month period ended March 31, 2011, compared to $29.1 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $0.6 million for the three month period ended March 31, 2011, compared to $0.9 million for the same period in the prior year.

The Company’s non interest income was $5.2 million for the three month period ended March 31, 2011. This represented an increase of $2.4 million or 85.7 percent compared to $2.8 million for the same period in the prior year. This increase partially resulted from an increase in investment advisory fees. Fee income from this source increased primarily as a result of the effects of recent improvement in both domestic and international equity markets. Assets under management were approximately $1.6 billion at March 31, 2011 compared to $1.3 billion at March 31, 2010. The overall increases in non interest income also included growth in deposit service charges. Non interest income also included recognized pre-tax impairment charges on securities available for sale of $0.2 million for the three month period ended March 31, 2011 and $1.8 million for the same period in the prior year. The impairment charges were related to the Company’s investments in pooled trust preferred securities. Non interest income for the three month periods ended March 31, 2011 and 2010 also included $0.1 million of net gains and $0.1 million of net losses, respectively, related to sales and revaluations of other real estate owned.

Non interest expense was $20.5 million for the three month period ended March 31, 2011. This represented an increase of $2.0 million or 10.8 percent, compared to $18.5 million for the same period in the prior year. Increases in non interest expense resulted primarily from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, increases in costs associated with problem loan resolution and other real estate owned, investment in technology and personnel to accommodate growth and the expansion of services and products available to new and existing customers.

The Office of the Comptroller of the Currency (“OCC”), which is the primary federal regulator of the Bank, has directed greater scrutiny to banks with higher levels of commercial real estate loans. During the fourth quarter of 2009, the OCC required HVB to maintain, by December 31, 2009, a total risk-based capital ratio of at least 12.0%, a Tier 1 risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 8.0%. These capital levels are in excess of “well capitalized” levels generally applicable to banks under current regulations. The Company and HVB have continuously exceeded all required regulatory capital ratios.

Critical Accounting Policies

Application of Critical Accounting Policies —The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company’s significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, management evaluates its estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require management to make estimates and judgments, and therefore, are critical to understanding the Company’s results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Company’s Board of Directors.

Results of Operations for the Three Month Periods Ended March 31, 2011 and March 31, 2010

Summary of Results

The Company reported net income of $4.8 million for the three month period ended March 31, 2011, a slight decrease of $0.1 million or 2.0 percent compared to $4.9 million for the same period in the prior year. The slight decrease in net income for the three month period ended March 31, 2011, compared to the same period in the prior year, reflected slightly lower net interest income and higher noninterest expense, partially offset by higher non interest income, a lower provision for loan losses and lower income taxes. Net interest income was slightly lower primarily due to margin compression from the effects of the retention of excess liquidity from deposit growth in short term liquidity portfolios, essentially offset by partial reinvestment of available liquidity in new loans. The provision for loan losses totaled $5.5 million for the three month period ended March 31, 2011, compared to $5.6 million for the same period in the prior year, reflective of continued weakness in the overall economy. Non interest income increased primarily as a result of a $1.6 million decrease in recognized impairment charges related to the Company’s investments in pooled trust preferred securities and increases in fee income from investment advisory and deposit services. Increases in non interest expense resulted primarily from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, increase in costs associated with problem loan resolution and other real estate owned, investment in technology and personnel to accommodate growth and the expansion of services and products available to new and existing customers.

Diluted earnings per share were $0.27 for both the three month period ended March 31, 2011 and March 31, 2010. The prior period per share amount has been adjusted to reflect the 10 percent stock dividend distributed in December 2010. Annualized returns on average stockholders’ equity and average assets were 6.6 percent and 0.7 percent for the three month period ended March 31, 2011, compared to 6.5 percent and 0.7 percent for the same period in the prior year. Returns on adjusted average stockholders’ equity were virtually the same at 6.6 percent and 6.5 percent, respectively for the three month periods ended March 31, 2011 and 2010. Adjusted average stockholders’ equity excludes the effects of net unrealized gains, net of tax of $0.4 million and $1.8 million, on securities available for sale for the three month periods ended March 31, 2011 and 2010, respectively. The annualized return on adjusted average stockholders’ equity is, under SEC regulations, a non-GAAP financial measure. Management believes that this non-GAAP financial measures more closely reflects actual performance, as it is more consistent with the Company’s stated asset/liability management strategies, which do not contemplate significant realization of market gains or losses on securities available for sale which were primarily related to changes in interest rates or illiquidity in the marketplace.

Average Balances and Interest Rates

The following tables set forth the average balances of interest earning assets and interest bearing liabilities for the three month period ended March 31, 2011 and March 31, 2010, as well as total interest and corresponding yields and rates (dollars in thousands):


	Three Months Ended March 31,
	2011							2010
	Average				Yield/			Average				Yield/
	Balance		Interest(3)		Rate			Balance		Interest(3)		Rate
	(Unaudited)

ASSETS
Interest earning assets:
Deposits in Banks	$	276,957	$	164		0.24	%	$	181,154	$	93		0.21	%
Federal funds sold		44,662		26		0.23			88,102		42		0.19
Securities:(1)
Taxable		339,975		2,950		3.47			362,575		3,687		4.07
Exempt from federal income taxes		115,360		1,786		6.19			169,939		2,631		6.19
Loans, net(2)		1,727,420		26,332		6.10			1,758,302		27,564		6.27

Total interest earning assets		2,504,374		31,258		4.99			2,560,072		34,017		5.32

Non interest earning assets:
Cash & due from banks		41,022							42,009
Other assets		153,212							141,787

Total non interest earning assets		194,234							183,796

Total assets	$	2,698,608						$	2,743,868

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Money market	$	870,155	$	1,539		0.71	%	$	889,697	$	2,180		0.98	%
Savings		114,769		127		0.44			112,779		128		0.45
Time		184,473		435		0.94			207,127		674		1.30
Checking with interest		280,805		173		0.25			328,819		353		0.43
Securities sold under repo & other s/t borrowings		39,708		47		0.47			66,071		77		0.47
Other borrowings		75,063		844		4.50			123,777		1,498		4.84

Total interest bearing liabilities		1,564,973		3,165		0.81			1,728,270		4,910		1.14

Non interest bearing liabilities:
Demand deposits		819,945							693,881
Other liabilities		22,713							25,573

Total non interest bearing liabilities		842,658							719,454

Stockholders’ equity(1)		290,977							296,144

Total liabilities and stockholders’ equity	$	2,698,608						$	2,743,868

Net interest earnings			$	28,093						$	29,107

Net yield on interest earning assets						4.49	%						4.55	%


(1)	Excludes unrealized gains (losses) on securities available for sale. Management believes that this presentation more closely reflects actual performance, as it is more consistent with the Company’s stated asset/liability management strategies, which have not resulted in significant realization of temporary market gains or losses on securities available for sale which were primarily related to changes in interest rates. Effects of these adjustments are presented in the table below.

(2)	Includes loans classified asnon-accrual.

(3)

The data contained in the tables has been adjusted to a tax equivalent basis, based on the Company’s federal statutory rate of 35 percent. Management believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules. Effects of these adjustments are presented in the table below.

Average Balances and Interest Rates Non-GAAP Reconciliation to GAAP


	Three Months Ended
	March 31,
	2011			2010
	(000’s)

Total interest earning assets:
As reported	$	2,504,935		$	2,562,904
Unrealized gain on securities available for sale(1)		561			2,832

Adjusted total interest earning assets	$	2,504,374		$	2,560,072


Net interest earnings:
As reported	$	27,468		$	28,186
Adjustment to tax equivalency basis(2)		625			921

Adjusted net interest earnings	$	28,093		$	29,107


Net yield on interest earning assets:
As reported		4.39	%		4.40	%
Effects of(1) and(2) above		0.10	%		0.15	%

Adjusted net yield on interest earning assets		4.49	%		4.55	%

Average stockholders’ equity:
As reported	$	291,426		$	297,941
Effects of (1) and (2) above		449			1,797

Adjusted average stockholders’ equity	$	290,927		$	296,144

Interest Differential

The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three month periods ended March 31, 2011 and March 31, 2010:


	(000’s)
	Three Month Period Increase
	(Decrease) Due to Change in
	Volume			Rate			Total(1)

Interest income:
Deposits in Banks	$	49		$	22		$	71
Federal funds sold		(21	)		5			(16	)
Securities:
Taxable		(230	)		(507	)		(737	)
Exempt from federal income taxes		(845	)		—			(845	)
Loans, net		(484	)		(748	)		(1,232	)

Total interest income		(1,531	)		(1,228	)		(2,759	)

Interest expense:
Deposits:
Money market		(48	)		(593	)		(641	)
Savings		2			(3	)		(1	)
Time		(74	)		(165	)		(239	)
Checking with interest		(52	)		(128	)		(180	)
Securities sold under repo & other s/t borrowings		(31	)		1			(30	)
Other borrowings		(590	)		(64	)		(654	)

Total interest expense		(793	)		(952	)		(1,745	)

Decrease in interest differential	$	(738	)	$	(276	)	$	(1,014	)


(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 2011 and 2010.

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. Net interest income, on a tax equivalent basis, declined slightly by $1.0 million or 3.4 percent to $28.1 million for the three month period ended March 31, 2011, compared to $29.1 million for the same period in the prior year. Net interest income was slightly lower due to a decrease in the tax equivalent basis net interest margin to 4.49 percent for the three month period ended March 31, 2011, compared to 4.55 percent for the same period in the prior year, partially offset by a $107.6 million or 12.9 percent increase in the excess of adjusted average interest earning assets over interest bearing liabilities to $939.4 million for the three month period ended March 31, 2011 from $831.8 million for the same period in the prior year.

The Company’s overall asset quality has been adversely affected by the current state of the economy and has continued to experience higher than normal levels of delinquent and nonperforming loans and a continuation of the slowdowns in repayments and declines in theloan-to-value ratios on existing loans. Changes in the levels of nonperforming loans have a direct impact on net interest income.

portfolios, available to fund future loan growth. With interest rates remaining at historical low levels, this increase in liquidity contributed to margin compression. This compression has been virtually offset by reinvestment of available liquidity in new loans, primarily local market multi-family loans and a $72.2 million reduction of term borrowings since March 31, 2010, of which $36.3 million occurred in the first quarter of 2011.

For purposes of the financial information included in this section, the Company adjusts average interest earning assets to exclude the effects of unrealized gains and losses on securities available for sale and adjusts net interest income to a tax equivalent basis. Management believes that this alternate presentation more closely reflects actual performance, as it is consistent with the Company’s stated asset/liability management strategies. The effects of these non-GAAP adjustments to tax equivalent basis net interest income and adjusted average assets are included in the table presented in“Average Balances and Interest Rates”section herein.

The Company has made efforts throughout the extended period of severe economic uncertainty and fluctuating interest rates to minimize the impact on its net interest income by appropriately repositioning its securities portfolio and funding sources while maintaining prudence and awareness of the potential consequences that the current economic crisis could have on its asset quality and interest rate risk profiles. The Company continues to increase the number of loans originated with interest rate floors as well as with fixed rates of interest and exercise caution in reinvestment of excess liquidity provided from continued strong deposit growth. These actions are being conducted partially to maintain flexibility in reaction to the continuation of historically low interest rates. The Company’s ability to make changes in its asset mix allows management to capitalize on more desirable yields, as available, on various interest earning assets. The result of these efforts has enabled the Company, given the difficulties being encountered in the current economic crisis, to maximize the effective repositioning of its portfolios from both asset and interest rate risk perspectives.

Interest income is determined by the volume of and related rates earned on interest earning assets. Volume decreases in loans, investments and federal funds sold and a lower average yield on interest earning assets, partially offset by a volume increase in interest earning deposits resulted in lower interest income for the three months ended March 31, 2011, compared to the same period in the prior year. Adjusted average interest earning assets for the three month period ended March 31, 2011 decreased $55.7 million or 2.2 percent to $2,504.4 million from $2,560.1 million for the same period in the prior year.

Loans are the largest component of interest earning assets. Average net loans decreased $30.9 million or 1.8 percent to $1,727.4 million for the three month period ended March 31, 2011 from $1,758.3 million for the same period in the prior year. The decrease in average net loans reflects the general softness in the availability of loans experienced over the past three years and the Company’s increased emphasis on problem loan resolution. The Company, however, continues to emphasize making new loans, expansion of loan production capabilities and more effective market penetration as evidenced by recent growth in the loan portfolio resulting primarily from strong demand for local market multi-family loans. The average yield on loans was 6.10 percent for the three month period ended March 31, 2011, compared to 6.27 percent for the same period in the prior year. The decline in the average yield resulted primarily from new loans being originated in a lower interest rate environment. As a result, interest income on loans was lower for the three month period ended March 31, 2011, compared to the same period in the prior year, due to lower volume and lower average interest rates.

Average total securities, including FHLB stock and excluding net unrealized gains and losses, decreased $77.2 million or 14.5 percent to $455.3 million for the three month period ended March 31, 2011 from $532.5 million for the same period in the prior year. The decrease in average total securities resulted primarily from a planned reduction in the portfolio conducted by the Company as part of its ongoing asset/liability management efforts. The decrease in average total securities for the three month period ended March 31, 2011, compared to the same period in the prior year reflects volume decreases in U.S. Treasury and Agency securities, mortgage-backed securities including collateralized mortgage obligations, obligations of state and political subdivisions and FHLB stock, partially offset by a volume increase in other securities. The average tax equivalent basis yield on securities was 4.16 percent for the three month period ended March 31, 2011, compared to 4.75 percent for the same period in the prior year. As a result, tax equivalent basis interest income on securities decreased for the three month period ended March 31, 2011, compared to the same period in the prior year, due to

lower volume and lower interest rates. Increases and decreases in average FHLB stock results from purchases or redemptions of stock in order to maintain required levels to support FHLB borrowings.

Interest expense is a function of the volume of, and rates paid for, interest bearing liabilities, comprised of deposits and borrowings. Interest expense decreased $1.7 million or 34.7 percent to $3.2 million for the three month period ended March 31, 2011 from $4.9 million for the same period in the prior year. Average interest bearing liabilities decreased $163.3 million or 9.4 percent to $1,565.0 million for the three month period ended March 31, 2011 from $1,728.3 million for the same period in the prior year. The decrease in average interest bearing liabilities for the three month period ended March 31, 2011, compared to the same period in the prior year, was due to volume decreases in interest bearing demand deposits, time deposits, securities sold under repurchase agreements and other short-term borrowings and other borrowings. The decreases in interest bearing deposits were more than offset by increases in noninterest bearing demand deposits. The decreases in average short-term and other borrowings for the three month period ended March 31, 2011, compared to the same period in the prior year, resulted from management’s decision to utilize available cash flow from deposit growth and maturing investment securities to reduce borrowings as part of the Company’s ongoing asset/liability management efforts. The average interest rate paid on interest bearing liabilities was 0.81 percent for the three month period ended March 31, 2011, compared to 1.14 percent for the same period in the prior year. As a result of these factors, interest expense on average interest bearing liabilities was lower for the three month period ended March 31, 2011, compared to the same period in the prior year due to lower interest rates and lower volume.

Average non interest bearing demand deposits increased $126.0 million or 18.2 percent to $819.9 million for the three month period ended March 31, 2011 from $693.9 million for the same period in the prior year. Non interest bearing demand deposits are an important component of the Company’s ongoing asset liability management, and also have a direct impact on the determination of net interest income.

The interest rate spread on a tax equivalent basis for the three month periods ended March 31, 2011 and 2010 is as follows:


	Three Month
	Period Ended
	March 31,
	2011			2010

Average interest rate on:
Total average interest earning assets		4.99	%		5.32	%
Total average interest bearing liabilities		0.81	%		1.14	%
Total interest rate spread		4.18	%		4.18	%

Interest rate spreads increase or decrease as a result of the relative change in average interest rates on interest earning assets compared to the change in average interest rates on interest bearing liabilities. The interest rate spread was unchanged for the three month period ended March 31, 2011, compared to the prior year period. Management cannot predict what impact market conditions will have on its interest rate spread and future compression of net interest spread may occur.

Provision for Loan Losses

The Company recorded a provision for loan losses of $5.5 million for the three month period ended March 31, 2011, compared to $5.6 million for the same period in the prior year. The provision for loan losses is charged to income to bring the Company’s allowance for loan losses to a level deemed appropriate by management. See“Allowance for loan losses” for further discussion.

Non Interest Income

March 31, 2010. The overall increases in non interest income also included growth in deposit service charges. Non interest income also included recognized pre-tax impairment charges on securities available for sale of $0.2 million for the three month period ended March 31, 2011, compared to $1.8 million for the same period in the prior year. The impairment charges were related to the Company’s investments in pooled trust preferred securities. The Company has continued to hold its investments in pooled trust preferred securities as it does not believe that the current market value estimates for these investments are indicative of their underlying value. The pooled trust preferred securities are primarily backed by various U.S. financial institutions many of which are experiencing severe financial difficulties as a result of the current economic downturn. Continuation of these conditions may result in additional impairment charges on these securities in the future. Non interest income for the three month periods ended March 31, 2011 and 2010 also included $0.1 million of net gains and $0.1 million of net losses, respectively, related to sales and revaluations of other real estate owned.

Non Interest Expense

Non interest expense was $20.5 million for the three month period ended March 31, 2011 which was an increase of $2.0 million or 10.8 percent from $18.5 million for the three month period ended March 31, 2010. Increases in non interest expense resulted primarily from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, increase in costs associated with problem loan resolution and other real estate owned, investment in technology and personnel to accommodate growth and the expansion of services and products available to new and existing customers.

Salaries and employee benefits, the largest component of non interest expense, increased $0.9 million or 9.1 percent to $10.8 million as compared to $9.9 million for the same period in the prior year. The increase primarily resulted from merit increases, the reinstatement of an incentive compensation plan and additional personnel added to accommodate growth.

Occupancy expense totaled $2.3 million for the three month period ended March 31, 2011 which was a slight increase of $0.1 million or 4.5 percent as compared to $2.2 million for the same period in the prior year. The slight increase reflected the Company’s continued expansion, including the opening of new branch facilities, as well as rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.

Professional services expense totaled $1.5 million for the three month period ended March 31, 2011 which was an increase of $0.2 million or 15.4 percent as compared to $1.3 million for the same period in the prior year. The increase was primarily due to costs related to the engagement of consultants to assist with new systems implementations.

Equipment expense totaled $1.0 million for the three month period ended March 31, 2011 which was unchanged from the same period in the prior year.

Business development expense was $0.5 million for the three month period ended March 31, 2011 which was a decrease of $0.1 million or 16.7 percent as compared to $0.6 million for the same period in the prior year. The decrease resulted for reduced participation in business development events and an anticipated reduction in the cost of the Company’s annual and quarterly reports.

The FDIC assessment for the three period ended March 31, 2011 totaled $1.1 million which was unchanged as compared to the same period in the prior year.

Significant changes, more than 5 percent, in other components of non interest expense for the three month period ended March 31, 2011 compared to March 31, 2010, were due to the following:


	•	Decrease of $143,000 (145.9%), in other insurance expense, resulting from reductions in the estimates of the net cost of certain life insurance policies due partially offset by increases in banker’s professional and automobile insurance costs,

	•	Decrease of $36,000 (14.9%) respectively, in stationery and printing costs, due to continued cost saving measures and decreased consumption,


	•	Decrease of $40,000 (22.1%) in communications expense due to continued cost saving measures,

	•	Decrease of $199,000 (33.0%) in other loan expenses primarily due to fluctuations in costs associated with the disposition and management of properties held as other real estate owned and asset recovery costs,

	•	Increase of $316,000 (37.9%) in outside services, due to outsourcing of several data processing and electronic services functions,

	•	Increase of $76,000 (135.7%) in dues and meetings due to increased participation in such events.

Income Taxes

Income taxes of $2.0 million and $2.1 million, respectively, were recorded in the three month periods ended March 31, 2011 and March 31, 2010, respectively. The Company’s overall effective tax rate was of 28.9 percent for the three month period ended March 31, 2011 compared to 30.1 percent for the same period in the prior year. The 2011 effective rate primarily due to the fact that tax-exempt income represented a higher percentage of pretax income in 2011 compared to 2010. The Company is subject to a Federal statutory rate of 35 percent, a New York State tax rate of 7.1 percent plus a 17 percent surcharge, a Connecticut State tax rate of 7.5 percent and a New York City tax rate of 9 percent.

Assets

The Company had total assets of $2,655.3 million at March 31, 2011, a slight decrease of $13.7 million or 0.5 percent from $2,669.0 million at December 31, 2010. The decrease resulted primarily from the repayment of $36.3 million of maturing term borrowings which was partially offset by deposit growth.

Cash and Due from Banks

Cash and due from banks was $240.1 million at March 31, 2011, a decrease of $44.1 million or 15.5 percent from $284.2 million at December 31, 2010. Included in cash and due from banks is interest earning deposits of $198.2 million at March 31, 2011 and $258.3 million at December 31, 2010.

Federal Funds Sold

Federal funds sold totaled $39.5 million at March 31, 2011, a decrease of $32.6 million or 45.2 percent from $72.1 million at December 31, 2010. The decrease was a result of deposit growth and investment paydowns being deployed into loans or utilized for the repayment of term borrowings.

Securities and FHLB Stock

Securities are selected to provide safety of principal, liquidity, pledging capabilities (to collateralize certain deposits and borrowings), income and to leverage capital. The Company’s investment strategy focuses on maximizing income while providing for safety of principal, maintaining appropriate utilization of capital, providing adequate liquidity to meet loan demand or deposit outflows and to manage overall interest rate risk. The Company selects individual securities whose credit, cash flow, maturity and interest rate characteristics, in the aggregate, affect the stated strategies.

The securities portfolio, which consists of various debt and equity securities, totaled $449.0 million at March 31, 2011, a decrease of $11.0 million or 2.4 percent from $460.0 million at December 31, 2010. FHLB stock totaled $5.4 million at March 31, 2011 and $7.0 million at December 31, 2010.

Securities are classified as either available for sale, representing securities the Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost. The available for sale portfolio totaled $433.7 million at March 31, 2011 which was a decrease of $10.0 million or 2.3 percent from $443.7 million at December 31, 2010. The held to maturity portfolio

totaled $15.3 million at March 31, 2011, which was a decrease of $1.0 million or 6.1 percent from $16.3 million at December 31, 2010.

U.S. Treasury and government agency obligations classified as available for sale totaled $3.0 million at March 31, 2011, which was unchanged from $3.0 million at December 31, 2010. There were no U.S. Treasury or government agency obligations classified as held to maturity at March 31, 2011 or at December 31, 2010.

Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $304.0 million at March 31, 2011, a decrease of $5.5 million or 1.8 percent from $309.5 million at December 31, 2010. The decrease was due to maturities and principal paydowns of $47.9 million and other changes of $3.2 million which were partially offset by purchases of $45.6 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $10.1 million at March 31, 2011, a decrease of $1.0 million or 9.0 percent from $11.1 million at December 31, 2010. The decrease was due to maturities and principal paydowns of $1.0 million.

Obligations of state and political subdivisions classified as available for sale totaled $112.6 million at March 31, 2011, a decrease of $3.5 million or 3.0 percent from $116.1 million at December 31, 2010. The decrease was a result of maturities and calls of $4.5 million which was partially offset by purchases of $0.8 million and other increases of $0.2 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both March 31, 2011 and December 31, 2010. The combined available for sale and held to maturity obligations of state and political subdivisions at March 31, 2011 were comprised of approximately 83 percent of New York State political subdivisions and 17 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 classified as available for sale decreased $0.8 million or 18.2 percent, to $3.6 million at March 31, 2010 from $4.4 million at December 31, 2010. The decrease was due to other changes of $0.7 million and maturities and calls of $0.1 million. Included in other changes were $0.2 million of OTTI losses related to the Company’s investments in pooled trust preferred securities. These pooled trust preferred securities, which had an aggregate cost basis of $11.6 million as of both March 31, 2011 and December 31, 2010, have suffered severe declines in estimated fair value primarily as a result of both illiquidity in the marketplace and declines in the credit ratings of a number of issuing banks underlying these securities. Management cannot predict what effect that continuation of such conditions could have on potential future value or whether there will be additional impairment charges related to these securities. There were no other debt securities classified as held to maturity at March 31, 2011 or at December 31, 2010.

Mutual funds and other equity securities classified as available for sale totaled $10.5 million at March 31, 2011, a decrease of $0.2 million or 1.9 percent from $10.7 million at December 31, 2010. The decrease was due to other changes of $0.2 million. There were no mutual funds of other equity securities classified as held to maturity at March 31, 2011 or at December 31, 2010.

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 $5.4 million at March 31, 2011 and $7.0 million at December 31, 2010.

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 March 31, 2011 or December 31, 2010.

Loans

Net loans totaled $1,774.7 million at March 31, 2011, an increase of $85.5 million or 5.1 percent from $1,689.2 million at December 31, 2010. The increase resulted principally from a $81.0 million increase in residential loans and a $25.7 million increase in commercial real estate loans which was partially offset by a $10.6 million decrease in commercial and industrial loans, a $5.8 million decrease in construction loans and $3.5 million decrease in lease financing and other loans. The significant increase in residential loans was primarily the result of strong demand for local market multi-family loans which increased by $96.3 million during the three

month period ended March 31, 2011. The Company expects to increase its focus on multi-family loans originated in the New York City area.

The loan portfolio is comprised of the following:


	March 31,			December 31,
	2011			2010
	(000’s)

Real Estate:
Commercial	$	821,959		$	796,253
Construction		168,567			174,369
Residential		548,346			467,326
Commercial and industrial		234,742			245,263
Lease financing and other		45,539			49,040

Total		1,819,153			1,732,251
Deferred loan fees, net		(4,187	)		(4,115	)
Allowance for loan losses		(40,287	)		(38,949	)

Loans, net	$	1,774,679		$	1,689,187

The following table illustrates the trend in nonperforming assets, delinquency and net charge-offs from March 2010 to March 2011 (in thousands):


	March 31,			December 31,			September 30,			June 30,			March 31,
	2011			2010			2010			2010			2010

Loans Past Due 90 Days or More and Still Accruing:
Real Estate:
Commercial		—		$	292			—			—		$	7,061
Construction		—			1,323			—			—			—
Residential		—			—		$	197		$	342			1,048

Total Real Estate		—			1,615			197			342			8,109
Commercial & Industrial		—			10			—			65			394
Lease Financing and Individuals		—			—			—			41			1

Total Loans Past Due 90 Days or More and Still Accruing		—			1,625			197			448			8,504

Non-Accrual Loans:
Real Estate:
Commercial	$	19,184			15,295			14,672			27,312			30,292
Construction		15,305			15,689			14,405			19,566			17,466
Residential		13,745			7,744			10,038			19,967			17,756

Total Real Estate		48,234			38,728			39,115			66,845			65,514
Commercial & Industrial		5,546			4,563			2,410			2,583			3,988
Lease Financing and Individuals		653			393			393			134			184

Total Non-Accrual Loans		54,433			43,684			41,918			69,562			69,686

Other Real Estate Owned		4,810			11,028			9,393			5,578			6,937

Nonperforming Assets excluding loans held for sale		59,243			56,337			51,508			75,588			85,127
Nonperforming loans held for sale		5,506			7,811			21,864			—			—

Total Nonperforming Assets including loans held for sale	$	64,749		$	64,148		$	73,372		$	75,588		$	85,127

Net charge-offs during quarter	$	4,113		$	46,223		$	16,813		$	20,784		$	4,864

Nonperforming assets to total assets:
Excluding loans held for sale		2.23	%		2.11	%		1.82	%		2.62	%		3.04	%
Including loans held for sale		2.44	%		2.40	%		2.59	%		2.62	%		3.04	%

Non-accrual loans increased $10.7 million to $54.4 million at March 31, 2011 from $43.7 million at December 31, 2010. This increase included the transfer of $2.3 million of nonaccrual commercial real estate loans from the loans held for sale category. There was no interest income on non-accrual loans included in net income for the three month period ended March 31, 2011 and the year ended December 31, 2010. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $0.8 million and $4.3 million for the three month period ended March 31, 2011 and the year ended December 31, 2010, respectively.

Net income is adversely impacted by the level of nonperforming assets caused by the deterioration of the borrowers’ ability to meet scheduled interest and principal payments. In addition to forgone revenue, the Company must increase the level of provision for loan losses, incur higher collection costs and other costs associated with the management and disposition of foreclosed properties.

The overall increase in nonperforming assets has primarily resulted from the current severe economic slowdown, which has had negative effects on real estate values, sales and available financing, particularly in the commercial and residential real estate sectors. Continuation of this condition could result in additional increases in nonperforming assets and charge-offs in the future.

During the three month period ended March 31, 2011:


	•	Non-accrual commercial real estate loans increased $3.9 million resulting from the transfer of eleven loans totaling $6.5 million, which was partially offset by full charge-off of one loan totaling $0.1 million, payoffs of two loans totaling $2.3 million and principal payments of $0.2 million.

	•	Non-accrual construction loans decreased $0.4 million, resulting from the payoff of two loans totaling $1.6 million, full or partial charge-offs taken on seven loans totaling $0.7 million which was partially offset by the transfer of one loan totaling $1.9 million.

	•	Non-accrual residential loans increased $6.0 million resulting from the transfer of twelve loans totaling $8.1 million which was partially offset by full or partial charge-offs taken on five loans totaling $2.1 million.

	•	Non-accrual commercial and industrial loans increased $0.9 million resulting from the transfer of ten loans totaling $3.3 million which was partially offset by full or partial charge offs of ten loans totaling $2.2 million, the payoff of one loan totaling $0.1 million and principal payments of $0.1 million.

	•	Non-accrual loans to individuals increased $0.2 million resulting from the transfer of one loan totaling $0.2 million.

	•	Other real estate owned decreased $6.2 million resulting from the sale of three properties totaling $6.0 million and valuation adjustments of $0.2 million taken on two properties.

At March 31, 2011, there were no loans past due 90 days or more and still accruing and three loans totaling $1.6 million at December 31, 2010. In addition, the Company had $12.7 million and $21.0 million of loans that were 31-89 days delinquent and still accruing at March 31, 2011 and December 31, 2010, respectively.

Loans considered by the Company to be impaired totaled $60.3 million and $49.6 million at March 31, 2011 and December 31, 2010, respectively, for which specific reserves of $0.9 million and $0.8 million had been established.

There were fourteen loans totaling $21.3 million at March 31, 2011 and eight loans totaling $17.2 million at December 31, 2010 that were considered troubled debt restructurings. One loan totaling $5.9 million at both March 31, 2011 and December 31, 2010 was performing in accordance with its restructured terms. The remaining loans which totaled $15.4 million and $11.3 million at March 31, 2011 and December 31, 2010, respectively, are on non-accrual status. At March 31, 2011, the Company had no commitments to lend additional funds to non-accrual or restructured loans.

The Company performs extensive ongoing asset quality monitoring by both internal and independent loan review functions. In addition, the Company conducts timely remediation and collection activities through a network of internal and external resources which include an internal asset recovery department, real estate and other loan workout attorneys and external collection agencies. In addition, during the second quarter of 2010, the Company decided to implement a more aggressive workout strategy for the resolution of problem assets in light of a sluggish economic recovery, continued weakness in local real estate activity and market values and growing difficulty in resolving problem loans in a timely fashion through traditional foreclosure proceedings due to increased bankruptcy filings and overcrowded court systems. See“Allowance for Loan Losses” below for further discussion of this strategy. Management believes that these efforts are appropriate for accomplishing either successful remediation or maximizing collections related to nonperforming assets.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to absorb probable losses incurred in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company’s methodology for assessing the

appropriateness of the allowance consists of a specific component for identified problem loans and a formula component to consider historical loan loss experience and additional risk factors affecting the portfolio.

See Note 2 to the Company’s condensed consolidated financial statements presented in this Form 10-Q for a detailed description of the methodology employed by the Company in determining the specific and formula components of the allowance for loan losses.

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:


	(000’s)
			Change
	March 31,		During			December 31,
	2011		2011			2010

Components
Specific:
Real Estate:
Commercial		—		—			—
Construction	$	850		—		$	850
Residential		19	$	2			17
Commercial and Industrial		68		43			25
Lease Financing and other		—		—			—

Total Specific component		937		45			892

Formula:
Real Estate:
Commercial	$	16,673	$	(63	)	$	16,736
Construction		6,280		(10	)		6,290
Residential		10,940		1,106			9,834
Commercial and Industrial		4,547		282			4,265
Lease Financing and other		910		(22	)		932

Total Formula component		39,350		1,293			38,057

Total Allowance	$	40,287				$	38,949

Net Change				1,338
Net Charge-offs				4,113

Provision for loan losses			$	5,451


			Change
	March 31,		During			December 31,
	2010		2010			2009

Components
Specific:
Real Estate:
Commercial	$	855	$	855			—
Construction		1,703		1,578		$	125
Residential		276		(2,202	)		2,478
Commercial and Industrial		131		(365	)		496
Lease Financing and other		478		3			475

Total Specific component		3,443		(131	)		3,574

Formula:
Real Estate:
Commercial		15,975		702			15,273
Construction		5,245		(432	)		5,677
Residential		8,496		1,268			7,228
Commercial and Industrial		6,165		(665	)		6,830
Lease Financing and other		39		(24	)		63

Total Formula component		35,920		849			35,071

Total Allowance	$	39,363				$	38,645

Net Change				718
Net Charge-offs				4,864

Provision for loan losses			$	5,582

The specific component of the allowance for loan losses is the result of our analysis of impaired loans and our determination of the amount required to reduce the carrying amount of such loans to estimated fair value. Accordingly, such allowance is dependent on the particular loans and their characteristics at each measurement date, not necessarily the total amount of such loans. The Company usually records partial charge-offs as opposed to specific reserves for impaired loans that are real estate collateral dependent and for which independent appraisals have determined the fair value of the collateral to be less than the carrying amount of the loan. During the three months ended March 31, 2011, the Company recorded $5.3 million of charge-offs, of which $1.6 million were partial charge-offs related to current nonaccrual loans. At March 31, 2011, the Company had $0.9 million of specific reserves allocated to five impaired loans. There were $0.8 million of specific reserves allocated to three impaired loans as of December 31, 2010. The Company’s analyses as of March 31, 2011 and December 31, 2010 indicated that impaired loans were principally real estate collateral dependent and that, with the exception of those loans for which specific reserves were assigned, there was sufficient underlying collateral value or guarantees to indicate expected recovery of the carrying amount of the loans.

The changes in the formula component of the allowance for loan losses are 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 formula component is then adjusted to reflect changes in other relevant factors affecting loan collectibility. Management periodically adjusted the formula component to an amount that, when considered with the specific component, represented its best estimate of probable losses in the loan portfolio as of each balance sheet date. The following are the major additional factors which affected the changes in the formula component of the allowance for loan losses at March 31, 2011:


	•	Economic and business conditions— Although current indicators clearly show that the economic downturn has begun to turn around, recovery is still expected to be a slow process. There is continued volatility in real estate values, particularly in the Company’s market areas, and the availability of mortgage financing is still limited and nonperforming loans have increased. As a result Company has continued to include additional factors for adverse economic and business conditions in the determination of the formula component of the allowance. The factors were maintained at December 2010 levels based on management’s judgment of


		limited impact on our portfolio from improvement in major economic indicators due to the continuing lag effect of the economic downturn offsetting the improvements in the economic indicators.


	•	Concentration— The primary collateral for the Company’s loans is real estate, particularly commercial real estate. The economic downturn has had a severe negative effect on activity and values throughout the real estate industry, which has heightened risk associated with this concentration. Therefore, consideration of the changes in levels of risk associated with concentrations resulting from adverse conditions in the marketplace is part of the determination of the formula component of the allowance. As result of charge-offs, paydowns and reduced production of new loans, concentrations in construction loans have been significantly reduced, and concentrations in commercial real estate loans have grown slightly. In addition, the Company has significantly increased it’s portfolio of local-area multifamily loans. The additional factor for concentrations in construction loans had already been reduced in late 2010 to reflect reduced balances, therefore, the factor was maintained at the December 2010 level. The additional factor for concentration in commercial real estate was also maintained at the December 2010 level as there was no significant change in the concentration. Due to recent significant increases in balances of multi-family loans, a factor for the new concentration was added for March 31, 2011.

	•	Collateral Values— Activity in commercial and residential real estate continues to be extremely soft, and there has been little improvement in values in the Company’s primary market areas. The Company has maintained significant additional factors to compensate for continued weakness in commercial and residential real estate collateral values. As mentioned above, the Company has had significant growth in its residential multi-family portfolio. The significance of the outstanding balances of this new program to the overall residential portfolio, together with the fact that appraisals of the underlying collateral for these loans were conducted after the effects of the economic downturn, resulted in the reduction of the additional factor for collateral value of residential real estate for the March 31, 2011 analysis. Additional collateral value factors for all other parts of the portfolio were maintained at December 2010 levels, as there was no specific evidence of any significant change.

	•	Asset quality— Changes in the amount of nonperforming loans, classified loans, delinquencies, and the results of the Company’s periodic loan review process are also considered in the process of determining the formula component. During the first quarter of 2011, the lagging effects of the economic downturn within the economy and our local market area have continued. The Company has continued to experience significant charge-offs and the historical loss factor used for determination of the formula component of the allowance, although appearing to have leveled off, continues at a higher than normal level. After considering the level of the historical loss factor and charge-offs recorded in the first quarter of 2011, the additional factor for charge-offs was maintained at December 2010 levels. The additional factors for delinquency and extension risk, which had been reduced in the third quarter of 2010, reflective of general improvement in delinquency levels and changes in portfolio concentrations were also maintained at December 2010 levels as management has to decided to monitor delinquency levels a little longer to ensure recent improvements warrant further adjustment to these factors.

Actual losses can vary significantly from the estimated amounts. The Company’s methodology permits adjustments to the allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the loan portfolio as of the evaluation date have changed. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, the Bank is able to adjust specific and inherent loss estimates based upon any more recent information that has become available. Additional information related to the Company’s allowance for loan losses is contained in Note 4 to the Company’s condensed consolidated financial statements presented in this Form 10-Q.

Deposits

Deposits totaled $2,243.6 million at March 31, 2011, an increase of $9.2 million or 0.4 percent from $2,234.4 million at December 31, 2010. The following table presents a summary of deposits at March 31, 2011 and December 31, 2010.


	(000’s)
	March 31,		December 31,
	2011		2010		Increase (Decrease)

Demand deposits	$	814,755	$	756,917	$	57,838
Money market accounts		884,906		862,450		22,456
Savings accounts		113,416		120,238		(6,822	)
Time deposits of $100,000 or more		131,487		144,497		(13,010	)
Time deposits of less than $100,000		42,485		43,851		(1,366	)
Checking with interest		256,564		306,459		(49,895	)

Total Deposits	$	2,243,613	$	2,234,412	$	9,201

The Company experienced growth in both new and existing customers, including growth from new branches added during 2009 and 2010 which was partially offset by seasonal decreases in municipal deposits. Proceeds from deposit growth were retained in liquid assets, primarily in interest earning bank deposits.

Borrowings

Total borrowings were $98.0 million at March 31, 2011, a decrease of $26.3 million or 21.2 percent from $124.3 million at December 31, 2010. The decrease resulted from the maturity of FHLB term borrowings of $36.3 million which was partially offset by a $9.9 million increase in short-term repurchase agreements and a $0.1 million increase in other borrowings. Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital and to manage interest rate risk.

Stockholders’ Equity

Stockholders’ equity totaled $290.7 million at March 31, 2011, an increase of $0.8 million or 0.3 percent from $289.9 million at December 31, 2010. The increase in stockholders’ equity resulted from net income of $4.8 million and net increase related to exercises of stock options of $0.4 million which was partially offset by cash dividends paid on common stock of $2.6 million, and decreases in accumulated other comprehensive income of $1.8 million.

The Company’s and the Bank’s capital ratios at March 31, 2011 and December 31, 2010 are as follows:


							Minimum to be			Enhanced Capital Requirements
	March 31,			December 31,			Considered			Effective
	2011			2010			Well Capitalized			as of December 31, 2009

Leverage ratio:
Company		9.9	%		9.6	%		5.0	%		N/A
HVB		9.1			8.8			5.0			8.0	%
Tier 1 capital:
Company		13.5	%		13.9	%		6.0	%		N/A
HVB		12.4			12.8			6.0			10.0	%
Total capital:
Company		14.8	%		15.2	%		10.0	%		N/A
HVB		13.7			14.0			10.0			12.0	%

During the fourth quarter of 2009, the Office of the Comptroller of the Currency (“‘OCC”) required HVB to maintain, a total risk-based capital ratio of at least 12.0%, a Tier 1 risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 8.0%. These capital levels are in excess of “well capitalized” levels generally applicable to banks under current regulations.

Liquidity

The Asset/Liability Strategic Committee (“ALSC”) of the Board of Directors of HVB establishes specific policies and operating procedures governing the Company’s liquidity levels and develops plans to address future liquidity needs, including contingent sources of liquidity. The primary functions of asset liability management are to provide safety of depositor and investor funds, assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirement of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to manage fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

The Company’s liquid assets at March 31, 2011 include cash and due from banks of $41.9 million, $198.2 million of interest earning deposits and Federal funds sold of $39.5 million. Interest earning deposits and Federal funds sold represent the Company’s excess liquid funds which are invested with other financial institutions and are available daily.

Other sources of liquidity include maturities and principal and interest payments on loans and securities. The loan and securities portfolios are of high credit quality and of mixed maturity, providing a constant stream of maturing and re-investable assets, which can be converted into cash should the need arise. The ability to redeploy these funds is an important source of medium to long term liquidity. The amortized cost of securities having contractual maturities, expected call dates or average lives of one year or less amounted to $108.5 million at March 31, 2011. This represented 24.2 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $248.4 million, or 13.7 percent of loans at March 31, 2011, mature in one year or less. The Company may increase liquidity by selling certain residential mortgages, or exchanging them for mortgage-backed securities that may be sold in the secondary market.

Non interest bearing demand deposits and interest bearing deposits from businesses, professionals, not-for-profit organizations and individuals are relatively stable, low-cost sources of funds. The deposits of the Bank generally have shown a steady growth trend as well as a generally consistent deposit mix. However, there can be no assurance that deposit growth will continue or that the deposit mix will not shift to higher rate products.

HVB is a member of the FHLB. As a member, HVB is able to participate in various FHLB borrowing programs which require certain investments in FHLB common stock as a prerequisite to obtaining funds. As of March 31, 2011, HVB had short-term borrowing lines with the FHLB of $200 million with no amounts outstanding. These and various other FHLB borrowing programs available to members are subject to availability of qualifying loanand/or investment securities collateral and other terms and conditions.

HVB also has unsecured overnight borrowing lines totaling $70 million with three major financial institutions which were all unused and available at March 31, 2011. In addition, HVB has approved lines under Retail Certificate of Deposit Agreements with three major financial institutions totaling $947 million of which no balances were outstanding as at March 31, 2011. Utilization of these lines are subject to product availability and other restrictions.

Additional liquidity is also provided by the Company’s ability to borrow from the Federal Reserve Bank’s discount window. In response to the current economic crisis, the Federal Reserve Bank has increased the ability of banks to borrow from this source through itsBorrower-in-Custody (“BIC”) program, which expanded the types of collateral which qualify as security for such borrowings. HVB has been approved to participate in the BIC program. There were no balances outstanding with the Federal Reserve at March 31, 2011.

As of March 31, 2011, the Company had qualifying loan and investment securities totaling approximately $350 million which could be utilized under available borrowing programs thereby increasing liquidity.

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

Contractual Obligations and Off-Balance Sheet Arrangements

The Company has outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to the Company’s obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. The Company is also obligated under leases or license agreements for certain of its branches and equipment. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end.

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 December 31, 2010. 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.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, in addition to those risk factors disclosed in the Company’s Annual Report onForm 10-K for the year ended December 31, 2010 include, but are not limited to:


	•	further increases in our non-performing loans and allowance for loan losses;

	•	our ability to manage our commercial real estate portfolio;

	•	the future performance of our investment portfolio;

	•	our opportunities for growth, our plans for expansion (including opening new branches) and the competition we face in attracting and retaining customers;

	•	economic conditions generally and in our market area in particular, which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans;

	•	demand for our products and services;

	•	possible impairment of our goodwill and other intangible assets;

	•	our ability to manage interest rate risk;

	•	the regulatory environment in which we operate, our regulatory compliance and future regulatory requirements;

	•	our intention and ability to maintain regulatory capital above the levels required by the OCC for the Bank and the levels required for us to be “well-capitalized”, or such higher capital levels as may be required;

	•	proposed legislative and regulatory action affecting us and the financial services industry;

	•	legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject us to additional regulatory oversight which may result in increased compliance costsand/or require us to change our business model;

	•	future FDIC special assessments or changes to regular assessments;

	•	our ability to raise additional capital in the future;

	•	potential liabilities under federal and state environmental laws; and

	•	limitations on dividends payable by the Company or the Bank.

We assume no obligation for updating any such forward-looking statements at any given time.

Impact of Inflation and Changing Prices

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk at December 31, 2010 were previously reported in the Company’s 2010 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at March 31, 2011 compared to December 31, 2010.

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

All market risk sensitive instruments are classified either as available for sale or held to maturity with no financial instruments entered into for trading purposes. The Company from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the three month period ended March 31, 2011. The Company had no derivative financial instruments in place at March 31, 2011 and December 31, 2010.

The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at March 31, 2011 shows the Company’s net interest income increasing slightly if interest rates rise and decreasing slightly if interest rates fall, considering a continuation of the current yield curve. A change in the shape or steepness of the yield curve will impact our market risk to change in interest rates.

The Company also prepares a static gap analysis which, at March 31, 2011, shows a positive cumulative static gap of $145.7 million in the one year time frame.

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 March 31, 2011.


	Percentage Change
	in Estimated
	Net Interest
	Income from
	March 31,
Gradual Change in Interest Rates	2011				Policy Limit

+200 basis points		0	.8	%		(5.0	)%
–100 basis points		(1	.4	)%		(5.0	)%

Beginning on March 31, 2008, a 100 basis point downward change was substituted for the 200 basis point downward scenario previously used, as management believes that a 200 basis point downward change is not a meaningful analysis in light of current interest rate levels. The percentage change in estimated net 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. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) orRule 15d-15(e) of the Exchange Act) as of March 31, 2011. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2011, the Company’s disclosure controls and procedures were effective in bringing to their attention on a timely basis information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act. Also, during the quarter ended March 31, 2011, there has not been any change that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1A.	*Risk Factors*

Our business is subject to various risks. These risks are included in our 2010 Annual Report onForm 10-K under “Risk Factors”.

There has been no material changes in such risk factors since the date of such report.

Item 6. Exhibits

(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).

SIGNATURES

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

HUDSON VALLEY HOLDING CORP.


	By:	/s/ Stephen R. Brown

Stephen R. Brown

Senior Executive Vice President,

Chief Financial Officer and Treasurer

May 10, 2011

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Hudson Valley Holding (HVB) Inactive 10-Q2011 Q1 Quarterly report

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