Hudson Valley Holding (HVB) 10-Q 2011 Q2 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 June 30, 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 þ     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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined inRule 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
	July 26,
Class	2011
Common stock, par value $0.20 per share	17,695,159

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		32
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		53
ITEM 4	CONTROLS AND PROCEDURES		53
PART II — OTHER INFORMATION
ITEM 1A	RISK FACTORS		54
ITEM 6	EXHIBITS		54
SIGNATURES			55
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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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
	June 30,
	2011			2010
Interest Income:
Loans, including fees	$	27,941		$	27,127
Securities:
Taxable		3,147			3,560
Exempt from Federal income taxes		1,150			1,621
Federal funds sold		23			36
Deposits in banks		201			166
Total interest income		32,462			32,510
Interest Expense:
Deposits		2,290			3,319
Securities sold under repurchase agreements and other short-term borrowings		57			71
Other borrowings		501			1,440
Total interest expense		2,848			4,830
Net Interest Income		29,614			27,680
Provision for loan losses		1,546			28,548
Net interest income (loss) after provision for loan losses		28,068			(868	)
Non Interest Income:
Service charges		1,552			1,612
Investment advisory fees		2,753			2,289
Recognized impairment charge on securities available for sale (includes $184 and $1,256 of total losses in 2011 and 2010, respectively, less $141 and $745 of losses on securities available for sale, recognized in other comprehensive income in 2011 and 2010, respectively)		(43	)		(511	)
Realized gain on securities available for sale, net		—			7
Losses on sales and revaluation of loans held for sale and other real estate owned, net		(1,000	)		(1,359	)
Other income		569			646
Total non interest income		3,831			2,684
Non Interest Expense:
Salaries and employee benefits		11,263			9,508
Occupancy		2,202			1,911
Professional services		1,749			1,549
Equipment		1,107			969
Business development		590			548
FDIC assessment		686			1,187
Other operating expenses		3,051			2,466
Total non interest expense		20,648			18,138
Income (Loss) Before Income Taxes		11,251			(16,322	)
Income Taxes (Benefit)		3,819			(5,367	)
Net Income (Loss)	$	7,432		$	(10,955	)
Basic Earnings (Loss) Per Common Share	$	0.42		$	(0.62	)
Diluted Earnings (Loss) Per Common Share	$	0.42		$	(0.62	)

See notes to condensed consolidated financial statements

2

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Dollars in thousands, except per share amounts

	Six Months Ended
	June 30,
	2011			2010
Interest Income:
Loans, including fees	$	54,273		$	54,691
Securities:
Taxable		6,097			7,247
Exempt from Federal income taxes		2,311			3,331
Federal funds sold		49			78
Deposits in banks		365			259
Total interest income		63,095			65,606
Interest Expense:
Deposits		4,564			6,654
Securities sold under repurchase agreements and other short-term borrowings		104			148
Other borrowings		1,345			2,938
Total interest expense		6,013			9,740
Net Interest Income		57,082			55,866
Provision for loan losses		6,997			34,130
Net interest income after provision for loan losses		50,085			21,736
Non Interest Income:
Service charges		3,592			3,415
Investment advisory fees		5,359			4,514
Recognized impairment charge on securities available for sale (includes $957 and $3,013 of total losses in 2011 and 2010, respectively, less $753 and $730 of losses on securities available for sale, recognized in other comprehensive income in 2011 and 2010, respectively)		(204	)		(2.283	)
Realized gain on securities available for sale, net		—			75
Losses on sales and revaluation of loans held for sale and other real estate owned, net		(873	)		(1,424	)
Other income		1,176			1,180
Total non interest income		9,050			5,477
Non Interest Expense:
Salaries and employee benefits		22,081			19,380
Occupancy		4,547			4,096
Professional services		3,202			2,864
Equipment		2,117			1,935
Business development		1,096			1,110
FDIC assessment		1,797			2,275
Other operating expenses		6,258			4,932
Total non interest expense		41,098			36,592
Income (Loss) Before Income Taxes		18,037			(9,379	)
Income Taxes (Benefit)		5,781			(3.279	)
Net Income (Loss)	$	12,256		$	(6,100	)
Basic Earnings (Loss) Per Common Share	$	0.69		$	(0.35	)
Diluted Earnings (Loss) Per Common Share	$	0.69		$	(0.35	)

See notes to condensed consolidated financial statements

3

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Dollars in thousands

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Net Income (Loss)	$	7,432		$	(10,955	)	$	12,256		$	(6,100	)
Other comprehensive gain (loss), net of tax:
Net change in unrealized (losses) gains:
Other-than-temporarily impaired securities available for sale:
Total losses		(184	)		(1,256	)		(957	)		(3,013	)
Losses recognized in earnings		43			511			204			2,283
Losses recognized in comprehensive income		(141	)		(745	)		(753	)		(730	)
Income tax effect		58			305			309			299
Unrealized holding losses onother-than-temporarily impaired securities available for sale, net of tax		(83	)		(440	)		(444	)		(431	)
Securities available for sale notother-than-temporarily impaired:
Gains (losses) arising during the year		333			698			(2,200	)		3,914
Income tax effect		(119	)		(269	)		870			(1,535	)
		214			429			(1,330	)		2,379
Gains recognized in earnings		—			(7	)		—			(75	)
Income tax effect		—			3			—			30
		—			(4	)		—			(45	)
Unrealized holding gains (losses) on securities available for sale notother-than-temporarily- impaired, net of tax		214			425			(1,330	)		2,334
Unrealized holding gain (loss) on securities, net		131			(15	)		(1,774	)		1,903
Minimum pension liability adjustment		74			102			155			204
Income tax effect		(30	)		(41	)		(62	)		(82	)
		44			61			93			122
Other comprehensive income (loss)		175			46			(1,681	)		2,025
Comprehensive Income (Loss)	$	7,607		$	(10,909	)	$	10,575		$	(4,075	)

See notes to condensed consolidated financial statements

4

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Dollars in thousands, except share amounts

	June 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	47,685		$	25,876
Interest earning deposits in banks		223,517			258,280
Federal funds sold		36,441			72,071
Securities available for sale at estimated fair value (amortized cost of $461,903, in 2011 and $440,792 in 2010)		461,825			443,667
Securities held to maturity at amortized cost (estimated fair value of $15,464 in 2011 and $17,272 in 2010)		14,484			16,267
Federal Home Loan Bank of New York (FHLB) Stock		4,732			7,010
Nonperforming loans held for sale		4,506			7,811
Loans (net of allowance for loan losses of $41,889 in 2011 and $38,949 in 2010)		1,888,761			1,689,187
Accrued interest and other receivables		13,127			16,396
Premises and equipment, net		27,218			28,611
Other real estate owned		2,370			11,028
Deferred income taxes, net		27,161			25,043
Bank owned life insurance		26,770			25,976
Goodwill		23,842			23,842
Other intangible assets		2,043			2,454
Other assets		13,333			15,514
TOTAL ASSETS	$	2,817,815		$	2,669,033
LIABILITIES
Deposits:
Non interest-bearing	$	857,732		$	756,917
Interest-bearing		1,560,659			1,477,495
Total deposits		2,418,391			2,234,412
Securities sold under repurchase agreements and other short-term borrowings		43,673			36,594
Other borrowings		36,484			87,751
Accrued interest and other liabilities		23,581			20,359
TOTAL LIABILITIES		2,522,129			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 17,689,049 and 17,665,908 shares in 2011 and 2010, respectively		3,798			3,793
Additional paid-in capital		347,245			346,750
Retained earnings (deficit)		2,961			(3,989	)
Accumulated other comprehensive income (loss), net		(754	)		927
Treasury stock, at cost; 1,299,414 shares in both 2011 and 2010		(57,564	)		(57,564	)
Total stockholders’ equity		295,686			289,917
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,817,815		$	2,669,033

See notes to condensed consolidated financial statements

5

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Six Months Ended June 30, 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											12,256						12,256
Stock option expense and exercises of stock options, net of tax		23,141		5					495								500
Cash dividends ($0.30 per share)											(5,306	)					(5,306	)
Accrued benefit liability adjustment														93			93
Net unrealized gain on securities available for sale:
Notother-than-temporarily impaired														(1,330	)		(1,330	)
Other-than-temporarily impaired (includes $957 of total losses less $204 of losses recognized in earnings, net of $309 tax)														(444	)		(444	)
Balance at June 30, 2011		17,689,049	$	3,798	$	(57,564	)	$	347,245	$	2,961		$	(754	)	$	295,686

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

													Accumulated
													Other
	Number of							Additional		Retained			Comprehensive
	Shares		Common		Treasury			Paid-in		Earning			Income
	Outstanding		Stock		Stock			Capital		(Deficit)			(Loss)			Total
Balance at January 1, 2010		16,016,738	$	3,463	$	(57,564	)	$	346,297	$	2,294		$	(812	)	$	293,678
Net loss											(6,100	)					(6,100	)
Stock option expense and exercises of stock options, net of tax		12,426		2					270								272
Cash dividends ($0.42 per share)											(7,373	)					(7,373	)
Accrued benefit liability adjustment														122			122
Net unrealized gain on securities available for sale:
Notother-than-temporarily impaired														2,334			2,334
Other-than-temporarily impaired (includes $3,013 of total losses less $2,283 of losses recognized in earnings, net of $299 tax)														(431	)		(431	)
Balance at June 30, 2010		16,029,164	$	3,465	$	(57,564	)	$	346,567	$	(11,179	)	$	1,213		$	282,502

See notes to condensed consolidated financial statements

6

HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Dollars in thousands

	For the Six Months
	Ended June 30,
	2011			2010
Operating Activities:
Net income	$	12,256		$	(6,100	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		6,997			34,130
Depreciation and amortization		1,979			1,969
Recognized impairment charge on securities available for sale		204			2,283
Realized gain on security transactions, net		—			(75	)
(Gain) loss on other real estate owned		(127	)		1,424
Amortization of premiums on securities, net		1,259			917
Increase in cash value of bank owned life insurance		(535	)		(671	)
Amortization of intangible assets		411			411
Stock option expense and related tax benefits		76			99
Deferred tax benefit		(1,001	)		(4,780	)
Decrease (increase) in deferred loan fees, net		9			(1,031	)
Decrease (increase) in accrued interest and other receivables		3,269			(3,872	)
Decrease (increase) in other assets		2,181			(283	)
Excess tax benefits from share-based payment arrangements		(7	)		(6	)
Increase (decrease) in accrued interest and other liabilities		3,222			(3	)
Decrease in accrued benefit liability adjustment		93			122
Net cash provided by operating activities		30,286			24,534
Investing Activities:
Net decrease (increase) in Federal funds sold		35,630			(23,274	)
Decrease in FHLB stock		2,278			784
Proceeds from maturities and paydowns of securities available for sale		124,616			138,973
Proceeds from maturities and paydowns of securities held to maturity		1,784			3,077
Proceeds from sales of securities available for sale		—			4,995
Purchases of securities available for sale		(147,130	)		(129,860	)
Net (increase) decrease in loans		(204,124	)		46,463
Proceeds from sale of other real estate owned		9,635			2,209
Net dispositions (purchases) of premises and equipment		(586	)		(542	)
Premiums paid on bank owned life insurance		(259	)		(259	)
Net (cash used) in provided by investing activities		(178,156	)		42,566
Financing Activities:
Net increase in deposits		183,979			238,448
Net decrease in securities sold under repurchase agreements and short-term borrowings		7,079			11,428
Repayment of other borrowings		(51,267	)		(21,014	)
Proceeds from exercise of stock options		424			173
Excess tax benefits from share-based payment arrangements		7			6
Cash dividends paid		(5,306	)		(7,373	)
Net cash (used in) provided by financing activities		134,916			221,668
(Decrease) increase in Cash and Due from Banks and interest earning deposits		(12,954	)		288,768
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	$	271,202		$	455,748
Supplemental Disclosures:
Interest paid	$	6,542		$	10,106
Income tax payments		2,550			6,703
Transfer from loans held for sale back to loan portfolio		2,305			—
Transfer to other real estate owned		850			—

See notes to condensed consolidated financial statements

7

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 June 30, 2011 and December 31, 2010 and the results of its operations, comprehensive income for the three and six month periods ended June 30, 2011 and 2010 and cash flows and changes in stockholders’ equity for the six month periods ended June 30, 2011 and 2010. The results of operations for the three and six month periods ended June 30, 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

8

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

9

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.

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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.

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.

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of June 30, 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

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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.

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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 June 30, 2011 and December 31, 2010 (in thousands):

June 30, 2011

			Gross Unrealized				Estimated Fair
	Amortized Cost		Gains		Losses		Value
Classified as Available for Sale
U.S. Treasury and government agencies	$	3,000	$	8		—	$	3,008
Mortgage-backed securities — residential		337,671		6,238	$	2,197		341,712
Obligations of states and political subdivisions		98,968		4,068		—		103,036
Other debt securities		12,193		2		8,703		3,492
Total debt securities		451,832		10,316		10,900		451,248
Mutual funds and other equity securities		10,071		630		124		10,577
Total	$	461,903	$	10,946	$	11,024	$	461,825

			Gross Unrecognized				Estimated Fair
	Amortized Cost		Gains		Losses		Value
Classified as Held to Maturity
Mortgage-backed securities — residential	$	9,347	$	659		—	$	10,006
Obligations of states and political subdivisions		5,137		321		—		5,458
Total	$	14,484	$	980	$	—	$	15,464

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 $11,626 and $2,923, respectively, at June 30, 2011. These investments represent trust preferred obligations of banking industry companies. The value of these investments has been severely negatively

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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 June 30, 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 relatedother-than-temporary impairment losses on pooled trust preferred securities as of June 30, 2011 included the following:

Annual prepayment	1.0%
Projected specific defaults/deferrals	30.6% - 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 six month period ended June 30, 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 whichother-than-temporary impairment was previously recognized		204		2,125
Credit related impairment not previously recognized		—		158
Balance at end of period	$	9,314	$	8,840

During the six month period ended June 30, 2011, pretax OTTI losses of $84, $48, $38, $33 and $1, respectively, were recognized on five pooled trust preferred securities which prior to the 2011 charges had book values of $2,208, $5,583, $949, $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.

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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 June 30, 2011 and December 31, 2010 (in thousands):

June 30, 2011

	Duration of Unrealized Loss
					Greater than 12
	Less than 12 Months				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	$	123,887	$	2,197					$	123,887	$	2,197
Obligations of states and political subdivisions		—		—		—		—		—		—
Other debt securities		—		—	$	2,923		8,703		2,923		8,703
Total debt securities		123,887		2,197		2,923		8,703		126,810		10,900
Mutual funds and other equity securities		—		—		226		124		226		124
Total temporarily impaired securities	$	123,887	$	2,197	$	3,149	$	8,827	$	127,036	$	11,024

There were no securities classified as held to maturity in an unrealized loss position at June 30, 2011.

December 31, 2010

	Duration of Unrealized Loss
					Greater than 12
	Less than 12 Months				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 120 and 90, respectively, at June 30, 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 June 30, 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

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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 June 30, 2011.

At June 30, 2011 and December 31, 2010, securities having a stated value of approximately $318,000 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 June 30, 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	$	9,237	$	9,266		—		—
After 1 but within 5 years		38,709		40,475	$	5,137	$	5,458
After 5 years but within 10 years		53,011		55,265		—		—
After 10 years		13,204		4,530		—		—
Mortgage-backed Securities — residential		337,671		341,712		9,347		10,006
Total	$	451,832	$	451,248	$	14,484	$	15,464

4.   Loans

The loan portfolio is comprised of the following:

	June 30,			December 31,
	2011			2010
	(000’s)
Real Estate:
Commercial	$	844,740		$	796,253
Construction		148,440			174,369
Residential		671,638			467,326
Commercial & Industrial		227,008			245,263
Lease Financing and other		42,949			49,040
Total		1,934,775			1,732,251
Deferred loan fees, net		(4,125	)		(4,115	)
Allowance for loan losses		(41,889	)		(38,949	)
Loans, net	$	1,888,761		$	1,689,187

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The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment for the three and six month periods ended June 30, 2011 and 2010 (in thousands):

	Three Months Ended June 30, 2011
																Lease
				Commercial						Residential			Commercial &			Financing
	Total			Real Estate			Construction			Real Estate			Industrial			& Other
Balance at beginning of period	$	40,287		$	16,673		$	7,130		$	10,959		$	4,615		$	910
Charge-offs		(1,372	)		—			(120	)		(818	)		(376	)		(58	)
Recoveries		1,428			448			436			465			71			8
Net Charge-offs		56			448			316			(353	)		(305	)		(50	)
Provision for loan losses		1,546			(9	)		(1,006	)		2,555			(64	)		70
Net change during the period		1,602			439			(690	)		2,202			(369	)		20
Balance at end of period	$	41,889		$	17,112		$	6,440		$	13,161		$	4,246		$	930

	Six Months Ended June 30, 2011
																Lease
				Commercial						Residential			Commercial &			Financing
	Total			Real Estate			Construction			Real Estate			Industrial			& Other
Balance at beginning of period	$	38,949		$	16,736		$	7,140		$	9,851		$	4,290		$	932
Charge-offs		(6,627	)		(156	)		(856	)		(3,013	)		(2,544	)		(58	)
Recoveries		2,570			686			575			1,019			276			14
Net (Charge-offs) recoveries		(4,057	)		530			(281	)		(1,994	)		(2,268	)		(44	)
Provision for loan losses		6,997			(154	)		(419	)		5,304			2,224			42
Net change during the period		2,940			376			(700	)		3,310			(44	)		(2	)
Balance at end of period	$	41,889		$	17,112		$	6,440		$	13,161		$	4,246		$	930

	Three Months Ended June 30, 2010
																Lease
				Commercial						Residential			Commercial &			Financing
	Total			Real Estate			Construction			Real Estate			Industrial			& Other
Balance at beginning of period	$	39,363		$	16,830		$	6,948		$	8,772		$	6,296		$	517
Charge-offs		(21,075	)		(6,572	)		(7,362	)		(5,679	)		(1,376	)		(86	)
Recoveries		291			—			11			3			274			3
Net Charge-offs		(20,784	)		(6,572	)		(7,351	)		(5,676	)		(1,102	)		(83	)
Provision for loan losses		28,548			10,233			8,809			8,292			1,454			(240	)
Net change during the period		7,764			3,661			1,458			2,616			352			(323	)
Balance at end of period	$	47,127		$	20,491		$	8,406		$	11,388		$	6,648		$	194

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	Six Months Ended June 30, 2010
																Lease
				Commercial						Residential			Commercial &			Financing
	Total			Real Estate			Construction			Real Estate			Industrial			& Other
Balance at beginning of period	$	38,645		$	15,273		$	5,802		$	9,706		$	7,326		$	538
Charge-offs		(25,969	)		(6,686	)		(7,474	)		(10,075	)		(1,625	)		(109	)
Recoveries		321			—			11			9			292			9
Net Charge-offs		(25,648	)		(6,686	)		(7,463	)		(10,066	)		(1,333	)		(100	)
Provision for loan losses		34,130			11,904			10,067			11,748			655			(244	)
Net change during the period		8,482			5,218			2,604			1,682			(678	)		(344	)
Balance at end of period	$	47,127		$	20,491		$	8,406		$	11,388		$	6,648		$	194

Impaired loans as of June 30, 2011 and December 31, 2010 were as follows (in thousands):

	June 30, 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	$	44,927	$	43,542		—	$	22,714	$	21,166		—
Construction		9,915		8,431		—		16,985		11,868		—
Residential		18,154		13,755		—		11,476		7,223		—
Commercial & industrial		10,730		9,025		—		5,543		4,538		—
Lease financing & other		506		249		—		651		393		—
With an allowance recorded:
Commercial		—		—		—		—		—		—
Construction		5,355		5,355	$	907		3,821		3,821	$	850
Residential		—		—		—		521		521		17
Commercial & industrial		25		25		25		25		25		25
Lease financing & other		—		—		—		—		—		—
Total loans	$	89,612	$	80,382	$	932	$	61,736	$	49,555	$	892

The Company classifies all loans considered to be troubled debt restructurings (“TDRs”) as impaired. Impaired loans as of June 30, 2011 and December 31, 2010 included $39,031 and $17,236, respectively, of loans considered to be TDRs. At June 30, 2011, three TDRs with a carrying amounts of $22,765 were on accrual status and performing in accordance with their modified terms. At 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 June 30, 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.

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The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 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	$	40,957	$	17,112	$	5,533	$	13,161	$	4,221	$	930
Individually evaluated for impairment		932		—		907		—		25		—
Total ending balance of allowance	$	41,889	$	17,112	$	6,440	$	13,161	$	4,246	$	930
Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	1,854,393	$	801,199	$	134,653	$	657,883	$	217,958	$	42,700
Individually evaluated for impairment		80,382		43,542		13,786		13,755		9,050		249
Total ending balance of loans	$	1,934,775	$	844,741	$	148,439	$	671,638	$	227,008	$	42,949

	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

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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 June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 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	$	5,837		—	$	1,942	$	292
Non owner occupied		14,941		—		13,353		—
Construction:
Commercial		2,932		—		4,477		1,323
Residential		10,853		—		11,212		—
Residential:
Multifamily		5,248		—		1,437		—
1-4 family		4,797		—		4,649		—
Home equity		3,710		—		1,658		10
Commercial & Industrial		9,050		—		4,563		—
Other:
Lease financing and other		249		—		393		—
Overdrafts		—				—
Total	$	57,617		—	$	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 June 30, 2011 and December 31, 2010 by class of loans (in thousands):

	June 30, 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	$	324,151		—	$	2,024	$	5,054	$	7,078	$	317,073
Non owner occupied		520,589		—		2,564		13,438		16,002		504,587
Construction:
Commercial		84,722		—		4,513		2,932		7,445		77,277
Residential		63,718		—		—		10,852		10,852		52,866
Residential:
Multifamily		364,659		—		1,117		4,132		5,249		359,410
1- 4 family		191,460	$	313		2,548		4,797		7,658		183,802
Home equity		115,519		1,952		238		3,710		5,900		109,619
Commercial & Industrial		227,008		—		390		9,050		9,440		217,568
Other:
Lease financing and other
Overdrafts		42,949		99		6		249		354		42,595
Total	$	1,934,775	$	2,364	$	13,400	$	54,214	$	69,978	$	1,864,797

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	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.

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The following table presents the risk category by class of loans as of June 30, 2011 and December 31, 2010 of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed (in thousands):

	June 30, 2011
					Special
	Total		Pass		Mention		Substandard		Doubtful
Commercial Real Estate:
Owner occupied	$	324,151	$	245,330	$	30,901	$	47,920		—
Non owner occupied		520,589		433,987		29,659		56,943		—
Construction:
Commercial		84,722		63,390		11,750		9,582		—
Residential		63,718		42,949		4,111		16,658		—
Residential:
Multifamily		364,659		350,954		2,884		10,821		—
1-4 family		103,170		81,608		7,042		14,520		—
Home equity		7,041		75		—		6,966		—
Commercial & Industrial		227,008		206,238		5,469		15,301		���
Other:
Lease Financing & Other		39,382		38,379		375		628		—
Total loans	$	1,734,440	$	1,462,910	$	92,191	$	179,339		—

	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.

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The following table presents the delinquency categories by class of loans as of June 30, 2011 and December 31, 2010 for loans evaluated for risk in groups of homogeneous loans (in thousands):

	June 30, 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	$	88,290	$	287		—		—	$	287	$	88,003
Home equity		108,478		1,528	$	238		—		1,766		106,712
Other:
Other loans		1,449		2		—		—		2		1,447
Overdrafts		2,118		—		—		—		—		2,118
Total loans	$	200,335	$	1,817	$	238		—	$	2,055	$	198,280

	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

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The following table presents the average recorded investment in impaired loans by portfolio segment and interest recognized on impaired loans for the three and six month periods ended June 30, 2011 and 2010 (in thousands):

											Lease
			Commercial				Residential		Commercial &		Financing
	Total		Real Estate		Construction		Real Estate		Industrial		& Other
Three months ended June 30, 2011:
Average recorded investment in impaired loans	$	70,344	$	34,299	$	14,545	$	13,750	$	7,431	$	319
Interest Income recognized during impairment	$	59	$	59	$	—	$	—	$	—	$	—
Three months ended June 30, 2010:
Average recorded investment in impaired loans	$	79,850	$	32,519	$	24,543	$	18,861	$	2,045	$	1,882
Interest Income recognized during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Six months ended June 30, 2011:
Average recorded investment in impaired loans	$	62,636	$	28,705	$	15,021	$	12,245	$	6,310	$	355
Interest income recognized during impairment	$	59	$	59	$	—	$	—	$	—	$	—
Six months ended June 30, 2010:
Average recorded investment in impaired loans	$	69,996	$	29,072	$	19,153	$	17,775	$	2,226	$	1,770
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 $1,674 and $4,100, respectively, for the six month periods ended June 30, 2011 and 2010.

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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					Six Months Ended
	June 30,					June 30,
	2011		2010			2011		2010
	(000’s except share data)
Numerator:
Net income (loss) available to common shareholders for basic and diluted earnings per share	$	7,432	$	(10,955	)	$	12,256	$	(6,100	)
Denominator:
Denominator for basic earnings per common share — weighted average shares		17,689,016		17,631,097			17,683,814		17,627,596
Effect of dilutive securities:
Stock options		59,073		—			61,999		—
Denominator for diluted earnings per common share — adjusted weighted average shares		17,748,089		17,631,097			17,745,813		17,627,596
Basic earnings per common share	$	0.42	$	(0.62	)	$	0.69	$	(0.35	)
Diluted earnings per common share	$	0.42	$	(0.62	)	$	0.69	$	(0.35	)
Dividends declared per share	$	0.15	$	0.21		$	0.30	$	0.42

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. For the three and six month periods ended June 30, 2010, the effects of outstanding stock options were not included in the diluted earning per share calculation as they would have been antidilutive due to the Company’s net loss for the respective periods. At June 30, 2011, the Company had 265,193 anti dilutive options with an average exercise price of $32.34.

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						Six Months
	Ended						Ended
	June 30,						June 30,
	2011			2010			2011			2010
Service cost	$	96		$	65		$	191		$	129
Interest cost		147			144			294			283
Amortization of prior service cost		(58	)		(47	)		(116	)		(95	)
Amortization of net loss		139			149			279			299
Net periodic pension cost	$	324		$	311		$	648		$	616

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 and six month periods ended June 30, 2011, the Company contributed $153 and $306, respectively, to these plans.

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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 six month period ended June 30, 2011.

The following table summarizes stock option activity for the six month period ended June 30, 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		(23,141	)		18.31
Cancelled or Expired		(17,447	)		23.22
Outstanding at June 30, 2011		659,482			24.14	$	451		2.8
Exercisable at June 30, 2011		631,301			23.47	$	451		2.8
Available for future grant		1,210,000

1)  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 June 30, 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 six month period ended June 30, 2011 or the year ended December 31, 2010.

Net compensation expense of $28 and $69 related to the Company’s stock option plans was included in net income for the three and six month periods ended June 30, 2011, respectively. The total tax effect related thereto was $3 and $2, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $137 at June 30, 2011. This expense is expected to be recognized over a remaining weighted average period of 1.0 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

26

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 June 30, 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.

27

Assets and liabilities measured at fair value are summarized below:

	Fair Value Measurements at June 30, 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		—	$	3,008		—	$	3,008
Mortgage-backed securities — residential		—		341,712		—		341,712
Obligations of states and political subdivisions		—		103,036		—		103,036
Other debt securities		—		569	$	2,923		3,492
Mutual funds and other equity securities		—		10,577		—		10,577
Total assets at fair value		—	$	458,902	$	2,923	$	461,825
Measured on a non-recurring basis:
Impaired loans(1)		—		—	$	19,715	$	19,715
Loans held for sale(2)		—		—		4,506		4,506
Other real estate owned(3)		—		—		2,370		2,370
Total assets at fair value		—		—	$	26,591	$	26,591

(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 June 30, 2011 was $20,647 for which a specific allowance of $932 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 June 30, 2011 was derived by management from appraisals which used various assumptions and were discounted as necessary, resulting in a Level 3 classification.

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	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 and six month periods ended June 30, 2011 and 2010:

	Level 3 Assets Measured on a Recurring Basis
	For the three months						For the six months
	ended June 30,						ended June 30,
	2011			2010			2011			2010
	(000’s)						(000’s)
Balance at beginning of period	$	3,016		$	3,800		$	3,687		$	3,938
Transfers into (out of) Level 3		94			85			196			244
Net unrealized gain (loss) included in other comprehensive income		(141	)		(745	)		(753	)		730
Principal payments		(3	)		—			(3	)		—
Recognized impairment charge included in the statement of income		(43	)		(511	)		(204	)		(2,283	)
Balance at end of period	$	2,923		$	2,629		$	2,923		$	2,629

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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 June 30, 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 June 30, 2011 and December 31, 2010 were as follows:

	June 30, 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	$	307.6	$	307.6	$	356.2	$	356.2
Held to maturity securities, and accrued interest		14.6		15.5		16.3		17.3
FHLB Stock		4.7		N/A		7.0		N/A
Loans and accrued interest		1,919.5		1,953.6		1,717.8		1,759.8
Liabilities:
Deposits with no stated maturity and accrued interest		2,251.6		2,251.6		2,047.4		2,047.4
Time deposits and accrued interest		168.0		168.4		188.5		188.9
Securities sold under repurchase agreements and other short-term borrowing and accrued interest		43.7		43.7		36.6		36.6
Other borrowings and accrued interest		36.7		34.8		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.

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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 became 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. The adoption of this ASU by the Company is not expected to have a material effect on the Company’s financial condition or results of operations.

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

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

This section presents discussion and analysis of the Company’s consolidated financial condition at June 30, 2011 and December 31, 2010, and the consolidated results of operations for the three and six month periods ended June 30, 2011 and June 30, 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 June 30, 2011 of $7.4 million or $0.42 per diluted share, an increase of $18.4 million compared to a net loss of $11.0 million or $(0.62) per diluted share for the same period in the prior year. Net income for the six month period ended June 30, 2011 was $12.3 million or $0.69 per diluted share, an increase of $18.4 million compared to a net loss of $6.1 million or $(0.35) per diluted share for the same period in the prior year. Per share amounts for the 2010 periods have been adjusted to reflect the effects of the 10 percent stock dividend issued in December 2010.

The increases in earnings resulted primarily from significant decreases in the provision for loan losses which totaled $1.5 million and $7.0 million, respectively, for the three and six month periods ended June 30, 2011, compared to $28.5 million and $34.1 million, respectively, for the same periods in the prior year. The 2011 provisions are significantly lower than those in 2010, however, 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. The severity of the decline in real estate values has provided new market opportunities for the disposition of distressed assets as investors search for yield in the current low interest rate environment and our more aggressive policy has begun to take advantage of those opportunities. 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 probable 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 $115.6 million and $202.5 million, respectively, during the three and six month period ended June 30, 2011. These increases resulted primarily from strong demand for local market multi-family loans and increases 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 six month period ended June 30, 2011. The Company has continued to experience a slowdown in

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payments of certain loans, such as construction loans, whose repayment is often dependent on sales of completed properties, as well as higher than normal levels of 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 slightly to $64.5 million at June 30, 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 theloan-to-value ratios on existing loans continued during the first half of 2011. Despite recent improvement in most economic indicators, the Company’s loan portfolio continued to be adversely impacted by the effects of severe declines in the demand for and values of virtually all commercial and residential real estate properties. These declines, together with the limited availability of residential mortgage financing, resulted in continued downward pressure on the overall asset quality of the Company’s loan portfolio. In addition, significant increases in filings of bankruptcy and foreclosure proceedings continue to overload the court systems and have resulted in what the Company believes to be unacceptable delays in attempts to obtain title to real estate and other collateral through conventional foreclosure. As a result of these factors, since the second quarter of 2010, the Company has followed the more aggressive strategy for resolving problem assets discussed above including consideration of sales of certain nonperforming loans.

Total deposits increased $184.0 million during the six month period ended June 30, 2011, compared to the prior year end. The Company continued to experience significant growth in new customers both in existing branches and new branches added during the last two years. 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 offset by reinvestment of available liquidity in new loans, primarily local market multi-family loans and a $66.3 million reduction of term borrowings since June 30, 2010, of which $51.3 million occurred in the first half of 2011. The resulting net interest margin of 4.55 percent for the three month period ended June 30, 2011, increased compared to the 4.39 percent for the three month period ended March 31, 2011, and the 4.15 percent for three month period ended June 30, 2010.

As a result of the aforementioned activity in the Company’s core businesses of loans and deposits and other asset/liability management activities, tax equivalent basis net interest income increased by $1.6 million or 5.6 percent to $30.2 million for the three month period ended June 30, 2011, compared to $28.6 million for the same period in the prior year. Tax equivalent basis net interest income increased by $0.6 million or 1.0 percent to $58.3 million for the six month period ended June 30, 2011, compared to $57.7 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $0.6 million and $1.2 million, respectively, for the three and six month periods ended June 30, 2011, compared to $0.9 million and $1.8 million, respectively, for the same periods in the prior year.

The Company’s non interest income was $3.8 million and $9.1 million, respectively, for the three and six month periods ended June 30, 2011. This represented increases of $1.1 million or 40.7 percent and $3.6 million or 65.5 percent, respectively, compared to $2.7 million and $5.5 million, respectively, for the same periods in the prior year. These increases partially resulted from an increase in investment advisory fees. Fee income from this source increased primarily as a result of the effects of continued improvement in both domestic and international equity markets. Assets under management were approximately $1.5 billion at June 30, 2011 compared to $1.2 billion at June 30, 2010. Non interest income also included recognized pre-tax impairment charges on securities available for sale of $0.1 million and $0.2 million, respectively, for the three and six month periods ended June 30, 2011 and $0.5 million and $2.3 million, respectively, for the same periods 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

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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 also included other losses of $1.0 million and $0.9 million, respectively, for the three and six month periods ended June 30, 2011 and $1.4 million and $1.4 million, respectively, for the same periods in the prior year. These losses related to sales and revaluations of other real estate owned and loans held for sale.

Non interest expense was $20.6 million and $41.1 million, respectively, for the three and six month periods ended June 30, 2011. This represented increases of $2.5 million or 13.8 percent and $4.5 million or 12.3 percent, respectively, compared to $18.1 million and $36.6 million, respectively, for the same periods 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, 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.

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 and Six Month Periods Ended June 30, 2011 and June 30, 2010

Summary of Results

The Company recorded net income of $7.4 million or $0.42 per diluted share and $12.3 million or $0.69 per diluted share, respectively, for the three and six month periods ended June 30, 2011, compared to net losses of $11.0 million or $(0.62) per diluted share and $6.1 million or $(0.35) per diluted share for the same periods in the prior year. Per share amounts for the 2010 periods have been adjusted to reflect the effects of the 10% stock dividend issued in December 2010. The increases in net income for the three and six month periods ended June 30, 2011, compared to the same periods in the prior year, reflected significantly lower provisions for loan losses, higher net interest income and higher non interest income, partially offset by higher non interest expense and higher income taxes. Higher earnings in the 2011 periods, compared to the same periods in the prior year, resulted primarily from significant decreases in the provisions for loan losses which totaled $1.5 million and $7.0 million, respectively, for the three and six month periods ended June 30, 2011, compared to $28.5 million and $34.1 million, respectively, for the same periods in the prior year. The 2011 provisions are significantly lower than those in 2010, however, 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. Net interest income was

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higher primarily due to reinvestment of excess liquidity into new loans and a lower average cost of funds. Non interest income was higher in 2011, compared to 2010, primarily due to higher investment advisory fees, lower charges forother-than-temporary impairment of available for sale securities, and lower losses on disposition and revaluation of other real estate owned and loans held for sale. Increases in non interest expense in 2011, compared to 2010, 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.

Annualized returns (losses) on average stockholders’ equity and average assets were 10.1 percent and 1.1 percent for the three month period ended June 30, 2011, compared to (14.8) percent and (1.5) percent for the same period in the prior year. Annualized returns (losses) on average stockholders’ equity and average assets were 8.4 percent and 0.9 percent for the six month period ended June 30, 2011, compared to (4.1) percent and (0.4) percent for the same period in the prior year. Returns on adjusted average stockholders’ equity were virtually the same at 10.1 percent and 8.4 percent, respectively, for the three and six month periods ended June 30, 2011 and (15.0) percent and (4.1) percent, respectively for the same periods in the prior year. Adjusted average stockholders’ equity excludes the effects of average net unrealized gains, net of tax of $0.2 million and $0.3 million for the three and six month periods ended June 30, 2011,and $2.9 million and $2.4 million, respectively, for the same periods in the prior year, on securities available for sale. The annualized return on adjusted average stockholders’ equity is, under SEC regulations, a non-GAAP financial measure. Management believes that this non-GAAP financial measure 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.

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Average Balances and Interest Rates

The following tables set forth the average balances of interest earning assets and interest bearing liabilities for the three and six month periods ended June 30, 2011 and June 30, 2010, as well as total interest and corresponding yields and rates (dollars in thousands):

	Three Months Ended June 30,
	2011							2010
	Average				Yield/			Average				Yield/
	Balance		Interest(3)		Rate			Balance		Interest(3)		Rate
	(Unaudited)
ASSETS
Interest earning assets:
Deposits in Banks	$	250,408	$	201		0.32	%	$	316,380	$	166		0.21	%
Federal funds sold		41,988		23		0.22			62,114		36		0.23
Securities:(1)
Taxable		358,474		3,147		3.51			386,195		3,560		3.69
Exempt from federal income taxes		110,642		1,769		6.40			165,845		2,494		6.02
Loans, net(2)		1,840,076		27,941		6.07			1,731,967		27,127		6.27
Total interest earning assets		2,601,588		33,081		5.09			2,662,501		33,383		5.02
Non interest earning assets:
Cash & due from banks		50,110							48,753
Other assets		140,332							138,224
Total non interest earning assets		190,442							186,977
Total assets	$	2,792,030						$	2,849,478
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Money market	$	969,145	$	1,603		0.66	%	$	961,839	$	2,167		0.90	%
Savings		112,632		115		0.41			112,318		133		0.47
Time		169,824		384		0.90			209,038		665		1.27
Checking with interest		290,163		188		0.26			361,091		354		0.39
Securities sold under repo & other s/t borrowings		45,350		57		0.50			60,917		71		0.47
Other borrowings		46,379		501		4.32			118,465		1,440		4.86
Total interest bearing liabilities		1,633,493		2,848		0.70			1,823,668		4,830		1.06
Non interest bearing liabilities:
Demand deposits		841,503							716,312
Other liabilities		23,804							16,739
Total non interest bearing liabilities		865,307							733,051
Stockholders’ equity(1)		293,230							292,759
Total liabilities and stockholders’ equity	$	2,792,030						$	2,849,478
Net interest earnings			$	30,233						$	28,553
Net yield on interest earning assets						4.65	%						4.29	%

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	Six Months Ended June 30,
	2011							2010
	Average				Yield/			Average				Yield/
	Balance		Interest(3)		Rate			Balance		Interest(3)		Rate
	(Unaudited)
ASSETS
Interest earning assets:
Deposits in Banks	$	263,609	$	365		0.28	%	$	249,140	$	259		0.21	%
Federal funds sold		43,318		49		0.23			75,036		78		0.21
Securities:(1)
Taxable		349,276		6,097		3.49			374,450		7,247		3.87
Exempt from federal income taxes		112,988		3,555		6.29			167,881		5,125		6.11
Loans, net(2)		1,784,059		54,273		6.08			1,745,062		54,691		6.27
Total interest earning assets		2,553,250		64,339		5.04			2,611,569		67,400		5.16
Non interest earning assets:
Cash & due from banks		45,591							45,401
Other assets		146,736							139,995
Total non interest earning assets		192,327							185,396
Total assets	$	2,745,577						$	2,796,965
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Money market	$	919,924	$	3,142		0.68	%	$	925,967	$	4,347		0.94	%
Savings		113,695		242		0.43			112,547		261		0.46
Time		177,107		819		0.92			208,088		1,339		1.29
Checking with interest		285,510		361		0.25			345,044		707		0.41
Securities sold under repo & other s/t borrowings		42,545		104		0.49			63,480		148		0.47
Other borrowings		60,642		1,345		4.44			121,106		2,938		4.85
Total interest bearing liabilities		1,599,423		6,013		0.75			1,776,232		9,740		1.10
Non interest bearing liabilities:
Demand deposits		830,784							705,159
Other liabilities		23,260							21,132
Total non interest bearing liabilities		854,044							726,291
Stockholders’ equity(1)		292,110							294,442
Total liabilities and stockholders’ equity	$	2,745,577						$	2,796,965
Net interest earnings			$	58,326						$	57,660
Net yield on interest earning assets						4.57	%						4.42	%

(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 as non-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.

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Average Balances and Interest Rates Non-GAAP Reconciliation to GAAP

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(000’s)						(000’s)
Total interest earning assets:
As reported	$	2,601,546		$	2,667,221		$	2,553,508		$	2,615,350
Unrealized (loss) gain on securities available for sale(1)		(42	)		4,720			258			3,781
Adjusted total interest earning assets	$	2,601,588		$	2,662,501		$	2,553,250		$	2,611,569
Net interest earnings:
As reported	$	29,614		$	27,680		$	57,082		$	55,866
Adjustment to tax equivalency basis(2)		619			873			1,244			1,794
Adjusted net interest earnings	$	30,233		$	28,553		$	58,326		$	57,660
Net yield on interest earning assets:
As reported		4.55	%		4.15	%		4.47	%		4.27	%
Effects of(1) and(2) above		0.10	%		0.14	%		0.10	%		0.15	%
Adjusted net yield on interest earning assets		4.65	%		4.29	%		4.57	%		4.42	%
Average stockholders’ equity:
As reported	$	293,390		$	295,695		$	292,413		$	296,812
Effects of(1) and(2) above		160			2,936			303			2,370
Adjusted average stockholders’ equity	$	293,230		$	292,759		$	292,110		$	294,442

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Interest Differential

The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three and six month periods ended June 30, 2011 and June 30, 2010:

	(000’s)									(000’s)
	Three Month Period Increase									Six Month Period Increase
	(Decrease) Due to Change in									(Decrease) Due to Change in
	Volume			Rate			Total(1)			Volume			Rate			Total(1)
Interest income:
Deposits in Banks	$	(35	)	$	70		$	35		$	15		$	91		$	106
Federal funds sold		(12	)		(1	)		(13	)		(33	)		4			(29	)
Securities:
Taxable		(256	)		(157	)		(413	)		(487	)		(663	)		(1,150	)
Exempt from federal income taxes		(830	)		105			(725	)		(1,676	)		106			(1,570	)
Loans, net		1,693			(879	)		814			1,222			(1,640	)		(418	)
Total interest income		560			(862	)		(302	)		(959	)		(2,102	)		(3,061	)
Interest expense:
Deposits:
Money market		16			(580	)		(564	)		(28	)		(1,177	)		(1,205	)
Savings		—			(18	)		(18	)		3			(22	)		(19	)
Time		(125	)		(156	)		(281	)		(199	)		(321	)		(520	)
Checking with interest		(70	)		(96	)		(166	)		(122	)		(224	)		(346	)
Securities sold under repo & other s/t borrowings		(18	)		4			(14	)		(49	)		5			(44	)
Other borrowings		(876	)		(63	)		(939	)		(1,467	)		(126	)		(1,593	)
Total interest expense		(1,073	)		(909	)		(1,982	)		(1,862	)		(1,865	)		(3,727	)
Increase (decrease) in interest differential	$	1,633		$	47		$	1,680		$	903		$	(237	)	$	666

(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

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.

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, increased by $1.6 million or 5.6 percent to $30.2 million and $0.6 million or 1.0 percent to $58.3 million, respectively, for the three and six month periods ended June 30, 2011, compared to $28.6 million and $57.7 million, respectively, for the same periods in the prior year. Net interest income for the 2011 periods was higher partially due to increases in the tax equivalent basis net interest margin to 4.65 percent and 4.57 percent, respectively, for the three and six month periods ended June 30, 2011, compared to 4.29 percent and 4.42 percent, respectively, for the same periods in the prior year, partially offset by generally lower interest rates. The increase in net interest income was also partially due

39

to increases in the excess of adjusted average interest earning assets over average interest bearing liabilities of $129.3 million or 15.4 percent to $968.1 million, and $118.5 million or 14.2 percent to $953.9 million, respectively, for the three and six month periods ended June 2011 compared to $838.8 million and $835.4 million for the same periods in the prior year.

The Company’s overall asset quality has continued to be 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.

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.

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 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. Management believes that 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 investments, federal funds sold and interest bearing deposits, partially offset by a volume increase in loans and a slightly higher average yield on interest earning assets, resulted in lower interest income for the three month period ended June 30, 2011, compared to the same period in the prior year. Adjusted average interest earning assets for the three month period ended June 30, 2011 decreased $60.9 million or 2.3 percent to $2,601.6 million from $2,662.5 million for the same period in the prior year. Volume decreases in investments and federal funds sold and a lower average yield on interest earning assets, partially offset by volume increases in loans and interest earning deposits, resulted in lower interest income for the six month period ended June 30, 2011, compared to the same period in the prior year. Adjusted average interest earning assets for the six month period ended June 30, 2011 decreased $58.3 million or 2.2 percent to $2,553.3 million from $2,611.6 million for the same period in the prior year. The decreases in average interest earning assets for the 2011 periods, compared to the same periods in the prior year, resulted primarily from the Company’s planned utilization of existing available liquidity to reduce term borrowings.

Loans are the largest component of interest earning assets. Average net loans increased $108.1 million or 6.2 percent to $1,840.1 million, and increased $39.0 million or 2.2 percent to $1,784.1 million, respectively, for the three and six month periods ended June 30, 2011, compared to $1,732.0 million and $1,745.1 million, respectively, for the same periods in the prior year. The average yield on loans was 6.07 percent and 6.08 percent, respectively, for the three and six month periods ended June 30, 2011, compared to 6.27 percent for both of the same periods in the prior year. As a result, interest income on loans was higher for the three month period ended June 30, 2011, compared to the same period in the prior year, due to higher volume, partially offset by lower average interest rates. Interest income on loans was slightly lower for the six month period ended June 30, 2011, compared to the same period in the prior year, as a result of lower average interest rates, partially offset by higher volume.

Average total securities, including Federal Home Loan Bank (“FHLB”) stock and excluding net unrealized gains and losses, decreased $82.9 million or 15.0 percent to $469.1 million, and decreased $80.0 million or 14.8 percent to $462.3 million, respectively, for the three and six month periods ended June 30, 2011, compared to $552.0 million and $542.3 million for the same periods in the prior year. The decreases in average total securities resulted primarily from a planned reduction in the portfolio conducted by the Company as part of its ongoing asset/

40

liability management efforts. The average tax equivalent basis yield on securities was 4.19 percent and 4.18 percent, respectively, for the three and six month periods ended June 30, 2011, compared to 4.39 percent and 4.56 percent, respectively, for the same periods in the prior year. As a result, tax equivalent basis interest income on securities decreased for the three and six month periods ended June 30, 2011, compared to the same periods in the prior year, due to lower volume and lower interest rates. Increases and decreases in average FHLB stock resulted 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 $2.0 million or 41.7 percent to $2.8 million and $3.7 million or 38.1 percent to $6.0 million, respectively, for the three and six month periods ended June 30, 2011, compared to $4.8 million and $9.7 million, respectively, for the same periods in the prior year. Average interest bearing liabilities decreased $190.2 million or 10.4 percent to $1,633.5 million and $176.8 million or 10.0 percent to $1,599.4 million, respectively, for the three and six month periods ended June 30, 2011, compared to $1,823.7 million and $1,776.2 million, respectively, for the same periods in the prior year. The decreases in average interest bearing liabilities for the three and six month periods ended June 30, 2011, compared to the same periods in the prior year, were 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 average interest bearing deposits were more than offset by increases in noninterest bearing demand deposits. The decrease in average short-term and other borrowings for the three and six month periods ended June 30, 2011, compared to the same periods in the prior year, resulted from management’s decision to utilize 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 0.70 percent and 0.75 percent, respectively, for the three and six month periods ended June 30, 2011, compared to 1.06 percent and 1.10 percent, respectively, for the same periods in the prior year. As a result of these factors, interest expense on average interest bearing liabilities was lower for the three and six month periods ended June 30, 2011, compared to the same periods in the prior year due to lower interest rates and lower volume.

Average non interest bearing demand deposits increased $125.2 million or 17.5 percent to $841.5 million, and $125.6 million or 17.8 percent to $830.8 million, respectively, for the three and six month periods ended June 30, 2011, compared to $716.3 million and $705.2 million, respectively, for the same periods 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 and six month periods ended June 30, 2011 and 2010 is as follows:

	Three Month						Six Month
	Period Ended						Period Ended
	June 30,						June 30,
	2011			2010			2011			2010
Average interest rate on:
Total average interest earning assets		5.09	%		5.02	%		5.04	%		5.16	%
Total average interest bearing liabilities		0.70	%		1.06	%		0.75	%		1.10	%
Total interest rate spread		4.39	%		3.96	%		4.29	%		4.06	%

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. 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 $1.5 million and $7.0 million, respectively, for the three and six month periods ended June 30, 2011, compared to $28.5 million and $34.1 million, respectively, for the same periods 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.

41

Non Interest Income

The Company’s non interest income was $3.8 million and $9.1 million, respectively, for the three and six month periods ended June 30, 2011. This represented increases of $1.1 million or 40.7 percent and $3.6 million or 65.5 percent, respectively, compared to $2.7 million and $5.5 million, respectively, for the same periods in the prior year. These increases partially resulted from an increase in investment advisory fees. Fee income from this source increased primarily as a result of the effects of continued improvement in both domestic and international equity markets. Assets under management were approximately $1.5 billion at June 30, 2011 compared to $1.2 billion at June 30, 2010. Non interest income also included recognized pre-tax impairment charges on securities available for sale of $0.1 million and $0.2 million, respectively, for the three and six month periods ended June 30, 2011 and $0.5 million and $2.3 million, respectively, for the same periods 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 also included other losses of $1.0 million and $0.9 million, respectively, for the three and six month periods ended June 30, 2011 and $1.4 million and $1.4 million, respectively, for the same periods in the prior year. These losses related to sales and revaluations of other real estate owned and loans held for sale.

Non Interest Expense

Non interest expense was $20.6 million and $41.1 million, respectively, for the three and six month periods ended June 30, 2011. This represented increases of $2.5 million or 13.8 percent and $4.5 million or 12.3 percent, respectively, compared to $18.1 million and $36.6 million, respectively, for the same periods 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, 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, partially offset by a lower FDIC deposit insurance premiums.

Salaries and employee benefits, the largest component of non interest expense, for the three and six month periods ended June 30, 2011 increased $1.8 million or 18.9 percent to $11.3 million and $2.7 million or 13.9 percent to $22.1 million, respectively, compared to $9.5 million and $19.4 million for the same periods in the prior year. The increases primarily resulted from the Company’s reinstatement of an incentive compensation plan previously terminated in 2009, merit increases, and additional personnel added to accommodate growth.

Occupancy expense for the three and six month periods ended June 30, 2011 increased $0.3 million or 15.8 percent to $2.2 million and increased $0.4 million or 9.8 percent to $4.5 million, respectively, as compared to $1.9 million and $4.1 million for the same periods in the prior year. The 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 for the three and six month periods ended June 30, 2011 increased $0.2 million or 13.3 percent to $1.7 million and $0.3 million or 10.3 percent to $3.2 million, respectively, compared to $1.5 million and $2.9 million, respectively, for the same periods in the prior year. The increases were primarily due to costs related to the engagement of consultants to assist with new systems implementations.

Equipment expense for the three and six month periods ended June 30, 2011 increased $0.1 million or 10.0 percent to $1.1 million and $0.2 million or 10.5 percent to $2.1 million, respectively, compared to $1.0 million and $1.9 million, respectively, for the same periods in the prior year. The increase was due to increased equipment and software maintenance costs.

Business development expense was $0.6 million and $1.1 million, respectively, for the three and six month periods ended June 30, 2011, compared to $0.5 million and $1.1 million, respectively for the same periods in the

42

prior year. The slight increase in the three month period, compared to the prior year period, resulted from slightly higher public relations expenses.

The FDIC assessment for the three and six month periods ended June 30, 2011 decreased $0.5 million or 41.7 percent to $0.7 million and $0.5 million or 21.7 percent to $1.8 million, respectively, compared to $1.2 million and $2.3 million for the same periods in the prior year. The decreases were due to the change in the premium calculation base by the FDIC.

Significant changes in other components of non interest expense for the three and six month periods ended June 30, 2011 compared to June 30, 2010, were due to the following:

•  Increase of $100,000 (62.9%) and $243,000 (94.6%), respectively, in other insurance expense, resulting increases in banker’s professional and automobile insurance costs,

•  Increase of $91,000 (90.1%) and $55,000 (16.1%), respectively, in stationary and printing costs, due to increased consumption,

•  Decrease of $27,000 (12.2%) and an increase of $63,000 (15.6%) in courier costs due to increased utilization in the first quarter of 2011,

•  Increase of $239,000 (60.2%) and $40,000 (4.0%) in other loan expenses primarily due to costs associated with properties held as other real estate owned and asset recovery costs,

•  Decrease of $16,000 (1.4%) and increase of $300,000 (15.3%) in outside services, due to outsourcing of several data processing functions,

•  Increase of $45,000 (12.1%) and $121,000 (85.8%) in meetings and seminars due to reflecting reduced participation in such events in 2010.

Income Taxes

Income taxes (benefit) of $3.8 million and $5.8 million, respectively, were recorded in the three and six month periods ended June 30, 2011, compared to $(5.4) million and $(3.3) million, respectively for the same periods in the prior year. Overall effective tax rate of 32.1 percent for the six month period ended June 30, 2011 was lower compared to 35.0 percent for the same period in the prior year. The 2011 effective rate was lower 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.

Financial Condition

Assets

The Company had total assets of $2,817.8 million at June 30, 2011, an increase of $148.8 million or 5.6 percent from $2,669.0 million at December 31, 2010.

Cash and Due from Banks

Cash and due from banks was $271.2 million at June 30, 2011, a decrease of $13.0 million or 4.6 percent from $284.2 million at December 31, 2010. Included in cash and due from banks is interest earning deposits of $223.5 million at June 30, 2011 and $258.3 million at December 31, 2010.

Federal Funds Sold

Federal funds sold totaled $36.4 million at June 30, 2011, a decrease of $35.7 million or 49.5 percent from $72.1 million at December 31, 2010. The decrease was a result of excess liquidity being deployed into loans or utilized for the repayment of term borrowings.

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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.

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 $461.8 million at June 30, 2011 which was an increase of $18.1 million or 4.1 percent from $443.7 million at December 31, 2010. The increase resulted from a $32.2 million increase in mortgage-backed securities which were partially offset by a decrease of $13.1 million of obligations of state political subdivisions, a decrease of $0.9 million of other debt securities and a decrease of $0.1 million of mutual funds and other equity securities. Included in other debt securities are pooled trust preferred securities, which had an aggregate cost basis of $11.6 million as of both June 30, 2011 and December 31, 2010. These pooled trust preferred securities have suffered severe declines in the prior periods 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.

The held to maturity portfolio totaled $14.5 million at June 30, 2011, which was a decrease of $1.8 million or 12.4 percent from $16.3 million at December 31, 2010. The decrease was due to a decrease of $1.8 million in mortgage-backed securities.

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 $4.7 million at June 30, 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 June 30, 2011 or December 31, 2010.

Loans

Net loans totaled $1,888.8 million at June 30, 2011, an increase of $199.6 million or 11.8 percent from $1,689.2 million at December 31, 2010. The increase resulted principally from a $204.3 million increase in residential real estate loans and a $48.5 increase in commercial real estate loans which was partially offset by a $25.9 million decrease in construction loans, a $18.3 million decrease in commercial and industrial loans, and a $6.1 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 $212.4 million during the six month period ended June 30, 2011. The Company expects to continue its focus on multi-family loans originated in the New York City area.

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The loan portfolio is comprised of the following:

	June 30,			December 31,
	2011			2010
	(000’s)
Real Estate:
Commercial	$	844,740		$	796,253
Construction		148,440			174,369
Residential		671,638			467,326
Commercial and industrial		227,008			245,263
Lease financing and other		42,949			49,040
Total		1,934,775			1,732,251
Deferred loan fees, net		(4,125	)		(4,115	)
Allowance for loan losses		(41,889	)		(38,949	)
Loans, net	$	1,888,761		$	1,689,187

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

	June 30,			March 31,			December 31,			September 30			June 30,
	2011			2011			2010			2010			2010
Loans Past Due 90 Days or More and Still Accruing:
Real Estate:
Commercial		—			—		$	292			—			—
Construction		—			—			1,323			—			—
Residential		—			—			—		$	197		$	342
Total Real Estate		—			—			1,615			197			342
Commercial & Industrial		—			—			10			—			65
Lease Financing and Individuals		—			—			—			—			41
Total Loans Past Due 90 Days or More and Still Accruing		—			—			1,625			197			448
Non-Accrual Loans:
Real Estate:
Commercial	$	20,778		$	19,184			15,295			14,672			27,312
Construction		13,785			15,305			15,689			14,405			19,566
Residential		13,755			13,745			7,744			10,038			19,967
Total Real Estate		48,318			48,234			38,728			39,115			66,845
Commercial & Industrial		9,050			5,546			4,563			2,410			2,583
Lease Financing and Individuals		249			653			393			393			134
Total Non-Accrual Loans		57,617			54,433			43,684			41,918			69,562
Other Real Estate Owned		2,370			4,810			11,028			9,393			5,578
Nonperforming Assets excluding loans held for sale		59,987			59,243			56,337			51,508			75,588
Nonperforming loans held for sale		4,506			5,506			7,811			21,864			—
Total Nonperforming Assets including loans held for sale	$	64,493		$	64,749		$	64,148		$	73,372		$	75,558
Net (recoveries) charge-offs during quarter	$	(56	)	$	4,113		$	3,763		$	16,813		$	20,784
Nonperforming assets to total assets:
Excluding loans held for sale		2.13	%		2.23	%		2.11	%		1.82	%		2.62	%
Including loans held for sale		2.29	%		2.44	%		2.40	%		2.59	%		2.62	%

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Non-accrual loans increased $13.9 million to $57.6 million at June 30, 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 six month period ended June 30, 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 $1.7 million and $4.3 million for the six month period ended June 30, 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 high level of 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 six month period ended June 30, 2011:

•  Non-accrual commercial real estate loans increased $5.5 million resulting from the transfer of eleven loans totaling $8.6 million, which was partially offset by the charge-off of one loan totaling $0.1 million, payoffs of four loans totaling $2.8 million and principal payments of $0.2 million.

•  Non-accrual construction loans decreased $1.9 million, resulting from the payoff of three loans totaling $3.5 million, full or partial charge-offs taken on eight loans totaling $0.8 million and the transfer of two loans totaling $0.9 million to other real estate owned which was partially offset by the transfer of four loans totaling $3.3 million.

•  Non-accrual residential loans increased $6.0 million resulting from the transfer of seventeen loans totaling $9.0 million which was partially offset by full or partial charge-offs taken on nine loans totaling $2.9 million and principal payments of $0.1 million.

•  Non-accrual commercial and industrial loans increased $4.5 million resulting from the transfer of nineteen loans totaling $7.2 million which was partially offset by full or partial charge offs of fifteen loans totaling $2.5 million, the payoff of one loan totaling $0.1 million and principal payments of $0.1 million.

•  Non-accrual loans to individuals decreased $0.2 million resulting from principal payments of $0.6 million and charge-offs of $0.1 million which was partially offset by the transfer of five loans totaling $0.5 million.

•  Other real estate owned decreased $8.6 million resulting from the sale of four properties totaling $9.3 million and valuation adjustments of $0.2 million taken on two properties which was partially offset by the addition of one property totaling $0.9 million.

There were no loans past due 90 days or more and still accruing at June 30, 2011 and three loans totaling $1.6 million at December 31, 2010 that were past due 90 days and still accruing. In addition, the Company had $12.4 million and $21.0 million of loans that were31-89 days delinquent and still accruing at June 30, 2011 and December 31, 2010, respectively.

Loans considered by the Company to be impaired totaled $80.4 million and $49.6 million at June 30, 2011 and December 31, 2010, respectively, for which specific reserves of $0.9 million and $0.9 million had been established.

There were nineteen loans totaling $39.0 million at June 30, 2011 and there were eight loans totaling $17.2 million at December 31, 2010 that were considered troubled debt restructurings. At June 30, 2011, four loans totaling $22.8 million were performing in accordance with their restructured terms and, at December 31, 2010, one loan totaling $5.9 million was performing in accordance with its restructured terms. The remaining loans which totaled $16.3 million and $11.3 million at June 30, 2011 and December 31, 2010, respectively, are on non-accrual status. At June 30, 2011, the Company had no commitments to lend additional funds to non-accrual or restructured loans.

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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 thisForm 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
	June 30,		During			December 31,
	2011		2011			2010
Components
Specific:
Real Estate:
Commercial		—		—			—
Construction	$	907	$	57		$	850
Residential		—		(17	)		17
Commercial and Industrial		25		—			25
Lease Financing and other		—		—			—
Total Specific component		932		40			892
Formula:
Real Estate:
Commercial		17,112		376			16,736
Construction		5,533		(757	)		6,290
Residential		13,161		3,327			9,834
Commercial and Industrial		4,221		(44	)		4,265
Lease Financing and other		930		(2	)		932
Total Formula component		40,957		2,900			38,057
Total Allowance	$	41,889				$	38,949
Net Change				2,940
Net Charge-offs				(4,057	)
Provision for loan losses			$	6,997

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			Change
	June 30,		During			December 31,
	2010		2010			2009
Components
Specific:
Real Estate:
Commercial	$	972	$	972			—
Construction		2,432		2,307		$	125
Residential		361		(2,117	)		2,478
Commercial and Industrial		25		(471	)		496
Lease Financing and other		133		(342	)		475
Total Specific component		3,923		349			3,574
Formula:
Real Estate:
Commercial		19,519		4,246			15,273
Construction		5,974		297			5,677
Residential		11,027		3,799			7,228
Commercial and Industrial		6,623		(207	)		6,830
Lease Financing and other		61		(2	)		63
Total Formula component		43,204		8,133			35,071
Total Allowance	$	47,127				$	38,645
Net Change				8,482
Net Charge-offs				(25,648	)
Provision for loan losses			$	34,130

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 six months ended June 30, 2011, the Company recorded $6.6 million of charge-offs, of which $2.5 million were partial charge-offs related to current nonaccrual loans. At June 30, 2011, the Company had $0.9 million of specific reserves allocated to three impaired loans. There were $0.9 million of specific reserves allocated to three impaired loans as of December 31, 2010. The Company’s analyses as of June 30, 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 June 30, 2011:

•  Economic and business conditions— Although current indicators clearly show that the economy has begun to turn around, recovery is still expected to be a slow process. There is continued volatility in real estate

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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.

•  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 a result of charge-offs, paydowns and reduced production of new loans, concentrations in construction loans have been significantly reduced, concentrations in commercial real estate loans have grown slightly, In addition, the Company has significantly increased its portfolio of local-area multifamily loans. Changes in these concentrations were considered in the determination of the formula component of the allowance.

•  Collateral Values— Activity in commercial and residential real estate continues to be extremely soft, and there has been little improvement in collateral values in the Company’s primary market areas. As a result, additional collateral value factors both for Real Estate and for all other parts of the portfolio continue to be included in the determination of the formula component of the allowance.

•  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 half of 2011, the lagging effects of the economic downturn within the economy and our local market area have continued, however the levels of charge-offs have reduced substantially from 2010 levels. Changes in asset quality are considered in the determination of the formula component of the allowance.

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 thisForm 10-Q.

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of June 30, 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 or regulatory examinations.

Deposits

Deposits totaled $2,418.4 million at June 30, 2011, an increase of $184.0 million or 8.2 percent from $2,234.4 million at December 31, 2010. The following table presents a summary of deposits at June 30, 2011 and December 31, 2010.

	(000’s)
	June 30,		December 31,
	2011		2010		Increase (Decrease)
Demand deposits	$	857,732	$	756,917	$	100,815
Money market accounts		1,009,236		862,450		146,786
Savings accounts		109,436		120,238		(10,802	)
Time deposits of $100,000 or more		126,193		144,497		(18,304	)
Time deposits of less than $100,000		41,678		43,851		(2,173	)
Checking with interest		274,116		306,459		(32,343	)
Total Deposits	$	2,418,391	$	2,234,412	$	183,979

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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 $80.2 million at June 30, 2011, a decrease of $44.1 million or 35.5 percent from $124.3 million at December 31, 2010. The decrease resulted from maturities of FHLB term borrowings of $51.3 million which was partially offset by a $7.2 million increase in short-term repurchase agreements. 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 $295.7 million at June 30, 2011, an increase of $5.8 million or 2.0 percent from $289.9 million at December 31, 2010. The increase in stockholders’ equity resulted from net income of $12.3 million and net increase related to exercises of stock options of $0.5 million which was partially offset by cash dividends paid on common stock of $5.3 million, and decreases in accumulated other comprehensive income of $1.7 million.

The Company’s and the Bank’s capital ratios at June 30, 2011 and December 31, 2010 are as follows:

							Minimum to be			Enhanced Capital Requirements
	June 30,			December 31,			Considered			Effective
	2011			2010			Well Capitalized			as of December 31, 2009
Leverage ratio:
Company		9.8	%		9.6	%		5.0	%		N/A
HVB		9.1			8.8			5.0			8.0	%
Tier 1 capital:
Company		13.2	%		13.9	%		6.0	%		N/A
HVB		12.3			12.8			6.0			10.0	%
Total capital:
Company		14.4	%		15.2	%		10.0	%		N/A
HVB		13.5			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 June 30, 2011 include cash and due from banks of $47.7 million, $223.5 million of interest earning deposits and Federal funds sold of $36.4 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.

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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 $136.4 million at June 30, 2011. This represented 28.6 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $236.5 million, or 12.2 percent of loans at June 30, 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 June 30, 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 June 30, 2011. In addition, HVB has approved lines under Retail Certificate of Deposit Agreements with three major financial institutions totaling $1.0 billion of which no balances were outstanding as at June 30, 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 June 30, 2011.

As of June 30, 2011, the Company had qualifying loan and investment securities totaling approximately $389 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.

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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 Hudson Valley’s Annual Report onForm 10-K for the year ended December 31, 2010 include, but are not limited to, statements regarding:

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

•  ineffectiveness in managing our commercial real estate portfolio;

•  lower than expected future performance of our investment portfolio;

•  a lack of opportunities for growth, plans for expansion (including opening new branches) and increased or unexpected competition in attracting and retaining customers;

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

•  lower than expected demand for our products and services;

•  possible impairment of our goodwill and other intangible assets;

•  our inability to manage interest rate risk;

•  increased expense and burdens resulting from the regulatory environment in which we operate and our ability to comply with existing and future regulatory requirements;

•  our inability to maintain regulatory capital above the levels required by the Office of the Comptroller of the Currency, or the OCC, for Hudson Valley 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 may adversely affect 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) may subject us to additional regulatory oversight which may result in increased compliance costsand/or require us to change our business model;

•  potential increases or changes in competition among financial institutions and potential increases in interest expense resulting from the FRB’s recent repeal of Regulation Q, which will permit banks to offer interest-bearing demand deposit accounts to commercial customers;

•  future increased Federal Deposit Insurance Corporation, or FDIC, special assessments or changes to regular assessments;

•  our inability to raise additional capital in the future;

•  potential liabilities under federal and state environmental laws; and

•  limitations on dividends payable by Hudson Valley or Hudson Valley Bank.

Hudson Valley does not undertake to update or revise any of its forward-looking statements even if experience shows that the indicated results or events will not be realized.

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.

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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 onForm 10-K. There have been no material changes in the Company’s market risk exposure at June 30, 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 six month period ended June 30, 2011. The Company had no derivative financial instruments in place at June 30, 2011 and December 31, 2010.

The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at June 30, 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 June 30, 2011, shows a positive cumulative static gap of $56.5 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 June 30, 2011.

	Percentage Change
	in Estimated
	Net Interest
	Income from
	June 30,
Gradual Change in Interest Rates	2011				Policy Limit
+200 basis points		0	.3	%		(5.0	)%
−100 basis points		(1	.1	)%		(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 June 30, 2011. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 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 June 30, 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.

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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

3	.1	Restated Certificate of Incorporation of Hudson Valley Holding Corp.(1)
3	.2	Amended and Restated By-Laws of Hudson Valley Holding Corp.(2)
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).
101	.INS	XBRL Instance Document(3)
101	.SCH	XBRL Taxonomy Extension Schema(3)
101	.CAL	XBRL Taxonomy Extension Calculation Linkbase(3)
101	.LAB	XBRL Taxonomy Extension Label Linkbase(3)
101	.PRE	XBRL Taxonomy Extension Presentation Linkbase(3)
101	.DEF	XBRL Taxonomy Extension Definition Linkbase(3)

(1)	Incorporated herein by reference in this document to theForm 10-Q filed on October 20, 2009.
(2)	Incorporated herein by reference in this document to theForm 8-K filed on April 28, 2010.
(3)	Pursuant to Rule 406T ofRegulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or section 34(b) of the Investment Company Act of 1940, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on 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

August 8, 2011

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