##### Table of Contents






SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2005

Commission File number 030525

HUDSON VALLEY HOLDING CORP.

(Exact name of registrant as specified in its
charter)




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|                                                                                  |  |                                                        
|--------------------------------------------------------------------------------- |  | -------------------------------------------------------
|                                                                                 
|New York
    (State or other jurisdiction of
    incorporation or organization)   |  | 13-3148745
    (I.R.S. Employer
    Identification No.)
|                                                                                 
|21 Scarsdale Road, Yonkers, New York
    (Address of principal executive offices) |  | 10707
    (Zip Code)                                   

Registrants telephone number, including
area code: (914) 961-6100

Securities Registered Pursuant to
Section 12(b) of the Act: None



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Securities Registered Pursuant to
Section 12(g) of the Act:

|                                          |  |                                           |      | 
|----------------------------------------- |  | ----------------------------------------- | ---- | 
|Title of each Class                       |  | Name of each exchange on which registered
|                                          |  |                                          
|Common Stock, ($0.20 par value per share) |  |                                           | None | 

Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities
Act.  Yes  o  No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or
Section 15 (d) of the
Act.  Yes  o  No  x

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.    o

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

Large accelerated
filer  o          Accelerated
filer  x          Non-accelerated
filer  o


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

|                                   |  |                              |  | 
|---------------------------------- |  | ---------------------------- |  | 
|Class                              |  | Outstanding at March 1, 2006
|                                   |  |                             
|Common Stock
    ($0.20 par value) |  | 8,155,935 Shares            

The aggregate market value on June 30, 2005
of voting stock held by non-affiliates of the Registrant was
approximately $209,420,000.

Documents incorporated by reference:

Portions of the registrants definitive
Proxy Statement for the 2006 Annual Meeting of Stockholders is
incorporated by reference in Part III of this report.



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FORM 10-K

TABLE OF CONTENTS


|                                                        |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  |          |    | 
|------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | -------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                                        |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  | Page No.
|                                                        |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  |         
|PART I                                                  |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  |          |    | 
|                                                        |  | ITEM 1                                                                                                                                                                                                                                                                                                          |    | BUSINESS                                                                                                             |  |          | 1  | 
|                                                        |  | ITEM 1A                                                                                                                                                                                                                                                                                                         |    | RISK FACTORS                                                                                                         |  |          | 10 | 
|                                                        |  | ITEM 1B                                                                                                                                                                                                                                                                                                         |    | UNRESOLVED STAFF COMMENTS                                                                                            |  |          | 13 | 
|                                                        |  | ITEM 2                                                                                                                                                                                                                                                                                                          |    | PROPERTIES                                                                                                           |  |          | 13 | 
|                                                        |  | ITEM 3                                                                                                                                                                                                                                                                                                          |    | LEGAL PROCEEDINGS                                                                                                    |  |          | 13 | 
|                                                        |  | ITEM 4                                                                                                                                                                                                                                                                                                          |    | SUBMISSION OF MATTERS TO A
    VOTE OF SECURITY HOLDERS                                                              |  |          | 13 | 
|PART II                                                 |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  |          |    | 
|                                                        |  | ITEM 5                                                                                                                                                                                                                                                                                                          |    | MARKET FOR REGISTRANTS
    COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
    OF EQUITY SECURITIES |  |          | 14 | 
|                                                        |  | ITEM 6                                                                                                                                                                                                                                                                                                          |    | SELECTED FINANCIAL DATA                                                                                              |  |          | 17 | 
|                                                        |  | ITEM 7                                                                                                                                                                                                                                                                                                          |    | MANAGEMENTS DISCUSSION
    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |  |          | 18 | 
|                                                        |  | ITEM 7A                                                                                                                                                                                                                                                                                                         |    | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK                                                       |  |          | 49 | 
|                                                        |  | ITEM 8                                                                                                                                                                                                                                                                                                          |    | FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                                                                      |  |          | 53 | 
|                                                        |  | ITEM 9                                                                                                                                                                                                                                                                                                          |    | CHANGES IN AND DISAGREEMENTS
    WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |  |          | 85 | 
|                                                        |  | ITEM 9A                                                                                                                                                                                                                                                                                                         |    | CONTROLS AND PROCEDURES                                                                                              |  |          | 85 | 
|                                                        |  | ITEM 9B                                                                                                                                                                                                                                                                                                         |    | OTHER INFORMATION                                                                                                    |  |          | 85 | 
|PART III                                                |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  |          |    | 
|                                                        |  | ITEMS 10 THROUGH 14. (INCORPORATED BY REFERENCE
    TO THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
    SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
    WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
    NOT LATER THAN 120 DAYS AFTER THE END OF THAT FISCAL YEAR) |    |                                                                                                                      |  |         
|PART IV                                                 |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                                                      |  |          |    | 
|                                                        |  | ITEM 15                                                                                                                                                                                                                                                                                                         |    | EXHIBITS AND FINANCIAL
    STATEMENT SCHEDULES                                                                       |  |          | 85 | 
|SIGNATURES                                              |  |                                                                                                                                                                                                                                                                                                                 | 87 |                                                                                                                     
|EX-11: STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
|EX-21: SUBSIDIARIES OF THE COMPANY                     
|EX-23: CONSENTS OF EXPERTS AND COUNSEL                 
|EX-31.1: CERTIFICATION                                 
|EX-31.2: CERTIFICATION                                 
|EX-32.1: CERTIFICATION                                 
|EX-32.2: CERTIFICATION                                 





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PART I




ITEM 1  BUSINESS

General

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 subsidiaries, Hudson Valley Bank
(HVB), a New York chartered commercial bank
headquartered in Westchester County, New York and NYNB Bank
(NYNB), a New York chartered commercial bank
headquartered in Bronx County, New York (together with HVB,
the Banks). HVB is an independent bank established
in 1982. NYNB, an independent bank, is the successor to New York
National Bank, a national banking association which the Company
acquired effective January 1, 2006. HVB has 15 branch
offices in Westchester County, New York, 3 in Manhattan, New
York, 2 in Bronx County, New York, and 1 in Queens County, New
York. NYNB has 3 branch offices in Manhattan, New York and 2 in
Bronx County, New York.

The Company provides investment management
services through a wholly-owned subsidiary of HVB, A.R.
Schmeidler & Co., Inc. (ARS), a money management
firm, thereby generating fee income. ARS has offices at 555
Fifth Avenue in Manhattan, New York.

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. See
Our Market Area.

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. Our strategy is to operate community-oriented
banking institutions 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 by acquiring other banks and related
businesses, adding staff and continuing to open new branch
offices and loan production offices.

Forward-Looking Statements

This Annual Report on Form 10-K contains
forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. These statements relate to future events or our future
financial performance. We have attempted to identify
forward-looking statements by terminology including
anticipates, believes, can,
continue, could, estimates,
expects, intends, may,
plans, potential, predicts,
should or will or the negative of these
terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties
and other factors, that may cause our or the banking
industrys actual results, levels of activity, performance
or achievements to be materially different from any future
results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
For a discussion of some factors that could adversely effect our
future performance, see Item 1A  Risk
Factors and Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations Forward-Looking Statements.

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Subsidiaries of the Banks

In 1991, HVB formed a wholly-owned
subsidiary, Hudson Valley Investment Corp., a Delaware
corporation, primarily for the purpose of acquiring and managing
a portfolio of investment securities, some of which were
previously owned by HVB.

In 1993, HVB formed a wholly-owned subsidiary,
Sprain Brook Realty Corp., primarily for the purpose of holding
property obtained by HVB through foreclosure in its normal
course of business.

In 1997, HVB formed a subsidiary (of which it
owns more than 99 percent of the voting stock), Grassy Sprain
Real Estate Holdings, Inc., a real estate investment trust,
primarily for the purpose of acquiring and managing a portfolio
of mortgage-backed securities, loans collateralized by real
estate and other investment securities previously owned by HVB.

In 2001, HVB began originating lease financing
transactions through a wholly owned subsidiary, HVB Leasing Corp.

In 2002, HVB formed two wholly-owned
subsidiaries. HVB Realty Corp. owns and manages five branch
locations in Yonkers, New York and HVB Employment Corp. leases
certain branch staff to HVB.

In 2004, HVB acquired for cash A.R.
Schmeidler & Co., Inc. as a wholly-owned subsidiary in
a transaction accounted for as a purchase. This money management
firm provides investment management services to its customers
thereby generating fee income.

In 1997, NYNB formed a wholly-owned subsidiary,
369 East 149th Street Corp., primarily for the purpose of owning
and operating certain commercial real estate property of which
NYNB is a tenant.

The Company has no separate operations or
revenues apart from the Banks and their subsidiaries.

Employees

At December 31, 2005, we employed 314
full-time employees and 45 part-time employees. We provide a
variety of benefit plans, including group life, health, dental,
disability, retirement and stock option plans. We consider our
employee relations to be satisfactory.

Our Market Area

Westchester County is a suburban county located
in the northern sector of the New York metropolitan area. It has
a large and varied economic base containing many corporate
headquarters, research facilities, manufacturing firms as well
as well-developed trade and service sectors. The median
household income, based on 2002 census data, was $62,762. The
Countys 2002 per capita income of $37,170 placed
Westchester County among the highest of nations counties.
In 2002, the Countys unemployment rate was
4.1 percent, as compared to New York State at
6.1 percent and the United States at 5.8 percent. The
County has over 30,000 businesses, which form a large portion of
our current and potential customer base.

New York City, which borders Westchester County,
is the nations financial capital and the home of more than
8 million individuals representing virtually every race and
nationality. According to the 2002 census data, the median
household income in the city was $41,603, while the per capita
income was $25,472. This places New York City in the top ranks
of cities across the United States. The city also has a vibrant
and diverse business community with more than 590,000 businesses
and professional service firms. New York City is comprised of
five counties or boroughs: Bronx, Kings (Brooklyn), New York
(Manhattan), Queens and Richmond (Staten Island).

New York City has many attractive attributes
and we believe that there is an opportunity for community banks
to service our niche markets of businesses and professionals
very effectively. We expanded into the New York City market with
the opening of our first branch in the Bronx in 1999 and
subsequently opened a second branch in this borough in 2002. We
entered the Manhattan market with the opening of a full-service
branch in the Lincoln Building in 2002 and followed in April
2004 with a second full-service branch in lower Manhattan in the
Woolworth Building. In December 2005 a third full-service branch
was opened in Manhattan at 350 Park Avenue. Further
expansion in New York City continued in 2003 with the
opening of a loan production office in Rego Park, Queens
which converted to a full-service branch in 2005. Our
acquisition of

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New York National Bank in January 2006 has
added three additional full-service branches in Manhattan and
two additional full-service branches in the Bronx. We will
continue to evaluate expansion opportunities in these three, as
well as the other two boroughs of New York City.


Competition

The banking and financial services business in
our market area is highly competitive. There are approximately
19 commercial banks with branch banking offices in our
Westchester County and New York City market area. In addition, a
number of other depository institutions compete in our market
area including savings banks, savings and loan associations,
credit unions and brokerage houses. Our branches compete with
local offices of large New York City commercial banks due to
their proximity to and location within New York City. Other
financial institutions, such as mutual funds, finance companies,
factoring companies, mortgage bankers and insurance companies,
also compete with us for both loans and deposits. We are smaller
in size than most of our competitors. In addition, many non-bank
competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally
insured banks.

Competition for depositors funds and for
credit-worthy loan customers is intense. A number of larger
banks are increasing their efforts to serve smaller commercial
borrowers. Competition among financial institutions is based
upon interest rates and other credit and service charges, the
quality of service provided, the convenience of banking
facilities, the products offered and, in the case of larger
commercial borrowers, relative lending limits.

Federal legislation permits adequately
capitalized bank holding companies to expand across state lines
to offer banking services. In view of this, it is possible for
large organizations to enter many new markets, including our
market area. Many of these competitors, by virtue of their size
and resources, may enjoy efficiencies and competitive advantages
over us in pricing, delivery and marketing of their products and
services. The passage of the Financial Services Modernization
Act of 1999 (the Gramm-Leach-Bliley Act) may also
increase the number of powerful competitors in our market by
allowing other financial institutions to form or acquire banking
subsidiaries.

In response to competition, we have focused our
attention on customer service and on addressing the needs of
businesses, professionals and not-for-profit organizations
located in the communities in which we operate. We emphasize
community relations and relationship banking. We believe that,
despite the continued growth of large institutions and the
potential for large out-of-area banking and financial
institutions to enter our market area, there will continue to be
opportunities for efficiently-operated, service-oriented,
well-capitalized, community-based banking organizations to grow
by serving customers that are not served well by larger
institutions or do not wish to bank with such large institutions.

Our strategy is to increase earnings through
growth within our existing market. Our primary market area,
Westchester County and New York City, has a high concentration
of the types of customers that we desire to serve. We expect to
continue to expand by opening new full-service banking
facilities and loan production offices, by expanding deposit
gathering and loan originations in our market area, by enhancing
and expanding computerized and telephonic products, by
diversifying our products and services, by acquiring other banks
and related businesses and through strategic alliances and
contractual relationships.

During the past five years, we have focused on
maintaining existing customer relationships and adding new
relationships by providing products and services that meet these
customers needs. The focus of our products and services
continues to be businesses, professionals, not-for-profit
organizations and municipalities. We have expanded our market
from Westchester County to include sections of New York City. We
have opened six new facilities during the past five years, one
in White Plains, Westchester County, one in Yonkers, Westchester
County, three in Manhattan, New York, one in Queens County, and
one in Bronx County, New York and anticipate opening at least
one additional facility during 2006. We expect to continue to
open additional facilities in the future. We have invested in
technology based products and services to meet customer needs.
In addition, we have expanded products and services in our
deposit gathering and lending programs, and our offering of
investment management and trust services. As a result, we have
approximately doubled our total assets during this five year
period.

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Lending

We engage in a variety of lending activities
which are primarily categorized as real estate, commercial and
industrial, individual and lease financing. At December 31,
2005, gross loans totaled $1,026.4 million (excluding
NYNB). Gross loans were comprised of the following loan types:

|                          |  |  |       |  
|------------------------- |  |  | ----- | -
|Real estate               |  |  | 65.8  | %
|Commercial and industrial |  |  | 30.9  |  
|Individuals               |  |  | 2.5   |  
|Lease financing           |  |  | 0.8   |  
|                          |  |  |       |  
|Total                     |  |  | 100.0 | %
|                          |  |  |       |  

At December 31, 2005, HVBs unsecured
lending limit to one borrower under applicable regulations was
approximately $27.0 million.

In managing our loan portfolios, we focus on:



| |                                                                  
| | -----------------------------------------------------------------
| | (i) the application of its established
    underwriting criteria,



| |       |                                                                                                                                                           
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  | the establishment of individual lending
    authorities well below the Banks legal lending authority,                                                    
|
| | (iii) | the involvement by senior management and the
    Board of Directors in the loan approval process for designated
    categories, types or amounts of loans,



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | (iv) an awareness of concentration by
    industry or collateral, and                              
|
| | (v) the monitoring of loans for timely
    payment and to seek to identify potential problem loans.

We utilize our credit department to assess
acceptable and unacceptable credit risks based upon established
underwriting criteria. We utilize our loan officers, branch
managers and credit department to identify changes in a
borrowers financial condition that may affect the
borrowers ability to perform in accordance with loan
terms. Lending policies and procedures place an emphasis on
assessing a borrowers income flow as well as collateral
values. Further, we utilize systems and analysis which assist in
monitoring loan delinquencies. We utilize our loan officers,
loan collection department and legal counsel in collection
efforts on past due loans. Additional collateral or guarantees
may be requested where delinquencies remain unresolved.

An independent loan review department reviews
loans in our portfolios and assigns a risk grading to each
reviewed loan. Loans are reviewed based upon the type of loan,
the collateral for the loan, the amount of the loan and any
other pertinent information. The loan review department reports
directly to the Board of Directors.

See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Loan Portfolio for further
information related to our portfolio and lending activities.

Deposits

We offer deposit products ranging in maturity
from demand-type accounts to certificates of deposit with
maturities of up to 5 years. Deposits are generally derived
from customers within our primary marketplace. We solicit only
certain types of deposits from outside our market area,
primarily from certain professionals and government agencies.

We set deposit rates to remain generally
competitive with other financial institutions in our market,
although we do not generally seek to match the highest rates
paid by competing institutions. We have established a process to
review interest rates on all deposit products and, based upon
this process, update our deposit rates weekly. Our Asset/
Liability Management Policy and our Liquidity Policy set
guidelines to manage overall interest rate risk and liquidity.
These guidelines can affect the rates paid on deposits. Deposit
rates are reviewed under these policies periodically since
deposits are our primary source of liquidity.

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We offer deposit pick up services for certain
business customers. We have 18 automated teller machines,
or ATMs, at various locations, which generate activity fees
based on use by other banks customers.

For more information regarding our deposits, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Deposits.

Portfolio Management Services

We provide investment management services to our
customers and others through a subsidiary,
A. R. Schmeidler & Co., Inc. The acquisition
of this firm has allowed us to expand our investment management
services to customers and to expand revenue by offering such
services. We anticipate that we will continue to expand this
line of business.

We also provide a software application to a
limited number of customers designed to meet the specific
administrative needs of bankruptcy trustees through a marketing
and licensing agreement with the application vendor. We have no
current plans to expand this line of business. In addition, we
have participated in loans originated by various other financial
institutions within the normal course of business and within
standard industry practices.

Supervision and Regulation

Banks and bank holding companies are extensively
regulated under both federal and state law. We have set forth
below brief summaries of various aspects of supervision and
regulation which do not purport to be complete and which are
qualified in their entirety by reference to applicable laws,
rules and regulations.

As a bank holding company, we are regulated by
and subject to the supervision of the Board of Governors of the
Federal Reserve System (the FRB) and are required to
file with the FRB an annual report and such other information as
may be required. The FRB has the authority to conduct
examinations of the Company as well.

The Bank Holding Company Act of 1956 (the
BHC Act) limits the types of companies which we may
acquire or organize and the activities in which they may engage.
In general, a bank holding company and its subsidiaries are
prohibited from engaging in or acquiring control of any company
engaged in non-banking activities unless such activities are so
closely related to banking or managing and controlling banks as
to be a proper incident thereto. Activities determined by the
FRB to be so closely related to banking within the meaning of
the BHC Act include operating a mortgage company, finance
company, credit card company, factoring company, trust company
or savings association; performing certain data processing
operations; providing limited securities brokerage services;
acting as an investment or financial advisor; acting as an
insurance agent for certain types of credit-related insurance;
leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation service; operating a
collection agency; and providing certain courier services. The
FRB also has determined that certain other activities, including
real estate brokerage and syndication, land development,
property management and underwriting of life insurance unrelated
to credit transactions, are not closely related to banking and
therefore are not proper activities for a bank holding company.

The BHC Act requires every bank holding company
to obtain the prior approval of the FRB before acquiring
substantially all the assets of, or direct or indirect ownership
or control of more than five percent of the voting shares of,
any bank. Subject to certain limitations and restrictions, a
bank holding company, with the prior approval of the FRB, may
acquire an out-of-state bank.

In November 1999, Congress amended certain
provisions of the BHC Act through passage of the
Gramm-Leach-Bliley Act. Under this legislation, a bank holding
company may elect to become a financial holding
company and thereby engage in a broader range of
activities than would be permissible for traditional bank
holding companies. In order to qualify for the election, all of
the depository institution subsidiaries of the bank holding
company must be well capitalized and well managed, as defined
under FRB regulations, and all such subsidiaries must have
achieved a rating of satisfactory or better with
respect to meeting community credit needs. Pursuant to the
Gramm-Leach-Bliley Act, financial holding companies are
permitted to engage in activities that are financial in
nature or incidental or complementary thereto, as
determined by the FRB. The Gramm-Leach-Bliley Act identifies
several activities as financial in nature,
including, among others,

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insurance underwriting and agency activities,
investment advisory services, merchant banking and underwriting,
and dealing in or making a market in securities.


We believe we meet the regulatory criteria that
would enable us to elect to become a financial holding company.
We have not yet determined whether to make such an election.

The Gramm-Leach-Bliley Act also makes it possible
for entities engaged in providing various other financial
services to form financial holding companies and form or acquire
banks. Accordingly, the Gramm-Leach-Bliley Act makes it possible
for a variety of financial services firms to offer products and
services comparable to the products and services we offer.

There are various statutory and regulatory
limitations regarding the extent to which present and future
banking subsidiaries of the Company can finance or otherwise
transfer funds to the Company or its non-banking subsidiaries,
whether in the form of loans, extensions of credit, investments
or asset purchases, including regulatory limitation on the
payment of dividends directly or indirectly to the Company from
HVB or NYNB. Federal and state bank regulatory agencies also
have the authority to limit further HVBs or NYNBs
payment of dividends based on such factors as the maintenance of
adequate capital for such subsidiary bank, which could reduce
the amount of dividends otherwise payable. Under applicable
banking statutes, at December 31, 2005, HVB could have
declared additional dividends of approximately
$35.1 million to the Company without prior regulatory
approval.

Under the policy of the FRB, the Company is
expected to act as a source of financial strength to its banking
subsidiaries and to commit resources to support its banking
subsidiaries in circumstances where we might not do so absent
such policy. In addition, any subordinated loans by the Company
to its banking subsidiaries would also be subordinate in right
of payment to depositors and obligations to general creditors of
such subsidiary banks. The Company currently has no loans to the
Banks.

The FRB has established capital adequacy
guidelines for bank holding companies that are similar to the
Federal Deposit Insurance Corporation (FDIC) capital
requirements for the Banks described below. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Capital
Resources and Note 10 to the Consolidated Financial
Statements. As of December 31, 2005, our Tier 1 and
Total risk-based capital ratios were 13.8 percent and
14.9 percent, respectively, and our leverage capital ratio
was 8.3 percent. All ratios exceed the requirements under
these regulations and classify us as well
capitalized.

The Banks are organized under the Banking Law of
the State of New York. Their operations are subject to federal
and state laws applicable to commercial banks and to extensive
regulation, supervision and examination by the New York
Superintendent of Banks and the Banking Board of the State of
New York, as well as by the FDIC, as its primary federal
regulator and insurer of deposits. While the Banks are not
members of the Federal Reserve System, they are subject to
certain regulations of the FRB. In addition to banking laws,
regulations and regulatory agencies, the Banks are subject to
various other laws, regulations and regulatory agencies, all of
which directly or indirectly affect their operations. The New
York Superintendent of Banks and the FDIC examine the affairs of
the Banks for the purpose of determining its financial condition
and compliance with laws and regulations.

The New York Superintendent of Banks and the FDIC
have significant discretion in connection with their supervisory
and enforcement activities and examination policies, including
policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies whether by the FDIC,
Congress, the New York Superintendent of Banks or the New York
Legislature could have a material adverse impact on the Banks.

Federal laws and regulations also limit, with
certain exceptions, the ability of state banks to engage in
activities or make equity investments that are not permissible
for national banks. We do not expect such provisions to have a
material adverse effect on us.

Capital
Standards

The FDIC has adopted risk-based capital
guidelines to which FDIC-insured, state-chartered banks that are
not members of the Federal Reserve System, such as the Banks,
are subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more
sensitive to the differences

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in risk profiles among banking organizations.
Banks are required to maintain minimum levels of capital based
upon their total assets and total risk-weighted
assets. For purposes of these requirements, capital is
comprised of both Tier 1 and Tier 2 capital.
Tier 1 capital consists primarily of common stock and
retained earnings. Tier 2 capital consists primarily of loan
loss reserves, subordinated debt, and convertible securities. In
determining total capital, the amount of Tier 2 capital may not
exceed the amount of Tier 1 capital. A banks total
risk-based assets are determined by assigning the
banks assets and off-balance sheet items (e.g., letters of
credit) to one of four risk categories based upon their relative
credit risks. The greater the risk associated with an asset, the
greater the amount of such asset that will be subject to capital
requirements. Banks must satisfy the following three minimum
capital standards:




| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | (1) Tier 1 capital in an amount equal to
    between 4 percent and 5 percent of total assets (the
    leverage ratio);
|
| | (2) Tier 1 capital in an amount equal to
    4 percent of risk-weighted assets; and                                     
|
| | (3) total Tier 1 and Tier 2 capital in an
    amount equal to 8 percent of risk-weighted assets.                        

The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), defines specific
capital categories based upon an institutions capital
ratios. The capital categories, in declining order, are:
(i) well capitalized; (ii) adequately capitalized;
(iii) undercapitalized; (iv) significantly
undercapitalized; and (v) critically undercapitalized.
Under FDICIA and the FDICs prompt corrective action rules,
the FDIC may take any one or more of the following actions
against an undercapitalized bank: restrict dividends and
management fees, restrict asset growth and prohibit new
acquisitions, new branches or new lines of business without
prior FDIC approval. If a bank is significantly
undercapitalized, the FDIC may also require the bank to raise
capital, restrict interest rates a bank may pay on deposits,
require a reduction in assets, restrict any activities that
might cause risk to the bank, require improved management,
prohibit the acceptance of deposits from correspondent banks and
restrict compensation to any senior executive officer. When a
bank becomes critically undercapitalized, (i.e., the ratio of
tangible equity to total assets is equal to or less than
2 percent), the FDIC must, within 90 days thereafter,
appoint a receiver for the bank or take such action as the FDIC
determines would better achieve the purposes of the law. Even
where such other action is taken, the FDIC generally must
appoint a receiver for a bank if the bank remains critically
undercapitalized during the calendar quarter beginning
270 days after the date on which the bank became critically
undercapitalized.

To be considered adequately
capitalized, an institution must generally have a leverage
ratio of at least 4 percent, a Tier 1 capital to
risk-weighted assets ratio of at least 4 percent and total
Tier 1 and Tier 2 capital to risk-weighted assets
ratio of at least 8 percent. To be categorized as
well capitalized, an institution must maintain a
minimum total risk-based capital ratio of 10 percent, a
Tier 1 risk-based capital ratio of at least 6 percent
and a Tier 1 leverage ratio of at least 5 percent. As of
December 31, 2005, the most recent notification from the
FDIC categorized HVB as well capitalized under the
regulatory framework for prompt corrective action. There are no
conditions that we believe have changed HVBs category.

In connection with the acquisition of New York
National Bank, we have agreed with our regulators to maintain
NYNB as well capitalized under the regulatory
framework for prompt corrective action. For NYNB to be
categorized as well capitalized, we anticipate the
Company will make a capital contribution to NYNB in an amount
not yet determined, but that is not expected to be material.

See Note 10 to the Consolidated Financial
Statements.

Safety
and Soundness Standards

Federal law requires each federal banking agency
to prescribe for depository institutions under its jurisdiction
standards relating to, among other things: internal controls;
information systems and audit systems; loan documentation;
credit underwriting; interest rate risk exposure; asset growth;
compensation; fees and benefits; and such other operational and
managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and
Interagency Guidelines Establishing Standards for Safety and
Soundness (the Guidelines) to implement these safety
and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions
before capital becomes impaired. The Guidelines address internal
controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate

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risk exposure; asset quality; earnings and
compensation; fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any
standard prescribed by the Guidelines, the agency may require
the institution to submit to the agency an acceptable plan to
achieve compliance with the standard set by the Federal Deposit
Insurance Act. The final regulations establish deadlines for
submission and review of such safety and soundness compliance
plans.


The federal banking agencies also have adopted
final regulations for real estate lending prescribing uniform
guidelines for real estate lending. The regulations require
insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for
extensions of credit secured by real estate. The policies must
address loan portfolio management, underwriting standards and
loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.

Premiums
for Deposit Insurance

The FDIC has implemented a risk-based assessment
system, under which an institutions deposit insurance
premium assessment is based on the probability that the deposit
insurance fund will incur a loss with respect to the
institution, the likely amount of any such loss, and the revenue
needs of the deposit insurance fund.

Under this risk-based assessment system, banks
are categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and
one of three categories based on supervisory evaluations by its
primary federal regulator (in the Banks case, the FDIC).
The three supervisory categories are: financially sound with
only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration
(Group B), and poses a substantial probability of loss
(Group C). The capital ratios used by the FDIC to define
well-capitalized, adequately capitalized and undercapitalized
are the same in the FDICs prompt corrective action
regulations. HVB is currently considered a Well
Capitalized Group A institution and, therefore, is
not subject to any quarterly FDIC Bank Insurance Fund
(BIF) assessments. This could change in the future
based on the capitalization of the BIF.

NYNB is subject to quarterly BIF assessments
based upon the supervisory category assigned to New York
National Bank prior to its acquisition by the Company. NYNB will
remain subject to quarterly assessments until its supervisory
category changes.

FDIC insurance of deposits may be terminated by
the FDIC, after notice and hearing, upon a finding by the FDIC
that the insured institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule
or order of, or conditions imposed by, the FDIC. As a condition
of the continuation of deposit insurance by the FDIC for New
York National Bank upon its conversion to NYNB, we were required
to correct certain deficiencies related to Bank Secrecy Act
compliance that existed at New York National Bank prior to
its acquisition by the Company. We believe we have complied with
the required corrective action. We are not aware of any
practice, condition or violation that might lead to termination
of deposit insurance.

Community
Reinvestment Act and Fair Lending Developments

Under the Community Reinvestment Act
(CRA), as implemented by FDIC regulations, the Bank
has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its
entire community, including low and moderate income
neighborhoods. The CRA does not prescribe specific lending
requirements or programs for financial institutions nor does it
limit an institutions discretion to develop the types of
products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires
the FDIC, in connection with its examination of a bank, to
assess the institutions record of meeting the credit needs
of its community and to take such record into account in its
evaluation of certain applications by such institution. The
Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) amended the CRA to require public
disclosure of an institutions CRA rating and require the
FDIC to provide a written evaluation of an institutions
CRA performance utilizing a four-tiered descriptive rating
system. Institutions are evaluated and rated by the FDIC as
Outstanding, Satisfactory, Needs
to Improve or Substantial Non Compliance.
Failure to receive at least a Satisfactory rating
may inhibit an institution from undertaking certain activities,
including acquisitions of other financial institutions, which
require regulatory approval based, in part, on CRA

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Compliance considerations. As of its last CRA
examination in December 2004, HVB received a rating of
Satisfactory. As of its latest CRA examination in
1997, NYNB received a rating of Outstanding.


USA
Patriot Act

The USA Patriot Act of 2001, signed into law on
October 26, 2001, enhances the powers of domestic law
enforcement organizations and makes numerous other changes aimed
at countering the international terrorist threat to the security
of the United States. Title III of the legislation most
directly affects the financial services industry. It is intended
to enhance the federal governments ability to fight money
laundering by monitoring currency transactions and suspicious
financial activities. The USA Patriot Act has significant
implications for depository institutions and other businesses
involved in the transfer of money. Under the USA Patriot Act, a
financial institution must establish due diligence policies,
procedures and controls reasonably designed to detect and report
money laundering through correspondent accounts and private
banking accounts. Financial institutions must follow regulations
adopted by the Treasury Department to encourage financial
institutions, their regulatory authorities, and law enforcement
authorities to share information about individuals, entities,
and organizations engaged in or suspected of engaging in
terrorist acts or money laundering activities. Financial
institutions must follow regulations adopted by the Treasury
Department setting forth minimum standards regarding customer
identification. These regulations require financial institutions
to implement reasonable procedures for verifying the identity of
any person seeking to open an account, maintain records of the
information used to verify the persons identity, and
consult lists of known or suspected terrorists and terrorist
organizations provided to the financial institution by
government agencies. Every financial institution must establish
anti-money laundering programs, including the development of
internal policies and procedures, designation of a compliance
officer, employee training, and an independent audit function.
The passage of the USA Patriot Act has increased our compliance
activities, but has not otherwise affected our operations.

Governmental
Monetary Policy

Our business and earnings depend in large part on
differences in interest rates. One of the most significant
factors affecting our earnings is the difference between
(1) the interest rates paid by us on our deposits and other
borrowings (liabilities) and (2) the interest rates
received by us on loans made to our customers and securities
held in our investment portfolios (assets). The value of and
yield on our assets and the rates paid on our liabilities are
sensitive to changes in prevailing market rates of interest.
Therefore, our earnings and growth will be influenced by general
economic conditions, the monetary and fiscal policies of the
federal government, including the Federal Reserve System, whose
function is to regulate the national supply of bank credit in
order to influence inflation and overall economic growth. Its
policies are used in varying combinations to influence overall
growth of bank loans, investments and deposits and may also
affect interest rates charged on loans, earned on investments or
paid for deposits.

In view of changing conditions in the national
and local economies, we cannot predict possible future changes
in interest rates, deposit levels, loan demand, or availability
of investment securities and the resulting effect our business
or earnings.

Investment
Advisers Act of 1940

A. R. Schmeidler & Co., Inc., is a money
manager registered as an investment adviser under the federal
Investment Advisers Act of 1940. ARS and its representatives are
also registered under the laws of various states regulating
investment advisers and their representatives. Regulation under
the Investment Advisers Act requires the filing and updating of
a Form ADV, filed with the Securities and Exchange
Commission. The Investment Advisers Act regulates, among other
things, the fees that may be charged to advisory clients, the
custody of client funds, relationships with brokers and the
maintenance of books and records.

Available Information

We make available free of charge on our website
(http://www.hudsonvalleybank.com) our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports,
as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and
Exchange Commission. We provide electronic or paper copies of
filings free of charge upon request.

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ITEM 1A  RISK FACTORS

Risks Related to Our Business

Our markets are intensely competitive, and our
principal competitors are larger than us.

We face significant competition both in making
loans and in attracting deposits. This competition is based on,
among other things, interest rates and other credit and service
charges, the quality of services rendered, the convenience of
the banking facilities, the range and type of products offered
and the relative lending limits in the case of loans to larger
commercial borrowers. Westchester County and New York City have
a very high density of financial institutions, many of which are
branches of institutions which are significantly larger than we
are and have greater financial resources and higher lending
limits. Many of these institutions offer services that we do not
or cannot provide. Nearly all such institutions compete with us
to varying degrees.

Our competition for loans comes principally from
commercial banks, savings banks, savings and loan associations,
credit unions, mortgage banking companies, insurance companies
and other financial service companies. Our most direct
competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations, and money
market funds and other securities funds offered by brokerage
firms and other similar financial institutions. We face
additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and
brokerage firms, and insurance companies.

Competition may increase in the future as a
result of regulatory change in the financial services industry.
We expect to face increased competitive pressure from
non-banking sources as a result of the Gramm-Leach-Bliley Act,
which permits banks and bank holding companies to affiliate more
easily with other financial service institutions, such as
insurance companies and brokerage firms.

We operate in a highly regulated industry and
could be adversely affected by governmental monetary policy or
regulatory change.

We are subject to regulation by several
government agencies, including the FRB, the FDIC, the New York
Superintendent of Banks, and the Banking Board of the State of
New York. Changes in governmental economic and monetary policy
not only can affect our ability to attract deposits and make
loans, but can also affect the demand for business and personal
lending and for real estate mortgages.

Government regulations affect virtually all areas
of our operations, including our range of permissible
activities, products and services, the geographic locations in
which our services can be offered, the amount of capital
required to be maintained to support operations, the right to
pay dividends and the amount which we can pay to obtain
deposits. The passage of the Gramm-Leach-Bliley Act, which
permits banks and bank holding companies to affiliate more
easily with other financial service firms, could significantly
change the nature of the financial services market over the next
few years. There can be no assurance that we will be able to
adapt successfully to changes initiated by this or other
governmental or regulatory action.

Our efforts to expand within our market and
provide additional services by acquiring smaller banks and
related businesses may not prove to be successful, and may
subject us to unexpected costs or liabilities.

We recently acquired a money management firm,
A.R. Schmeidler & Co., Inc., and New York National
Bank, a community-based national bank headquartered in the
Bronx. We could have difficulty integrating these new businesses
within our organization, and the new businesses may not generate
the revenues that we anticipate. This could result in added
costs or the diversion of management resources, and we might not
achieve the intended benefits of the transactions. In addition,
we could be subject to new and unexpected liabilities as a
result of making these acquisitions.

The opening of new branches could reduce our
profitability.

The opening of a new branch requires us to incur
a number of upfront expenses associated with the leasing and
build-out of the space to be occupied by the branch, the
staffing of the branch and similar matters. These expenses are
typically greater than the income generated by the branch until
it builds up its customer base. In opening branches in a new
locality we may also encounter unanticipated problems in
adjusting to local market conditions.

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Our income is sensitive to changes in interest
rates.

Our profitability, like that of most banking
institutions, depends to a large extent upon our net interest
income. Net interest income is the difference between interest
income received on interest-earning assets, including loans and
securities, and the interest paid on interest-bearing
liabilities, including deposits and borrowings. Accordingly, our
results of operations and financial condition depend largely on
movements in market interest rates and our ability to manage our
assets and liabilities in response to such movements.

We try to manage our interest rate risk exposure
by closely monitoring our assets and liabilities in an effort to
reduce the effects of changes in interest rates primarily by
altering the mix and maturity of our loans, investments and
funding sources.

Currently, our income would be minimally changed
in the twelve months following December 31, 2005 due to
changes in the interest rate environment. However, a
continuation of the current trend of rising short-term interest
rates and a flattening of the yield curve could have an adverse
effect on our net interest income by decreasing the spread
between the rates earned on assets and paid on liabilities.
Changes in interest rates also affect the volume of loans we
originate, as well as the value of our loans and other
interest-earning assets, including investment securities.

In addition, changes in interest rates may result
in an increase in higher cost deposit products within our
existing portfolios, as well as a flow of funds away from bank
accounts into direct investments (such as U.S. Government and
corporate securities, and other investment instruments such as
mutual funds) to the extent that we may not pay rates of
interest competitive with these alternative investments.
See Quantitative and Qualitative Disclosures About Market
Risk.

We may incur liabilities under federal and
state environmental laws with respect to foreclosed
properties.

Approximately 88% of the loans held by HVB as of
December 31, 2005 were secured, either on a primary or
secondary basis, by real estate. Approximately half of these
loans were commercial real estate loans, with most of the
remainder being for single or multi-family residences. We
currently do not own any property acquired on foreclosure.
However, we have in the past and may in the future acquire
properties through foreclosure on loans in default. Under
federal and state environmental laws, we could face liability
for some or all of the costs of removing hazardous substances,
contaminants or pollutants from properties we acquire on
foreclosure. While other persons might be primarily liable, such
persons might not be financially solvent or able to bear the
full cost of the clean up. It is also possible that a lender
that has not foreclosed on property but has exercised unusual
influence over the borrowers activities may be required to
bear a portion of the clean up costs under federal or state
environmental laws.

A downturn in the economy in our market area
would adversely affect our loan portfolio and our growth
potential.

Our primary lending market area is concentrated
in Westchester County, New York and New York City with a primary
focus on businesses, professionals and not-for-profit
organizations located in this area. Accordingly, the asset
quality of our loan portfolio is largely dependent upon the
areas economy and real estate markets. A downturn in the
economy in our primary lending area would adversely affect our
operations and limit our future growth potential.

A downturn in the real estate market could
negatively affect our business.

A downturn in the real estate market could
negatively affect our business because a significant portion
(approximately 88% as of December 31, 2005) of our loans
are secured, either on a primary or secondary basis, by real
estate. Our ability to recover on defaulted loans by selling the
real estate collateral would then be diminished and we would be
more likely to suffer losses on defaulted loans.

A downturn in the real estate market could also
result in lower customer demand for real estate loans. This
could in turn result in decreased profits, as our alternative
investments, such as securities, generally earn less than real
estate loans.

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Technological change may affect our ability to
compete.

The banking industry continues to undergo rapid
technological changes, with frequent introductions of new
technology-driven products and services. In addition to
improving customer services, the effective use of technology
increases efficiency and enables financial institutions to
reduce costs. Our future success will depend, in part, on our
ability to address the needs of customers by using technology to
provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater
resources to invest in technological improvements. There can be
no assurance that we will be able to effectively implement new
technology-driven products and services or be successful in
marketing such products and services to the public.

In addition, because of the demand for
technology-driven products, banks are increasingly contracting
with outside vendors to provide data processing and core banking
functions. The use of technology-related products, services,
delivery channels and processes exposes a bank to various risks,
particularly transaction, strategic, reputation and compliance
risks. There can be no assurance that we will be able to
successfully manage the risks associated with our increased
dependency on technology.

Our profitability depends on our
customers ability to repay their loans and our ability to
make sound judgments concerning credit risk.

There are risks inherent in making all loans,
including risks with respect to the period of time over which
loans may be repaid, risks resulting from changes in economic
conditions, risks inherent in dealing with individual borrowers,
and, in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral. We
maintain an allowance for loan losses based on, among other
things, historical experience, an evaluation of economic
conditions, and regular reviews of delinquencies and loan
portfolio quality. Our judgment as to the adequacy of the
allowance for loan losses is based upon a number of assumptions
which we believe to be reasonable but which may or may not prove
to be correct. Thus, there can be no assurance that charge-offs
in future periods will not exceed the allowance for loan losses
or that additional increases in the allowance for loan losses
will not be required. Additions to the allowance for loan losses
would result in a decrease in net income and capital.

Risks Related to Our Common Stock

For a discussion of risks related to our common
stock, see Item 5 of this Annual Report on Form 10-K.

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ITEM 1B  UNRESOLVED STAFF
COMMENTS

None.



ITEM 2  PROPERTIES

Our principal executive offices, including
administrative and operating departments, are located at
21 Scarsdale Road, Yonkers, New York, in premises we own.
HVBs main branch is located at 35 East Grassy Sprain
Road, Yonkers, New York, in premises we lease. NYNBs main
branch is locations at 369 East 149th Street,
Bronx, New York in premises that we own.

In addition to HVBs main branch, we operate
14 branches in Westchester County, New York. We own
the following seven branches: 37 East Main Street,
Elmsford, New York; 61 South Broadway, Yonkers,
New York; 150 Lake Avenue, Yonkers, New York; 865
McLean Avenue, Yonkers, New York; 512 South Broadway,
Yonkers, New York; 21 Scarsdale Road, Yonkers,
New York; and 664 Main Street, Mount Kisco,
New York. We lease the following branches: 403 East
Sandford Boulevard, Mount Vernon, New York; 1835 East
Main Street, Peekskill, New York; 500 Westchester Avenue, Port
Chester, New York; 233 Marble Avenue, Thornwood,
New York; 328 Central Avenue, White Plains,
New York, Five Huguenot Street, New Rochelle,
New York and 40 Church Street, White Plains,
New York.

In addition to the branches in Westchester County
and NYNBs main branch, we operate three branches in Bronx,
New York. We lease the following branches: 3130 East
Tremont Avenue, Bronx, New York, 975 Allerton Avenue,
Bronx, New York, and 1042 Westchester Avenue, Bronx,
New York. We also operate six branches in Manhattan,
New York. We lease the following branches: 60 East
42nd Street, New York, New York, 233 Broadway,
New York, New York, 350 Park Avenue, New York,
New York, 4211 Broadway, New York, New York and 619 Main
Street, Roosevelt Island, New York. We own the following
branch: 2256 Second Avenue, New York, New York. We
operate one full service branch office located at 97-77 Queens
Boulevard, Rego Park, New York (Queens County), in premises
we lease.

Of the leased properties, 4 properties located in
New Rochelle, Manhattan and Rego Park, New York, have lease
terms that expire within the next 2 years, with each lease
subject to our renewal option. We currently expect to exercise
our renewal option on the leases of each of these properties.

A. R. Schmeidler & Co., Inc is located
at 555 Fifth Avenue, New York, New York in premises leased by
the subsidiary. This lease expires in December 2006.

We currently operate 18 ATM machines, 14 of which
are located in the Banks facilities. Four ATMs are located
at off-site locations: St. Josephs Hospital, Yonkers, New
York, Lincoln Hospital, Bronx, New York, Segundo Ruis Belvis
Diagnostic & Treatment Center, Bronx, New York and
Morrisania Diagnostic & Treatment Center, Bronx, New York.

In our opinion, the premises, fixtures and
equipment are adequate and suitable for the conduct of our
business. All facilities are well maintained and provide
adequate parking.



ITEM 3  LEGAL PROCEEDINGS

Various claims and lawsuits are pending against
the Company and its subsidiaries in the ordinary course of
business. In the opinion of management, after consultation with
legal counsel, resolution of each matter is not expected to have
a material effect on the financial condition or results of
operations of the Company and its subsidiaries.



ITEM 4  SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of
shareholders of Hudson Valley Holding Corp. during the fourth
quarter of 2005.

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PART II




ITEM 5  MARKET FOR
REGISTRANTS COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock was held of record as of
March 1, 2006 by approximately 914 shareholders. Our
common stock trades on a limited and sporadic basis in the
over-the-counter market under the symbol HUVL. We
have historically purchased shares of common stock from
shareholders at a price we believe to be the fair market value
at the time. Some of these purchases are made pursuant to Stock
Restriction Agreements which give us a right of first refusal if
the shareholder wishes to sell his or her shares. The majority
of transactions in our common stock are sales to the Company or
private transactions. There can be no assurance that we will
purchase any additional stock in the future.

The table below sets forth the high and the low
prices per share at which we purchased shares of our common
stock from shareholders in 2005 and 2004. The price per share
has been adjusted to reflect the 10 percent stock dividends
to shareholders in December 2005 and 2004.

|               |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |      |       |     
|               |  | 2005 |       | 2004
|               |  |      |       |     
|               |  | High |       | Low  |  | High |       | Low
|               |  |      |       |      |  |      |       |    
|First Quarter  |  | $    | 55.45 |      |  | $    | 33.18 |     |  | $ | 35.54 |  |  | $ | 29.95 | 
|Second Quarter |  |      | 52.73 |      |  |      | 34.09 |     |  |   | 49.59 |  |  |   | 30.78 | 
|Third Quarter  |  |      | 52.73 |      |  |      | 34.09 |     |  |   | 37.19 |  |  |   | 31.61 | 
|Fourth Quarter |  |      | 49.32 |      |  |      | 38.18 |     |  |   | 32.23 |  |  |   | 30.16 | 

The foregoing prices were not subject to retail
markup, markdown or commission.

In 1998, the Board of Directors of the Company
adopted a policy of paying quarterly cash dividends to holders
of its common stock. Quarterly cash dividends were paid as
follows: In 2005, $0.40 per share to shareholders of record
on February 10; $0.43 per share to shareholders of
record May 6, August 5 and November 4. In 2004,
$0.34 per share to shareholders of record on
February 6; $0.36 per share to shareholders of record
May 7, August 6 and November 4. Dividends per
share have been adjusted to reflect the 10 percent stock
dividends to shareholders in December 2005 and 2004.

Stock dividends of 10 percent each (one
share for every 10 outstanding shares) were declared by the
Company for shareholders of record on December 9, 2005 and
December 10, 2004.

Effective December 12, 2005, the Board of
Directors of the Company adjusted the price at which the Company
would repurchase shares to $42.00 per share, or
$50.50 per share for a transaction of at least
2,500 shares, taking into consideration the 10 percent
stock dividend to shareholders in December 2005. This offer was
limited to 75,000 shares and expired February 28,
2006, at which time the Company offered to repurchase up to
75,000 shares at a price of $42.75 per share or $51.25 per
share for a transaction of at least 2,500 shares. This
offer expires May 30, 2006.

Any funds which the Company may require in the
future to pay cash dividends, as well as various Company
expenses, are expected to be obtained by the Company chiefly in
the form of cash dividends from HVB and secondarily from sales
of common stock pursuant to the Companys stock option
plan. The ability of the Company to declare and pay dividends in
the future will depend not only upon its future earnings and
financial condition, but also upon the future earnings and
financial condition of the Banks and their ability to transfer
funds to the Company in the form of cash dividends and
otherwise. The Company is a separate and distinct legal entity
from the Banks. The Companys right to participate in any
distribution of the assets or earnings of the Banks is
subordinate to prior claims of creditors of the Banks.

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The following table sets forth information with
respect to purchases made by the Company of its common stock
during the three months ended December 31, 2005.

|                 |  |              |        |            |  |                  |       |             |  |  |        |  |  |  |        | 
|---------------- |  | ------------ | ------ | ---------- |  | ---------------- | ----- | ----------- |  |  | ------ |  |  |  | ------ | 
|                 |  |              |        |            |  |                  |       | Maximum    
|                 |  |              |        |            |  | Total Number     |       | Number of  
|                 |  |              |        |            |  | of Shares        |       | Shares That
|                 |  |              |        |            |  | Purchased as     |       | May Yet Be 
|                 |  | Total Number |        | Average    |  | Part of Publicly |       | Purchased  
|                 |  | of Shares    |        | Price Paid |  | Announced        |       | Under the  
|Period           |  | Purchased    |        | Per Share  |  | Programs         |       | Programs(2)
|                 |  |              |        |            |  |                  |       |            
|October 2005(1)  |  |              | 5,101  |            |  | $                | 49.66 |             |  |  | 5,101  |  |  |  |       | 
|November 2005(1) |  |              | 3,249  |            |  | $                | 53.59 |             |  |  | 2,606  |  |  |  |       | 
|December 2005(2) |  |              | 3,269  |            |  | $                | 48.50 |             |  |  | 3,269  |  |  |  | 71,731 | 
|                 |  |              |        |            |  |                  |       |             |  |  |        |  |  |  |        | 
|Total            |  |              | 11,619 |            |  | $                | 50.43 |             |  |  | 10,976 |  |  |  |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In August 2005, the Company announced that the
    Board of Directors had approved a share repurchase program which
    authorized the repurchase of up to 75,000 of the Companys
    shares at a price of $45.25 per share, or a price of
    $54.25 per share for transactions of at least
    2,500 shares. This offer expired on December 9, 2005.                                                                                                       
|   
|(2) | In November 2005, the Company announced that the
    Board of Directors had approved a share repurchase program which
    authorized the repurchase of up to 75,000 of the Companys
    shares at a price of $42.00 per share, or a price of
    $50.50 per share for transactions of at least
    2,500 shares taking into consideration the 10 percent
    stock dividend to shareholders on December 9, 2005. This
    offer expired on February 28, 2006.

There is currently no active market for the
common stock and there can be no assurance that a market will
develop.

Our common stock trades from time to time in the
over-the-counter bulletin board market under the symbol
HUVL. Trading in this market is sporadic. In the
absence of an active market for our common stock, there can be
no assurance that a shareholder will be able to find a buyer for
his or her shares. Stock prices as a whole may also be lower
than they would be if an active market were to develop, and may
tend to fluctuate more dramatically.

We have determined not to apply, at this time,
for the listing of our common stock on a securities exchange. If
we do apply in the future for such listing, there can be no
assurance that the common stock will be listed on any securities
exchange. Even if we successfully list the common stock on a
securities exchange, there can be no assurance that any
organized public market for the securities will develop or that
there will be any private demand for the common stock. We could
also fail to meet the requirements for continued inclusion on
such exchange, such as requirements relating to the minimum
number of public shareholders or the aggregate market value of
publicly held shares.

The liquidity of the common stock depends upon
the presence in the marketplace of willing buyers and sellers.
Liquidity also may be limited by other factors, including
restrictions imposed on the common stock by shareholders.

We have historically created a secondary market
for our stock by issuing offers to repurchase shares from any
shareholder. However, we are not obligated to issue such offers
to repurchase shares in the future and may discontinue or limit
such offers at any time.

If our common stock is not listed on an exchange,
it may not be accepted as collateral for loans, or if accepted,
its value may be substantially discounted. As a result,
investors should regard the common stock as a long-term
investment and should be prepared to bear the economic risk of
an investment in the common stock for an indefinite period.
Investors who may need or wish to dispose of all or a part of
their investments in the common stock may not be able to do so
except by private, direct negotiations with third parties.

15



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##### Table of Contents



The development of a market for the common
stock could be limited by existing agreements with respect to
resale.

A significant number of our shareholders are
current or former directors and employees (or their family
members) who purchased their shares subject to various Stock
Restriction Agreements. Pursuant to these Stock Restriction
Agreements, we enjoy a right of first refusal if the shareholder
proposes to sell his or her shares to a third party.
Historically, we have exercised our right of first refusal and
have purchased a substantial portion of the shares offered to us
pursuant to the Stock Restriction Agreements. Our repurchase of
stock has effectively created a secondary market for the stock.
We have no obligation to repurchase the common stock under the
Stock Restriction Agreements or otherwise and there can be no
assurance that we will purchase any additional shares in the
future. If we continue to exercise our right to repurchase
shares subject to the Stock Restriction Agreements, this will
limit the availability of shares in public markets.

Government regulation restricts our ability to
pay cash dividends.

Dividends from HVB are the only current
significant source of cash for the Company. There are various
statutory and regulatory limitations regarding the extent to
which HVB and NYNB can pay dividends or otherwise transfer funds
to the Company. Federal and state bank regulatory agencies also
have the authority to limit further the Banks payment of
dividends based on such factors as the maintenance of adequate
capital for each Bank, which could reduce the amount of
dividends otherwise payable. We paid a cash dividend to our
shareholders of $1.69 per share in 2005, and $1.42 per share in
2004 (adjusted for subsequent stock dividends). Under applicable
banking statutes, at December 31, 2005, HVB could have
declared dividends of approximately $35.1 million to the
Company without prior regulatory approval. No assurance can be
given that the Banks will have the profitability necessary to
permit the payment of dividends in the future; therefore, no
assurance can be given that the Company would have any funds
available to pay dividends to shareholders.

Federal and state agencies require us to maintain
adequate levels of capital. The failure to maintain adequate
capital or to comply with applicable laws, regulations and
supervisory agreements could subject us to federal and state
enforcement provisions, such as the termination of deposit
insurance, the imposition of substantial fines and other civil
penalties and, in the most severe cases, the appointment of a
conservator or receiver for a depositary institution. Moreover,
dividends can be restricted by any of our regulatory authorities
if the agency believes that our financial condition warrants
such a restriction.

In addition, our ability to declare and pay
dividends is restricted under the New York Business Corporation
Law, which provides that dividends may only be paid by a
corporation out of its surplus.

In the event of a liquidation or reorganization
of the Banks, the ability of holders of debt and equity
securities of the Company to benefit from the distribution of
assets from the Banks upon any such liquidation or
reorganization would be subordinate to prior claims of creditors
of the Banks (including depositors), except to the extent that
the Companys claim as a creditor may be recognized. The
Company is not currently a creditor of the Banks.

Equity Compensation Plan Information

The following table sets forth information
regarding the Companys Stock Option Plans. All equity
compensation plans have been approved by the Companys
stockholders. The amounts presented are as of December 31,
2005, exclude NYNB and do not include awards made subsequent to
that date. Additional details related to the Companys
equity compensation plans are provided in Notes 8 and 10 to
the consolidated financial statements.

|                                                   |  |                      |         |                     |  |                      |       |  |  |  |         | 
|-------------------------------------------------- |  | -------------------- | ------- | ------------------- |  | -------------------- | ----- |  |  |  | ------- | 
|                                                   |  |                      |         |                     |  | Number of Securities
|                                                   |  | Number of Securities |         |                     |  | Remaining Available 
|                                                   |  | to be Issued Upon    |         | Weighted-Average    |  | for Future Issuance 
|                                                   |  | Exercise of          |         | Exercise Price of   |  | Under Equity        
|Plan Category                                      |  | Outstanding Options  |         | Outstanding Options |  | Compensation Plans  
|                                                   |  |                      |         |                     |  |                     
|Equity compensation plans approved by stockholders |  |                      | 773,868 |                     |  | $                    | 26.87 |  |  |  | 237,566 | 
|                                                   |  |                      |         |                     |  |                      |       |  |  |  |         | 

16



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##### Table of Contents






ITEM 6  SELECTED FINANCIAL
DATA

The following table sets forth selected
historical consolidated financial data for the years ended and
as of the dates indicated. The selected historical consolidated
financial data as of December 31, 2005 and 2004, and for
the years ended December 31, 2005, 2004 and 2003, are
derived from our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. The selected
historical consolidated financial data as of December 31,
2003, 2002 and 2001 and for the years ended December 31,
2002 and 2001 are derived from our consolidated financial
statements that are not included in this Annual Report on
Form 10-K. Share and per share data have been restated to
reflect the effects of 10 percent stock dividends issued in
2005, 2004, 2003 and 2002. The information set forth below
excludes NYNB and should be read in conjunction with the
consolidated financial statements and Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Annual Report on
Form 10-K.

|                                            |  |                         |           |                           |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|------------------------------------------- |  | ----------------------- | --------- | ------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                            |  |                        
|                                            |  | Year ended December 31,
|                                            |  |                        
|                                            |  | 2005                    |           | 2004                      |  | 2003 |           | 2002 |  | 2001
|                                            |  |                         |           |                           |  |      |           |      |  |     
|                                            |  |                         |           |                           |  |     
|                                            |  |                         |           | (000s except share data) |  |     
|Operating Results:                          |  |                         |           |                           |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Total interest income                       |  | $                       | 110,364   |                           |  | $    | 88,432    |      |  | $    | 76,520    |  |  | $ | 84,743    |  |  | $ | 89,878    | 
|Total interest expense                      |  |                         | 25,306    |                           |  |      | 16,795    |      |  |      | 15,444    |  |  |   | 22,982    |  |  |   | 32,517    | 
|                                            |  |                         |           |                           |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Net interest income                         |  |                         | 85,058    |                           |  |      | 71,637    |      |  |      | 61,076    |  |  |   | 61,761    |  |  |   | 57,361    | 
|Provision for loan losses                   |  |                         | 2,059     |                           |  |      | 473       |      |  |      | 437       |  |  |   | 3,902     |  |  |   | 4,380     | 
|Income before income taxes                  |  |                         | 46,983    |                           |  |      | 40,970    |      |  |      | 35,962    |  |  |   | 30,744    |  |  |   | 28,376    | 
|Net income                                  |  |                         | 30,945    |                           |  |      | 27,540    |      |  |      | 24,207    |  |  |   | 21,584    |  |  |   | 18,881    | 
|Basic earnings per common share             |  |                         | 3.81      |                           |  |      | 3.42      |      |  |      | 3.06      |  |  |   | 2.77      |  |  |   | 2.47      | 
|Diluted earning pers common share           |  |                         | 3.71      |                           |  |      | 3.36      |      |  |      | 2.99      |  |  |   | 2.70      |  |  |   | 2.40      | 
|Weighted average shares outstanding         |  |                         | 8,117,890 |                           |  |      | 8,043,138 |      |  |      | 7,904,476 |  |  |   | 7,783,527 |  |  |   | 7,647,729 | 
|Adjusted weighted average share outstanding |  |                         | 8,341,446 |                           |  |      | 8,204,759 |      |  |      | 8,085,506 |  |  |   | 7,997,216 |  |  |   | 7,853,763 | 
|Cash dividends per common share             |  |                         | 1.69      |                           |  |      | 1.42      |      |  |      | 1.20      |  |  |   | 0.99      |  |  |   | 0.89      | 

|                     |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|-------------------- |  | ------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2005         |           | 2004 |  | 2003 |           | 2002 |  | 2001
|                     |  |              |           |      |  |      |           |      |  |     
|Financial position:  |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Securities           |  | $            | 883,992   |      |  | $    | 875,120   |      |  | $    | 861,410   |  |  | $ | 743,884   |  |  | $ | 624,209   | 
|Loans, net           |  |              | 1,009,819 |      |  |      | 862,496   |      |  |      | 707,104   |  |  |   | 642,438   |  |  |   | 600,377   | 
|Total assets         |  |              | 2,032,721 |      |  |      | 1,840,874 |      |  |      | 1,669,513 |  |  |   | 1,506,883 |  |  |   | 1,372,453 | 
|Deposits             |  |              | 1,407,996 |      |  |      | 1,235,341 |      |  |      | 1,124,900 |  |  |   | 1,027,176 |  |  |   | 888,377   | 
|Borrowings           |  |              | 435,212   |      |  |      | 427,593   |      |  |      | 386,400   |  |  |   | 327,383   |  |  |   | 352,720   | 
|Stockholders equity |  |              | 169,789   |      |  |      | 159,662   |      |  |      | 142,361   |  |  |   | 136,807   |  |  |   | 113,342   | 

Financial Ratios

Significant ratios of the Company for the periods
indicated are as follows:

|                                                                                               |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |       |  
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------ | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | -
|                                                                                               |                                                                              |             
|                                                                                               |                                                                              | December 31,
|                                                                                               |                                                                              |             
|                                                                                               |                                                                              | 2005         |        | 2004  |   | 2003 |        | 2002  |   | 2001
|                                                                                               |                                                                              |              |        |       |   |      |        |       |   |     
|Earnings Ratios                                                                                |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|Net income as a percentage of:                                                                 |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|                                                                                               | Average earning assets                                                       |              |        | 1.66  | % |      |        | 1.64  | % |      |        | 1.62  | % |  |        | 1.58  | % |  |        | 1.51  | %
|                                                                                               | Average total assets                                                         |              |        | 1.58  |   |      |        | 1.56  |   |      |        | 1.54  |   |  |        | 1.50  |   |  |        | 1.43  |  
|                                                                                               | Average total stockholders equity(1)                                        |              |        | 18.54 |   |      |        | 18.55 |   |      |        | 18.51 |   |  |        | 18.72 |   |  |        | 18.74 |  
|Capital Ratios                                                                                 |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|                                                                                               | Average total stockholders equity to
    average total assets(1)            |              |        | 8.53  | % |      |        | 8.40  | % |      |        | 8.31  | % |  |        | 8.02  | % |  |        | 7.64  | %
|                                                                                               | Average net loans as a multiple of average total
    stockholders equity(1) |              |        | 5.56  |   |      |        | 5.25  |   |      |        | 5.07  |   |  |        | 5.37  |   |  |        | 5.56  |  
|                                                                                               | Leverage capital                                                             |              |        | 8.30  |   |      |        | 8.17  |   |      |        | 8.43  |   |  |        | 8.28  |   |  |        | 7.90  |  
|                                                                                               | Tier 1 capital (to risk weighted assets)                                     |              |        | 13.82 |   |      |        | 14.46 |   |      |        | 15.63 |   |  |        | 17.05 |   |  |        | 15.36 |  
|                                                                                               | Total risk-based capital (to risk weighted assets)                           |              |        | 14.94 |   |      |        | 15.59 |   |      |        | 16.88 |   |  |        | 18.30 |   |  |        | 16.47 |  
|Other                                                                                          |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|Allowance for loan losses as a percentage of
    year-end loans                                |                                                                              |              | 1.32   | %     |   |      | 1.35   | %     |   |      | 1.59   | %     |   |  | 1.76   | %     |   |  | 1.31   | %    
|Loans (net) as a percentage of year-end
    total assets                                       |                                                                              |              | 49.68  |       |   |      | 46.85  |       |   |      | 42.35  |       |   |  | 42.63  |       |   |  | 43.74  |      
|Loans (net) as a percentage of year-end
    total deposits                                     |                                                                              |              | 71.75  |       |   |      | 69.82  |       |   |      | 62.86  |       |   |  | 62.54  |       |   |  | 67.58  |      
|Securities as a percentage of year-end total
    assets                                        |                                                                              |              | 43.49  |       |   |      | 47.54  |       |   |      | 51.60  |       |   |  | 49.37  |       |   |  | 45.48  |      
|Average interest earning assets as a percentage
    of average interest bearing liabilities(1) |                                                                              |              | 154.24 |       |   |      | 155.00 |       |   |      | 153.18 |       |   |  | 147.71 |       |   |  | 138.43 |      
|Dividends per share as a percentage of diluted
    earnings per share                          |                                                                              |              | 45.28  |       |   |      | 42.55  |       |   |      | 40.06  |       |   |  | 36.69  |       |   |  | 34.38  |      






|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes unrealized losses in 2005, and
    unrealized gains in 2004, 2003, 2002 and 2001, net of tax, on
    securities available for sale.

17



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##### Table of Contents






ITEM 7  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
December 31, 2005 and 2004, and consolidated results of
operations for each of the three years in the period ended
December 31, 2005. The Company is consolidated with its
wholly-owned subsidiary, Hudson Valley Bank, and the Banks
subsidiaries, Hudson Valley Investment Corp., Grassy Sprain Real
Estate Holdings, Inc., Sprain Brook Realty Corp., HVB Leasing
Corp., HVB Employment Corp., HVB Realty Corp. and
A.R. Schmeidler & Co., Inc. (collectively
HVB). This section does not include information
relating to NYNB Bank, which was acquired by the Company
effective January 1, 2006. Pro-forma effects of this
acquisition are not presented herein as it is not deemed a
significant subsidiary as defined by
Regulation S-X of the Securities and Exchange Commission.
This discussion and analysis should be read in conjunction with
the financial statements and supplementary financial information
contained elsewhere in this Annual Report on Form 10-K.

Overview of Managements Discussion and
Analysis

This overview is intended to highlight selected
information included in this Annual Report on Form 10-K. 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 Annual Report on Form 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 portions of New York City. The
Companys assets consist primarily of loans and investment
securities, which are funded by deposits, borrowings and
capital. The primary source of revenue is net interest income,
the difference between interest income on loans and investments,
and interest expense on deposits and borrowed funds. The
Companys basic strategy is to grow net interest income and
noninterest income by the retention of its existing customer
base and the expansion of its core businesses and branch offices
within its current market and surrounding areas. The
Companys primary market risk exposure is interest rate
risk. Interest rate risk is the exposure of net interest income
to changes in interest rates.

Net income for 2005 was $30.9 million or
$3.71 per diluted share, an increase of $3.4 million or
12.4 percent compared to $27.5 million or $3.36 per
diluted share in 2004. Net income for 2005 and 2004 included
approximately $0.7 million of after-tax net realized losses
and approximately $0.7 million of after-tax realized gains,
respectively, on sales of securities available for sale. These
sales were conducted as part of the Companys ongoing
asset/liability management process, which reflected
managements efforts to effectively reposition its
portfolio during periods of changing economic conditions and
interest rates. The Company achieved substantial growth during
2005 in both of its core businesses, loans and deposits. In
addition, during 2004, the Company increased its long-term
borrowings by $75.0 million in an effort to continue to
effectively utilize its capital. Overall asset quality continued
to be good as a result of the Companys conservative
underwriting and investment standards. In addition, during the
fourth quarter of 2004, the Company expanded its services to
customers and increased its fee based revenue through the
acquisition of A.R. Schmeidler & Co., Inc., a
registered investment advisory firm located in Manhattan, New
York, which at December 31, 2005 had approximately
$780 million in assets under management as compared to
approximately $400 million at the time of its
acquisition.

Interest rates, particularly short-term interest
rates, began to rise gradually in the second half of 2004 and
continued to rise throughout 2005. The immediate effect of this
rise in interest rates was positive to the Company, due to more
assets than liabilities repricing in the near term. The rise in
short-term rates, however, has not been accompanied with similar
increases in longer term interest rates resulting in a
flattening of the yield curve. This condition has begun to and
would continue to put downward pressure on the Companys
net interest income as liabilities continue to reprice at higher
rates and maturing longer term assets reprice at similar or only
slightly higher rates.

18



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##### Table of Contents



The effects of the rise in short-term interest
rates, growth in the Companys core businesses of loans and
deposits, increases in non-interest income and additional
leveraging have resulted in tax equivalent basis net interest
income increasing by $13.5 million or 17.7 percent to
$89.8 million in 2005, compared to $76.3 million in
2004. The effect of the adjustment to a tax equivalent basis was
$4.8 million and $4.7 million for 2005 and 2004,
respectively.

Non interest income, excluding securities net
gains and losses, was $9.5 million for 2005, an increase of
$4.1 million or 75.9 percent compared to
$5.4 million in 2004. The increase was primarily due to the
addition of investment advisory fees resulting from the
acquisition of A.R. Schmeidler & Co., Inc. and
also reflects growth in deposit activity and other service fees
and increases in scheduled fees.

Non interest expense for 2005 was
$44.3 million, an increase of $7.6 million or
20.7 percent compared to $36.7 million in 2004. The
increase reflects the Companys continued investment in its
branch offices, technology and personnel to accommodate growth
in both loans and deposits and the expansion of services and
products available to new and existing customers, including the
addition of the operating expenses of A.R. Schmeidler &
Co., Inc.

The Company uses a simulation analysis to
estimate the effect that specific movements in interest rates
would have on net interest income. Excluding the effects of
planned growth and anticipated new business, the simulation
analysis at December 31, 2005 reflects minimal near term
interest rate risk with the Companys net interest income
rising slightly if rates rise and declining slightly if rates
fall.

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

The Company and HVB are subject to various
regulatory capital guidelines. To be considered well
capitalized, an institution must generally have a leverage
ratio of at least 5 percent, a Tier 1 ratio of
6 percent and a Total capital ratio of 10 percent.
Both the Company and HVB exceeded all current regulatory capital
requirements and were in the well-capitalized
category at December 31, 2005. Management plans to conduct
the affairs of the Company and the Bank so as to maintain a
strong capital position in the future.

Critical Accounting Policies

Application of Critical Accounting
Policies The
Companys consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States. The Companys significant accounting
policies are more fully described in Note 1 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 judgements,
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.

Allowance for Loan Losses The Company maintains an allowance for
loan losses to absorb losses inherent 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 several key components, which
include a specific component for identified problem loans, a
formula component, and an unallocated component. The specific
component incorporates the results of measuring impaired loans
as provided in SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. These accounting standards
prescribe the measurement methods, income recognition and
disclosures related to impaired loans. A loan is recognized as
impaired when it is probable that principal and/or interest are
not collectible in accordance with the loans

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contractual terms. A loan is not deemed to be
impaired if there is a short delay in receipt of payment or if,
during a longer period of delay, the Company expects to collect
all amounts due including interest accrued at the contractual
rate during the period of delay. Measurement of impairment can
be based on the present value of expected future cash flows
discounted at the loans effective interest rate, the
loans observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation
is inherently subjective as it requires material estimates that
may be susceptible to significant change. If the fair value of
the impaired loan is less than the related recorded amount, a
specific valuation component is established within the allowance
for loan losses or a writedown is charged against the allowance
for loan losses if the impairment is considered to be permanent.
Measurement of impairment does not apply to large groups of
smaller balance homogenous loans that are collectively evaluated
for impairment such as the Companys portfolios of home
equity loans, real estate mortgages, installment and other loans.


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

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

Actual losses can vary significantly from the
estimated amounts. The 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 December 31, 2005 and 2004. 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 examination.

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

Securities Securities are classified as either
available for sale, representing securities the Bank may sell in
the ordinary course of business, or as held to maturity,
representing securities the Bank has the ability and positive
intent to hold until maturity. Securities available for sale are
reported at fair value with unrealized gains and losses (net of
tax) excluded from operations and reported in other
comprehensive income. Securities held to maturity are stated at
amortized cost (specific identification). The amortization of
premiums and

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accretion of discounts is determined by using the
level yield method to the earlier of the call or maturity date.
Securities are not acquired for purposes of engaging in trading
activities. Realized gains and losses from sales of securities
are determined using the specific identification method.


Goodwill and Other Intangible
Assets In accordance with
the provisions of SFAS No. 142, 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 values and/or remaining amortization periods of the
intangible assets, adjustments are made to reflect such
impairment. The Companys impairment evaluations as of
December 31, 2005 did not indicate impairment of its
goodwill or identified intangible assets.

Results of Operations for Each of the Three
Years in the Period Ended December 31, 2005

Summary of Results

The Company reported net income of
$30.9 million in 2005, an increase of $3.4 million or
12.4 percent compared to $27.5 million in 2004, which
increased $3.3 million or 13.6 percent compared to
$24.2 million in 2003. The increase in 2005 net income,
compared to 2004, reflects higher net interest income and higher
non interest income partially offset by higher non interest
expense, net losses on securities transactions, a higher
provision for loan losses and a higher effective tax rate. The
increase in 2004 net income, compared to 2003, reflects higher
net interest income and higher non interest income partially
offset by higher non interest expense, lower net gains on
securities transactions, a slightly higher provision for loan
losses and a higher effective tax rate.

Diluted earnings per share were $3.71 in 2005 an
increase of $0.35 or 10.4 percent compared to $3.36 in 2004,
which increased $0.37 or 12.4 percent compared to $2.99 in
2003. These increases reflect the higher net income in 2005 and
2004 compared to their respective prior years. Prior period per
share amounts have been adjusted to reflect the 10 percent
stock dividend distributed in December, 2005. Return on average
equity, excluding securities available for sale net unrealized
gains and losses, was 18.54 percent in 2005, compared to
18.55 percent in 2004 and 18.51 percent in 2003.
Return on average assets, excluding securities available for
sale net unrealized gains and losses, was 1.58 percent in
2005, compared to 1.56 percent in 2004 and
1.54 percent in 2003.

Net interest income for 2005 was
$85.1 million, an increase of $13.4 million or
18.7 percent compared to $71.6 million in 2004, which
increased $10.6 million or 17.3 percent compared to
$61.1 million in 2003. The 2005 increase over 2004 was
primarily due to $176.8 million growth in the average
balance of interest earning assets which was in excess of the
$120.0 million growth in the average balance of interest
bearing liabilities and an increase in the tax equivalent basis
net interest margin to 4.83% from 4.53%. The 2004 increase over
2003 was primarily due to $185.0 million growth in the
average balance of interest earning assets which was in excess
of the $107.9 million growth in the average balance of
interest bearing liabilities and an increase in the tax
equivalent basis net interest margin to 4.53% from 4.37%.

The 2005 increase in the tax equivalent basis net
interest margin resulted primarily from the effects of the
growth in loans, the Companys highest yielding asset, as a
percentage of interest earning assets, and the positive effect
of increases short-term interest rates on net interest earning
assets. The 2005 increase in the average balance of interest
earning assets reflected growth in loans, investments and
short-term funds. The 2005 increases in interest earning assets
were funded primarily by deposit growth. The 2004 increase in
the tax equivalent basis net interest margin resulted primarily
from the effects of the redeployment of short-term and maturing
funds into longer term assets as interest rates began to
stabilize in the second half of 2003 and into the first half of
2004, growth in loans, the Companys highest yielding
asset, as a percentage of interest earning assets, and the
positive effect of increases in short-term interest rates on net
interest earning assets toward the end of 2004. The 2004
increase in the average balance of interest earning assets
reflected growth in loans and investments partially offset by
the aforementioned decrease in short-term funds. The increase in
loans and

21



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investments were funded by deposit growth and by
a $75 million increase in the Companys long-term
borrowings.


Non interest income, excluding securities gains
and losses, increased $4.1 million or 75.9 percent to
$9.5 million in 2005 compared to $5.4 million in 2004,
which increased $2.2 million or 68.8 percent compared
to $3.2 million in 2003. The increase in 2005, compared to
2004, was primarily due to the addition of investment advisory
fees resulting from the acquisition of
A.R. Schmeidler & Co., Inc. and also reflects
growth in deposit activity and other service fees and increases
in scheduled fees. The increase in 2004, compared to 2003, was
primarily due to growth in deposit activity and other service
charges, increases in scheduled fees, and the addition of
investment advisory fees resulting from the fourth quarter 2004
acquisition of A.R. Schmeidler & Co., Inc.,
partially offset by a $0.9 million gain on sale of other
real estate owned in 2003. Sales of investment securities
resulted in a net loss of $1.2 million in 2005 and net
gains of $1.1 million and $5.4 million in 2004 and
2003, respectively. The sales were conducted as part of the
Companys ongoing asset/ liability management process.

Non interest expenses increased $7.6 million
or 20.7 percent to $44.3 million in 2005 compared to
$36.7 million in 2004, which increased $3.4 million or
10.2 percent compared to $33.3 million in 2003. These
increases reflect higher amounts in employee salaries and
benefits, occupancy and equipment expense and other expenses
resulting from the Companys continuing growth and
investments in people, technology, products and branch
facilities. The 2005 and 2004 expenses also included higher
professional and other expenses associated with the
Sarbanes-Oxley Act and other regulatory requirements. The
effective tax rate in 2005 increased to 34.1 percent,
compared to 32.8 percent in 2004, which increased slightly
compared to 32.7 percent in 2003. The 2005 increase was
primarily as a result of an increase in the percentage of the
Companys income subject to Federal, New York State, and
particularly New York City taxes, reflecting the Companys
growth in the New York City markets. The 2004 increase, compared
to 2003, was primarily due to a decrease in tax exempt income as
a percentage of total interest income.

The Companys total capital ratio under the
risk-based capital guidelines exceeds regulatory guidelines of
8.0 percent, as the total ratio equaled 14.9 percent and
15.6 percent at December 31, 2005 and 2004,
respectively. The Companys leverage capital ratio was
8.3 percent and 8.2 percent at December 31, 2005
and 2004, respectively.

22



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##### Table of Contents



Average Balances and Interest
Rates

The following table sets forth the average
balances of interest earning assets and interest bearing
liabilities for each of the last three years as well as total
interest and corresponding yields and rates. The data contained
in the table has been adjusted to a tax equivalent basis, based
on the federal statutory rate of 35 percent in 2005, 2004
and 2003.

|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |      |  
|------------------------------------------------------------------------------- | -------------------------------- | -------------------------- | --------- | ----------- |  | ------ | ------- | ------- |  | ----------- | ---- | ------ | - | ------- | --------- | ----------- |  | ------ | ------ | ------ |  |  | ---- | ---- | - | - | --------- | ------- |  | - | ------ | ------ |  |  | ---- | ---- | -
|                                                                                |                                  |                           
|                                                                                |                                  | (000s except percentages)
|                                                                                |                                  | Year ended December 31,   
|                                                                                |                                  |                           
|                                                                                |                                  |                            |           |             |  |       
|                                                                                |                                  | 2005                       |           | 2004        |  | 2003  
|                                                                                |                                  |                            |           |             |  |       
|                                                                                |                                  | Average                    |           |             |  | Yield/ |         | Average |  |             |      | Yield/ |   | Average |           |             |  | Yield/
|                                                                                |                                  | Balance                    |           | Interest(3) |  | Rate   |         | Balance |  | Interest(3) |      | Rate   |   | Balance |           | Interest(3) |  | Rate  
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |       
|ASSETS                                                                          |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Interest earning assets:                                                        |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Deposits in banks                                                               |                                  | $                          | 2,992     |             |  | $      | 129     |         |  |             | 4.31 | %      |   | $       | 4,566     |             |  | $      | 46     |        |  |  | 1.01 | %    |   | $ | 2,492     |         |  | $ | 14     |        |  |  | 0.56 | %   
|Federal funds sold                                                              |                                  |                            | 23,907    |             |  |        | 841     |         |  |             | 3.52 |        |   |         | 14,540    |             |  |        | 209    |        |  |  | 1.44 |      |   |   | 51,658    |         |  |   | 555    |        |  |  | 1.07 |     
|Securities:(1)                                                                  |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Taxable                          |                            |           | 703,359     |  |        |         | 28,377  |  |             |      | 4.03   |   |         |           | 692,026     |  |        |        | 25,307 |  |  |      | 3.66 |   |   |           | 608,965 |  |   |        | 19,707 |  |  |      | 3.24 |  
|                                                                                | Exempt from federal income taxes |                            |           | 201,188     |  |        |         | 13,612  |  |             |      | 6.77   |   |         |           | 191,991     |  |        |        | 13,437 |  |  |      | 7.00 |   |   |           | 172,503 |  |   |        | 12,532 |  |  |      | 7.26 |  
|Loans, net(2)                                                                   |                                  |                            | 928,866   |             |  |        | 72,169  |         |  |             | 7.77 |        |   |         | 780,331   |             |  |        | 54,136 |        |  |  | 6.94 |      |   |   | 662,800   |         |  |   | 48,098 |        |  |  | 7.26 |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total interest earning assets                                                   |                                  |                            | 1,860,312 |             |  |        | 115,128 |         |  |             | 6.19 |        |   |         | 1,683,454 |             |  |        | 93,135 |        |  |  | 5.53 |      |   |   | 1,498,418 |         |  |   | 80,906 |        |  |  | 5.40 |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Non interest earning assets:                                                    |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Cash and due from banks          |                            |           | 42,706      |  |        |         |         |  |             |      |        |   |         |           | 40,604      |  |        |        |        |  |  |      |      |   |   |           | 38,634  |  |   |        |        |  |  |      |      |  
|                                                                                | Other assets                     |                            |           | 53,500      |  |        |         |         |  |             |      |        |   |         |           | 44,166      |  |        |        |        |  |  |      |      |   |   |           | 36,513  |  |   |        |        |  |  |      |      |  
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total non interest earning assets                                               |                                  |                            | 96,206    |             |  |        |         |         |  |             |      |        |   |         | 84,770    |             |  |        |        |        |  |  |      |      |   |   | 75,147    |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total assets                                                                    |                                  | $                          | 1,956,518 |             |  |        |         |         |  |             |      |        |   | $       | 1,768,224 |             |  |        |        |        |  |  |      |      |   | $ | 1,573,565 |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                        |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Interest bearing liabilities:                                                   |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Deposits:                                                                       |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Money market                     |                            | $         | 384,214     |  |        | $       | 4,115   |  |             |      | 1.07   | % |         | $         | 327,055     |  |        | $      | 1,823  |  |  |      | 0.56 | % |   | $         | 300,566 |  |   | $      | 2,050  |  |  |      | 0.68 | %
|                                                                                | Savings                          |                            |           | 74,317      |  |        |         | 386     |  |             |      | 0.52   |   |         |           | 70,321      |  |        |        | 160    |  |  |      | 0.28 |   |   |           | 64,184  |  |   |        | 149    |  |  |      | 0.23 |  
|                                                                                | Time                             |                            |           | 188,460     |  |        |         | 3,907   |  |             |      | 2.07   |   |         |           | 165,349     |  |        |        | 1,963  |  |  |      | 1.19 |   |   |           | 169,435 |  |   |        | 2,213  |  |  |      | 1.31 |  
|                                                                                | Checking with interest           |                            |           | 125,934     |  |        |         | 462     |  |             |      | 0.37   |   |         |           | 110,499     |  |        |        | 238    |  |  |      | 0.22 |   |   |           | 98,852  |  |   |        | 259    |  |  |      | 0.26 |  
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |                            | 170,072   |             |  |        | 4,909   |         |  |             | 2.89 |        |   |         | 181,870   |             |  |        | 2,140  |        |  |  | 1.18 |      |   |   | 156,989   |         |  |   | 1,730  |        |  |  | 1.10 |     
|Other borrowings                                                                |                                  |                            | 263,108   |             |  |        | 11,527  |         |  |             | 4.38 |        |   |         | 231,014   |             |  |        | 10,471 |        |  |  | 4.53 |      |   |   | 188,159   |         |  |   | 9,043  |        |  |  | 4.81 |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total interest bearing liabilities                                              |                                  |                            | 1,206,105 |             |  |        | 25,306  |         |  |             | 2.10 |        |   |         | 1,086,108 |             |  |        | 16,795 |        |  |  | 1.55 |      |   |   | 978,185   |         |  |   | 15,444 |        |  |  | 1.58 |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Non interest bearing liabilities:                                               |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Demand deposits                  |                            |           | 562,533     |  |        |         |         |  |             |      |        |   |         |           | 517,532     |  |        |        |        |  |  |      |      |   |   |           | 451,282 |  |   |        |        |  |  |      |      |  
|                                                                                | Other liabilities                |                            |           | 20,927      |  |        |         |         |  |             |      |        |   |         |           | 16,083      |  |        |        |        |  |  |      |      |   |   |           | 13,291  |  |   |        |        |  |  |      |      |  
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total non interest bearing liabilities                                          |                                  |                            | 583,460   |             |  |        |         |         |  |             |      |        |   |         | 533,615   |             |  |        |        |        |  |  |      |      |   |   | 464,573   |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Stockholders equity(1)                                                         |                                  |                            | 166,953   |             |  |        |         |         |  |             |      |        |   |         | 148,501   |             |  |        |        |        |  |  |      |      |   |   | 130,807   |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total liabilities and stockholders equity(1)                                   |                                  | $                          | 1,956,518 |             |  |        |         |         |  |             |      |        |   | $       | 1,768,224 |             |  |        |        |        |  |  |      |      |   | $ | 1,573,565 |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Net interest earnings                                                           |                                  |                            |           |             |  | $      | 89,822  |         |  |             |      |        |   |         |           |             |  | $      | 76,340 |        |  |  |      |      |   |   |           |         |  | $ | 65,462 |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |         |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Net yield on interest earning assets                                            |                                  |                            |           |             |  |        |         |         |  |             | 4.83 | %      |   |         |           |             |  |        |        |        |  |  | 4.53 | %    |   |   |           |         |  |   |        |        |  |  | 4.37 | %   




|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes unrealized gains and losses on
    securities available for sale.                                                                              
|   
|(2) | Includes loans classified as non-accrual.                                                                                                               
|   
|(3) | Effect of adjustment to a tax equivalent basis
    was $4,764, $4,703 and $4,386 for the years ended
    December 31, 2005, 2004 and 2003, respectively.

23



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##### Table of Contents



Interest Differential

The following table sets forth the dollar amount
of changes in interest income, interest expense and net interest
income between the years ended December 31, 2005 and 2004,
and the years ended December 31, 2004 and 2003, on a tax
equivalent basis.

|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |       |  
|------------------------------------------------------------------------------- | -------------------------------- | --------------------- | ------ | --------------------- |  | -------- | ------ | ------ | - | ---- | ------ | -------- |  | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                |                                  |                      
|                                                                                |                                  | (000s)              
|                                                                                |                                  |                      
|                                                                                |                                  |                       |        |                      
|                                                                                |                                  | 2005 Compared to 2004 |        | 2004 Compared to 2003
|                                                                                |                                  | Increase (Decrease)   |        | Increase (Decrease)  
|                                                                                |                                  | Due to Change in      |        | Due to Change in     
|                                                                                |                                  |                       |        |                      
|                                                                                |                                  | Volume                |        | Rate                  |  | Total(1) |        | Volume |   | Rate |        | Total(1)
|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |         
|Interest income:                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|Deposits in banks                                                               |                                  | $                     | (16    | )                     |  | $        | 99     |        |   | $    | 83     |          |  | $ | 12     |       |   | $ | 20     |       |   | $ | 32     |      
|Federal funds sold                                                              |                                  |                       | 135    |                       |  |          | 497    |        |   |      | 632    |          |  |   | (399   | )     |   |   | 53     |       |   |   | (346   | )    
|Securities:                                                                     |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|                                                                                | Taxable                          |                       |        | 414                   |  |          |        | 2,656  |   |      |        | 3,070    |  |   |        | 2,688 |   |   |        | 2,912 |   |   |        | 5,600 |  
|                                                                                | Exempt from federal income taxes |                       |        | 644                   |  |          |        | (469   | ) |      |        | 175      |  |   |        | 1,416 |   |   |        | (511  | ) |   |        | 905   |  
|Loans, net                                                                      |                                  |                       | 10,305 |                       |  |          | 7,728  |        |   |      | 18,033 |          |  |   | 8,529  |       |   |   | (2,491 | )     |   |   | 6,038  |      
|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|Total interest income                                                           |                                  |                       | 11,482 |                       |  |          | 10,511 |        |   |      | 21,993 |          |  |   | 12,246 |       |   |   | (17    | )     |   |   | 12,229 |      
|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|Interest expense:                                                               |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|Deposits:                                                                       |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|                                                                                | Money market                     |                       |        | 319                   |  |          |        | 1,973  |   |      |        | 2,292    |  |   |        | 181   |   |   |        | (408  | ) |   |        | (227  | )
|                                                                                | Savings                          |                       |        | 9                     |  |          |        | 217    |   |      |        | 226      |  |   |        | 14    |   |   |        | (3    | ) |   |        | 11    |  
|                                                                                | Time                             |                       |        | 274                   |  |          |        | 1,670  |   |      |        | 1,944    |  |   |        | (53   | ) |   |        | (197  | ) |   |        | (250  | )
|                                                                                | Checking with interest           |                       |        | 33                    |  |          |        | 191    |   |      |        | 224      |  |   |        | 31    |   |   |        | (52   | ) |   |        | (21   | )
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |                       | (139   | )                     |  |          | 2,908  |        |   |      | 2,769  |          |  |   | 274    |       |   |   | 136    |       |   |   | 410    |      
|Other borrowings                                                                |                                  |                       | 1,455  |                       |  |          | (399   | )      |   |      | 1,056  |          |  |   | 2,060  |       |   |   | (632   | )     |   |   | 1,428  |      
|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|Total interest expense                                                          |                                  |                       | 1,951  |                       |  |          | 6,560  |        |   |      | 8,511  |          |  |   | 2,507  |       |   |   | (1,156 | )     |   |   | 1,351  |      
|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      
|Increase in interest differential                                               |                                  | $                     | 9,531  |                       |  | $        | 3,951  |        |   | $    | 13,482 |          |  | $ | 9,739  |       |   | $ | 1,139  |       |   | $ | 10,878 |      
|                                                                                |                                  |                       |        |                       |  |          |        |        |   |      |        |          |  |   |        |       |   |   |        |       |   |   |        |      




|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

Net Interest Income

Net interest income, the difference between
interest income and interest expense, is the most significant
component of the Companys consolidated earnings. The
extended period of declining interest rates which began in 2001
and continued into the first half of 2004, was replaced by an
environment where interest rates, particularly short-term
interest rates, began to rise gradually during the second half
of 2004 and have continued to rise throughout 2005. The initial
impact of the gradual rise in short-term interest rates on the
Companys net interest income during the second half of
2004 and 2005 was positive. This was due to more assets than
liabilities repricing in the near term.

The Company has made efforts throughout these
periods of fluctuating interest rates to minimize the impact on
its net interest income by appropriately repositioning its
securities portfolio and funding sources while maintaining
prudence in its asset and interest rate risk profiles. During
the first half of 2003, the Company sold the remainder of its
rapidly prepaying fixed rate mortgage-backed securities
portfolio and callable U.S. agency securities which
management believed would be called within the ensuing twelve
months. Proceeds from these sales, which included the
recognition of pretax gains of $5.4 million, were reinvested

24



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##### Table of Contents



primarily in variable rate mortgage-backed
securities and collateralized mortgage obligations
(CMOs). As rates began to stabilize after the
second quarter of 2003 and through the first half of 2004, the
Company redeployed the maturing short-term securities into fixed
rate mortgage-backed securities and U.S. agency securities with
expected average lives of less than four years. In addition,
during 2004, the Company increased its long-term borrowings by
$75.0 million in an effort to continue to effectively
utilize its capital. The proceeds from these borrowings were
invested in fixed rate mortgage-backed securities and
obligations of state and political subdivisions. Additional
repositioning of the investment portfolio was accomplished in
late 2005 through the sale of approximately $50 million of
fixed rate U.S. agency bonds and reinvestment of the
proceeds into U.S. Agency backed CMOs with higher
yields and more attractive cash flow characteristics. The result
of these efforts, together with continued growth in the core
businesses of loans and deposits, enabled the Company to grow
net interest income in 2004 and 2005 and have also effectively
repositioned its portfolios from both asset and interest rate
risk perspectives. The aforementioned rise in short-term
interest rates in late 2004 and 2005 has not been accompanied by
corresponding increases in longer-term interest rates, resulting
in a flattening of the yield curve. A continuation of this
condition would put downward pressure on the Companys
future net interest income as liabilities continued to reprice
at higher rates and maturing longer term assets reprice at
similar or only slightly higher rates.


Net interest income, on a tax equivalent basis,
increased $13.5 million or 17.7 percent to
$89.8 million in 2005, compared to $76.3 million in
2004, which increased $10.8 million or 16.5 percent
from $65.5 million in 2003. The increase in 2005, compared
to 2004, primarily resulted from an increase of
$56.8 million or 9.5 percent in the excess of interest
earning assets over interest bearing liabilities to
$654.2 million in 2005 from $597.3 million in 2004 and
an increase in the tax equivalent basis net interest margin to
4.83 percent in 2005 from 4.53 percent in 2004. The
increase in 2004, compared to 2003, primarily resulted from an
increase of $77.1 million or 14.8 percent in the
excess of interest earning assets over interest bearing
liabilities to $597.3 million in 2004 from
$520.2 million in 2003 and an increase in the tax
equivalent basis net interest margin to 4.53 percent in
2004 from 4.37 percent in 2003. The effect of the
adjustment to tax equivalent basis net interest income was
$4.8 million, $4.7 million and $4.4 million for
2005, 2004 and 2003, respectively.

Interest income is determined by the volume of
and related rates earned on interest earning assets. Volume
increases in loans, securities and Federal funds sold and higher
average rates resulted in higher interest income in 2005,
compared to 2004. Volume increases in loans and securities and
higher average rates on securities partially offset by a volume
decrease in Federal funds sold and lower average rates on loans
resulted in higher interest income in 2004, compared to 2003.

Average interest earning assets in 2005 increased
$176.8 million or 10.5 percent to
$1,860.3 million from $1,683.5 million in 2004, which
increased $185.0 million or 12.3 percent from
$1,498.4 million in 2003. 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.

Securities are the largest component of interest
earning assets. Total securities, including Federal Home Loan
Bank (FHLB) stock and excluding net unrealized
gains, increased $20.0 million or 2.3 percent to
$907.0 million at December 31, 2005 from
$887.0 million at December 31, 2004, which increased
$19.2 million or 2.2 percent from $867.8 million
at December 31, 2003. Average total securities, including
FHLB stock and excluding net unrealized gains, increased
$20.5 million or 2.3 percent to $904.5 million in
2005 from $884.0 million in 2004, which increased
$102.5 million or 13.1 percent from
$781.5 million in 2003. The increase in average total
securities in 2005 compared to 2004 reflects volume increases in
mortgage-backed securities including CMOs, obligations of states
and political subdivisions, FHLB Stock and other investments
partially offset by volume decreases in U.S. Treasury and
U.S. agency securities. Increases in average
mortgage-backed securities, obligations of state and political
subdivisions and other investments reflect investment of deposit
growth and the redeployment of maturing funds and proceeds of
sales of U.S. Agency securities. The increase in average
FHLB stock results from purchases of stock required to support
FHLB borrowings. Despite the general flattening of the yield
curve during 2005 due to the steady rise of short-term interest
rates, longer term rates did increase, although to a lesser
degree. This increased yields on reinvested funds during 2005.
As a result of the aforementioned factors, tax equivalent basis
interest income from securities increased in 2005, compared to
2004, due to higher volume and higher rates. The increase in

25



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##### Table of Contents



average total securities in 2004 compared to 2003
reflects volume increases in U.S. agency securities,
mortgage-backed securities including CMOs, obligations of
state and political subdivisions, FHLB stock and other
securities partially offset by volume decreases in short-term
U.S. Treasury obligations. During 2004, as interest rates
continued to stabilize, the Company completed the redeployment
of short-term securities into longer term opportunities,
principally fixed mortgage-backed securities. In addition,
during 2004, the Company increased its long-term borrowings by
$75.0 million and invested the proceeds into fixed rate
mortgage-backed securities and obligations of state and
political subdivisions. As a result, tax equivalent basis
interest income on securities increased in 2004, compared to
2003, due to higher volume and higher interest rates.


Net loans increased $147.3 million or
17.1 percent to $1,009.8 million at December 31,
2005 from $862.5 million at December 31, 2004, which
increased $155.4 million or 21.2 percent from
$707.1 million at December 31, 2003. Average net loans
increased $148.6 million or 19.0 percent to
$928.9 million in 2005 from $780.3 million in 2004,
which increased $117.5 million or 17.7 percent from
$662.8 million in 2003. The increases in average net loans
in 2005 and 2004 were primarily due to the Companys
emphasis on making new loans through more effective market
penetration in its primary market. Average interest rates were
higher in 2004 than in 2003 and lower in 2004 than in 2003. As a
result, interest income on loans in 2005 was higher than in 2004
due to higher volume and higher rates, and interest income on
loans in 2004 was higher than in 2003 due to higher volume
partially offset by lower interest rates.

Interest expense is a function of the volume of,
and rates paid for, interest bearing liabilities, comprised of
deposits and borrowings. Interest expense increased
$8.5 million or 50.6 percent to $25.3 million in
2005 from $16.8 million in 2004, which increased
$1.4 million or 9.1 percent from $15.4 million in
2003. Average balances of interest bearing liabilities increased
$120.0 million or 11.0 percent to
$1,206.1 million in 2005 from $1,086.1 million in
2004, which increased $107.9 million or 11.0 percent
from $978.2 million in 2003. The increase in average
interest bearing liabilities in 2005, compared to 2004, was due
to increases in interest bearing demand deposits, time deposits
and other borrowings, partially offset by a decrease in
securities sold under repurchase agreements and other short-term
borrowings. The increases in average interest bearing demand
deposits and average time deposits in 2005, compared to 2004,
resulted from growth in existing customers, new customers and
continuing growth resulting from the opening of new branches.
The increase in average other borrowings in 2005, compared to
2004, resulted from the full year effect of an addition of
$75.0 million in long-term borrowings during 2004,
discussed below. The decrease in average securities sold under
repurchase agreements and other short-term borrowings in 2005,
compared to 2004, resulted primarily from timing of reinvestment
of available funds. The increase in average interest bearing
liabilities in 2004, compared to 2003, was due to increases in
interest bearing demand deposits, short-term borrowings and
other borrowings, partially offset by a decrease in time
deposits. The increase in average interest bearing demand
deposits in 2004, compared to 2003, resulted from growth in
existing customers, new customers and continuing growth
resulting from the opening of new branches. The increase in
average other borrowings in 2004, compared to 2003, resulted
from the addition of $75.0 million in long-term borrowings
reflecting managements efforts to effectively utilize its
available capital. The decrease in average time deposits in
2004, compared to 2003, resulted primarily from decreases in
short-term jumbo certificates of deposit from municipal
customers which are acquired on a bid basis. Overall average
increases in funding in 2005 and 2004 were invested in loans and
securities. Average interest rates paid on interest bearing
liabilities were higher in 2005 compared to 2004 and slightly
lower in 2004 compared to 2003. As a result of these factors,
interest expense on average interest bearing liabilities was
higher in 2005 compared to 2004 due to higher volume and higher
rates, and interest expense on average interest bearing
liabilities was higher in 2004 compared to 2003 due to higher
volume partially offset by slightly lower rates.

Average non interest bearing demand deposits
increased $45.0 million or 8.7 percent to
$562.5 million in 2005 from $517.5 million in 2004,
which increased $66.2 million or 14.7 percent from
$451.3 million in 2003. 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.

26



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##### Table of Contents



The interest rate spread on a tax equivalent
basis for each of the three years in the period ended
December 31, 2005 is as follows:

|                          |                                            |      |  |      |   |      |  |      |   |  |  |      |  
|------------------------- | ------------------------------------------ | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                          |                                            | 2005 |  | 2004 |   | 2003
|                          |                                            |      |  |      |   |     
|Average interest rate on: |                                            |      |  |      |   |      |  |      |   |  |  |     
|                          | Total average interest earning assets      |      |  | 6.19 | % |      |  | 5.53 | % |  |  | 5.40 | %
|                          | Total average interest bearing liabilities |      |  | 2.10 |   |      |  | 1.55 |   |  |  | 1.58 |  
|                          | Total interest rate spread                 |      |  | 4.09 |   |      |  | 3.98 |   |  |  | 3.82 |  

In 2005, the interest rate spread increased as
short-term interest rates rose steadily and longer term rates
rose to a lesser degree. The increase was primarily due to
earning assets repricing at a faster rate than interest bearing
liabilities, and an increase in loans, the Companys
highest yielding asset, as a percentage of total earning assets.
In 2004, the interest rate spread increased as rates stabilized
and short-term rates began to rise. This increase was due
primarily to earning assets repricing at a faster rate than
interest bearing liabilities and the redeployment of maturing
short-term investments into longer term opportunities, partially
offset by a $75.0 million increase in long-term borrowings
conducted as a leveraging transaction. The leveraging of capital
generally tends to decrease the interest rate spread, however,
it adds net interest income without adding significant operating
costs. Management cannot predict what impact market conditions
will have on its interest rate spread and future compression in
net interest rate spread may occur.

Non Interest Income

The Company recorded non interest income of
$8.3 million, $6.5 million and $8.7 million in
2005, 2004 and 2003, respectively. Non interest income includes
service charge income, investment advisory fees, gains and
losses on securities transactions and other income.

Service charges increased $0.6 million or
17.8 percent to $4.0 million in 2005 from
$3.4 million in 2004, which increased $2.0 million or
138.4 percent from $1.4 million in 2003. The
increases, were primarily due to growth in deposit activity and
other service charges and increases in scheduled fees.

Investment advisory fees increased
$3.2 million or 237.4 percent to $4.6 million in
2005 from $1.4 million in 2004, which increased $1.1 or
351.3 percent from $0.3 million in 2003. The increases
were primarily due to the Banks acquisition of A.R.
Schmeidler & Co., Inc., a money management firm.

Sales of securities available for sale resulted
in net losses of $1.2 million in 2005, and gains of
$1.1 million and $5.4 million in 2004 and 2003,
respectively. Sales are generally conducted as part of the
Companys overall asset/liability management efforts
designed to restructure the portfolio, manage cash flow and
enhance portfolio yield, and efforts to manage the
Companys overall interest rate risk in response to changes
in interest rates or changes in the composition of the balance
sheet.

Other income increased $0.2 million or
31.7 percent to $0.9 million in 2005 from
$0.7 million in 2004, which decreased $0.8 million or
54.5 percent from $1.5 million in 2003. Other income
includes a gain on sale of other real estate owned
(OREO) of $0.9 million in 2003, and
miscellaneous income of $0.9 million, $0.7 million and
$0.6 million in 2005, 2004 and 2003, respectively.

Non Interest Expense

Non interest expense increased $7.6 million
or 20.7 percent to $44.3 million in 2005, from
$36.7 million in 2004, which increased $3.4 million or
10.2 percent from $33.3 million in 2003. The 2005
increases were partially the due to expenses related to the
acquisition of New York National Bank and additional
professional expenses associated with the requirements of the
Sarbanes-Oxley Act of 2002. The 2004 increases were partially
the result of additional professional and other expenses
associated with the requirements of the Sarbanes-Oxley Act of
2002 and other regulatory requirements. The remainder of the
2005 and 2004 increases reflects the overall growth of the
Company. The Companys efficiency ratio (a lower ratio
indicates greater efficiency) which compares non interest
expense to total adjusted revenue (taxable equivalent net
interest

27



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##### Table of Contents



income, plus non interest income, excluding gain
or loss on security transactions) was 44.6 percent in 2005,
compared to 44.9 percent in 2004 and 48.5 percent in
2003.


Salaries and employee benefits, the largest
component of non interest expense, increased $4.5 million
or 21.4 percent in 2005 to $25.6 million, from
$21.1 million in 2004, which increased $2.1 million or
10.9 percent from $19.0 million in 2003. The Company
opened two new branches in 2005 and opened one new branch and
acquired A.R. Schmeidler & Co., Inc., a registered
investment advisory firm in 2004, resulting in increased staff.
The increases in both 2005 and 2004 also reflected the cost of
additional personnel necessary for the Company to accommodate
the growth in deposits and loans, the expansion of services and
products available to customers, increases in the number of
customer relationships, and annual merit increases. Increases in
salaries and employee benefits in both 2005 and 2004 were also
attributable to incentive compensation programs and other
benefit plans necessary to be competitive in attracting and
retaining high quality and experienced personnel, as well as
higher costs associated with related payroll taxes.

|                          |  |      |     |      |  |      |     |  |  |  |     | 
|------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                          |  | 2005 |     | 2004 |  | 2003
|                          |  |      |     |      |  |     
|Employees at December 31, |  |      |     |      |  |      |     |  |  |  |     | 
|Full Time Employees       |  |      | 314 |      |  |      | 281 |  |  |  | 263 | 
|Part Time Employees       |  |      | 45  |      |  |      | 28  |  |  |  | 31  | 

|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|---------------------------------------- |  | -------------------------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                         |  |                           
|                                         |  | (000s except percentages)
|Salaries and Employee Benefits           |  |                            |        |   |  |   |        |   |  |   |        |  
|Salaries                                 |  | $                          | 17,902 |   |  | $ | 15,413 |   |  | $ | 13,665 |  
|Payroll Taxes                            |  |                            | 1,472  |   |  |   | 1,217  |   |  |   | 1,103  |  
|Medical Plans                            |  |                            | 1,328  |   |  |   | 1,204  |   |  |   | 1,048  |  
|Incentive Compensation Plans             |  |                            | 2,755  |   |  |   | 1,648  |   |  |   | 1,497  |  
|Employee Retirement Plans                |  |                            | 1,570  |   |  |   | 1,278  |   |  |   | 1,252  |  
|Other                                    |  |                            | 547    |   |  |   | 312    |   |  |   | 441    |  
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|Total                                    |  | $                          | 25,574 |   |  | $ | 21,072 |   |  | $ | 19,006 |  
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|Percentage of total non interest expense |  |                            | 57.7   | % |  |   | 57.4   | % |  |   | 57.0   | %
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  

Occupancy expense increased 20.6 percent to
$3.8 million in 2005 from $3.1 million in 2004 which
was an 8.3 percent increase from $2.8 million in 2003.
The increases in both 2005 and 2004 were due to the opening of
new branch offices 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 increased 23.7 percent
to $4.3 million in 2005 from $3.5 million in 2004,
which was a 7.3 percent increase from $3.3 million for
2003. The increases in 2005 were due to expenses related to the
acquisition of New York National Bank and higher audit costs
related to Sarbanes-Oxley compliance. The increases in 2004 were
due to higher audit costs related to Sarbanes-Oxley compliance,
higher legal costs and professionals engaged to assist in the
acquisition of A.R. Schmeidler and Co., Inc.

Equipment expense increased 11.7 percent to
$2.3 million in 2005 from $2.1 million in 2004, which
was a increase of 16.9 percent from $1.8 million in
2003. The increases in both 2005 and 2004 reflected increases
costs to maintain the Companys equipment and additional
equipment necessary to support the new branches.

Business development expense increased
16.0 percent to $1.7 million in 2005 from
$1.5 million in 2004, which was a 4.4 percent increase
over $1.4 million in 2003. The increases reflected costs
associated with increased general promotion of products and
services, expanded business development efforts and promotion of
new branches.

FDIC assessment was $178,000 for 2005 and 173,000
in 2004 and $177,000 for 2003. The slight increase in 2005 was
due to increases in HVBs deposit subject to FDIC
assessment. The slight decrease in 2004 resulted from decreases
in the HVBs deposits subject to FDIC assessment.

28



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##### Table of Contents



Other operating expenses, as reflected in the
following table increased 21.5 percent in 2005 and
increased 10.2 percent in 2004.

|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|----------------------------------------- |  | -------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                          |  | 2005                       |       | 2004 |  | 2003
|                                          |  |                            |       |      |  |     
|                                          |  |                           
|                                          |  | (000s except percentages)
|Other Operating Expenses                  |  |                            |       |      |  |      |       |   |  |   |       |  
|Other insurance                           |  | $                          | (186  | )    |  | $    | 40    |   |  | $ | (55   | )
|Stationery and printing                   |  |                            | 872   |      |  |      | 731   |   |  |   | 541   |  
|Communications expense                    |  |                            | 1,073 |      |  |      | 1,123 |   |  |   | 911   |  
|Courier expense                           |  |                            | 772   |      |  |      | 750   |   |  |   | 617   |  
|Other loan expense                        |  |                            | 351   |      |  |      | 181   |   |  |   | 267   |  
|Outside services                          |  |                            | 1,587 |      |  |      | 1,256 |   |  |   | 1,053 |  
|Dues, meetings and seminars               |  |                            | 471   |      |  |      | 204   |   |  |   | 461   |  
|Other                                     |  |                            | 1,529 |      |  |      | 1,038 |   |  |   | 1,042 |  
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|Total                                     |  | $                          | 6,469 |      |  | $    | 5,323 |   |  | $ | 4,837 |  
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|Percentages of total non interest expense |  |                            | 14.6  | %    |  |      | 14.5  | % |  |   | 14.5  | %
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  

The 2005 increases reflect higher outside service
fees, higher customer service related expenses including courier
expenses, higher other loan expenses and higher dues, meetings
and seminar expenses, and higher stationery and printing costs,
all related to growth in customer and business activities. The
2005 decreases reflect lower insurance costs and lower
communication expenses, primarily due to greater efficiencies
gained due to a change in service providers.

The 2004 increases reflect higher outside service
fees, higher customer service related expenses including
communications and courier expenses, higher insurance costs,
higher stationery and printing costs, all related to growth in
customer and business activities. The 2004 decreases reflect
lower other loan expenses and decreases in dues and seminar
expense due to reduced participation in such events.

To monitor and control the amount of non interest
expenses, as well as non interest income, the Company
continually monitors the system of internal budgeting, including
analysis and follow up of budget variances.

Income Taxes

Income taxes of $16.0 million,
$13.4 million and $11.8 million were recorded in 2005,
2004 and 2003, respectively. The Company is currently subject to
a statutory Federal tax rate of 35 percent, a New York
State tax rate of 7.5 percent plus a 17 percent surcharge,
and a New York City tax rate of approximately
9 percent. The Companys overall effective tax rate
was 34.1 percent, 32.8 percent and 32.7 percent in
2005, 2004 and 2003, respectively. The increase in the overall
effective tax rates for 2005 and 2004, compared to the prior
year periods, resulted from increases in the percentages of
income subject to Federal, New York State, and
New York City taxes.

In the normal course of business, the
Companys Federal, New York State and New York City
corporation tax returns are subject to audit. The New York
State Department of Taxation and Finance has completed audits of
the Companys New York State corporation tax returns for
the years 1996 through 2004. The Company has reached a tentative
agreement with New York State on all open issues for tax
years 1996 through 2004, and does not believe the final
resolution of this matter will have a significant impact on its
financial position or results of operations. Other pertinent tax
information is set forth in the Notes to Consolidated Financial
Statements included elsewhere herein.

Financial Condition at December 31, 2005
and 2004

Securities
Portfolio

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

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on maximizing income while providing for safety
of principal, maintaining appropriate utilization of capital,
providing adequate liquidity to meet loan demand or deposit
outflows and to manage overall interest rate risk. The Company
selects individual securities whose credit, cash flow, maturity
and interest rate characteristics, in the aggregate, affect the
stated strategies.


The securities portfolio consists of various debt
and equity securities totaling $884.0 million and
$875.1 million and FHLB stock totaling $13.7 million
and $14.2 million at December 31, 2005 and 2004,
respectively.

In accordance with SFAS No. 115, the
Companys investment policies include a determination of
the appropriate classification of securities at the time of
purchase. If management has the intent and ability to hold
securities until maturity, they are classified as
held-to-maturity and carried at amortized cost. Securities held
for indefinite periods of time and not intended to be
held-to-maturity include the securities management intends to
use as part of its asset/ liability strategy and liquidity
management and the securities that may be sold in response to
changes in interest rates, resultant prepayment risks, liquidity
demands and other factors. Such securities are classified as
available for sale and are carried at fair value. The held to
maturity portfolio totaled $50.1 million and
$70.9 million at December 31, 2005 and 2004,
respectively. All other securities were classified as available
for sale at December 31, 2004.

Average aggregate securities and FHLB stock
represented 48.6 percent and 52.5 percent of average
interest earning assets in 2005 and 2004, respectively. Emphasis
on the securities portfolio will continue to be an important
part of the Companys investment strategy. The size of the
securities portfolio will depend on loan and deposit growth, the
level of capital and the Companys ability to take
advantage of leveraging opportunities.

The following table sets forth the amortized
cost, gross unrealized gains and losses and the estimated fair
value of securities classified as available for sale and held to
maturity at December 31:

2005 (000s)

|                                                |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 
|----------------------------------------------- |  | --------- | ------- | ---------- |  | --------- | ----- | ---------- |  | - | ------ |  |  | - | ------- | 
|                                                |  |           |         |            |  |          
|                                                |  |           |         | Gross      |  |          
|                                                |  |           |         | Unrealized |  |          
|                                                |  | Amortized |         |            |  | Estimated
|Classified as Available for Sale                |  | Cost      |         | Gains      |  | Losses    |       | Fair Value
|                                                |  |           |         |            |  |           |       |           
|                                                |  |          
|                                                |  | (000s)  
|U.S. Treasuries and government agencies         |  | $         | 119,200 |            |  | $         | 1     |            |  | $ | 2,969  |  |  | $ | 116,232 | 
|Mortgage-backed securities                      |  |           | 468,731 |            |  |           | 448   |            |  |   | 9,761  |  |  |   | 459,418 | 
|Obligations of state and political subdivisions |  |           | 203,204 |            |  |           | 4,203 |            |  |   | 1,300  |  |  |   | 206,107 | 
|Other debt securities                           |  |           | 27,906  |            |  |           | 179   |            |  |   | 246    |  |  |   | 27,839  | 
|                                                |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 
|Total debt securities                           |  |           | 819,041 |            |  |           | 4,831 |            |  |   | 14,276 |  |  |   | 809,596 | 
|Mutual funds and other equity securities        |  |           | 24,159  |            |  |           | 609   |            |  |   | 491    |  |  |   | 24,277  | 
|                                                |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 
|Total                                           |  | $         | 843,200 |            |  | $         | 5,440 |            |  | $ | 14,767 |  |  | $ | 833,873 | 
|                                                |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 
|Classified as Held to Maturity                  |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 
|                                               
|Mortgage-backed securities                      |  | $         | 44,990  |            |  | $         |      |            |  | $ | 499    |  |  | $ | 44,491  | 
|Obligations of state and political subdivisions |  |           | 5,129   |            |  |           | 36    |            |  |   | 23     |  |  |   | 5,142   | 
|                                                |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 
|Total                                           |  | $         | 50,119  |            |  | $         | 36    |            |  | $ | 522    |  |  | $ | 49,633  | 
|                                                |  |           |         |            |  |           |       |            |  |   |        |  |  |   |         | 

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2004 (000s)

|                                                 |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 
|------------------------------------------------ |  | --------- | ------- | ---------- |  | --------- | ----- | ---------- |  | - | ----- |  |  | - | ------- | 
|                                                 |  |           |         |            |  |          
|                                                 |  |           |         | Gross      |  |          
|                                                 |  |           |         | Unrealized |  |          
|                                                 |  | Amortized |         |            |  | Estimated
|Classified as Available for Sale                 |  | Cost      |         | Gains      |  | Losses    |       | Fair Value
|                                                 |  |           |         |            |  |           |       |           
|U.S. Treasury and government agencies            |  | $         | 167,756 |            |  | $         | 19    |            |  | $ | 1,810 |  |  | $ | 165,965 | 
|Mortgage-backed securities                       |  |           | 393,447 |            |  |           | 1,216 |            |  |   | 3,309 |  |  |   | 391,354 | 
|Obligations of states and political subdivisions |  |           | 190,411 |            |  |           | 6,471 |            |  |   | 635   |  |  |   | 196,247 | 
|Other debt securities                            |  |           | 29,245  |            |  |           | 272   |            |  |   | 304   |  |  |   | 29,213  | 
|                                                 |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 
|Total debt securities                            |  |           | 780,859 |            |  |           | 7,978 |            |  |   | 6,058 |  |  |   | 782,779 | 
|Mutual funds and other equity securities         |  |           | 21,056  |            |  |           | 639   |            |  |   | 221   |  |  |   | 21,474  | 
|                                                 |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 
|Total                                            |  | $         | 801,915 |            |  | $         | 8,617 |            |  | $ | 6,279 |  |  | $ | 804,253 | 
|                                                 |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 
|Classified as Held To Maturity                   |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 
|Mortgage-backed securities                       |  | $         | 65,739  |            |  | $         | 906   |            |  | $ | 31    |  |  | $ | 66,614  | 
|Obligations of states and political subdivisions |  |           | 5,128   |            |  |           | 74    |            |  |   | 6     |  |  |   | 5,196   | 
|                                                 |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 
|Total                                            |  | $         | 70,867  |            |  | $         | 980   |            |  | $ | 37    |  |  | $ | 71,810  | 
|                                                 |  |           |         |            |  |           |       |            |  |   |       |  |  |   |         | 

The following table presents the amortized cost
of securities at December 31, 2005, distributed based on
contractual maturity or earlier call date for securities
expected to be called, and weighted average yields computed on a
tax equivalent basis. Mortgage-backed securities which may have
principal prepayments are distributed to a maturity category
based on estimated average lives. Actual maturities will differ
from contractual maturities because issuers may have the right
to call or prepay obligations with or without call or prepayment
penalties.

|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  
|------------------------------------------------ |  | -------------------------- | ------- | ------------------ |  | ------------------ | ---- | -------------- |  | ------ | ------- | ----- |  | ------ | ---- | ----- |  | ------ | ------- | ----- |  |  | ---- | - |  | - | ------ |  |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |      
|                                                 |  |                            |         | After 1 but within |  | After 5 but within |      |                |  |       
|                                                 |  | Within 1 Year              |         | 5 Years            |  | 10 Years           |      | After 10 Years |  | Total 
|                                                 |  |                            |         |                    |  |                    |      |                |  |       
|                                                 |  | Amount                     |         | Yield              |  | Amount             |      | Yield          |  | Amount |         | Yield |  | Amount |      | Yield |  | Amount |         | Yield
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |      
|                                                 |  |                           
|                                                 |  | (000s except percentages)
|U.S. Treasury and government agencies            |  | $                          | 21,406  |                    |  |                    | 3.38 | %              |  | $      | 77,792  |       |  |        | 3.47 | %     |  | $      | 20,002  |       |  |  | 5.11 | % |  |   |       |  |  |  |     |   |  | $ | 119,200 |  |  |  | 3.73 | %
|Mortgage-backed securities                       |  |                            | 121,832 |                    |  |                    | 4.67 |                |  |        | 298,170 |       |  |        | 4.75 |       |  |        | 84,347  |       |  |  | 4.72 |   |  | $ | 9,372  |  |  |  | 4.75 | % |  |   | 513,721 |  |  |  | 4.72 |  
|Obligations of states and political subdivisions |  |                            | 35,386  |                    |  |                    | 7.77 |                |  |        | 70,820  |       |  |        | 7.28 |       |  |        | 99,402  |       |  |  | 6.20 |   |  |   | 2,725  |  |  |  | 6.21 |   |  |   | 208,333 |  |  |  | 6.83 |  
|Other debt securities                            |  |                            | 22,580  |                    |  |                    | 6.10 |                |  |        | 5,326   |       |  |        | 5.75 |       |  |        |        |       |  |  |     |   |  |   |       |  |  |  |      |   |  |   | 27,906  |  |  |  | 6.03 |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  
|Total                                            |  | $                          | 201,204 |                    |  |                    |      |                |  | $      | 452,108 |       |  |        |      |       |  | $      | 203,751 |       |  |  |      |   |  | $ | 12,097 |  |  |  |      |   |  | $ | 869,160 |  |  |  |      |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  
|Estimated fair value                             |  | $                          | 198,782 |                    |  |                    |      |                |  | $      | 445,444 |       |  |        |      |       |  | $      | 203,030 |       |  |  |      |   |  | $ | 11,956 |  |  |  |      |   |  | $ | 859,212 |  |  |  |      |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  

Obligations of U.S. Treasury and government
agencies principally include U.S. Treasury securities and
debentures and notes issued by the FHLB, Fannie Mae, Freddie Mac
and the Federal Farm Credit Banks Funding Corporation
(FFCB). The total balances held of such securities
classified as available for sale decreased $49.8 million to
$116.2 million as of December 31, 2005, from
$166.0 million as of December 31, 2004, which
decreased $21.1 million from $187.1 million at
December 31, 2003. The 2005 decrease resulted from sales of
$50.0 million, maturities and calls of $16.6 million,
and other decreases of $2.5 million partially offset by
purchases of $19.3 million. The 2004 decrease resulted from
maturities and calls of $54.6 million and other decreases
of $2.8 million partially offset by purchases of
$36.3 million.

The Company invests in mortgage-backed
securities, including CMOs that are primarily issued by
the Government National Mortgage Association (GNMA),
Fannie Mae, Freddie Mac and, to a lesser extent from time to
time, such securities issued by others. GNMA securities are
backed by the full faith and credit of the U.S. Treasury,
assuring investors of receiving all of the principal and
interest due from the mortgages backing the securities. Fannie
Mae and Freddie Mac guarantee the payment of interest at the
applicable certificate rate and the full collection of the
mortgages backing the securities; however, such securities are
not backed by the full faith and credit of the
U.S. Treasury.

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Mortgage-backed securities, including CMOs,
classified as available for sale increased $68.0 million to
$459.4 million as of December 31, 2005 from
$391.4 million as of December 31, 2004, which
decreased $42.8 million from $434.2 million at
December 31, 2003. The 2005 increase was due to purchases
of $184.1 million partially offset by principal paydowns of
$107.2 million and other decreases of $8.9 million.
The 2004 decrease was due to principal paydowns of
$117.6 million, sales of $22.5 million and other
decreases of $2.1 million partially offset by purchases of
$99.4 million. The purchases were fixed and variable rate
mortgage-backed securities and CMOs with average lives of
less than five years at the time of purchase. The sales were
conducted as a result of managements efforts to reposition
the portfolio during the periods of changing economic conditions
and interest rates. Mortgage-backed securities, including
CMOs, classified as held to maturity totaled
$45.0 million at December 31, 2005 which was a
decrease of $20.7 million from $65.7 million as of
December 31, 2004. There were no mortgage-backed securities
classified as held to maturity in 2003. The decrease in 2005 was
due to principal paydowns of $20.9 million partially offset
by other increases of $0.2 million. The increase in 2004
was due to purchases of $71.3 million partially offset by
principal paydowns of $5.6 million. The purchases were
fixed rate mortgage-backed securities and CMOs with
average lives of less than five years at the time of purchase.

During 2005, purchases of fixed rate
mortgage-backed securities classified as available for sale of
$184.1 million were partially offset by sales of principal
paydowns of $70.5 million and other changes of $8.9 million.
There were no purchases of adjustable rate mortgage-backed
securities classified as available for sale or held to maturity
during 2005. Principal paydowns of adjustable rate
mortgage-backed securities were $36.7 million in 2005.
During 2004, purchases of fixed rate mortgage-backed securities
classified as available for sale of $94.4 million were partially
offset by principal paydowns of $59.2 million, sales of $22.5
million and other reductions of $0.7 million, and purchases of
adjustable rate mortgage-backed securities classified as
available for sale of $5.0 million were offset by principal
paydowns of $58.4 million and other reductions of $1.4 million.
In addition, during 2004, purchases of fixed rate
mortgage-backed securities classified as held to maturity of
$71.3 million were partially offset by principal paydowns of
$5.6 million. There were no adjustable rate mortgage-backed
securities classified as held to maturity during 2004.

Obligations of states and political subdivisions
classified as available for sale increased $9.9 million to
$206.1 million at December 31, 2005, from
$196.2 million at December 31, 2004, which increased
$5.5 million from $190.7 million at December 31,
2004. The 2005 increase resulted from purchases of
$33.6 million partially offset by maturities and calls of
$20.8 million and other decreases of $2.9 million. The
2004 increase resulted from purchases of $36.9 million
partially offset by maturities and redemptions of
$23.0 million, sales of $6.6 million and other changes
of $1.8 million. Obligations of states and political
subdivisions classified as held to maturity totaled
$5.1 million at both December 31, 2005 and
December 31, 2004. The 2004 increase resulted from
purchases of $5.1 million. The obligations at year end 2005
were comprised of approximately 67 percent for New York
State political subdivisions and 33 percent for a variety
of other states and their subdivisions all with diversified
final maturities. The Company considers such securities to have
favorable tax equivalent yields and further utilizes such
securities for their favorable income tax treatment.

Other debt securities classified as available for
sale decreased $1.4 million to $27.8 million at
December 31, 2005 from $29.2 million at
December 31, 2004, which increased $1.2 million from
$28.0 million at December 31, 2003. The 2005 decrease
was due to maturities and calls of $1.3 and other decreases of
$0.1 million. The 2004 increase was due to purchases of
$2.2 million offset by maturities and calls of
$1.0 million. The purchases consisted of fixed rate
corporate bonds and variable rate trust preferred securities
acquired as part of the Companys redeployment of the
proceeds from maturing short term investments. There were no
other debt securities classified as held to maturity during
2005, 2004 or 2003.

Mutual funds and other equities classified as
available for sale totaled $24.3 million at
December 31, 2005, which increased of $2.8 million
from $21.5 million at December 31, 2004, which was
unchanged from December 31, 2003. The 2005 increase was due
to purchases of $3.1 million and other decreases of
$0.3 million. The purchases were shares of a mutual fund
which invests primarily in variable rate mortgage-backed
securities with characteristics consistent with the
Companys investment strategy. There were no mutual funds
or other equities classified as held to maturity during 2005,
2004 or 2003.

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The Company invests in FHLB stock and other
securities which are rated with an investment grade by
nationally recognized credit rating organizations. As a matter
of policy, the Company invests in non-rated securities, on a
limited basis, when the Company is able to satisfy itself as to
the underlying credit. These non-rated securities outstanding at
December 31, 2005 totaled approximately $10.9 million
comprised primarily of obligations of municipalities located
within the Companys market area. The Bank, as a member of
the FHLB, invests in stock of the FHLB as a prerequisite to
obtaining funding under various advance programs offered by the
FHLB. The Bank must purchase additional shares of FHLB stock to
obtain increases in such borrowings.

The Company continues to exercise a conservative
approach to investing by purchasing high credit quality
investments with various maturities and cash flows to provide
for liquidity needs and prudent asset liability management. The
Companys securities portfolio provides for a significant
source of income, liquidity and is utilized in managing
Company-wide interest rate risk. These securities are used to
collateralize borrowings and deposits to the extent required or
permitted by law. Therefore, the securities portfolio is an
integral part of the Companys funding strategy.

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 December 31, 2005.

Loan Portfolio

Real Estate Loans:Real estate loans are comprised primarily of loans
collateralized by interim and permanent commercial mortgages,
construction mortgages and residential mortgages including home
equity loans. The Company originates these loans primarily for
its portfolio, although a significant portion of its residential
real estate loans, in addition to meeting the Companys
underwriting criteria, comply with nationally recognized
underwriting criteria (conforming loans) and can be
sold in the secondary market.

Commercial real estate loans are offered by the
Company generally on a fixed or variable rate basis with
5 year terms and, in some cases, up to 10 year terms.
Amortizations generally range up to 25 years. The Company
also originates 15 year fixed rate self-amortizing
commercial mortgages.

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. The Company generally utilizes
licensed or certified appraisers, previously approved by the
Company, to determine the estimated value of the property.
Commercial mortgages are generally underwritten for up to 75% of
the value of the property depending on the type of the property.
The Company generally requires lease assignments where
applicable. 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 assignments and/or the guarantee of
the operating company when the property is owner occupied. These
types of loans are often for larger amounts than other types of
loans made by the Company and 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, repayment of such loans may be negatively impacted by
adverse changes in economic conditions.

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. The majority of these
loans are made with variable rates of interest, although some
fixed rate financing is provided. The loan amount is generally
limited to 65% to 75% of completed value, depending on the type
of property. Most non-residential construction loans require
pre-approved permanent financing or pre-leasing with the Bank
providing the permanent financing. The Company funds
construction of single family homes and commercial real estate,
when no contract of sale exists, based upon the experience of
the builder, the financial strength of the owner, the type and
location of the property and other factors. Construction loans
are generally personally guaranteed by the principal(s).
Repayment of

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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 are offered by the
Company with terms of up to 30 years and loan to value
ratios of up to 80%. The Company offers fixed and adjustable
rate loans. Adjustable rate loans generally have a fixed rate
for the first 3, 5 or 7 years and then convert to an
annual adjustable rate, generally based upon the applicable
constant maturity U.S. Treasury securities index plus 2.5%
to 3.0%. These adjustable rate loans generally provide for a
maximum annual change in the rate of 2% with an interest rate
ceiling over the life of the loan. Fixed rate loans are
generally underwritten to Fannie Mae and Freddie Mac guidelines.
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.

The Company offers a variety of home equity line
of credit products. These products include credit lines on
primary residences, vacation homes and 1-6 unit residential
investment properties. Low cost and no income verification
options are available to qualified borrowers who intend to
actively utilize the lines. Depending on the product, loan
amounts of $50,000 to $2,000,000 are available for terms ranging
from 5 years to 30 years with various repayment terms.
Required combined maximum loan to value ratios range from 65% to
80%, and the lines generally have interest rates ranging from
the prime rate (as published in the Wall Street Journal) to
prime plus 2%.

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, often with real estate as secondary collateral, but are
also offered on an unsecured basis. These loans generally have
variable rates of interest. Commercial loans, for the purpose of
purchasing equipment and/or inventory, are usually written for
terms of 1 to 5 years with, exceptionally, longer terms. 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. The Company generally requires a debt service
coverage ratio of at least 125%. 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.

Loans to Individuals and
Leasing:The Company offers
installment loans and reserve lines of credit to individuals.
Installment loans are limited to $50,000 and lines of credit are
limited to $5,000. These loans have terms up to 5 years with
fixed or variable rates of interest. The rate of interest is
dependent on the term of the loan and the type of collateral.
The Company does not place an emphasis on originating these
types of loans.

The Company also originates lease financing
transactions. These transactions are primarily conducted with
businesses, professionals and not-for-profit organizations and
provide financing principally for office equipment, telephone
systems, computer systems, energy saving improvements and other
special use equipment. The terms vary depending on the equipment
being leased, but are generally 3 to 5 years. The interest
rate is dependent on the term of the lease, the type of
collateral, and the overall credit of the customer.

Average net loans increased $148.5 million
or 19.0 percent to $928.9 million in 2005 from
$780.3 million in 2004, which increased $117.5 million
or 17.7 percent from $662.8 million in 2003. Gross
loans increased $149.4 million or 17.0 percent to
$1,026.4 million at December 31, 2005 from
$877.0 million at December 31,

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2004, which increased $156.6 million or
21.7 percent from $720.4 million at December 31,
2003. The changes in gross loans resulted primarily from:




| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Decreases of $13.1 million and
    $8.1 million in 2005 and 2004, respectively, in commercial
    real estate mortgages, due primarily to accelerated prepayment
    experience due to the low interest rate environment,                              
|
| |  | Increases in construction loans of
    $62.7 million and $55.1 million in 2005 and 2004,
    respectively, resulting from a greater emphasis on this product
    including an expanded offering and focused marketing,                                 
|
| |  | Increases in residential real estate mortgages of
    $54.0 million and $43.9 million in 2005 and 2004,
    respectively, primarily as a result of increased activity
    primarily in multi-family loans,                                             
|
| |  | Increases in commercial and industrial loans of
    $39.9 million and $58.9 million in 2005 and 2004,
    respectively, primarily due to increased activity and a greater
    emphasis on this product with resulting increased market
    penetration,
|
| |  | Increases of $2.1 million and
    $0.3 million in 2005 and 2004, respectively, in lease
    financings, and                                                                                                                                            
|
| |  | Increases in loans to individuals of
    $3.8 million and $6.5 million in 2005 and 2004,
    respectively.                                                                                                                                             

Major classifications of loans, including loans
held for sale, at December 31 are as follows:

|                          |              |         |           |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |         | 
|------------------------- | ------------ | ------- | --------- | ------- |  | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                          |              |        
|                          |              | (000s)
|                          |              |        
|                          |              | 2005    |           | 2004    |  | 2003 |         | 2002    |  | 2001
|                          |              |         |           |         |  |      |         |         |  |     
|Real Estate:              |              |         |           |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|                          | Commercial   |         | $         | 220,384 |  |      | $       | 233,452 |  |      | $       | 241,566 |  |   | $       | 231,411 |  |   | $       | 210,840 | 
|                          | Construction |         |           | 178,731 |  |      |         | 116,064 |  |      |         | 60,892  |  |   |         | 56,691  |  |   |         | 52,496  | 
|                          | Residential  |         |           | 276,384 |  |      |         | 222,392 |  |      |         | 178,518 |  |   |         | 164,287 |  |   |         | 174,859 | 
|Commercial and industrial |              |         | 316,907   |         |  |      | 277,013 |         |  |      | 218,130 |         |  |   | 179,288 |         |  |   | 140,573 |        
|Individuals               |              |         | 25,632    |         |  |      | 21,787  |         |  |      | 15,256  |         |  |   | 14,509  |         |  |   | 11,824  |        
|Lease financing           |              |         | 8,348     |         |  |      | 6,276   |         |  |      | 6,000   |         |  |   | 9,224   |         |  |   | 19,282  |        
|                          |              |         |           |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|Total                     |              |         | 1,026,386 |         |  |      | 876,984 |         |  |      | 720,362 |         |  |   | 655,410 |         |  |   | 609,874 |        
|Deferred loan fees        |              |         | (3,042    | )       |  |      | (2,687  | )       |  |      | (1,817  | )       |  |   | (1,462  | )       |  |   | (1,479  | )      
|Allowance for loan losses |              |         | (13,525   | )       |  |      | (11,801 | )       |  |      | (11,441 | )       |  |   | (11,510 | )       |  |   | (8,018  | )      
|                          |              |         |           |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|Loans, net                |              | $       | 1,009,819 |         |  | $    | 862,496 |         |  | $    | 707,104 |         |  | $ | 642,438 |         |  | $ | 600,377 |        
|                          |              |         |           |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        

The Companys primary lending emphasis is
for loans to businesses and developers, primarily in the form of
commercial and multi-family residential real estate mortgages,
construction loans, and commercial and industrial loans,
including lines of credit. The Company will continue to
emphasize these types of loans, which have increased
significantly during both 2005 and 2004, and which enable the
Company to meet the borrowing needs of businesses in the
communities it serves. These loans are made at both fixed rates
of interest and variable or floating rates of interest,
generally based upon the prime rate as published in the Wall
Street Journal. At December 31, 2005, the Company had total
gross loans with fixed rates of interest of $456.1 million,
or 44.4 percent, and total gross loans with variable or
floating rates of interest of $570.3 million, or
55.6 percent, as compared to $419.9 million or
47.9 percent of fixed rate loans and $457.1 million or
52.1 percent of variable or floating rate loans at
December 31, 2004.

At December 31, 2005 and 2004, the Company
had approximately $306.6 million and $228.9 million,
respectively, of committed but unissued lines of credit,
commercial mortgages, construction loans and commercial and
industrial loans.

The following table presents the maturities of
loans outstanding at December 31, 2005 excluding loans to
individuals, real estate mortgages (other than construction
loans) and lease financings, and the amount of

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such loans by maturity date that have
pre-determined interest rates and the amounts that have floating
or adjustable rates.


|                                      |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|------------------------------------- |  | -------------------------- | ------- | ---------- |  | ------- | ------- | ----- |  | ------- | ------- | - |  | - | ------- | - |  |  | ----- | -
|                                      |  |                           
|                                      |  | (000s except percentages)
|                                      |  |                           
|                                      |  |                            |         | After 1    |  |        
|                                      |  | Within 1                   |         | But within |  | After 5 |         |      
|                                      |  | Year                       |         | 5 years    |  | Years   |         | Total |  | Percent
|                                      |  |                            |         |            |  |         |         |       |  |        
|Loans:                                |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|Real estate  commercial              |  | $                          | 24,365  |            |  | $       | 123,587 |       |  | $       | 72,432  |   |  | $ | 220,384 |   |  |  | 30.8  | %
|Real estate  construction            |  |                            | 159,700 |            |  |         | 17,882  |       |  |         | 1,150   |   |  |   | 178,732 |   |  |  | 25.0  |  
|Commercial and industrial             |  |                            | 106,308 |            |  |         | 113,727 |       |  |         | 96,872  |   |  |   | 316,907 |   |  |  | 44.2  |  
|                                      |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|Total                                 |  | $                          | 290,373 |            |  | $       | 255,196 |       |  | $       | 170,454 |   |  | $ | 716,023 |   |  |  | 100.0 | %
|                                      |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|Rate Sensitivity:                     |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|Fixed or predetermined interest rates |  | $                          | 19,010  |            |  | $       | 181,883 |       |  | $       | 148,463 |   |  | $ | 349,356 |   |  |  | 48.8  | %
|Floating or adjustable interest rates |  |                            | 271,363 |            |  |         | 73,313  |       |  |         | 21,991  |   |  |   | 366,667 |   |  |  | 51.2  |  
|                                      |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|Total                                 |  | $                          | 290,373 |            |  | $       | 255,196 |       |  | $       | 170,454 |   |  | $ | 716,023 |   |  |  | 100.0 | %
|                                      |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  
|Percent                               |  |                            | 40.6    | %          |  |         | 35.6    | %     |  |         | 23.8    | % |  |   | 100.0   | % |  |  |       |  
|                                      |  |                            |         |            |  |         |         |       |  |         |         |   |  |   |         |   |  |  |       |  

It is the Companys policy to discontinue
the accrual of interest on loans when, in the opinion of
management, a reasonable doubt exists as to the timely
collectibility of the amounts due. Regulatory requirements
generally prohibit the accrual of interest on certain loans when
principal or interest is due and remains unpaid for 90 days
or more, unless the loan is both well secured and in the process
of collection.

The following table summarizes the Companys
non-accrual loans, loans past due 90 days or more and still
accruing, restructured loans, OREO and related interest income
not recorded on non-accrual loans as of and for the year ended
December 31:

|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                                                                             |  |                           
|                                                                                                                             |  | (000s except percentages)
|                                                                                                                             |  |                           
|                                                                                                                             |  | 2005                       |       | 2004 |  | 2003 |       | 2002 |  | 2001
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |     
|Non-accrual loans at year end                                                                                                |  | $                          | 3,837 |      |  | $    | 2,301 |      |  | $    | 2,913 |   |  | $ | 4,758 |   |  | $ | 3,523 |  
|OREO at year end                                                                                                             |  |                            |      |      |  |      |      |      |  |      |      |   |  |   | 1,831 |   |  |   | 2,021 |  
|Restructured loans at year end                                                                                               |  |                            |      |      |  |      |      |      |  |      |      |   |  |   |      |   |  |   |      |  
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Total nonperforming assets                                                                                                   |  | $                          | 3,837 |      |  | $    | 2,301 |      |  | $    | 2,913 |   |  | $ | 6,589 |   |  | $ | 5,544 |  
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Loans past due 90 days or more and still
    accruing                                                                        |  |                            | 3,522 |      |  |      | 3,227 |      |  |      | 1,431 |   |  |   | 1,596 |   |  |   | 137   |  
|Additional interest income that would have been
    recorded if these borrowers had complied with contractual loan
    terms |  |                            | 283   |      |  |      | 243   |      |  |      | 188   |   |  |   | 179   |   |  |   | 511   |  
|Nonperforming assets to total assets at year end                                                                             |  |                            | 0.19  | %    |  |      | 0.13  | %    |  |      | 0.17  | % |  |   | 0.43  | % |  |   | 0.40  | %

At December 31, 2005, the Company had no
commitments to lend additional funds to customers with
non-accrual or restructured loan balances. Non-accrual loans
increased $1.5 million to $3.8 million at
December 31, 2005 from $2.3 million at
December 31, 2004, which decreased $0.6 million from
$2.9 million at December 31, 2003. Net income is
adversely impacted by the level of non-performing 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.

At December 31, 2005, loans that aggregated
approximately $21.9 million, which are not on non-accrual
status, were potential problem loans that may result in their
being placed on non-accrual status in the future. There were no
restructured loans considered to be impaired at
December 31, 2005, 2004 and 2003.

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In accordance with SFAS No. 114, which
establishes the accounting treatment of impaired loans, loans
that are within the scope of SFAS No. 114 totaling
$3.8 million, $2.3 million and $2.9 million at
December 31, 2005, 2004 and 2003, respectively, have been
measured based on the estimated fair value of the collateral
since these loans are all collateral dependent. At
December 31, 2004, the Company had two borrowers with
accruing loans totaling $4.9 million which were not deemed
to be impaired within the scope of SFAS No. 114, but
to which specific reserves were considered appropriate. The
total allowance for loan losses specifically allocated to
impaired and other identified problem loans was
$1.3 million, $1.6 million and $1.5 million at
December 31, 2005, 2004 and 2003, respectively. The average
recorded investment in impaired loans for the years ended
December 31, 2005, 2004 and 2003 was approximately
$3.7 million, $2.7 million and $5.1 million,
respectively.

Allowance for Loan Losses and Provision for
Loan Losses

Allowance for Loan
Losses

The Company maintains an allowance for loan
losses to absorb losses inherent 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 several key components, which include
a specific component for identified problem loans, a formula
component, and an unallocated component. The specific component
incorporates the results of measuring impaired loans as provided
in SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a
Loan  Income Recognition and Disclosures. These
accounting standards prescribe the measurement methods, income
recognition and disclosures related to impaired loans.

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

The appropriateness of the unallocated component
is reviewed by management based upon its evaluation of
then-existing economic and business conditions affecting the key
lending areas of the 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,
specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such
conditions were believed to have had on the collectibility of
the loan portfolio. Senior management reviews these conditions
quarterly. Managements evaluation of the loss related to
these conditions is reflected in the unallocated component. The
evaluation of the inherent loss with respect to these conditions
is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio
segments.

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##### Table of Contents



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/credit for
loan losses for the dates indicated is as follows:

|                             |  |              |        |             |  |              |       |             |  |              |        |  |  |   |      |   |  |   |        | 
|---------------------------- |  | ------------ | ------ | ----------- |  | ------------ | ----- | ----------- |  | ------------ | ------ |  |  | - | ---- | - |  | - | ------ | 
|                             |  |             
|                             |  | (000s)     
|                             |  |             
|                             |  | December 31, |        | Change      |  | December 31, |       | Change      |  | December 31,
|                             |  | 2005         |        | During 2005 |  | 2004         |       | During 2004 |  | 2003        
|                             |  |              |        |             |  |              |       |             |  |             
|Components:                  |  |              |        |             |  |              |       |             |  |              |        |  |  |   |      |   |  |   |        | 
|Specific                     |  | $            | 1,300  |             |  | $            | (315  | )           |  | $            | 1,615  |  |  | $ | 83   |   |  | $ | 1,532  | 
|Formula                      |  |              | 625    |             |  |              | (761  | )           |  |              | 1,386  |  |  |   | 77   |   |  |   | 1,309  | 
|Unallocated                  |  |              | 11,600 |             |  |              | 2,800 |             |  |              | 8,800  |  |  |   | 200  |   |  |   | 8,600  | 
|                             |  |              |        |             |  |              |       |             |  |              |        |  |  |   |      |   |  |   |        | 
|Total Allowance              |  | $            | 13,525 |             |  |              |       |             |  | $            | 11,801 |  |  |   |      |   |  | $ | 11,441 | 
|                             |  |              |        |             |  |              |       |             |  |              |        |  |  |   |      |   |  |   |        | 
|Net change                   |  |              |        |             |  |              | 1,724 |             |  |              |        |  |  |   | 360  |   |  |   |        | 
|Net recoveries/(charge-offs) |  |              |        |             |  |              | (335  | )           |  |              |        |  |  |   | (113 | ) |  |   |        | 
|                             |  |              |        |             |  |              |       |             |  |              |        |  |  |   |      |   |  |   |        | 
|Provision for loan losses    |  |              |        |             |  | $            | 2,059 |             |  |              |        |  |  | $ | 473  |   |  |   |        | 
|                             |  |              |        |             |  |              |       |             |  |              |        |  |  |   |      |   |  |   |        | 

|                             |  |             |      |              |  |             |        |              |  |   |       |   |  |   |       | 
|---------------------------- |  | ----------- | ---- | ------------ |  | ----------- | ------ | ------------ |  | - | ----- | - |  | - | ----- | 
|                             |  | Change      |      | December 31, |  | Change      |        | December 31,
|                             |  | During 2003 |      | 2002         |  | During 2002 |        | 2001        
|                             |  |             |      |              |  |             |        |             
|Components:                  |  |             |      |              |  |             |        |              |  |   |       |   |  |   |       | 
|Specific                     |  | $           | 250  |              |  | $           | 1,282  |              |  | $ | 475   |   |  | $ | 807   | 
|Formula                      |  |             | (19  | )            |  |             | 1,328  |              |  |   | 817   |   |  |   | 511   | 
|Unallocated                  |  |             | (300 | )            |  |             | 8,900  |              |  |   | 2,200 |   |  |   | 6,700 | 
|                             |  |             |      |              |  |             |        |              |  |   |       |   |  |   |       | 
|Total Allowance              |  |             |      |              |  | $           | 11,510 |              |  |   |       |   |  | $ | 8,018 | 
|                             |  |             |      |              |  |             |        |              |  |   |       |   |  |   |       | 
|Net change                   |  |             | (69  | )            |  |             |        |              |  |   | 3,492 |   |  |   |       | 
|Net recoveries/(charge-offs) |  |             | (506 | )            |  |             |        |              |  |   | (410  | ) |  |   |       | 
|                             |  |             |      |              |  |             |        |              |  |   |       |   |  |   |       | 
|Provision for loan losses    |  | $           | 437  |              |  |             |        |              |  | $ | 3,902 |   |  |   |       | 
|                             |  |             |      |              |  |             |        |              |  |   |       |   |  |   |       | 

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

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 changes in the unallocated component of the
allowance for loan losses are the result of managements
consideration of other relevant factors affecting loan
collectibility. Due to the inherent uncertainty in the process,
management does not attempt to quantify separate amounts for
each of the conditions considered in estimating the unallocated
component of the allowance. Management periodically adjusted the
unallocated component to an amount that, when considered with
the specific and formula components, represented its best
estimate of probable losses in the loan portfolio as of each
balance sheet date. The following factors affected the changes
in the unallocated component of the allowance for loan losses
each year:

2005



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic and business conditions 
    Signs of increased inflation, such as the recent pronounced rise
    in energy costs, increases in the cost of raw materials used in
    construction, significant increases in real estate taxes within
    the Companys market area and the gradual rise in
    short-term interest rates which began in the third quarter of
    2004, continued throughout 2005 and into the first quarter of
    2006. Continuation of such conditions could have negative
    effects on the demand for or value of real estate, the primary
    collateral for the Companys loans, and the ability of
    borrowers to repay their loans. Consideration of such events
    that trigger economic uncertainty is part of the determination
    of the unallocated component of the allowance.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Concentration  Concentration in
    construction loans increased to 17.4 percent of total loans at
    December 31, 2005 from 13.2 percent at
    December 31, 2004. These loans generally have a higher
    degree of risk than other types of loans which the Company
    makes, since repayment of the loans is generally dependent on
    the borrowers ability to successfully construct and sell
    or lease completed properties. Increases in such concentrations,
    and the associated increase in risk, is not reflected in the
    formula component of the allowance due to the lag caused by
    using three years historical losses in determining the loss
    factors. Therefore consideration of changes in concentrations is
    a part of the determination of the unallocated component of the
    allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Credit quality  Delinquencies
    increased slightly during the year ended December 31, 2005,
    and the dollar amount of nonperforming loans also increased,
    primarily due to the addition of a $1.6 million
    construction loan on which the Company has been notified of a
    title issue on its collateral, apparently as a result of
    fraudulent satisfactions filed by the borrower on the
    Companys lien and a prior lien. Other than the
    aforementioned loan, the Companys regular periodic loan
    review process noted continued strength in overall credit
    quality which is believed to have been mainly attributable to
    the continued strength in real estate values in the
    Companys primary market area. However, continuation of
    recent trends of rising construction, energy and interest costs,
    as well as real estate taxes, may negatively impact the
    borrowers ability to pay and collateral values. Certain
    loans were downgraded due to potential deterioration of
    collateral values, the borrowers cash flows or other
    specific factors that negatively impact the borrowers
    ability to meet their loan obligations. Certain of these loans,
    including the aforementioned $1.6 million loan, are also
    considered in connection with the analysis of impaired loans
    performed to determine the specific component of the allowance.
    However, due to the uncertainty of that determination, such
    loans are also considered in the process of determining the
    unallocated component of the allowance.
|
| |  | New loan products  The Company
    introduced a series of low cost home equity products since the
    fourth quarter of 2002. As of December 31, 2005, home
    equity loans represent approximately 7.8 percent of total
    loans. Any probable losses with respect to these products are
    not reflected in the formula component of the allowance for loan
    losses since there is no loss history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that a $2.8 million increase in the unallocated
component of the allowance to $11.6 million reflects our
best estimate of probable losses which have been incurred as of
December 31, 2005.

2004



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic and business conditions 
    Continuation of the improvements in the overall economy which
    began during the second half of 2003, as evidenced by reduced
    unemployment and improvements in productivity and corporate
    profits, became less certain during the second half of 2004.
    Signs of increased inflation, such as the recent pronounced rise
    in energy costs, increases in the cost of raw materials used in
    construction and significant increases in real estate taxes
    within the Companys market area, as well as a rise in
    short-term interest rates, which began in the third quarter of
    2004 and has continued into the first quarter of 2005, could
    have negative effects on the demand for or value of real estate,
    the primary collateral for the Companys loans, and the
    ability of borrowers to repay their loans. Consideration of such
    events that trigger economic uncertainty is part of the
    determination of the unallocated component of the allowance.
|
| |  | Concentration  Concentration in
    construction loans increased to 13.2 percent of total loans
    at December 31, 2004 from 8.5 percent at
    December 31, 2003. These loans generally have a higher
    degree of risk than other types of loans which the Company
    makes, since repayment of the loans is generally dependent on
    the borrowers ability to successfully construct and sell
    or lease completed properties. In addition, concentration in
    commercial and industrial loans increased to 31.6 percent
    of total loans at December 31, 2004 from 30.3 percent
    at December 31, 2003. These loans also generally have a
    higher degree of risk than other types of loans which the
    Company makes since repayment of these loans is largely based on
    the borrowers ability to successfully operate their
    businesses. Increases                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | in such concentrations, and the associated
    increase in risk, is not reflected in the formula component of
    the allowance due to the lag caused by using three years
    historical losses in determining the loss factors. Therefore
    consideration of changes in concentrations is a part of the
    determination of the unallocated component of the allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Credit quality  Nonperforming loans
    decreased during the year ended December 31, 2004, although
    the Company experienced an increase in delinquencies. As a
    result of the Companys regular periodic loan review
    process, management noted overall improvement in credit quality
    which is believed to have been mainly attributable to the
    continued rise in real estate values in the Companys
    primary market area. However, continuation of recent trends of
    rising construction, energy and interest costs may negatively
    impact the borrowers ability to meet their loan
    obligations. Certain loans were downgraded due to potential
    deterioration of collateral values, the borrowers cash
    flows or other specific factors that negatively impact the
    borrowers ability to meet their loan obligations. Certain
    of these loans are also considered in connection with the
    analysis of impaired loans performed to determine the specific
    component of the allowance. However, due to the uncertainty of
    that determination, such loans are also considered in the
    process of determining the unallocated component of the
    allowance.
|
| |  | New loan products  The Company has
    introduced several low cost home equity products since the
    fourth quarter of 2002. As of December 31, 2004, home
    equity loans represent approximately 7.2% of total loans. Any
    probable losses with respect to these products are not reflected
    in the formula component of the allowance for loan losses since
    there is no loss history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that a $200,000 increase in the unallocated component
of the allowance to $8.8 million reflects our best estimate
of probable losses which have been incurred as of
December 31, 2004.

2003



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic and business conditions  The
    general softness in the economy experienced during the first
    half of 2003 has shown signs of improvement during the second
    half of the year, as evidenced by reduced unemployment and
    improvements in productivity and corporate profits. Management
    believes that this condition has had positive impacts on
    economic and business activity within the Companys primary
    market area, has strengthened the demand for commercial real
    estate, which is the primary collateral for the Companys
    loans, and has generally improved the ability of borrowers to
    repay their loans. Consideration of such economic and business
    conditions is part of the determination of the unallocated
    component of the allowance.                                                                                                                                                                                                      
|
| |  | Concentration  Concentration in
    commercial and industrial loans increased to 30.3 percent
    of the portfolio from 27.4 percent at the prior year end,
    an increase of $38.8 million. These types of loans
    generally have a higher degree of risk than other types of loans
    which the Company makes since repayment of the loans is largely
    dependent on the borrowers ability to successfully operate
    their businesses. An increase in such concentration, and the
    associated increase in risk, is not reflected in the formula
    component of the allowance due to the lag caused by using three
    year historical losses in determining the loss factors.
    Therefore, consideration of changes in concentration is a part
    of the determination of the unallocated component of the
    allowance.                                                                                                                                                                    
|
| |  | Credit quality  Non-accrual loans and
    loans past due 90 days or more and still accruing decreased at
    December 31, 2003 by $2.0 million or 31.6 percent to $4.4
    million from $6.4 million at December 31, 2002. Although
    improvement occurred in delinquencies and nonperforming loans in
    the aggregate, certain loans were downgraded as a result of the
    Companys regular periodic loan review process. These
    downgrades resulted from potential deterioration of collateral
    values, the borrowers cash flows or other specific factors
    that negatively impact the borrowers ability to meet their
    loan obligations. Certain of these loans are also considered in
    connection with the analysis of impaired loans performed to
    determine the specific component of the allowance. However, due
    to the uncertainty of that determination, such loans are also
    considered in the process of determining the unallocated
    component of the allowance.

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| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | New loan products  The Bank introduced
    a no cost home equity product during the fourth quarter of 2002
    and began financing business equipment leases during the fourth
    quarter of 2000. Any probable losses with respect to these
    products are not reflected in the formula component of the
    allowance for loan losses since there is no loss history.

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that a decrease in the unallocated component of the
allowance of $300,000 reflects our best estimate of probable
losses which have been incurred as of December 31, 2003.

A summary of the allowance for loan losses for
the years ended December 31, is as follows:

|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |        |   | 
|------------------------------------------------------------------------------------ | ------------------------------- | -------------------------- | --------- | ---- | - | ---- | ------- | ---- | --- | ---- | ------- | ---- | ---- | - | ------- | ---- | - | - | ------- | ------ | - | 
|                                                                                     |                                 |                           
|                                                                                     |                                 | (000s except percentages)
|                                                                                     |                                 |                           
|                                                                                     |                                 | 2005                       |           | 2004 |   | 2003 |         | 2002 |     | 2001
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |     
|Net loans outstanding at end of year                                                 |                                 | $                          | 1,009,819 |      |   | $    | 862,496 |      |     | $    | 707,104 |      |      | $ | 642,438 |      |   | $ | 600,377 |       
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Average net loans outstanding during the year                                        |                                 |                            | 928,866   |      |   |      | 780,331 |      |     |      | 662,800 |      |      |   | 619,098 |      |   |   | 560,584 |       
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Allowance for loan losses:                                                           |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Balance, beginning of year                                                           |                                 | $                          | 11,801    |      |   | $    | 11,441  |      |     | $    | 11,510  |      |      | $ | 8,018   |      |   | $ | 4,816   |       
|Provision charged to expense                                                         |                                 |                            | 2,059     |      |   |      | 473     |      |     |      | 437     |      |      |   | 3,902   |      |   |   | 4,380   |       
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|                                                                                     |                                 |                            | 13,860    |      |   |      | 11,914  |      |     |      | 11,947  |      |      |   | 11,920  |      |   |   | 9,196   |       
|Charge-offs and recoveries during the year:                                          |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Charge offs:                                                                         |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|                                                                                     | Real estate:                    |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |        |  
|                                                                                     |                                 | Commercial                 |           |      |  |      |         |      | (62 | )    |         |      | (540 | ) |         |      |  |   |         |        |  | 
|                                                                                     |                                 | Construction               |           |      |  |      |         |      |    |      |         |      |     |   |         |      |  |   |         |        |  | 
|                                                                                     |                                 | Residential                |           |      |  |      |         |      |    |      |         |      |     |   |         |      |  |   |         |        |  | 
|                                                                                     | Commercial and industrial       |                            |           | (318 | ) |      |         | (102 | )   |      |         | (176 | )    |   |         | (290 | ) |   |         | (1,407 | )
|                                                                                     | Lease financing and individuals |                            |           | (53  | ) |      |         | (30  | )   |      |         | (1   | )    |   |         | (189 | ) |   |         | (21    | )
|Recoveries:                                                                          |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|                                                                                     | Real estate:                    |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |        |  
|                                                                                     |                                 | Commercial                 |           |      | 4 |      |         |      |    |      |         |      |     |   |         |      |  |   |         |        |  | 
|                                                                                     |                                 | Construction               |           |      |  |      |         |      |    |      |         |      |     |   |         |      |  |   |         |        |  | 
|                                                                                     |                                 | Residential                |           |      |  |      |         |      |    |      |         |      |     |   |         |      |  |   |         |        | 6 | 
|                                                                                     | Commercial and industrial       |                            |           | 26   |   |      |         | 72   |     |      |         | 197  |      |   |         | 66   |   |   |         | 242    |  
|                                                                                     | Lease financing and individuals |                            |           | 6    |   |      |         | 9    |     |      |         | 14   |      |   |         | 3    |   |   |         | 2      |  
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Net (charge-offs) recoveries during the year                                         |                                 |                            | (335      | )    |   |      | (113    | )    |     |      | (506    | )    |      |   | (410    | )    |   |   | (1,178  | )     
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Balance, end of year                                                                 |                                 | $                          | 13,525    |      |   | $    | 11,801  |      |     | $    | 11,441  |      |      | $ | 11,510  |      |   | $ | 8,018   |       
|                                                                                     |                                 |                            |           |      |   |      |         |      |     |      |         |      |      |   |         |      |   |   |         |       
|Ratio of net charge-offs to average net loans
    outstanding during the year        |                                 |                            | 0.04      | %    |   |      | 0.01    | %    |     |      | 0.08    | %    |      |   | 0.07    | %    |   |   | 0.21    | %     
|Ratio of allowance for loan losses to gross loans
    outstanding at end of the year |                                 |                            | 1.32      | %    |   |      | 1.35    | %    |     |      | 1.59    | %    |      |   | 1.76    | %    |   |   | 1.31    | %     

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The distribution of our allowance for loan losses
at the dates indicated is summarized as follows:

|                                |              |                            |        |            |  |          |           |            |  |            |        |          |   |   |        |     |  |   |         |         |  |  |        |       |  
|------------------------------- | ------------ | -------------------------- | ------ | ---------- |  | -------- | --------- | ---------- |  | ---------- | ------ | -------- | - | - | ------ | --- |  | - | ------- | ------- |  |  | ------ | ----- | -
|                                |              |                           
|                                |              | (000s except percentages)
|                                |              |                           
|                                |              |                            |        |           
|                                |              | 2005                       |        | 2004      
|                                |              |                            |        |           
|                                |              |                            |        | Percentage |  |          |           | Percentage
|                                |              |                            |        | of Loans   |  |          |           | of Loans  
|                                |              |                            |        | in each    |  |          |           | in each   
|                                |              | Amount of                  |        | Loan       |  | Category |           | Amount of  |  | Loan       |        | Category
|                                |              | Loan Loss                  |        | Amounts by |  | by Total |           | Loan Loss  |  | Amounts by |        | by Total
|                                |              | Allowance                  |        | Category   |  | Loans    |           | Allowance  |  | Category   |        | Loans   
|                                |              |                            |        |            |  |          |           |            |  |            |        |         
|Real Estate:                    |              |                            |        |            |  |          |           |            |  |            |        |          |   |   |        |     |  |   |         |         |  |  |        |      
|                                | Commercial   |                            | $      | 168        |  |          | $         | 220,384    |  |            |        | 21.47    | % |   | $      | 779 |  |   | $       | 233,452 |  |  |        | 26.62 | %
|                                | Construction |                            |        | 800        |  |          |           | 178,731    |  |            |        | 17.41    |   |   |        | 122 |  |   |         | 116,064 |  |  |        | 13.23 |  
|                                | Residential  |                            |        | 153        |  |          |           | 276,384    |  |            |        | 26.93    |   |   |        |    |  |   |         | 222,392 |  |  |        | 25.36 |  
|Commercial and industrial       |              |                            | 794    |            |  |          | 316,907   |            |  |            | 30.88  |          |   |   | 2,091  |     |  |   | 277,013 |         |  |  | 31.59  |      
|Lease financing and individuals |              |                            | 10     |            |  |          | 33,980    |            |  |            | 3.31   |          |   |   | 9      |     |  |   | 28,063  |         |  |  | 3.20   |      
|Unallocated                     |              |                            | 11,600 |            |  |          |          |            |  |            |       |          |   |   | 8,800  |     |  |   |        |         |  |  |       |      
|                                |              |                            |        |            |  |          |           |            |  |            |        |          |   |   |        |     |  |   |         |         |  |  |        |      
|Total                           |              | $                          | 13,525 |            |  | $        | 1,026,386 |            |  |            | 100.00 | %        |   | $ | 11,801 |     |  | $ | 876,984 |         |  |  | 100.00 | %    
|                                |              |                            |        |            |  |          |           |            |  |            |        |          |   |   |        |     |  |   |         |         |  |  |        |      

|                                |              |                            |        |              |  |          |         |            |  |              |        |            |   |           |        |              |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |       |  
|------------------------------- | ------------ | -------------------------- | ------ | ------------ |  | -------- | ------- | ---------- |  | ------------ | ------ | ---------- | - | --------- | ------ | ------------ |  | -------- | ------- | ------- |  |  | ------ | ----- | - | - | ----- | --- |  | - | ------- | ------- |  |  | ------ | ----- | -
|                                |              |                           
|                                |              | (000s except percentages)
|                                |              |                           
|                                |              |                            |        |              |  |         
|                                |              | 2003                       |        | 2002         |  | 2001    
|                                |              |                            |        |              |  |         
|                                |              |                            |        | Percentage   |  |          |         | Percentage |  |              |        | Percentage
|                                |              |                            |        | of Loans     |  |          |         | of Loans   |  |              |        | of Loans  
|                                |              |                            |        | in Each      |  |          |         | in Each    |  |              |        | in Each   
|                                |              | Amount of                  |        |              |  | Category |         | Amount of  |  |              |        | Category   |   | Amount of |        |              |  | Category
|                                |              | Loan Loss                  |        | Loan Amounts |  | by Total |         | Loan Loss  |  | Loan Amounts |        | by Total   |   | Loan Loss |        | Loan Amounts |  | by Total
|                                |              | Allowance                  |        | by Category  |  | Loans    |         | Allowance  |  | by Category  |        | Loans      |   | Allowance |        | by Category  |  | Loans   
|                                |              |                            |        |              |  |          |         |            |  |              |        |            |   |           |        |              |  |         
|Real Estate:                    |              |                            |        |              |  |          |         |            |  |              |        |            |   |           |        |              |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      
|                                | Commercial   |                            | $      | 167          |  |          | $       | 241,566    |  |              |        | 33.53      | % |           | $      | 375          |  |          | $       | 231,411 |  |  |        | 35.31 | % |   | $     | 807 |  |   | $       | 210,840 |  |  |        | 35.57 | %
|                                | Construction |                            |        | 79           |  |          |         | 60,892     |  |              |        | 8.45       |   |           |        | 100          |  |          |         | 56,691  |  |  |        | 8.65  |   |   |       | 189 |  |   |         | 52,496  |  |  |        | 8.61  |  
|                                | Residential  |                            |        | 85           |  |          |         | 178,518    |  |              |        | 24.78      |   |           |        | 12           |  |          |         | 164,287 |  |  |        | 25.07 |   |   |       | 41  |  |   |         | 174,859 |  |  |        | 28.67 |  
|Commercial and industrial       |              |                            | 2,498  |              |  |          | 218,130 |            |  |              | 30.28  |            |   |           | 2,116  |              |  |          | 179,288 |         |  |  | 27.36  |       |   |   | 239   |     |  |   | 140,573 |         |  |  | 23.05  |      
|Lease financing and individuals |              |                            | 12     |              |  |          | 21,256  |            |  |              | 2.96   |            |   |           | 7      |              |  |          | 23,733  |         |  |  | 3.61   |       |   |   | 42    |     |  |   | 31,106  |         |  |  | 5.10   |      
|Unallocated                     |              |                            | 8,600  |              |  |          |        |            |  |              |       |            |   |           | 8,900  |              |  |          |        |         |  |  |       |       |   |   | 6,700 |     |  |   |        |         |  |  |       |      
|                                |              |                            |        |              |  |          |         |            |  |              |        |            |   |           |        |              |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      
|Total                           |              | $                          | 11,441 |              |  | $        | 720,362 |            |  |              | 100.00 | %          |   | $         | 11,510 |              |  | $        | 655,410 |         |  |  | 100.00 | %     |   | $ | 8,018 |     |  | $ | 609,874 |         |  |  | 100.00 | %    
|                                |              |                            |        |              |  |          |         |            |  |              |        |            |   |           |        |              |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      

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.

Management believes the allowance for loan losses
is the best estimate of probable losses which have been incurred
as of December 31, 2005. 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. During 2004, the FDIC and the New York
State Banking Department completed examinations of the Bank. The
regulatory agencies concluded that the process of internal asset
review and the allowance for loan losses were adequate.

Provision for Loan
Losses

The Company recorded a provision for loan losses
of $2.1 million during 2005, compared to $0.5 million
during 2004 and $0.4 million during 2003. The provision for
loan losses is charged to income to bring the

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Companys allowance for loan losses to a
level deemed appropriate by management based on the factors
previously discussed under Allowance for Loan Losses.


Deposits

The Companys fundamental source of funds
supporting interest earning assets is deposits, consisting of
non interest bearing demand deposits, checking with interest,
money market, savings and various forms of time deposits. The
maintenance of a strong deposit base is key to the development
of lending opportunities and creates long term customer
relationships, which enhance the ability to cross sell services.
Depositors include various sized businesses, professionals,
not-for-profit organizations, municipalities and individuals. To
meet the requirements of a diverse customer base, a full range
of deposit instruments are offered, which has allowed the
Company to maintain and expand its deposit base despite intense
competition from other banking institutions and non-bank
financial service providers.

The following table presents a summary of
deposits at December 31:

|                                    |  |         |           |      |  |   |           | 
|----------------------------------- |  | ------- | --------- | ---- |  | - | --------- | 
|                                    |  |        
|                                    |  | (000s)
|                                    |  |        
|                                    |  | 2005    |           | 2004
|                                    |  |         |           |     
|Demand deposits                     |  | $       | 576,032   |      |  | $ | 512,790   | 
|Money market accounts               |  |         | 421,720   |      |  |   | 364,778   | 
|Savings accounts                    |  |         | 73,028    |      |  |   | 73,747    | 
|Time deposits of $100,000 or more   |  |         | 149,231   |      |  |   | 106,737   | 
|Time deposits of less than $100,000 |  |         | 57,217    |      |  |   | 62,780    | 
|Checking with interest              |  |         | 130,768   |      |  |   | 114,509   | 
|                                    |  |         |           |      |  |   |           | 
|Total                               |  | $       | 1,407,996 |      |  | $ | 1,235,341 | 
|                                    |  |         |           |      |  |   |           | 

At December 31, 2005 and 2004, certificates
of deposits and other time deposits of $100,000 or more totaled
$149.2 million and $106.7 million, respectively. At
December 31, 2005, such deposits classified by time
remaining to maturity were as follows:

|                         |  |         |         | 
|------------------------ |  | ------- | ------- | 
|                         |  | (000s)
|                         |  |        
|3 months or less         |  | $       | 115,098 | 
|Over 3 through 6 months  |  |         | 20,496  | 
|Over 6 through 12 months |  |         | 13,637  | 
|Over 12 months           |  |         |        | 
|                         |  |         |         | 
|Total                    |  | $       | 149,231 | 
|                         |  |         |         | 

Total deposits at December 31, 2005 increased
$172.7 million or 14.0 percent to $1,408.0 million, from
$1,235.3 million at December 31, 2004, which increased $110.4
million or 9.8 percent from $1,124.9 million at December 31,
2003. Average deposits outstanding increased $144.7 million or
12.2 percent to $1,335.5 million in 2005 from $1,190.8 million
in 2004, which increased $106.5 million or 9.8 percent from
$1,084.3 million in 2003. Excluding municipal CDs, which
are acquired on a bid basis, total deposits increased 14.0
percent and 9.9 percent, and average deposits increased 12.3
percent and 10.1 percent in 2005 and 2004, respectively.

Average non interest bearing deposits increased
$45.0 million or 8.7 percent to $562.5 million in 2005 from
$517.5 in 2004 which increased $66.3 million or 14.7 percent
from $451.3 million in 2003. These increases reflect the
Companys continuing emphasis on developing this funding
source. Average interest bearing deposits in 2005 increased
$99.7 million or 14.8 percent reflecting increases in checking
with interest accounts, money market accounts, savings accounts
and time deposits. Average interest bearing deposits increased
$40.2 million or 6.3 percent to $673.2 million in 2004
reflecting increases in checking with interest accounts, money
market accounts, and savings accounts partially offset by
decreases in time deposits.

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Average money market deposits increased
$57.1 million or 17.5 percent in 2005 and
$26.5 million or 8.8 percent in 2004, due in part to
new customer accounts, increased activity and the addition of
new branches.

Average checking with interest deposits increased
$15.4 million or 14.0 percent in 2005 and
$11.7 million or 11.8 percent in 2004 primarily as a
result of new customer accounts, increased activity in existing
accounts and the addition of new branches.

Average time deposits increased
$23.1 million or 14.0 percent in 2005 and decreased
$4.1 million or 2.4 percent in 2004. The increase was
a result of new customer accounts, increased activity and the
addition of new branches. The decrease resulted primarily from
decreases in average municipal CDs of $2.6 million in
2004. The decrease in average municipal CDs, which are
generally short term and are acquired on a bid basis, were
principally the result of reduced emphasis on obtaining this
type of deposit, due to significant increases in non-interest
bearing and other lower cost deposits and a shift to longer term
borrowings as part of the Companys ongoing management of
interest rate risk.

Average savings deposit balances reflect moderate
growth, increasing $4.0 million and $6.1 million in
2005 and 2004, respectively.

On average, deposit rates increased in 2005 and
decreased in 2004 due to the remaining effects of the steadily
declining interest rate environment which continued through
first half of 2004. Beginning in the second half of 2004, short
term rates began to rise gradually resulting in higher deposit
costs towards the end of 2005.

Time deposits of over $100,000, including
municipal CDs, increased $42.5 million at
December 31, 2005 and increased $18.3 million at
December 31, 2004, respectively, compared to the prior year
end balances. Municipal CDs are used to expand or maintain
lower cost municipal deposits, fund securities purchases and for
capital leveraging. These CDs are primarily short term and
are acquired on a bid basis. Time deposits of over $100,000
generally have maturities of 7 to 180 days.

The Company also utilizes wholesale borrowings,
brokered deposits and other sources of funds interchangeably
with time deposits in excess of $100,000 depending upon
availability and rates paid for such funds at any point in time.
Due to the generally short maturity of these funding sources,
the Company can experience higher volatility of interest margins
during periods of both rising and declining interest rates. The
Company does not generally acquire brokered deposits.

The following table summarizes the average
amounts and rates of various classifications of deposits for the
periods indicated:

|                                       |  |                            |           |         |  |         |      |      |  |        |           |      |  |  |      |   |  |   |           |  |  |  |      |  
|-------------------------------------- |  | -------------------------- | --------- | ------- |  | ------- | ---- | ---- |  | ------ | --------- | ---- |  |  | ---- | - |  | - | --------- |  |  |  | ---- | -
|                                       |  |                           
|                                       |  | (000s except percentages)
|                                       |  |                           
|                                       |  |                           
|                                       |  | Year ended December 31,   
|                                       |  |                           
|                                       |  |                            |           |         |  |        
|                                       |  | 2005                       |           | 2004    |  | 2003   
|                                       |  | Average                    |           | Average |  | Average
|                                       |  |                            |           |         |  |        
|                                       |  | Amount                     |           | Rate    |  | Amount  |      | Rate |  | Amount |           | Rate
|                                       |  |                            |           |         |  |         |      |      |  |        |           |     
|Demand deposits  Non interest bearing |  | $                          | 562,533   |         |  |         |     |      |  | $      | 517,532   |      |  |  |     |   |  | $ | 451,282   |  |  |  |     |  
|Money market accounts                  |  |                            | 384,214   |         |  |         | 1.07 | %    |  |        | 327,055   |      |  |  | 0.56 | % |  |   | 300,566   |  |  |  | 0.68 | %
|Savings accounts                       |  |                            | 74,317    |         |  |         | 0.52 |      |  |        | 70,321    |      |  |  | 0.23 |   |  |   | 64,184    |  |  |  | 0.23 |  
|Time deposits                          |  |                            | 188,460   |         |  |         | 2.07 |      |  |        | 165,349   |      |  |  | 1.19 |   |  |   | 169,435   |  |  |  | 1.31 |  
|Checking with interest                 |  |                            | 125,934   |         |  |         | 0.37 |      |  |        | 110,499   |      |  |  | 0.22 |   |  |   | 98,852    |  |  |  | 0.26 |  
|                                       |  |                            |           |         |  |         |      |      |  |        |           |      |  |  |      |   |  |   |           |  |  |  |      |  
|Total                                  |  | $                          | 1,335,458 |         |  |         | 0.66 | %    |  | $      | 1,190,756 |      |  |  | 0.35 | % |  | $ | 1,084,319 |  |  |  | 0.43 | %
|                                       |  |                            |           |         |  |         |      |      |  |        |           |      |  |  |      |   |  |   |           |  |  |  |      |  

Borrowings

Borrowings with original maturities of one year
or less totaled $172.1 million and $164.5 million at
December 31, 2005 and 2004, respectively. Such short-term
borrowings consisted of securities sold under agreements to
repurchase and borrowings from the FHLB and other correspondent
banks. Other borrowings

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totaled $263.1 million at both
December 31, 2005 and 2004, consisting of borrowings from
the FHLB with initial stated maturities of five or ten years and
one to four year call options.


Interest expense on all borrowings totaled
$16.4 million, $12.6 million and $10.8 million in
2005, 2004 and 2003, respectively. The following table
summarizes the average balances, weighted average interest rates
and the maximum month-end outstanding amounts of securities sold
under agreements to repurchase and FHLB borrowings for each of
the years:

|                                               |  |  |                  |                            |  |      |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  |  | ---------------- | -------------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  |  |                  |                           
|                                               |  |  |                  | (000s except percentages)
|                                               |  |  |                  |                           
|                                               |  |  |                  | 2005                       |  | 2004 |         | 2003
|                                               |  |  |                  |                            |  |      |         |     
|Average balance:                               |  |  | Short-term       |                            |  | $    | 170,072 |      |  | $ | 181,870 |   |  | $ | 156,989 |  
|                                               |  |  | Other borrowings |                            |  |      | 263,108 |      |  |   | 231,014 |   |  |   | 188,159 |  
|Weighted average interest rate (for the year): |  |  | Short-term       |                            |  |      | 2.9     | %    |  |   | 1.2     | % |  |   | 1.1     | %
|                                               |  |  | Other borrowings |                            |  |      | 4.4     |      |  |   | 4.5     |   |  |   | 4.8     |  
|Weighted average interest rate (at year end):  |  |  | Short-term       |                            |  |      | 2.6     | %    |  |   | 1.7     | % |  |   | 1.0     | %
|                                               |  |  | Other borrowings |                            |  |      | 4.4     |      |  |   | 4.3     |   |  |   | 4.7     |  
|Maximum month-end outstanding amount:          |  |  | Short-term       |                            |  |      | 200,423 |      |  | $ | 216,920 |   |  | $ | 198,436 |  
|                                               |  |  | Other borrowings |                            |  |      | 263,119 |      |  |   | 263,125 |   |  |   | 188,169 |  

During 2004, the Company increased its long-term
borrowings by $75 million reflecting managements
efforts to effectively leverage its capital and to manage
interest rate risk. The additional borrowings had 5 year
terms with 1 year call provisions and a weighted average
interest rate of 3.25 percent.

At December 31, 2005, the Company had
available unused short-term lines of credit of $200 million
from the FHLB, $80 million from correspondent banks and
$110 million in available borrowings under Retail CD
Agreements with two major investment banking firms, all of which
are subject to various terms and conditions.

Capital Resources

Stockholders equity increased $10.1 million
or 6.3 percent to $169.8 million at December 31, 2005 from
$159.7 million at December 31, 2004, which increased $17.3
million or 12.2 percent from $142.4 million at December 31,
2003. The 2005 increase resulted from net income of $30.9
million, net proceeds from stock options exercised of $4.7
million, and proceeds from sales of treasury stock of $0.3
million, partially offset by cash dividends paid of $13.7
million, purchases of treasury stock of $5.5 million and a
reduction of accumulated other comprehensive income of $6.6
million. The 2004 increase resulted from net income of $27.5
million, net proceeds from stock options exercised of $4.1
million, and proceeds from sales of treasury stock of $0.5
million, partially offset by cash dividends paid of $11.5
million, purchases of treasury stock of $1.9 million and a
reduction of accumulated other comprehensive income of $1.4
million.

The Company paid its first cash dividend in 1996,
and the Board of Directors authorized a quarterly cash dividend
policy in the first quarter of 1998. HVBs payment of
dividends to the Company, the Companys primary source of
funds, is subject to limitation by federal and state regulators
based on such factors as the maintenance of adequate capital,
which could reduce the amount of dividends otherwise payable.
See Business  Supervision and Regulation.

The various components and changes in
stockholders equity are reflected in the Consolidated
Statements of Changes in Stockholders Equity for the years
ended December 31, 2005, 2004 and 2003 included elsewhere
herein.

Management believes that future retained earnings
will provide the necessary capital for current operations and
the planned growth in total assets.

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All banks and bank holding companies are subject
to risk-based capital guidelines. These guidelines define
capital as Tier 1 and Total capital. Tier 1 capital
consists of common stockholders equity and qualifying
preferred stock, less intangibles; and Total capital consists of
Tier 1 capital plus the allowance for loan losses up to
certain limits, preferred stock and certain subordinated and
term-debt securities. The guidelines require a minimum total
risk-based capital ratio of 8.0 percent, and a minimum
Tier 1 risk-based capital ratio of 4.0 percent.

The risk-based capital ratios at
December 31, follow:

|                |         |      |  |      |   |      |  |      |   |  |  |      |  
|--------------- | ------- | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                |         | 2005 |  | 2004 |   | 2003
|                |         |      |  |      |   |     
|Tier 1 capital: |         |      |  |      |   |      |  |      |   |  |  |     
|                | Company |      |  | 13.8 | % |      |  | 14.5 | % |  |  | 15.6 | %
|                | HVB     |      |  | 13.8 |   |      |  | 14.4 |   |  |  | 15.6 |  
|Total capital:  |         |      |  |      |   |      |  |      |   |  |  |     
|                | Company |      |  | 14.9 | % |      |  | 15.6 | % |  |  | 16.9 | %
|                | HVB     |      |  | 14.9 |   |      |  | 15.5 |   |  |  | 16.9 |  

Banks and bank holding companies must also
maintain a minimum leverage ratio of 4 percent, which
consists of Tier 1 capital based on risk-based capital
guidelines, divided by average tangible assets (excluding
intangible assets that were deducted to arrive at Tier 1
capital).

The leverage ratios were as follows at
December 31:

|        |  |      |     |      |  |      |     |   |  |  |     |  
|------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|        |  | 2005 |     | 2004 |  | 2003
|        |  |      |     |      |  |     
|Company |  |      | 8.3 | %    |  |      | 8.2 | % |  |  | 8.4 | %
|HVB     |  |      | 8.3 |      |  |      | 8.1 |   |  |  | 8.4 |  

To be considered well-capitalized
under FDICIA, an institution must generally have a leverage
ratio of at least 5 percent, Tier 1 ratio of 6 percent and
a Total capital ratio of 10 percent. HVB exceeds all
current regulatory capital requirements and was in the
well capitalized category at December 31, 2005.
Management plans to conduct the affairs of the Bank so as to
maintain a strong capital position in the future.

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
December 31, 2005, include cash and due from banks of
$47.8 million and Federal funds sold of $17.3 million.
Federal funds sold represents the Companys excess liquid
funds that are invested with other financial institutions in
need of funds and which mature daily.

Other sources of liquidity include maturities and
principal and interest payments on loans and securities. The
loan and securities portfolios are of high credit quality and of
mixed maturity, providing a constant stream of maturing and
reinvestable 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
$124.3 million at December 31, 2005. This represented
13.9 percent of the amortized cost of the securities
portfolio. Excluding installment loans to individuals, real
estate loans other than construction loans and lease financing,
$266.0 million, or 25.9 percent of loans at
December 31, 2005, mature in one year or less. The

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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 a relatively stable, low-cost
source 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. HVB has a borrowing
capacity of up to $200 million under two lines of credit at
December 31, 2005, at various terms secured by FHLB stock
owned and to be purchased and certain other assets of HVB. HVB
had no advances outstanding under these lines from the FHLB at
December 31, 2005. The Companys short-term borrowings
included $171.4 million under securities sold under
agreements to repurchase at December 31, 2005, and had
securities totaling $333.6 million at December 31,
2005 that could be sold under agreements to repurchase, thereby
increasing liquidity. In addition, HVB has agreements with two
investment firms to borrow up to $110 million under Retail
CD Brokerage Agreements and has agreements with correspondent
banks for purchasing Federal funds up to $80 million.
Additional liquidity is provided by the ability to borrow from
the Federal Reserve Banks discount window, which
borrowings must be collateralized by U.S. Treasury and
government agency securities.

The Company also 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.

A summary of significant long-term contractual
obligations and credit commitments at December 31, 2005
follows:

|                         |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |         | 
|------------------------ | --------------------------------------- | ------ | ------- | ------------ |  | ------------- | ------ | ------- |  | ----- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                         |                                         |        |         | After 1 Year |  | After 3 Years |        |         |  |      
|                         |                                         | Within |         | but Within   |  | but Within    |        | After   |  |      
|                         |                                         | 1 Year |         | 3 Years      |  | 5 Years       |        | 5 Years |  | Total
|                         |                                         |        |         |              |  |               |        |         |  |      
|Contractual Obligations: |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |        
|                         | Time Deposits                           |        | $       | 191,373      |  |               | $      | 10,158  |  |       | $       | 4,784   |  |   | $       | 133     |  |   | $       | 206,448 | 
|                         | FHLB Borrowings                         |        |         | 24           |  |               |        | 30,048  |  |       |         | 126,548 |  |   |         | 106,477 |  |   |         | 263,097 | 
|                         | Operating lease and license obligations |        |         | 1,998        |  |               |        | 2,177   |  |       |         | 1,922   |  |   |         | 4,638   |  |   |         | 10,735  | 
|                         |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |        
|Total                    |                                         | $      | 193,395 |              |  | $             | 42,383 |         |  | $     | 133,254 |         |  | $ | 111,248 |         |  | $ | 480,280 |        
|                         |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |        
|Credit Commitments:      |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |        
|                         | Available lines of credit               |        | $       | 149,405      |  |               | $      | 45,985  |  |       | $       | 5,992   |  |   | $       | 46,601  |  |   | $       | 247,983 | 
|                         | Other loan commitments                  |        |         | 58,577       |  |               |        |        |  |       |         |        |  |   |         |        |  |   |         | 58,577  | 
|                         | Letters of credit                       |        |         | 8,934        |  |               |        | 6,845   |  |       |         | 502     |  |   |         |        |  |   |         | 16,281  | 
|                         |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |        
|Total                    |                                         | $      | 216,916 |              |  | $             | 52,830 |         |  | $     | 6,494   |         |  | $ | 46,601  |         |  | $ | 322,841 |        
|                         |                                         |        |         |              |  |               |        |         |  |       |         |         |  |   |         |         |  |   |         |        

FHLB borrowings are presented in the above table
by contractual maturity date. The FHLB has rights, under certain
conditions, to call $242.8 million of those borrowings as
of various dates during 2006 and quarterly thereafter.

The Company pledges certain of its assets as
collateral for deposits of municipalities and other deposits
allowed or required by law, FHLB borrowings and repurchase
agreements. By utilizing collateralized funding sources, the
Company is able to access a variety of cost effective sources of
funds. The assets pledged consist of certain loans secured by
real estate, U.S. Treasury and government agency securities,
mortgage-backed securities, certain obligations of state and
political subdivisions and other securities. Management monitors
its liquidity requirements by assessing assets pledged, the
level of assets available for sale, additional borrowing
capacity and other factors. Management does not anticipate any
negative impact to its liquidity from its pledging activities.

Another source of funding for the Company is
capital market funds, which includes common stock, preferred
stock, convertible debentures, retained earnings and long-term
debt qualifying as regulatory capital.

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Each of the Companys sources of liquidity
is vulnerable to various uncertainties beyond the control of the
Company. Scheduled loan and security payments are a relatively
stable source of funds, while loan and security prepayments and
calls, and deposit flows vary widely in reaction to market
conditions, primarily prevailing interest rates. Asset sales are
influenced by general market interest rates and other unforeseen
market conditions. The Companys ability to borrow at
attractive rates is affected by its financial condition and
other market conditions.

In connection with the 2004 acquisition of
A. R. Schmeidler and Co., Inc., the Company may be required
to make additional performance-based payments over the five
years subsequent to the acquisition. These additional payments
would be accounted for as additional purchase price and, as a
result, would reduce the Companys liquidity and capital.
We believe that our liquidity and capital are sufficient for any
future payments required.

The Company anticipates it will make a capital
contribution to NYNB in an amount not yet determined, but that
is not expected to be material.

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

Quarterly Results of Operations
(Unaudited)

Set forth below are certain quarterly results of
operations for 2005 and 2004.

|                                  |  |                               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|--------------------------------- |  | ----------------------------- | ------ | ------------- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                  |  |                              
|                                  |  | (000s except per share data)
|                                  |  |                              
|                                  |  |                               |        |              
|                                  |  | 2005 Quarters                 |        | 2004 Quarters
|                                  |  |                               |        |              
|                                  |  | Fourth                        |        | Third         |  | Second |        | First |  | Fourth |        | Third |  | Second |        | First
|                                  |  |                               |        |               |  |        |        |       |  |        |        |       |  |        |        |      
|Interest income                   |  | $                             | 30,202 |               |  | $      | 28,368 |       |  | $      | 26,736 |       |  | $      | 25,058 |       |  | $ | 23,152 |  |  | $ | 23,009 |  |  | $ | 21,503 |  |  | $ | 20,768 | 
|Net interest income               |  |                               | 22,784 |               |  |        | 21,781 |       |  |        | 20,802 |       |  |        | 19,691 |       |  |   | 18,451 |  |  |   | 18,539 |  |  |   | 17,613 |  |  |   | 17,034 | 
|Provision for loan losses         |  |                               | 538    |               |  |        | 512    |       |  |        | 521    |       |  |        | 488    |       |  |   |       |  |  |   |       |  |  |   | 214    |  |  |   | 259    | 
|Income before income taxes        |  |                               | 12,197 |               |  |        | 12,148 |       |  |        | 11,777 |       |  |        | 10,861 |       |  |   | 11,194 |  |  |   | 11,641 |  |  |   | 9,532  |  |  |   | 8,603  | 
|Net income                        |  |                               | 7,718  |               |  |        | 8,025  |       |  |        | 7,863  |       |  |        | 7,339  |       |  |   | 7,320  |  |  |   | 7,847  |  |  |   | 6,411  |  |  |   | 5,962  | 
|Basic earnings per common share   |  |                               | 0.94   |               |  |        | 0.99   |       |  |        | 0.97   |       |  |        | 0.91   |       |  |   | 0.90   |  |  |   | 0.97   |  |  |   | 0.80   |  |  |   | 0.75   | 
|Diluted earnings per common share |  |                               | 0.91   |               |  |        | 0.96   |       |  |        | 0.95   |       |  |        | 0.89   |       |  |   | 0.89   |  |  |   | 0.96   |  |  |   | 0.78   |  |  |   | 0.73   | 

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, 2005. The Company
cautions that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, and that
statements relating to subsequent periods increasingly are
subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions.
Actual results could differ materially from forward-looking
statements.

In addition to those factors previously disclosed
by the Company and those factors identified elsewhere herein,
the following factors could cause actual results to differ
materially from such forward-looking statements:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | competitive pressure on loan and deposit product
    pricing;                                                          
|
| |  | other actions of competitors;                                                                                          
|
| |  | changes in economic conditions;                                                                                        
|
| |  | the extent and timing of actions of the Federal
    Reserve Board;                                                     
|
| |  | a loss of customer deposits;                                                                                           
|
| |  | changes in customers acceptance of the
    Banks products and services;                                              
|
| |  | regulatory delays or conditions imposed by
    regulators in connection with acquisitions or other expansion
    plans;
|
| |  | increases in federal and state income taxes
    and/or the Companys effective income tax rate;                        
|
| |  | the extent and timing of legislative and
    regulatory actions and reform; and                                        
|
| |  | inability to integrate acquired companies.                                                                             

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ITEM 7A  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Market risk is the potential for economic losses
to be incurred on market risk sensitive instruments arising from
adverse changes in market indices such as interest rates,
foreign currency exchange rates and commodity prices. Since all
Company transactions are denominated in U.S. dollars with no
direct foreign exchange or changes in commodity price exposures,
the Companys primary market risk exposure is interest rate
risk.

Interest rate risk is the exposure of net
interest income to changes in interest rates. Interest rate
sensitivity is the relationship between market interest rates
and net interest income due to the repricing characteristics of
assets and liabilities. If more liabilities than assets reprice
in a given period (a liability-sensitive position or
negative gap), market interest rate changes will be
reflected more quickly in liability rates. If interest rates
decline, such positions will generally benefit net interest
income. Alternatively, where assets reprice more quickly than
liabilities in a given period (an asset-sensitive position or
positive gap), a decline in market rates could have
an adverse effect on net interest income. Excessive levels of
interest rate risk can result in a material adverse effect on
the Companys future financial condition and results of
operations. Accordingly, effective risk management techniques
that maintain interest rate risk at prudent levels is essential
to the Companys safety and soundness.

The Company has no financial instruments entered
into for trading purposes. Federal funds, both purchases and
sales, on which rates change daily, and loans and deposits tied
to certain indices, such as the prime rate and federal discount
rate, are the most market sensitive and have the most stable
fair values. The least sensitive instruments include long-term
fixed rate loans and securities and fixed rate savings deposits,
which have the least stable fair value. On those types falling
between these extremes, the management of maturity distributions
is as important as the balances maintained. Management of
maturity distributions involve the matching of interest rate
maturities, as well as principal maturities, and is a key
determinant of net interest income. In periods of rapidly
changing interest rates, an imbalance (gap) between
the rate sensitive assets and liabilities can cause major
fluctuations in net interest income and in earnings.
Establishing patterns of sensitivity which will enhance future
growth regardless of frequent shifts in the market conditions is
one of the objectives of the Companys asset/liability
management strategy.

Evaluating the Companys exposure to changes
in interest rates is the responsibility of ALSC and includes
assessing both the adequacy of the management process used to
control interest rate risk and the quantitative level of
exposure. When assessing the interest rate risk management
process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls
are in place to maintain interest rate risk at appropriate
levels. Evaluating the quantitative level of interest rate risk
exposure requires the Company to assess the existing and
potential future effects of changes in interest rates on its
consolidated financial condition, including capital adequacy,
earnings, liquidity and asset quality.

The Company uses the simulation analysis to
estimate the effect that specific movements in interest rates
would have on net interest income. This analysis incorporates
management assumptions about the levels of future balance sheet
trends, different patterns of interest rate movements, and
changing relationships between interest rates (i.e. basis risk).
These assumptions have been developed through a combination of
historical analysis and future expected pricing behavior. For a
given level of market interest rate changes, the simulation can
consider the impact of the varying behavior of cash flows from
principal prepayments on the loan portfolio and mortgage-backed
securities, call activities on investment securities, balance
changes on non contractual maturity deposit products (demand
deposits, checking with interest, money market and savings
accounts), and embedded option risk by taking into account the
effects of interest rate caps and floors. The impact of planned
growth and anticipated new business activities is not integrated
into the simulation analysis. The Company can assess the results
of the simulation and, if necessary, implement suitable
strategies to adjust the structure of its assets and liabilities
to reduce potential unacceptable risks to net interest income.
The simulation analysis at December 31, 2005 shows the
Companys net interest income rising slightly if rates rise
and declining if rates fall.

The Companys policy limit on interest rate
risk is that if interest rates were to gradually increase or
decrease 200 basis points from current rates, the percentage
change in estimated net interest income for the subsequent
12 month measurement period should not decline by more than
5.0 percent. Net interest income is

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forecasted using various interest rate scenarios
that management believes are reasonably likely to impact the
Companys financial condition. A base case scenario, in
which current interest rates remain stable, is used for
comparison to other scenario simulations. The table below
illustrates the estimated exposures under a rising rate scenario
and a declining rate scenario calculated as a percentage change
in estimated net interest income from the base case scenario,
assuming a gradual shift in interest rates for the next 12 month
measurement period, beginning December 31, 2005 and 2004.
For 2004, a 100 basis point downward change in interest rates
was substituted for the 200 basis point downward scenario, as
management believed that a 200 basis point downward change was
not meaningful at that time in light of the extremely low
interest rate levels.


|                                 |  |                        |      |                        |  |  |      |   
|-------------------------------- |  | ---------------------- | ---- | ---------------------- |  |  | ---- | --
|                                 |  | Percentage Change in   |      | Percentage Change in  
|                                 |  | Estimated Net Interest |      | Estimated Net Interest
|                                 |  | Income from            |      | Income from           
|Gradual Change in Interest Rates |  | December 31, 2005      |      | December 31, 2004     
|                                 |  |                        |      |                       
|+200 basis points                |  |                        | 0.5  | %                      |  |  | (0.1 | )%
|-200 basis points (-100 in 2004) |  |                        | (3.7 | )%                     |  |  | (1.9 | )%

The percentage change in estimated net interest
income for the subsequent 12 month measurement period from
December 31, 2005 in the +200 basis points and -200 basis
points scenarios of 0.5% and (3.7)%, respectively, are within
the Companys policy limit of (5.0)%.

As with any method of measuring interest rate
risk, there are certain limitations inherent in the method of
analysis presented. Actual results may differ significantly from
simulated results should market conditions and management
strategies, among other factors, vary from the assumptions used
in the analysis. The model assumes that certain assets and
liabilities of similar maturity or period to repricing will
react the same to changes in interest rates, but, in reality,
they may react in different degrees to changes in market
interest rates. Specific types of financial instruments may
fluctuate in advance of changes in market interest rates, while
other types of financial instruments may lag behind changes in
market interest rates. Additionally, other assets, such as
adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the
asset. Furthermore, in the event of a change in interest rates,
expected rates of prepayments on loans and securities and early
withdrawals from time deposits could deviate significantly from
those assumed in the simulation.

One way to minimize interest rate risk is to
maintain a balanced or matched interest rate sensitivity
position. However, profits are not always maximized by matched
funding. To increase net interest earnings, the Company
selectively mis-matches asset and liability repricing to take
advantage of short-term interest rate movements and the shape of
the U.S. Treasury yield curve. The magnitude of the mismatch
depends on a careful assessment of the risks presented by
forecasted interest rate movements. The risk inherent in such a
mismatch, or gap, is that interest rates may not move as
anticipated.

Interest rate risk exposure is reviewed in
quarterly meetings in which guidelines are established for the
following quarter and the longer term exposure. The structural
interest rate mismatch is reviewed periodically by ALSC and
management.

Risk is mitigated by matching maturities or
repricing more closely, and by reducing interest rate risk by
the use of interest rate contracts. The Company does not use
derivative financial instruments extensively. However, as
circumstances warrant, the Company may purchase derivatives such
as interest rate contracts to manage its interest rate exposure.
Any derivative financial instruments are carefully evaluated to
determine the impact on the Companys interest rate risk in
rising and declining interest rate environments as well as the
fair value of the derivative instruments. Use of derivative
financial instruments is included in the Companys Asset/
Liability policy, which has been approved by the Board of
Directors. Additional information on derivative financial
instruments is presented in Note 1 to the Consolidated
Financial Statements.

The Company also prepares a static gap analysis.
The Static Gap as of December 31, 2005 and 2004
is presented in the tables below. Balance sheet items are
appropriately categorized by contractual maturity, expected
average lives for mortgage-backed securities, or repricing
dates, with prime rate indexed loans and certificates of
deposit. Checking with interest accounts, savings accounts,
money market accounts and other borrowings constitute the bulk
of the floating rate category. The determination of the interest
rate sensitivity of

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non contractual items is arrived at in a
subjective fashion. Savings accounts are viewed as a relatively
stable source of funds and are therefore classified as
intermediate funds.


At December 31, 2005, the Static
Gap showed a positive cumulative gap of $74.7 million
in the one day to one year repricing period, as compared to a
negative cumulative gap of $11.9 million at
December 31, 2004. The change in the cumulative static gap
between December 31, 2005 and December 31, 2004
reflects the results of the Companys efforts to reposition
its portfolios as a result of the slow rise in interest rates
and flattening of the yield curve which began in late 2004 and
continued through 2005. Management believes that this strategy
has enabled the Company to be well positioned for the next cycle
of interest rate changes.

The tables below set forth the interest rate
sensitivity analysis by repricing date at year end 2005 and 2004.

Interest Rate Sensitivity Analysis By
Repricing Date

December 31, 2005

|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|-------------------------------------------- |  | -------------------------- | ------- | -------- |  | ---------- | -------- | ------------ |  | --------- | ------- | -------- |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | 
|                                             |  |                           
|                                             |  | (000s except percentages)
|                                             |  |                           
|                                             |  |                            |         | Over One |  |           
|                                             |  |                            |         | Day to   |  | Over Three |          | Over One     |  |           |         | Non-     |  |      
|                                             |  |                            |         | Three    |  | Months to  |          | Year to Five |  | Over Five |         | Interest |  |      
|                                             |  | One Day                    |         | Months   |  | One Year   |          | Years        |  | Years     |         | Bearing  |  | Total
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |      
|Assets:                                      |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Loans, net                                   |  |                            |        |          |  | $          | 536,768  |              |  | $         | 66,948  |          |  | $     | 309,237 |   |  | $ | 91,378  |   |  | $ | 5,488    |   |  | $ | 1,009,819 | 
|Mortgage-backed securities                   |  |                            |        |          |  |            | 31,579   |              |  |           | 112,228 |          |  |       | 288,077 |   |  |   | 72,507  |   |  |   |         |   |  |   | 504,391   | 
|Other securities                             |  |                            |        |          |  |            | 44,511   |              |  |           | 48,533  |          |  |       | 153,938 |   |  |   | 146,291 |   |  |   |         |   |  |   | 393,273   | 
|Other earning assets                         |  | $                          | 19,393  |          |  |            |         |              |  |           |        |          |  |       |        |   |  |   |        |   |  |   |         |   |  |   | 19,393    | 
|Other assets                                 |  |                            |        |          |  |            |         |              |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 105,845  |   |  |   | 105,845   | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total Assets                                 |  |                            | 19,393  |          |  |            | 612,858  |              |  |           | 227,709 |          |  |       | 751,252 |   |  |   | 310,176 |   |  |   | 111,333  |   |  |   | 2,032,721 | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|                                            
|Liabilities & Stockholders
    Equity:     
|Interest bearing deposits                    |  |                            |        |          |  | $          | 561,078  |              |  | $         | 52,015  |          |  | $     | 14,942  |   |  | $ | 203,929 |   |  |   |         |   |  | $ | 831,964   | 
|Other borrowed funds                         |  | $                          | 57,763  |          |  |            | 114,358  |              |  |           | 16      |          |  |       | 156,596 |   |  |   | 106,479 |   |  |   |         |   |  |   | 435,212   | 
|Demand deposits                              |  |                            |        |          |  |            |         |              |  |           |        |          |  |       |        |   |  |   |        |   |  | $ | 576,032  |   |  |   | 576,032   | 
|Other liabilities                            |  |                            |        |          |  |            |         |              |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 19,724   |   |  |   | 19,724    | 
|Stockholders equity                         |  |                            |        |          |  |            |         |              |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 169,789  |   |  |   | 169,789   | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total Liabilities & Stockholders
    Equity |  |                            | 57,763  |          |  |            | 675,436  |              |  |           | 52,031  |          |  |       | 171,538 |   |  |   | 310,408 |   |  |   | 765,545  |   |  |   | 2,032,721 | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Net interest rate sensitivity gap            |  | $                          | (38,370 | )        |  | $          | (62,578  | )            |  | $         | 175,678 |          |  | $     | 579,714 |   |  | $ | (232    | ) |  | $ | (654,212 | ) |  |   |          | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap                               |  | $                          | (38,370 | )        |  | $          | (100,948 | )            |  | $         | 74,730  |          |  | $     | 654,444 |   |  | $ | 654,212 |   |  |   |         |   |  |   |          | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap to interest earning assets    |  |                            | (1.99   | )%       |  |            | (5.24    | )%           |  |           | 3.88    | %        |  |       | 33.96   | % |  |   | 33.95   | % |  |   |          |   |  |   |           | 
|                                             |  |                            |         |          |  |            |          |              |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 

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December 31, 2004

|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|------------------------------------------ |  | -------------------------- | ------- | -------- |  | ---------- | -------- | ---------- |  | --------- | ------- | -------- |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | 
|                                           |  |                           
|                                           |  | (000s except percentages)
|                                           |  |                           
|                                           |  |                            |         | Over One |  |           
|                                           |  |                            |         | Day to   |  | Over Three |          | Over One   |  |           |         | Non-     |  |      
|                                           |  |                            |         | Three    |  | Months to  |          | Year to    |  | Over Five |         | Interest |  |      
|                                           |  | One Day                    |         | Months   |  | One Year   |          | Five Years |  | Years     |         | Bearing  |  | Total
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |      
|Assets:                                    |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Loans, net                                 |  |                            |        |          |  | $          | 436,902  |            |  | $         | 55,952  |          |  | $     | 289,004 |   |  | $ | 75,661  |   |  | $ | 4,977    |   |  | $ | 862,496   | 
|Mortgage-backed securities                 |  |                            |        |          |  |            | 35,522   |            |  |           | 120,520 |          |  |       | 238,178 |   |  |   | 62,872  |   |  |   |         |   |  |   | 457,092   | 
|Other securities                           |  |                            |        |          |  |            | 37,354   |            |  |           | 33,086  |          |  |       | 230,054 |   |  |   | 131,740 |   |  |   |         |   |  |   | 432,234   | 
|Other earning assets                       |  | $                          | 5,700   |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   | 5,785   |   |  |   |         |   |  |   | 11,485    | 
|Other assets                               |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 77,567   |   |  |   | 77,567    | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total assets                               |  |                            | 5,700   |          |  |            | 509,778  |            |  |           | 209,558 |          |  |       | 757,236 |   |  |   | 276,058 |   |  |   | 82,544   |   |  |   | 1,840,874 | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Liabilities and stockholders equity:      |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Interest bearing deposits                  |  |                            |        |          |  | $          | 473,137  |            |  | $         | 44,309  |          |  | $     | 16,520  |   |  | $ | 188,585 |   |  |   |         |   |  | $ | 722,551   | 
|Other borrowed funds                       |  | $                          | 65,029  |          |  |            | 99,449   |            |  |           | 55,016  |          |  |       | 85,601  |   |  |   | 122,498 |   |  |   |         |   |  |   | 427,593   | 
|Demand deposits                            |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  | $ | 512,790  |   |  |   | 512,790   | 
|Other liabilities                          |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 18,278   |   |  |   | 18,278    | 
|Stockholders equity                       |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 159,662  |   |  |   | 159,662   | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total liabilities and stockholders equity |  |                            | 65,029  |          |  |            | 572,586  |            |  |           | 99,325  |          |  |       | 102,121 |   |  |   | 311,083 |   |  |   | 690,730  |   |  |   | 1,840,874 | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Net interest rate sensitivity gap          |  | $                          | (59,329 | )        |  | $          | (62,808  | )          |  | $         | 110,233 |          |  | $     | 655,115 |   |  | $ | (35,025 | ) |  | $ | (608,186 | ) |  |   |          | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap                             |  | $                          | (59,329 | )        |  | $          | (122,137 | )          |  | $         | (11,904 | )        |  | $     | 643,211 |   |  | $ | 608,186 |   |  |   |         |   |  |   |          | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap to interest-earning assets  |  |                            | (3.36   | )%       |  |            | (6.93    | )%         |  |           | (0.68   | )%       |  |       | 36.48   | % |  |   | 34.49   | % |  |   |          |   |  |   |           | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 

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ITEM 8  FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                  |                                                                |  |    |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  | -- | -- | 
|                                                                                                                                                 
|MANAGEMENTS REPORT TO THE STOCKHOLDERS                                                                                                           |                                                                |  | 54 |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING                                          |                                                                |  | 56 |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM                                                                                       |                                                                |  | 58 |   
|CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
    31, 2005 AND 2004 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
    ENDED DECEMBER 31, 2005: |                                                                |  |    |   
|                                                                                                                                                  | Consolidated Statements of Income                              |  |    | 59 | 
|                                                                                                                                                  | Consolidated Statements of Comprehensive Income                |  |    | 60 | 
|                                                                                                                                                  | Consolidated Balance Sheets                                    |  |    | 61 | 
|                                                                                                                                                  | Consolidated Statements of Changes in
    Stockholders Equity |  |    | 62 | 
|                                                                                                                                                  | Consolidated Statements of Cash Flows                          |  |    | 63 | 
|                                                                                                                                                  | Notes to Consolidated Financial Statements                     |  |    | 64 | 

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MANAGEMENTS REPORT TO THE
STOCKHOLDERS

March 13, 2006

To the Stockholders of Hudson Valley Holding Corp.

Consolidated Financial Statements

The management of Hudson Valley Holding Corp. and
its subsidiary, Hudson Valley Bank, (collectively the
Company), is responsible for the preparation,
integrity, and fair presentation of its published consolidated
financial statements and all other information presented in this
Annual Report. The consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America and, as such, include
amounts based on informed judgments and estimates made by
management.

The consolidated financial statements have been
audited by an independent registered public accounting firm,
which was given unrestricted access to all financial records and
related data, including minutes of all meetings of the
stockholders, the Board of Directors and committees of the Board
of Directors. Management believes all representations made to
the independent auditors during their audit were valid and
appropriate.

Internal Control

Management is responsible for establishing and
maintaining effective internal control over financial reporting,
including safeguarding of assets, for financial presentations in
conformity with accounting principles generally accepted in the
United States of America and, for Hudson Valley Bank, in
conformity with the Federal Financial Institutions Examination
Council Instructions for Consolidated Reports of Condition and
Income (Call Report Instructions). The internal
control contains monitoring mechanisms, and actions are taken to
correct deficiencies identified.

There are inherent limitations in the
effectiveness of internal control, including the possibility of
human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.

Management assessed the Companys internal
control over financial reporting, including safeguarding of
assets, for financial presentations in conformity with
accounting principles generally accepted in the United States of
America and, for Hudson Valley Bank, in conformity with the Call
Report Instructions as of December 31, 2005. This
assessment was based on criteria for effective internal control
over financial reporting, including safeguarding of assets,
described in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that
the Company maintained effective internal control over financial
reporting, including safeguarding of assets, presented in
conformity with accounting principles generally accepted in the
United States of America and, for Hudson Valley Bank, in
conformity with the Call Report Instructions, as of
December 31, 2005.

Audit Committee

The Audit Committee of the Board of Directors is
comprised entirely of outside directors who are independent of
the Companys management. The Audit Committee is
responsible for recommending to the Board of Directors the
selection of independent auditors. The Audit Committee meets
periodically with management, the independent auditors, and the
internal auditors to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for
performing an oversight role by reviewing and monitoring the
financial, accounting and auditing procedures of the Company in
addition to reviewing the Companys consolidated financial
reports. The independent auditors and the internal auditors have
full and free access to the Audit Committee, with or without the
presence of management, to discuss the adequacy of internal
control over financial reporting and any other matters which
they believe should be brought to the attention of the Audit
Committee.

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The Companys assessment of the
effectiveness of internal control over financial reporting and
the Companys consolidated financial statements have been
audited by Deloitte & Touche LLP, Independent
Registered Accounting Firm.

Compliance With Laws and Regulations

Management is also responsible for ensuring
compliance with the federal laws and regulations concerning
loans to insiders and the federal and state laws and regulations
concerning dividend restrictions, both of which are designated
by the Federal Deposit Insurance Corporation (FDIC) as safety
and soundness laws and regulations.

Management assessed Hudson Valley Banks
compliance with the designated safety and soundness laws and
regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment,
management believes that Hudson Valley Bank has complied, in all
material respects, with the designated safety and soundness laws
and regulations for the year ended December 31, 2005.

|                                                           |  |                                                                                              
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------
|James J. Landy
    President &
    Chief Executive Officer |  | Stephen R. Brown
    Senior Executive Vice President,
    Chief Financial Officer & Treasurer

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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL
REPORTING


To the Board of Directors and Stockholders of

Hudson Valley Holding Corp.


We have audited managements assessment,
included in the accompanying Managements Report to
the Stockholders, that Hudson Valley Holding Corp. and its
subsidiary, Hudson Valley Bank (collectively the
Company) maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Because managements assessment
and our audit were conducted to meet the reporting requirements
of Section 112 of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA), managements assessment and our
audit of the Companys internal control over financial
reporting included controls over the preparation by Hudson
Valley Bank (the Companys bank subsidiary) of the
schedules equivalent to the basic financial statements in
accordance with the Federal Financial Institutions Examination
Council Instructions for Consolidated Reports of Condition and
Income (Call Report Instructions). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing, and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.

A companys internal control over financial
reporting is a process designed by, or under the supervision of,
the companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of the inherent limitations of internal
control over financial reporting, including the possibility of
collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.

In our opinion, managements assessment that
the Company maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the criteria established in Internal
Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also, in
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2005, based on the criteria established in

56



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##### Table of Contents



Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.


We have not examined and, accordingly, we do not
express an opinion or any other form of assurance on
managements statement referring to compliance with laws
and regulations.

We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and
for the year ended December 31, 2005 of the Company and our
report dated March 13, 2006 expressed an unqualified
opinion on those consolidated financial statements.

Deloitte & Touche LLP

New York, New York


March 13, 2006


57



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Hudson Valley Holding Corp.


We have audited the accompanying consolidated
balance sheets of Hudson Valley Holding Corp. and its
subsidiary, (the Company), as of December 31,
2005 and 2004, and the related consolidated statements of
income, comprehensive income, changes in stockholders
equity, and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Hudson Valley Holding Corp. and subsidiary
at December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of
America.

We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2005, based on the criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 13, 2006 expressed an
unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over
financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.

DELOITTE & TOUCHE LLP

New York, New York

March 13, 2006


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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2005,
2004 and 2003


Dollars in thousands, except per share
amounts


|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------------- | -------------------------------- | ---- | ------- | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                |                                  | 2005 |         | 2004   |  | 2003
|                                                                                |                                  |      |         |        |  |     
|Interest Income:                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Loans, including fees                                                           |                                  | $    | 72,169  |        |  | $    | 54,136 |        |  | $ | 48,098 |       
|Securities:                                                                     |                                  |      |         |        |  |      |        |        |  |   |        |       
|                                                                                | Taxable                          |      |         | 28,377 |  |      |        | 25,307 |  |   |        | 19,707 | 
|                                                                                | Exempt from Federal income taxes |      |         | 8,848  |  |      |        | 8,734  |  |   |        | 8,146  | 
|Federal funds sold                                                              |                                  |      | 841     |        |  |      | 209    |        |  |   | 555    |       
|Deposits in banks                                                               |                                  |      | 129     |        |  |      | 46     |        |  |   | 14     |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Total interest income                                                           |                                  |      | 110,364 |        |  |      | 88,432 |        |  |   | 76,520 |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Interest Expense:                                                               |                                  |      |         |        |  |      |        |        |  |   |        |       
|Deposits                                                                        |                                  |      | 8,870   |        |  |      | 4,184  |        |  |   | 4,671  |       
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |      | 4,909   |        |  |      | 2,140  |        |  |   | 1,730  |       
|Other borrowings                                                                |                                  |      | 11,527  |        |  |      | 10,471 |        |  |   | 9,043  |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Total interest expense                                                          |                                  |      | 25,306  |        |  |      | 16,795 |        |  |   | 15,444 |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Net Interest Income                                                             |                                  |      | 85,058  |        |  |      | 71,637 |        |  |   | 61,076 |       
|Provision for loan losses                                                       |                                  |      | 2,059   |        |  |      | 473    |        |  |   | 437    |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Net interest income after provision for loan
    losses                         |                                  |      | 82,999  |        |  |      | 71,164 |        |  |   | 60,639 |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Non Interest Income:                                                            |                                  |      |         |        |  |      |        |        |  |   |        |       
|Service charges                                                                 |                                  |      | 3,973   |        |  |      | 3,373  |        |  |   | 1,415  |       
|Investment advisory fees                                                        |                                  |      | 4,569   |        |  |      | 1,354  |        |  |   | 300    |       
|Realized (loss) gain on sales of securities, net                                |                                  |      | (1,158  | )      |  |      | 1,100  |        |  |   | 5,408  |       
|Other income                                                                    |                                  |      | 919     |        |  |      | 698    |        |  |   | 1,534  |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Total non interest income                                                       |                                  |      | 8,303   |        |  |      | 6,525  |        |  |   | 8,657  |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Non Interest Expense:                                                           |                                  |      |         |        |  |      |        |        |  |   |        |       
|Salaries and employee benefits                                                  |                                  |      | 25,574  |        |  |      | 21,072 |        |  |   | 19,006 |       
|Occupancy                                                                       |                                  |      | 3,760   |        |  |      | 3,119  |        |  |   | 2,879  |       
|Professional services                                                           |                                  |      | 4,319   |        |  |      | 3,491  |        |  |   | 3,254  |       
|Equipment                                                                       |                                  |      | 2,297   |        |  |      | 2,056  |        |  |   | 1,759  |       
|Business development                                                            |                                  |      | 1,722   |        |  |      | 1,485  |        |  |   | 1,422  |       
|FDIC assessment                                                                 |                                  |      | 178     |        |  |      | 173    |        |  |   | 177    |       
|Other operating expenses                                                        |                                  |      | 6,469   |        |  |      | 5,323  |        |  |   | 4,837  |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Total non interest expense                                                      |                                  |      | 44,319  |        |  |      | 36,719 |        |  |   | 33,334 |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Income Before Income Taxes                                                      |                                  |      | 46,983  |        |  |      | 40,970 |        |  |   | 35,962 |       
|Income Taxes                                                                    |                                  |      | 16,038  |        |  |      | 13,430 |        |  |   | 11,755 |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Net Income                                                                      |                                  | $    | 30,945  |        |  | $    | 27,540 |        |  | $ | 24,207 |       
|                                                                                |                                  |      |         |        |  |      |        |        |  |   |        |       
|Basic Earnings per Common Share                                                 |                                  | $    | 3.81    |        |  | $    | 3.42   |        |  | $ | 3.06   |       
|Diluted Earnings per Common Share                                               |                                  | $    | 3.71    |        |  | $    | 3.36   |        |  | $ | 2.99   |       

See notes to consolidated financial statements.

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

For the years ended December 31, 2005,
2004 and 2003


Dollars in thousands


|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                              |  | 2005 |         | 2004 |  | 2003
|                                                                                              |  |      |         |      |  |     
|Net Income                                                                                    |  | $    | 30,945  |      |  | $    | 27,540 |   |  | $ | 24,207  |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|Other comprehensive (loss) income, net of
    tax:                                            |  |      |         |      |  |      |        |   |  |   |         |  
|Unrealized holding loss on securities available
    for sale arising during the year          |  |      | (12,823 | )    |  |      | (1,321 | ) |  |   | (11,784 | )
|Income tax effect                                                                             |  |      | 5,229   |      |  |      | 586    |   |  |   | 4,417   |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|                                                                                              |  |      | (7,594  | )    |  |      | (735   | ) |  |   | (7,367  | )
|Reclassification adjustment for net loss (gain)
    realized on securities available for sale |  |      | 1,158   |      |  |      | (1,100 | ) |  |   | (5,408  | )
|Income tax effect                                                                             |  |      | (472    | )    |  |      | 396    |   |  |   | 1,992   |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|                                                                                              |  |      | 686     |      |  |      | (704   | ) |  |   | (3,416  | )
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|Unrealized holding loss on securities, net                                                    |  |      | (6,908  | )    |  |      | (1,439 | ) |  |   | (10,783 | )
|Minimum pension liability adjustment                                                          |  |      | 436     |      |  |      | 7      |   |  |   | (174    | )
|Income tax effect                                                                             |  |      | (175    | )    |  |      | (3     | ) |  |   | 69      |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|                                                                                              |  |      | 261     |      |  |      | 4      |   |  |   | (105    | )
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|Other comprehensive loss                                                                      |  |      | (6,647  | )    |  |      | (1,435 | ) |  |   | (10,888 | )
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  
|Comprehensive Income                                                                          |  | $    | 24,298  |      |  | $    | 26,105 |   |  | $ | 13,319  |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |         |  

See notes to consolidated financial statements.

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004


Dollars in thousands, except per share and
share amounts


|                                                                                                                                               |                      |      |           |           |  |   |           |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                                                                                                                               |                      | 2005 |           | 2004     
|                                                                                                                                               |                      |      |           |          
|ASSETS                                                                                                                                         |                      |      |           |           |  |   |           |          
|Cash and due from banks                                                                                                                        |                      | $    | 47,776    |           |  | $ | 32,428    |          
|Federal funds sold                                                                                                                             |                      |      | 17,329    |           |  |   | 5,700     |          
|Securities available for sale, at estimated fair
    value (amortized cost of $843,200 in 2005 and $801,915 in 2004)                           |                      |      | 833,873   |           |  |   | 804,253   |          
|Securities held to maturity, at amortized cost
    (estimated fair value of $49,633 in 2005 and $71,810 in 2004)                               |                      |      | 50,119    |           |  |   | 70,867    |          
|Federal Home Loan Bank of New York
    (FHLB) stock                                                                                            |                      |      | 13,672    |           |  |   | 14,206    |          
|Loans (net of allowance for loan losses of
    $13,525 in 2005 and $11,801 in 2004)                                                            |                      |      | 1,009,819 |           |  |   | 862,496   |          
|Accrued interest and other receivables                                                                                                         |                      |      | 12,625    |           |  |   | 11,171    |          
|Premises and equipment, net                                                                                                                    |                      |      | 13,591    |           |  |   | 14,067    |          
|Deferred income taxes, net                                                                                                                     |                      |      | 12,306    |           |  |   | 6,632     |          
|Other assets                                                                                                                                   |                      |      | 21,881    |           |  |   | 19,054    |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|TOTAL ASSETS                                                                                                                                   |                      | $    | 2,032,721 |           |  | $ | 1,840,874 |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|LIABILITIES                                                                                                                                    |                      |      |           |           |  |   |           |          
|Deposits:                                                                                                                                      |                      |      |           |           |  |   |           |          
|                                                                                                                                               | Non interest-bearing |      | $         | 576,032   |  |   | $         | 512,790   | 
|                                                                                                                                               | Interest-bearing     |      |           | 831,964   |  |   |           | 722,551   | 
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|                                                                                                                                               | Total deposits       |      |           | 1,407,996 |  |   |           | 1,235,341 | 
|Securities sold under repurchase agreements and
    other short-term borrowings                                                                |                      |      | 172,115   |           |  |   | 164,472   |          
|Other borrowings                                                                                                                               |                      |      | 263,097   |           |  |   | 263,121   |          
|Accrued interest and other liabilities                                                                                                         |                      |      | 19,724    |           |  |   | 18,278    |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|TOTAL LIABILITIES                                                                                                                              |                      |      | 1,862,932 |           |  |   | 1,681,212 |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|Commitments and contingencies (Note
    12)                                                                                                    |                      |      |           |           |  |   |           |          
|                                                                                                                                              
|STOCKHOLDERS EQUITY                                                                                                                           |                      |      |           |           |  |   |           |          
|Common Stock, $0.20 par value; authorized
    10,000,000 shares; outstanding 8,138,752 and 7,359,160
    shares in 2005 and 2004, respectively |                      |      | 1,856     |           |  |   | 1,680     |          
|Additional paid-in capital                                                                                                                     |                      |      | 207,372   |           |  |   | 185,438   |          
|Retained earnings                                                                                                                              |                      |      | 1,431     |           |  |   | 1,492     |          
|Accumulated other comprehensive income (loss)                                                                                                  |                      |      | (6,282    | )         |  |   | 365       |          
|Treasury stock, at cost; 1,142,699 and
    1,040,046 shares in 2005 and 2004, respectively                                                     |                      |      | (34,588   | )         |  |   | (29,313   | )        
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|Total stockholders equity                                                                                                                     |                      |      | 169,789   |           |  |   | 159,662   |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|TOTAL LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                 |                      | $    | 2,032,721 |           |  | $ | 1,840,874 |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          

See notes to consolidated financial statements.

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the years ended December 31, 2005,
2004 and 2003


Dollars in thousands, except share
amounts


|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------- | --------- | ------ |  | -------- | ----- | ---------- |  | -------- | ------- | ------------- |  | ----- | ------- |  |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                         |  |             |           |        |  |          |       |            |  |          |         | Accumulated   |  |      
|                                                         |  | Number of   |           |        |  |          |       | Additional |  |          |         | Other         |  |      
|                                                         |  | Shares      |           | Common |  | Treasury |       | Paid-In    |  | Retained |         | Comprehensive |  |      
|                                                         |  | Outstanding |           | Stock  |  | Stock    |       | Capital    |  | Earnings |         | Income (Loss) |  | Total
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |      
|Balance at January 1, 2003                               |  |             | 5,887,600 |        |  | $        | 1,366 |            |  | $        | (24,534 | )             |  | $     | 146,393 |  |  | $ | 894     |   |  | $ | 12,688  |   |  | $ | 136,807 |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 24,207  |   |  |   |         |   |  |   | 24,207  |  
|Exercise of stock options, net of tax                    |  |             | 168,998   |        |  |          | 33    |            |  |          |         |               |  |       | 4,724   |  |  |   |         |   |  |   |         |   |  |   | 4,757   |  
|Purchase of treasury stock                               |  |             | (89,416   | )      |  |          |       |            |  |          | (3,833  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (3,833  | )
|Sale of treasury stock                                   |  |             | 20,371    |        |  |          |       |            |  |          | 543     |               |  |       | 301     |  |  |   |         |   |  |   |         |   |  |   | 844     |  
|Stock dividend                                           |  |             | 599,263   |        |  |          | 120   |            |  |          |         |               |  |       | 14,144  |  |  |   | (14,264 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (9,533  | ) |  |   |         |   |  |   | (9,533  | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (105    | ) |  |   | (105    | )
|Net unrealized loss on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (10,783 | ) |  |   | (10,783 | )
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                             |  |             | 6,586,816 |        |  |          | 1,519 |            |  |          | (27,824 | )             |  |       | 165,562 |  |  |   | 1,304   |   |  |   | 1,800   |   |  |   | 142,361 |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 27,540  |   |  |   |         |   |  |   | 27,540  |  
|Exercise of stock options, net of tax                    |  |             | 134,337   |        |  |          | 27    |            |  |          |         |               |  |       | 4,025   |  |  |   |         |   |  |   |         |   |  |   | 4,052   |  
|Purchase of treasury stock                               |  |             | (43,496   | )      |  |          |       |            |  |          | (1,854  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (1,854  | )
|Sale of treasury stock                                   |  |             | 12,824    |        |  |          |       |            |  |          | 365     |               |  |       | 165     |  |  |   |         |   |  |   |         |   |  |   | 530     |  
|Stock dividend                                           |  |             | 668,679   |        |  |          | 134   |            |  |          |         |               |  |       | 15,686  |  |  |   | (15,820 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (11,532 | ) |  |   |         |   |  |   | (11,532 | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | 4       |   |  |   | 4       |  
|Net unrealized loss on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (1,439  | ) |  |   | (1,439  | )
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2004                             |  |             | 7,359,160 |        |  | $        | 1,680 |            |  |          | (29,313 | )             |  |       | 185,438 |  |  |   | 1,492   |   |  |   | 365     |   |  |   | 159,662 |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 30,945  |   |  |   |         |   |  |   | 30,945  |  
|Exercise of stock options, net of tax                    |  |             | 142,415   |        |  |          | 28    |            |  |          |         |               |  |       | 4,698   |  |  |   |         |   |  |   |         |   |  |   | 4,726   |  
|Purchase of treasury stock                               |  |             | (110,126  | )      |  |          |       |            |  |          | (5,492  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (5,492  | )
|Sale of treasury stock                                   |  |             | 7,473     |        |  |          |       |            |  |          | 217     |               |  |       | 65      |  |  |   |         |   |  |   |         |   |  |   | 282     |  
|Stock dividend                                           |  |             | 739,830   |        |  |          | 148   |            |  |          |         |               |  |       | 17,171  |  |  |   | (17,319 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (13,687 | ) |  |   |         |   |  |   | (13,687 | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | 261     |   |  |   | 261     |  
|Net unrealized loss on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (6,908  | ) |  |   | (6,908  | )
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2005                             |  |             | 8,138,752 |        |  | $        | 1,856 |            |  | $        | (34,588 | )             |  | $     | 207,372 |  |  | $ | 1,431   |   |  | $ | (6,282  | ) |  | $ | 169,789 |  
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  

See notes to consolidated financial statements.

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the years ended December 31, 2005,
2004 and 2003


Dollars in thousands


|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |        |  
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---- | -------- | ----- | - | ---- | -------- | ------ | - | - | ---------- | ------ | -
|                                                                                                     |                                                    | 2005 |          | 2004  |   | 2003
|                                                                                                     |                                                    |      |          |       |   |     
|Operating Activities:                                                                                |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Net income                                                                                           |                                                    | $    | 30,945   |       |   | $    | 27,540   |        |   | $ | 24,207     |       
|Adjustments to reconcile net income to net cash
    provided by operating activities:                |                                                    |      |          |       |   |      |          |        |   |   |            |       
|                                                                                                     | Provision for loan losses                          |      |          | 2,059 |   |      |          | 473    |   |   |            | 437    |  
|                                                                                                     | Depreciation and amortization                      |      |          | 2,000 |   |      |          | 1,926  |   |   |            | 1,703  |  
|                                                                                                     | Realized loss (gain) on security transactions, net |      |          | 1,158 |   |      |          | (1,100 | ) |   |            | (5,408 | )
|                                                                                                     | Amortization of premiums on securities, net        |      |          | 2,662 |   |      |          | 4,259  |   |   |            | 4,284  |  
|                                                                                                     | Realized gain on sale of OREO                      |      |          |      |   |      |          |       |   |   |            | (850   | )
|                                                                                                     | Stock option expense and related tax benefits      |      |          | 550   |   |      |          | 330    |   |   |            | 843    |  
|                                                                                                     | Deferred taxes (benefit)                           |      |          | (821  | ) |      |          | 107    |   |   |            | (107   | )
|Increase in deferred loan fees                                                                       |                                                    |      | 354      |       |   |      | 871      |        |   |   | 355        |       
|Increase in accrued interest and other receivables                                                   |                                                    |      | (1,454   | )     |   |      | (393     | )      |   |   | (1,735     | )     
|Increase in other assets                                                                             |                                                    |      | (2,827   | )     |   |      | (8,744   | )      |   |   | (1,454     | )     
|Increase in accrued interest and other liabilities                                                   |                                                    |      | 1,937    |       |   |      | 1,935    |        |   |   | 1,160      |       
|Other changes, net                                                                                   |                                                    |      | 437      |       |   |      | 7        |        |   |   | (173       | )     
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Net cash provided by operating
    activities                                                        |                                                    |      | 36,999   |       |   |      | 27,211   |        |   |   | 23,262     |       
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Investing Activities:                                                                                |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Net (increase) decrease in Federal Funds sold                                                        |                                                    |      | (11,629  | )     |   |      | 300      |        |   |   | 23,393     |       
|(Decrease) increase in FHLB stock                                                                    |                                                    |      | 534      |       |   |      | (3,049   | )      |   |   | (698       | )     
|Proceeds from maturities of securities available
    for sale                                        |                                                    |      | 144,797  |       |   |      | 197,276  |        |   |   | 1,357,857  |       
|Proceeds from maturities of securities held to
    maturity                                          |                                                    |      | 20,919   |       |   |      | 5,596    |        |   |   |           |       
|Proceeds from sales of securities available for
    sale                                             |                                                    |      | 50,032   |       |   |      | 29,144   |        |   |   | 129,749    |       
|Purchases of securities available for sale                                                           |                                                    |      | (240,105 | )     |   |      | (174,933 | )      |   |   | (1,621,201 | )     
|Purchases of securities held to maturity                                                             |                                                    |      |         |       |   |      | (76,372  | )      |   |   |           |       
|(Decrease) increase in payable for securities
    purchased                                          |                                                    |      | (491     | )     |   |      | 491      |        |   |   |           |       
|Net increase in loans                                                                                |                                                    |      | (149,737 | )     |   |      | (156,737 | )      |   |   | (65,458    | )     
|Proceeds from sale of OREO                                                                           |                                                    |      |         |       |   |      |         |        |   |   | 2,681      |       
|Net purchases of premises and equipment                                                              |                                                    |      | (1,524   | )     |   |      | (1,557   | )      |   |   | (3,510     | )     
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Net cash used in investing
    activities                                                            |                                                    |      | (187,204 | )     |   |      | (179,841 | )      |   |   | (177,187   | )     
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Financing Activities:                                                                                |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Net increase in deposits                                                                             |                                                    |      | 172,655  |       |   |      | 110,441  |        |   |   | 97,724     |       
|Repayment of other borrowings                                                                        |                                                    |      | (24      | )     |   |      | (23      | )      |   |   | (27        | )     
|Proceeds from other borrowings                                                                       |                                                    |      |         |       |   |      | 75,000   |        |   |   |           |       
|Net increase (decrease) in securities sold under
    repurchase agreements and short term borrowings |                                                    |      | 7,643    |       |   |      | (33,784  | )      |   |   | 59,044     |       
|Proceeds from issuance of common stock                                                               |                                                    |      | 4,176    |       |   |      | 3,722    |        |   |   | 3,914      |       
|Proceeds from sale of treasury stock                                                                 |                                                    |      | 282      |       |   |      | 530      |        |   |   | 844        |       
|Cash dividends paid                                                                                  |                                                    |      | (13,687  | )     |   |      | (11,532  | )      |   |   | (9,533     | )     
|Acquisition of treasury stock                                                                        |                                                    |      | (5,492   | )     |   |      | (1,854   | )      |   |   | (3,833     | )     
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Net cash provided by financing
    activities                                                        |                                                    |      | 165,553  |       |   |      | 142,500  |        |   |   | 148,133    |       
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Increase (Decrease) in Cash and Due from
    Banks                                                   |                                                    |      | 15,348   |       |   |      | (10,130  | )      |   |   | (5,792     | )     
|Cash and due from banks, beginning of year                                                           |                                                    |      | 32,428   |       |   |      | 42,558   |        |   |   | 48,350     |       
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Cash and due from banks, end of year                                                                 |                                                    | $    | 47,776   |       |   | $    | 32,428   |        |   | $ | 42,558     |       
|                                                                                                     |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Supplemental Disclosures:                                                                            |                                                    |      |          |       |   |      |          |        |   |   |            |       
|Interest paid                                                                                        |                                                    |      | 24,212   |       |   | $    | 16,377   |        |   | $ | 16,325     |       
|Income tax payments                                                                                  |                                                    |      | 16,135   |       |   |      | 12,627   |        |   |   | 11,491     |       
|Change in unrealized loss on securities available
    for sale  net of tax                          |                                                    |      | (6,908   | )     |   |      | (1,439   | )      |   |   | (10,783    | )     

See notes to consolidated financial statements.

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Dollars in thousands, except per share and
share amounts


1  Summary of Significant Accounting
Policies

Description of Operations and Basis of
Presentation The
consolidated financial statements include the accounts of Hudson
Valley Holding Corp. and its wholly-owned subsidiary, Hudson
Valley Bank (HVB), (collectively the
Company). The Company offers a broad range of
lending and depository products to businesses, individuals and
government units through 15 branches in Westchester County, New
York, three branches in Manhattan, New York, two branches
in Bronx County, New York, and one branch in Queens County, New
York. The Company also provides investment management services
to its customers through its wholly-owned subsidiary A.R.
Schmeidler & Co., Inc, a money management firm acquired on
October 1, 2004. The acquisition, which was made for cash,
was accounted for as a purchase. The acquired company is not a
significant subsidiary for accounting purposes. All
inter-company accounts are eliminated. The consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated
balance sheet and income and expenses for the period. Actual
results could differ significantly from those estimates. An
estimate that is particularly susceptible to significant change
in the near term relates to the determination of the allowance
for loan losses. In connection with the determination of the
allowance for loan losses, management utilizes the work of
professional appraisers for significant properties.

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 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 amortization of premiums and accretion of
discounts is determined by using the level yield method to the
earlier of the call or maturity date. Securities are not
acquired for purposes of engaging in trading activities.
Realized gains and losses from sales of securities are
determined using the specific identification method.

Loans Loans are reported at their
outstanding principal balance, net of charge-offs, 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.

Interest Rate Contracts The Company, from time to time, uses
various interest rate contracts such as forward rate agreements,
interest rate swaps, caps and floors, primarily as hedges
against specific assets and liabilities. Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging
Activities  Deferral of the Effective Date of SFAS
Statement No. 133 and as amended by SFAS
No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities requires
that all derivative instruments, including interest rate
contracts, be recorded on the balance sheet at their fair value.
Changes in the fair value of derivative instruments are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
There were no interest rate contracts outstanding as of
December 31, 2005 or 2004.

Allowance for Loan Losses The Company maintains an allowance for
loan losses to absorb losses inherent in the loan portfolio
based on ongoing quarterly assessments of the estimated losses.
The methodology for assessing the appropriateness of the
allowance consists of several key components, which include a
specific component for identified problem loans, a formula
component, and an unallocated component. The specific component
incorporates the results of measuring impaired loans as provided
in SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. These accounting standards
prescribe the

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

measurement methods, income recognition and
disclosures related to impaired loans. A loan is recognized as
impaired when it is probable that principal and/or interest are
not collectible in accordance with the loans contractual
terms. A loan is not deemed to be impaired if there is a short
delay in receipt of payment or if, during a longer period of
delay, the Company expects to collect all amounts due including
interest accrued at the contractual rate during the period of
delay. Measurement of impairment can be based on the present
value of expected future cash flows discounted at the
loans effective interest rate, the loans observable
market price or the fair value of the collateral, if the loan is
collateral dependent. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to
significant change. If the fair value of the impaired loan is
less than the related recorded amount, a specific valuation
allowance is established within the allowance for loan losses or
a writedown is charged against the allowance for loan losses if
the impairment is considered to be permanent. Measurement of
impairment does not apply to large groups of smaller balance
homogenous loans that are collectively evaluated for impairment
such as the Companys portfolios of home equity loans, real
estate mortgages, installment and other loans.

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

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

Actual losses can vary significantly from the
estimated amounts. The 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 December 31, 2005 and 2004. 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 the 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 examination.

Loan Restructurings Loan restructurings are renegotiated
loans for which concessions have been granted to the borrower
that the Company would not have otherwise granted. Restructured
loans are returned to accrual status when said loans have
demonstrated performance, generally evidenced by six months of
payment performance in accordance with the restructured terms,
or by the presence of other significant factors.

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

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Real estate properties acquired
through loan foreclosure are recorded at the lower of cost or
estimated fair value, net of estimated selling costs, at time of
foreclosure. 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. Any gains on
dispositions of such properties reduce OREO expense.

Goodwill and Other Intangible
Assets In accordance with
the provisions of SFAS No. 142, 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 values and/or remaining amortization periods of the
intangible assets, adjustments are made to reflect such
impairment. The Companys impairment evaluations as of
December 31, 2005 and 2004 did not indicate impairment of
its goodwill or identified intangible assets.

Income Taxes Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period the change is
enacted.

Stock-Based
Compensation The Company
has stock option plans that provide for the granting of options
to directors, certain officers and to all eligible employees.
Effective January 1, 2002, the Company adopted
prospectively the fair value recognition provisions for
stock-based compensation in accordance with
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB Statement
No. 123 (SFAS No. 148).
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. Prior to 2002, the
Company accounted for stock-based employee compensation plans
under the recognition and measurement provisions of Accounting
Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, no stock-based employee
compensation cost was recorded prior to 2002 as all employee
options granted during those years had an exercise price equal
to the market value of the underlying common stock on the dates
of grant. Certain stock options under the Companys plans
vest over a five year period commencing one year from date of
grant. Therefore, the cost related to stock-based employee
compensation included in the determination of 2003 and
2002 net income is less than that which would have been
recognized if the fair value method had been applied to all
stock options granted since the original

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

effective date of SFAS No. 123.
Non-employee stock options are expensed as of the date of grant.
The effects on 2005, 2004, and 2003 net income and earnings
per share if the fair value method had been applied to all
outstanding and unvested awards were not significant.

The fair value (present value of the estimated
future benefit to the option holder) of each years option
grants is estimated on the date of grant using the Black-Scholes
option pricing model. The following weighted average assumptions
were used for grants in 2005, 2004 and 2003, respectively:
dividend yields of 4.5 percent, 4.5 percent and
4.2 percent; average expected volatility of
5.8 percent, 6.9 percent, and 8.0 percent,
average risk-free interest rates of 3.6 percent,
3.2 percent and 2.7 percent and expected average lives
of 4.9 years, 5.0 years and 5.1 years. All option
grants expire within 10 years of the date of grant. The
weighted average fair value of options granted during 2005, 2004
and 2003, including the effects of 10 percent stock
dividends declared in each year, was $0.78, $0.92 and $1.05,
respectively.

Earnings per Common Share SFAS No. 128, Earnings per
Share, 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 operations, 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 solely of stock options, had
been issued.

Weighted average common shares outstanding used
to calculate basic and diluted earnings per share were as
follows:

|                                |  |      |           |      |  |      |           |  |  |  |           | 
|------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                |  | 2005 |           | 2004 |  | 2003
|                                |  |      |           |      |  |     
|Weighted average common shares: |  |      |           |      |  |      |           |  |  |  |           | 
|Basic                           |  |      | 8,117,890 |      |  |      | 8,043,138 |  |  |  | 7,904,476 | 
|Effect of stock options         |  |      | 223,556   |      |  |      | 161,621   |  |  |  | 181,029   | 
|Diluted                         |  |      | 8,341,446 |      |  |      | 8,204,759 |  |  |  | 8,085,505 | 

In December 2005, 2004 and 2003, the Board
of Directors of the Company declared 10 percent stock
dividends. Share amounts have been retroactively restated to
reflect the issuance of the additional shares.

Disclosures About Segments of an Enterprise
and Related Information SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information,
establishes standards for the way business enterprises report
information about operating segments and establishes standards
for related disclosure about products and services, geographic
areas, and major customers. The statement requires that a
business enterprise report financial and descriptive information
about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and assess performance. The Company has one operating
segment, Community Banking.

Recent Accounting Pronouncements

Accounting Changes and Error Corrections In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (SFAS No. 154.) SFAS
No. 154 requires retrospective application to prior
periods financial statements for changes in accounting
principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS No. 154 also requires that retrospective

67



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

application of a change in accounting principle
be limited to the direct effects of the change. Indirect effects
of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an
accounting change, should be recognized in the period of the
accounting change. SFAS No. 154 also requires that a change
in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in
accounting estimate effected by a change in accounting
principle. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005.

Share-Based Payment In December 2004, the FASB
issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R) SFAS
No. 123R requires that compensation cost relating to
share-based payment transactions be recognized in the financial
statements with measurement based upon the fair value of the
equity or liability instruments issued. The Statement replaces
SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees. The effective date for SFAS No. 123R is
January 1, 2006. As discussed in Note 1 herein, as of
January 1, 2002, the Company adopted the fair value
recognition provisions for stock-based compensation in
accordance with SFAS No. 123 as amended by SFAS No. 148.
The Company expects to adopt SFAS No. 123R beginning on
January 1, 2006. Since the Company already accounts for
share-based payments under a fair value method, it does not
anticipate any material impact to its financial position or
results of operations as a result of the adoption of SFAS
No. 123R.

Other-Than-Temporary Impairment of Investments On November 3, 2005, the
FASB issued FASB Staff Position (FSP) Nos. FAS 115-1
and FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.
This FSP addresses the determination as to when an investment is
considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP
also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. This FSP
nullifies certain requirements of EITF Issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments, and supersedes EITF Topic
No. D-44, Recognition of Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. The guidance in this FSP amends FASB
Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The FSP is effective for
reporting periods beginning after December 15, 2005. The
Company intends to adopt this guidance on January 1, 2006, and
does not expect any impact on its consolidated financial
statements as a result of the adoption of this guidance.

Other Certain 2004 and 2003 amounts have
been reclassified to conform to the 2005 presentation.

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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2  Securities

|                                                |  |              |         |                  |  |           |       |            |  |                  |        |           |  |        |         |            |  |   |         |  |  |   |       |  |  |   |       |  |  |   |         | 
|----------------------------------------------- |  | ------------ | ------- | ---------------- |  | --------- | ----- | ---------- |  | ---------------- | ------ | --------- |  | ------ | ------- | ---------- |  | - | ------- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------- | 
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  |              |         |                 
|                                                |  | 2005         |         | 2004            
|                                                |  |              |         |                 
|                                                |  |              |         |                  |  |           |       |            |  |                  |        |          
|                                                |  |              |         | Gross Unrealized |  |           |       |            |  | Gross Unrealized |        |          
|                                                |  | Amortized    |         |                  |  | Estimated |       | Amortized  |  |                  |        | Estimated
|                                                |  | Cost         |         | Gains            |  | Losses    |       | Fair Value |  | Cost             |        | Gains     |  | Losses |         | Fair Value
|                                                |  |              |         |                  |  |           |       |            |  |                  |        |           |  |        |         |           
|                                                |  |              |         |                  |  |           |       |            |  |                  |        |          
|                                                |  |              |         | (000s)          |  |           |       |            |  | (000s)          |        |          
|Classified as Available for Sale                |  |              |         |                  |  |           |       |            |  |                  |        |           |  |        |         |            |  |   |         |  |  |   |       |  |  |   |       |  |  |   |         | 
|U.S. Treasuries and government agencies         |  | $            | 119,200 |                  |  | $         | 1     |            |  | $                | 2,969  |           |  | $      | 116,232 |            |  | $ | 167,756 |  |  | $ | 19    |  |  | $ | 1,810 |  |  | $ | 165,965 | 
|Mortgage-backed securities                      |  |              | 468,731 |                  |  |           | 448   |            |  |                  | 9,761  |           |  |        | 459,418 |            |  |   | 393,447 |  |  |   | 1,216 |  |  |   | 3,309 |  |  |   | 391,354 | 
|Obligations of state and political subdivisions |  |              | 203,204 |                  |  |           | 4,203 |            |  |                  | 1,300  |           |  |        | 206,107 |            |  |   | 190,411 |  |  |   | 6,471 |  |  |   | 635   |  |  |   | 196,247 | 
|Other debt securities                           |  |              | 27,906  |                  |  |           | 179   |            |  |                  | 246    |           |  |        | 27,839  |            |  |   | 29,245  |  |  |   | 272   |  |  |   | 304   |  |  |   | 29,213  | 
|                                                |  |              |         |                  |  |           |       |            |  |                  |        |           |  |        |         |            |  |   |         |  |  |   |       |  |  |   |       |  |  |   |         | 
|Total debt securities                           |  |              | 819,041 |                  |  |           | 4,831 |            |  |                  | 14,276 |           |  |        | 809,596 |            |  |   | 780,859 |  |  |   | 7,978 |  |  |   | 6,058 |  |  |   | 782,779 | 
|Mutual funds and other equity securities        |  |              | 24,159  |                  |  |           | 609   |            |  |                  | 491    |           |  |        | 24,277  |            |  |   | 21,056  |  |  |   | 639   |  |  |   | 221   |  |  |   | 21,474  | 
|                                                |  |              |         |                  |  |           |       |            |  |                  |        |           |  |        |         |            |  |   |         |  |  |   |       |  |  |   |       |  |  |   |         | 
|Total                                           |  | $            | 843,200 |                  |  | $         | 5,440 |            |  | $                | 14,767 |           |  | $      | 833,873 |            |  | $ | 801,915 |  |  | $ | 8,617 |  |  | $ | 6,279 |  |  | $ | 804,253 | 
|                                                |  |              |         |                  |  |           |       |            |  |                  |        |           |  |        |         |            |  |   |         |  |  |   |       |  |  |   |       |  |  |   |         | 

|                                                |  |              |        |            |  |           |    |            |  |            |     |           |  |        |        |            |  |   |        |  |  |   |     |  |  |   |    |  |  |   |        | 
|----------------------------------------------- |  | ------------ | ------ | ---------- |  | --------- | -- | ---------- |  | ---------- | --- | --------- |  | ------ | ------ | ---------- |  | - | ------ |  |  | - | --- |  |  | - | -- |  |  | - | ------ | 
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  |              |        |           
|                                                |  | 2005         |        | 2004      
|                                                |  |              |        |           
|                                                |  |              |        |            |  |           |    |            |  |            |     |          
|                                                |  |              |        | Gross      |  |           |    |            |  | Gross      |     |          
|                                                |  |              |        | Unrealized |  |           |    |            |  | Unrealized |     |          
|                                                |  | Amortized    |        |            |  | Estimated |    | Amortized  |  |            |     | Estimated
|                                                |  | Cost         |        | Gains      |  | Losses    |    | Fair Value |  | Cost       |     | Gains     |  | Losses |        | Fair Value
|                                                |  |              |        |            |  |           |    |            |  |            |     |           |  |        |        |           
|                                                |  |              |        |            |  |           |    |            |  |            |     |          
|                                                |  |              |        | (000s)    |  |           |    |            |  | (000s)    |     |          
|Classified as Held to Maturity                  |  |              |        |            |  |           |    |            |  |            |     |           |  |        |        |            |  |   |        |  |  |   |     |  |  |   |    |  |  |   |        | 
|Mortgage-backed securities                      |  | $            | 44,990 |            |  | $         |   |            |  | $          | 499 |           |  | $      | 44,491 |            |  | $ | 65,739 |  |  | $ | 906 |  |  | $ | 31 |  |  | $ | 66,614 | 
|Obligations of state and political subdivisions |  |              | 5,129  |            |  |           | 36 |            |  |            | 23  |           |  |        | 5,142  |            |  |   | 5,128  |  |  |   | 74  |  |  |   | 6  |  |  |   | 5,196  | 
|                                                |  |              |        |            |  |           |    |            |  |            |     |           |  |        |        |            |  |   |        |  |  |   |     |  |  |   |    |  |  |   |        | 
|Total                                           |  | $            | 50,119 |            |  | $         | 36 |            |  | $          | 522 |           |  | $      | 49,633 |            |  | $ | 70,867 |  |  | $ | 980 |  |  | $ | 37 |  |  | $ | 71,810 | 
|                                                |  |              |        |            |  |           |    |            |  |            |     |           |  |        |        |            |  |   |        |  |  |   |     |  |  |   |    |  |  |   |        | 

At December 31, 2005, securities having a
stated value of approximately $488,330 were pledged to secure
public deposits, securities sold under agreements to repurchase,
and for other purposes as required or permitted by law.

Gross proceeds from sales of securities available
for sale were $50,032, $29,144 and $129,749 for 2005, 2004 and
2003, respectively. This resulted in gross losses of $1,158 and
gross gains of $1,100 and $5,408 in 2005, 2004 and 2003
respectively. Applicable income taxes relating to such
transactions were $(472), $396 and $1,992 in 2005, 2004 and
2003, respectively.

69



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reflects 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 December 31, 2005 (in thousands):

|                                                 |  |                             |         |                        |  |            |       |            |  |            |         |            |  |   |       |  |  |   |         |  |  |   |        | 
|------------------------------------------------ |  | --------------------------- | ------- | ---------------------- |  | ---------- | ----- | ---------- |  | ---------- | ------- | ---------- |  | - | ----- |  |  | - | ------- |  |  | - | ------ | 
|                                                 |  |                             |         |                        |  |           
|                                                 |  | Duration of Unrealized Loss |         |                        |  |           
|                                                 |  |                             |         |                        |  |           
|                                                 |  |                             |         |                        |  |           
|                                                 |  | Less than 12 Months         |         | Greater than 12 Months |  | Total     
|                                                 |  |                             |         |                        |  |           
|                                                 |  |                             |         | Gross                  |  |            |       | Gross      |  |            |         | Gross     
|                                                 |  |                             |         | Unrealized             |  |            |       | Unrealized |  |            |         | Unrealized
|                                                 |  | Fair Value                  |         | Loss                   |  | Fair Value |       | Loss       |  | Fair Value |         | Loss      
|                                                 |  |                             |         |                        |  |            |       |            |  |            |         |           
|Classified as Available for Sale                 |  |                             |         |                        |  |            |       |            |  |            |         |            |  |   |       |  |  |   |         |  |  |   |        | 
|U.S. Treasury and government agencies            |  | $                           | 21,798  |                        |  | $          | 198   |            |  | $          | 92,198  |            |  | $ | 2,771 |  |  | $ | 113,996 |  |  | $ | 2,969  | 
|Mortgage-backed securities                       |  |                             | 245,211 |                        |  |            | 4,509 |            |  |            | 160,866 |            |  |   | 5,252 |  |  |   | 406,077 |  |  |   | 9,761  | 
|Obligations of states and political subdivisions |  |                             | 44,058  |                        |  |            | 636   |            |  |            | 19,221  |            |  |   | 664   |  |  |   | 63,279  |  |  |   | 1,300  | 
|Other debt securities                            |  |                             |        |                        |  |            |      |            |  |            | 17,274  |            |  |   | 246   |  |  |   | 17,274  |  |  |   | 246    | 
|                                                 |  |                             |         |                        |  |            |       |            |  |            |         |            |  |   |       |  |  |   |         |  |  |   |        | 
|Total debt securities                            |  |                             | 311,067 |                        |  |            | 5,343 |            |  |            | 289,559 |            |  |   | 8,933 |  |  |   | 600,626 |  |  |   | 14,276 | 
|Mutual funds and other equity securities         |  |                             | 2,528   |                        |  |            | 4     |            |  |            | 20,116  |            |  |   | 487   |  |  |   | 22,644  |  |  |   | 491    | 
|                                                 |  |                             |         |                        |  |            |       |            |  |            |         |            |  |   |       |  |  |   |         |  |  |   |        | 
|Total temporarily impaired securities            |  | $                           | 313,595 |                        |  | $          | 5,347 |            |  |            | 309,675 |            |  | $ | 9,420 |  |  |   | 623,270 |  |  | $ | 14,767 | 
|                                                 |  |                             |         |                        |  |            |       |            |  |            |         |            |  |   |       |  |  |   |         |  |  |   |        | 

|                                                 |  |                             |        |                        |  |            |     |            |  |            |       |            |  |   |    |  |  |   |        |  |  |   |     | 
|------------------------------------------------ |  | --------------------------- | ------ | ---------------------- |  | ---------- | --- | ---------- |  | ---------- | ----- | ---------- |  | - | -- |  |  | - | ------ |  |  | - | --- | 
|                                                 |  |                             |        |                        |  |           
|                                                 |  | Duration of Unrealized Loss |        |                        |  |           
|                                                 |  |                             |        |                        |  |           
|                                                 |  |                             |        |                        |  |           
|                                                 |  | Less than 12 Months         |        | Greater than 12 Months |  | Total     
|                                                 |  |                             |        |                        |  |           
|                                                 |  |                             |        | Gross                  |  |            |     | Gross      |  |            |       | Gross     
|                                                 |  |                             |        | Unrealized             |  |            |     | Unrealized |  |            |       | Unrealized
|                                                 |  | Fair Value                  |        | Loss                   |  | Fair Value |     | Loss       |  | Fair Value |       | Loss      
|                                                 |  |                             |        |                        |  |            |     |            |  |            |       |           
|Classified as Held to Maturity                   |  |                             |        |                        |  |            |     |            |  |            |       |            |  |   |    |  |  |   |        |  |  |   |     | 
|Mortgage-backed securities                       |  | $                           | 43,548 |                        |  | $          | 495 |            |  | $          | 943   |            |  | $ | 4  |  |  | $ | 44,491 |  |  | $ | 499 | 
|Obligations of states and political subdivisions |  |                             | 2,041  |                        |  |            | 16  |            |  |            | 268   |            |  |   | 7  |  |  |   | 2,309  |  |  |   | 23  | 
|                                                 |  |                             |        |                        |  |            |     |            |  |            |       |            |  |   |    |  |  |   |        |  |  |   |     | 
|Total temporarily impaired securities            |  | $                           | 45,589 |                        |  | $          | 511 |            |  | $          | 1,211 |            |  | $ | 11 |  |  | $ | 46,800 |  |  | $ | 522 | 
|                                                 |  |                             |        |                        |  |            |     |            |  |            |       |            |  |   |    |  |  |   |        |  |  |   |     | 

The Company has the ability and intent to hold
its securities to maturity or to recovery of cost. There have
been no downgrades in credit ratings of securities in the
Companys portfolio, and all of the Companys
securities continue to be readily marketable. Based on these and
other factors, the Company has concluded that the impairment in
the market value of the above securities is primarily the result
of changes in interest rates since the securities were acquired
and is considered to be temporary in nature. There were 473
securities in the Companys portfolio that were in a
unrealized loss position at December 31, 2005.

70



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The contractual maturity of all debt securities
held at December 31, 2005 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
|                            |  |                   
|                            |  | Amortized          |         | Fair 
|                            |  | Cost               |         | Value
|                            |  |                    |         |      
|Contractual Maturity        |  |                    |         |       |  |   |         | 
|Within 1 year               |  | $                  | 36,485  |       |  | $ | 36,671  | 
|After 1 but within 5 years  |  |                    | 107,564 |       |  |   | 105,927 | 
|After 5 but within 10 years |  |                    | 104,162 |       |  |   | 105,739 | 
|After 10 years              |  |                    | 107,228 |       |  |   | 106,983 | 
|Mortgage-backed Securities  |  |                    | 513,721 |       |  |   | 503,909 | 
|                            |  |                    |         |       |  |   |         | 
|Total                       |  | $                  | 869,160 |       |  | $ | 859,229 | 
|                            |  |                    |         |       |  |   |         | 

3  Credit Commitments and
Concentrations of Credit Risk

The Company has outstanding, at any time, a
significant number of commitments to extend credit and also
provide financial guarantees to third parties. Those
arrangements are subject to strict credit control assessments.
Guarantees specify limits to the Companys obligations. The
amounts of those loan commitments and guarantees are set out in
the following table. 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.

|                   |  |          |         |          |  |   |         | 
|------------------ |  | -------- | ------- | -------- |  | - | ------- | 
|                   |  | 2005     |         | 2004    
|                   |  | Contract |         | Contract
|                   |  | Amount   |         | Amount  
|                   |  |          |         |         
|Credit commitments |  | $        | 306,559 |          |  | $ | 228,944 | 
|Guarantees written |  |          | 16,281  |          |  | $ | 6,503   | 

The majority of loan commitments have terms up to
one year, with either a floating interest rate or contracted
fixed interest rates, generally ranging from 4.25% to 8.25%.
Guarantees written generally have terms up to one year.

Loan commitments and guarantees written have
off-balance-sheet credit risk because only origination fees and
accruals for probable losses are recognized in the balance sheet
until the commitments are fulfilled or the guarantees expire.
Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed
completely to perform as contracted. The credit risk amounts are
equal to the contractual amounts, assuming that the amounts are
fully advanced and that, in accordance with the requirements of
SFAS No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk, collateral
or other security would have no value.

The Companys policy is to require customers
to provide collateral prior to the disbursement of approved
loans. For loans and financial guarantees, the Company usually
retains a security interest in the property or products financed
or other collateral which provides repossession rights in the
event of default by the customer.

Concentrations of credit risk (whether on or
off-balance-sheet) arising from financial instruments exist in
relation to certain groups of customers. A group concentration
arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in
economic or other conditions. The Company does not have a
significant exposure to any individual customer or counterparty.
A geographic concentration arises because the Company operates

71



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

principally in Westchester County and Bronx
County, New York. Loans and credit commitments collateralized by
real estate including all loans where real estate is either
primary or secondary collateral are as follows:

|                   |  |             |         |            |  |       |         |  |  |   |           | 
|------------------ |  | ----------- | ------- | ---------- |  | ----- | ------- |  |  | - | --------- | 
|                   |  | Residential |         | Commercial |  |      
|                   |  | Property    |         | Property   |  | Total
|                   |  |             |         |            |  |      
|2005               |  |             |         |            |  |       |         |  |  |   |           | 
|Loans              |  | $           | 315,828 |            |  | $     | 584,065 |  |  | $ | 899,893   | 
|Credit commitments |  |             | 100,520 |            |  |       | 127,457 |  |  |   | 227,977   | 
|                   |  |             |         |            |  |       |         |  |  |   |           | 
|                   |  | $           | 416,348 |            |  | $     | 711,522 |  |  | $ | 1,127,870 | 
|                   |  |             |         |            |  |       |         |  |  |   |           | 
|2004               |  |             |         |            |  |       |         |  |  |   |           | 
|Loans              |  | $           | 332,554 |            |  | $     | 431,872 |  |  | $ | 764,426   | 
|Credit commitments |  |             | 55,874  |            |  |       | 107,033 |  |  |   | 162,907   | 
|                   |  |             |         |            |  |       |         |  |  |   |           | 
|                   |  | $           | 388,428 |            |  | $     | 538,905 |  |  | $ | 927,333   | 
|                   |  |             |         |            |  |       |         |  |  |   |           | 

The credit risk amounts represent the maximum
accounting loss that would be recognized at the reporting date
if counterparties failed completely to perform as contracted and
any collateral or security proved to have no value. The Company
has experienced little difficulty in accessing collateral when
required.

4  Loans

The loan portfolio is comprised of the following:

|                          |              |             |           |         |  |   |         |         | 
|------------------------- | ------------ | ----------- | --------- | ------- |  | - | ------- | ------- | 
|                          |              |            
|                          |              | December 31
|                          |              |            
|                          |              | 2005        |           | 2004   
|                          |              |             |           |        
|Real Estate:              |              |             |           |         |  |   |         |        
|                          | Commercial   |             | $         | 220,384 |  |   | $       | 233,452 | 
|                          | Construction |             |           | 178,731 |  |   |         | 116,064 | 
|                          | Residential  |             |           | 276,384 |  |   |         | 222,392 | 
|Commercial and industrial |              |             | 316,907   |         |  |   | 277,013 |        
|Individuals               |              |             | 25,632    |         |  |   | 21,787  |        
|Lease financing           |              |             | 8,348     |         |  |   | 6,276   |        
|                          |              |             |           |         |  |   |         |        
|Total                     |              |             | 1,026,386 |         |  |   | 876,984 |        
|Deferred loan fees        |              |             | (3,042    | )       |  |   | (2,687  | )      
|Allowance for loan losses |              |             | (13,525   | )       |  |   | (11,801 | )      
|                          |              |             |           |         |  |   |         |        
|Loans, net                |              | $           | 1,009,819 |         |  | $ | 862,496 |        
|                          |              |             |           |         |  |   |         |        

The Company has established credit policies
applicable to each type of lending activity in which it engages.
The Bank evaluates the credit worthiness of each customer and
extends credit based on credit history, ability to repay and
market value of collateral. The customers credit
worthiness is monitored on an ongoing basis. Additional
collateral is obtained when warranted. Real estate is the
primary form of collateral. Other important forms of collateral
are bank deposits and marketable securities. While collateral
provides assurance as a secondary source of repayment, the
Company ordinarily requires the primary source of payment to be
based on the borrowers ability to generate continuing cash
flows.

72



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the activity in the allowance for
loan losses follows:

|                           |                                            |             |        |       |   |      |        |      |   |   |        |      |  
|-------------------------- | ------------------------------------------ | ----------- | ------ | ----- | - | ---- | ------ | ---- | - | - | ------ | ---- | -
|                           |                                            |            
|                           |                                            | December 31
|                           |                                            |            
|                           |                                            | 2005        |        | 2004  |   | 2003
|                           |                                            |             |        |       |   |     
|Balance, beginning of year |                                            | $           | 11,801 |       |   | $    | 11,441 |      |   | $ | 11,510 |     
|Add (deduct):              |                                            |             |        |       |   |      |        |      |   |   |        |     
|                           | Provision for loan losses                  |             |        | 2,059 |   |      |        | 473  |   |   |        | 437  |  
|                           | Recoveries on loans previously charged-off |             |        | 36    |   |      |        | 81   |   |   |        | 211  |  
|                           | Charge-offs                                |             |        | (371  | ) |      |        | (194 | ) |   |        | (717 | )
|                           |                                            |             |        |       |   |      |        |      |   |   |        |     
|Balance, end of year       |                                            | $           | 13,525 |       |   | $    | 11,801 |      |   | $ | 11,441 |     
|                           |                                            |             |        |       |   |      |        |      |   |   |        |     

The recorded investment in impaired loans at
December 31, 2005 was $3,837 for which an allowance of
$1,300 has been established. The recorded investment in impaired
loans at December 31, 2004 was $2,301, for which an
allowance of $1,309 had been established. Generally, the fair
value of these loans was determined using the fair value of the
underlying collateral of the loan.

The average investment in impaired loans during
2005, 2004 and 2003 was $3,745, $2,664 and $5,077, respectively.
During the years reported, no income was recorded on impaired
loans during the portion of the year that they were impaired.

Non-accrual loans at December 31, 2005, 2004
and 2003 and related interest income are summarized as follows:

|                                                                                    |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                    |  | 2005 |       | 2004 |  | 2003
|                                                                                    |  |      |       |      |  |     
|Amount                                                                              |  | $    | 3,837 |      |  | $    | 2,301 |  |  | $ | 2,913 | 
|Interest income recorded                                                            |  |      |      |      |  |      |      |  |  |   |      | 
|Interest income that would have been recorded
    under the original contract terms |  |      | 283   |      |  |      | 243   |  |  |   | 188   | 

Non-accrual loans at December 31, 2005 and
2004 include $3,837 and $2,301, respectively, of loans
considered to be impaired under SFAS No. 114.

There were no restructured loans at
December 31, 2005, 2004 or 2003.

Loans made directly or indirectly to employees,
directors or principal shareholders were approximately $17,992
and $17,234 at December 31, 2005 and 2004, respectively.
During 2005, new loans granted to these individuals totaled
$10,029 and payments totaled $9,271.

73



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5  Premises and Equipment

A summary of premises and equipment follows:

|                                               |  |             |         |      |  |   |         |  
|---------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | -
|                                               |  |            
|                                               |  | December 31
|                                               |  |            
|                                               |  | 2005        |         | 2004
|                                               |  |             |         |     
|Land                                           |  | $           | 1,139   |      |  | $ | 1,139   |  
|Buildings                                      |  |             | 11,386  |      |  |   | 11,247  |  
|Leasehold improvements                         |  |             | 4,624   |      |  |   | 4,465   |  
|Furniture, fixtures and equipment              |  |             | 16,754  |      |  |   | 15,717  |  
|Automobiles                                    |  |             | 702     |      |  |   | 600     |  
|                                               |  |             |         |      |  |   |         |  
|Total                                          |  |             | 34,605  |      |  |   | 33,168  |  
|Less accumulated depreciation and amortization |  |             | (21,014 | )    |  |   | (19,101 | )
|                                               |  |             |         |      |  |   |         |  
|Premises and equipment, net                    |  | $           | 13,591  |      |  | $ | 14,067  |  
|                                               |  |             |         |      |  |   |         |  

Depreciation and amortization expense totaled
$2,000 in 2005.



|  |                                     
|- | ------------------------------------
|6 | Goodwill and Other Intangible Assets

In connection with the 2004 acquisition of
A.R. Schmeidler & Co., Inc., the Company
recorded customer relationship intangible assets of $2,470 and
non-compete provision intangible assets of $516, which have
amortization periods of 13 years and 7 years,
respectively. Deferred tax benefits have been provided for the
tax effect of temporary differences in the amortization periods
of identified intangible assets for book and tax purposes. Also
in connection with the acquisition, the Company recorded $4,492
of goodwill. In accordance with the terms of the acquisition
agreement, the Company may make additional performance-based
payments over the five years subsequent to the acquisition.
These additional payments would be accounted for as additional
purchase price and, as a result, would increase goodwill related
to the acquisition. In December 2005, the Company made the first
of these additional payments in the amount of $1,572. The
deferred income tax effect related to goodwill deductible for
tax purposes is included in net deferred tax assets in the
Companys Consolidated Balance Sheets. Goodwill and
identified intangible assets are included in Other
Assets in the Companys Consolidated Balance Sheets.

The following table sets forth the gross carrying
amount and accumulated amortization for each of the
Companys intangible assets subject to amortization as of
December 31, 2005 and 2004.

|                       |  |          |       |              |  |          |     |              |  |   |       |  |  |   |    | 
|---------------------- |  | -------- | ----- | ------------ |  | -------- | --- | ------------ |  | - | ----- |  |  | - | -- | 
|                       |  |          |       |             
|                       |  | 2005     |       | 2004        
|                       |  |          |       |             
|                       |  | Gross    |       |              |  | Gross    |     |             
|                       |  | Carrying |       | Accumulated  |  | Carrying |     | Accumulated 
|                       |  | Amount   |       | Amortization |  | Amount   |     | Amortization
|                       |  |          |       |              |  |          |     |             
|Customer Relationships |  | $        | 2,470 |              |  | $        | 237 |              |  | $ | 2,470 |  |  | $ | 47 | 
|Employment Related     |  |          | 516   |              |  |          | 92  |              |  |   | 516   |  |  |   | 18 | 
|                       |  |          |       |              |  |          |     |              |  |   |       |  |  |   |    | 
|Total                  |  | $        | 2,986 |              |  | $        | 329 |              |  | $ | 2,986 |  |  | $ | 65 | 
|                       |  |          |       |              |  |          |     |              |  |   |       |  |  |   |    | 

Intangible assets amortization expense was $264
for 2005 and $65 for 2004. There was no intangible assets
amortization in 2003. The annual intangible assets amortization
expense is estimated to be approximately $264 in each of the
five years subsequent to December 31, 2005.

Goodwill totaled $6,064 and $4,492 at
December 31, 2005 and 2004, respectively. The cumulative
deferred income tax effect of goodwill deductible for tax
purposes was $151 and $30 at December 31, 2005 and 2004,
respectively. Intangible assets related to prior service costs
in the Companys benefit plans are presented in
Note 11.

74



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|  |         
|- | --------
|7 | Deposits

The following table presents a summary of
deposits at December 31:

|                                    |  |         |           |      |  |   |           | 
|----------------------------------- |  | ------- | --------- | ---- |  | - | --------- | 
|                                    |  |        
|                                    |  | (000s)
|                                    |  |        
|                                    |  | 2005    |           | 2004
|                                    |  |         |           |     
|Demand deposits                     |  | $       | 576,032   |      |  | $ | 512,790   | 
|Money Market accounts               |  |         | 421,720   |      |  |   | 364,778   | 
|Savings accounts                    |  |         | 73,028    |      |  |   | 73,747    | 
|Time deposits of $100,000 or more   |  |         | 149,231   |      |  |   | 106,737   | 
|Time deposits of less than $100,000 |  |         | 57,217    |      |  |   | 62,780    | 
|Checking with interest              |  |         | 130,768   |      |  |   | 114,509   | 
|                                    |  |         |           |      |  |   |           | 
|Total Deposits                      |  | $       | 1,407,996 |      |  | $ | 1,235,341 | 
|                                    |  |         |           |      |  |   |           | 

At December 31, 2005 and 2004, certificates
of deposit and other time deposits of $100,000 or more totaled
$149.2 million and $106.7 million, respectively. At
December 31, such deposits classified by time remaining to
maturity were as follows:

|                                |  |         |         |      |  |   |         | 
|------------------------------- |  | ------- | ------- | ---- |  | - | ------- | 
|                                |  |        
|                                |  | (000s)
|                                |  |        
|                                |  | 2005    |         | 2004
|                                |  |         |         |     
|3 months or less                |  | $       | 115,098 |      |  | $ | 80,757  | 
|Over 3 months through 6 months  |  |         | 20,496  |      |  |   | 11,768  | 
|Over 6 months through 12 months |  |         | 13,637  |      |  |   | 14,212  | 
|Over 12 months                  |  |         |        |      |  |   |        | 
|                                |  |         |         |      |  |   |         | 
|Total                           |  | $       | 149,231 |      |  | $ | 106,737 | 
|                                |  |         |         |      |  |   |         | 

8  Borrowings

Borrowings with original maturities of one year
or less totaled $172,115 and $164,472 at December 31, 2005
and 2004, respectively. Such short-term borrowings consisted of
securities sold under agreements to repurchase of $171,463 and
$152,722 and note options on Treasury, tax and loan of $652 and
$750 at December 31, 2005 and 2004, respectively, and
overnight borrowings of $11,000 at December 31, 2004. Other
borrowings totaled $263,097 and $263,121 at December 31,
2005 and 2004, respectively, consisting of borrowings from FHLB
with initial stated maturities of five or ten years and one to
four year call options.

The borrowings from FHLB mature beginning in 2008
through 2015. The FHLB has the right to call $242.8 million of
such borrowings beginning in 2006 and quarterly thereafter.

75



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Interest expense on all borrowings totaled
$16,436, $12,611 and $10,773 in 2005, 2004 and 2003,
respectively. The following table summarizes the average
balances, weighted average interest rates and the maximum
month-end outstanding amounts of securities sold under
agreements to repurchase and FHLB borrowings for each of the
years:

|                                      |                  |      |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------- | ---------------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                      |                  | 2005 |   | 2004    |   | 2003
|                                      |                  |      |   |         |   |     
|Average balance:                      |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      | $ | 170,072 |   |      | $ | 181,870 |   |  | $ | 156,989 |  
|                                      | Other Borrowings |      |   | 263,108 |   |      |   | 231,014 |   |  |   | 188,159 |  
|Weighted average interest rate:       |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      |   | 2.9     | % |      |   | 1.2     | % |  |   | 1.1     | %
|                                      | Other Borrowings |      |   | 4.4     |   |      |   | 4.5     |   |  |   | 4.8     |  
|Maximum month-end outstanding amount: |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      | $ | 200,423 |   |      | $ | 216,920 |   |  | $ | 198,436 |  
|                                      | Other Borrowings |      |   | 263,119 |   |      |   | 263,125 |   |  |   | 188,169 |  

As of December 31, 2005 and 2004, these
borrowings were collateralized by loans and securities with an
estimated fair value of $482,032 and $474,040, respectively.

At December 31, 2005, the Company had
available unused short-term lines of credit of $200 million
from a large New York based investment banking firm,
$200 million from the FHLB and $80 million from
correspondent banks. In addition, the Company had
$110 million in available borrowings under Retail CD
Agreements with two major investment banking firms, all of which
are subject to various terms and conditions.

9  Income Taxes

A reconciliation of the income tax provision and
the amount computed using the federal statutory rate is as
follows:

|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  
|---------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ---- | - |  | - | ------ | - |  |  | ---- | - |  | - | ------ | - |  |  | ---- | -
|                                         |  |                        
|                                         |  | Years Ended December 31
|                                         |  |                        
|                                         |  |                         |        |      |  |     
|                                         |  | 2005                    |        | 2004 |  | 2003
|                                         |  |                         |        |      |  |     
|                                         |  |                         |        |      |  |      |      |   |  |  
|Income tax at statutory rate             |  | $                       | 16,444 |      |  |      | 35.0 | % |  | $ | 14,339 |   |  |  | 35.0 | % |  | $ | 12,587 |   |  |  | 35.0 | %
|State income tax, net of Federal benefit |  |                         | 2,529  |      |  |      | 5.3  |   |  |   | 2,068  |   |  |  | 5.1  |   |  |   | 1,923  |   |  |  | 5.4  |  
|Tax-exempt interest income               |  |                         | (2,918 | )    |  |      | (6.2 | ) |  |   | (2,944 | ) |  |  | (7.2 | ) |  |   | (2,730 | ) |  |  | (7.6 | )
|Non-deductible expenses and other        |  |                         | (17    | )    |  |      |     |   |  |   | (33    | ) |  |  | (0.1 | ) |  |   | (25    | ) |  |  | (0.1 | )
|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  
|Provision for income taxes               |  | $                       | 16,038 |      |  |      | 34.1 | % |  | $ | 13,430 |   |  |  | 32.8 | % |  | $ | 11,755 |   |  |  | 32.7 | %
|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  

76



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of the provision for income taxes
(benefit) are as follows:

|                 |          |                         |        |        |   |      |        |        |   |   |        |       |  
|---------------- | -------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ----- | -
|                 |          |                        
|                 |          | Years Ended December 31
|                 |          |                        
|                 |          | 2005                    |        | 2004   |   | 2003
|                 |          |                         |        |        |   |     
|Federal:         |          |                         |        |        |   |      |        |        |   |   |        |      
|                 | Current  |                         | $      | 12,823 |   |      | $      | 10,574 |   |   | $      | 9,622 |  
|                 | Deferred |                         |        | (650   | ) |      |        | (31    | ) |   |        | (112  | )
|State and Local: |          |                         |        |        |   |      |        |        |   |   |        |      
|                 | Current  |                         |        | 4,037  |   |      |        | 2,903  |   |   |        | 2,240 |  
|                 | Deferred |                         |        | (172   | ) |      |        | (16    | ) |   |        | 5     |  
|                 |          |                         |        |        |   |      |        |        |   |   |        |      
|Total            |          | $                       | 16,038 |        |   | $    | 13,430 |        |   | $ | 11,755 |      
|                 |          |                         |        |        |   |      |        |        |   |   |        |      

The tax effect of temporary differences giving
rise to the Companys deferred tax assets and liabilities
are as follows:

|                              |  |                   |        |                   |  |       |     |           |  |   |       |  |  |   |       | 
|----------------------------- |  | ----------------- | ------ | ----------------- |  | ----- | --- | --------- |  | - | ----- |  |  | - | ----- | 
|                              |  |                   |        |                  
|                              |  | December 31, 2005 |        | December 31, 2004
|                              |  |                   |        |                  
|                              |  | Asset             |        | Liability         |  | Asset |     | Liability
|                              |  |                   |        |                   |  |       |     |          
|Allowance for loan losses     |  | $                 | 5,510  |                   |  |       |     |           |  | $ | 4,744 |  |  |   |       | 
|Supplemental pension benefit  |  |                   | 2,197  |                   |  |       |     |           |  |   | 1,929 |  |  |   |       | 
|Minimum pension liability     |  |                   | 471    |                   |  |       |     |           |  |   | 645   |  |  |   |       | 
|Deferred compensation         |  |                   | 639    |                   |  |       |     |           |  |   | 693   |  |  |   |       | 
|Securities available for sale |  |                   | 3,740  |                   |  |       |     |           |  |   |       |  |  | $ | 1,016 | 
|Interest on non-accrual loans |  |                   | 204    |                   |  |       |     |           |  |   | 194   |  |  |   |       | 
|SFAS 123 compensation cost    |  |                   |        |                   |  | $     | 267 |           |  |   | 91    |  |  |   |       | 
|Depreciation                  |  |                   | 93     |                   |  |       |     |           |  |   |       |  |  |   | 188   | 
|Other                         |  |                   |       |                   |  |       | 551 |           |  |   |      |  |  |   | 460   | 
|                              |  |                   |        |                   |  |       |     |           |  |   |       |  |  |   |       | 
|                              |  | $                 | 12,854 |                   |  | $     | 818 |           |  | $ | 8,296 |  |  | $ | 1,664 | 
|                              |  |                   |        |                   |  |       |     |           |  |   |       |  |  |   |       | 

In the normal course of business, the
Companys Federal, New York State and New York City
Corporation tax returns are subject to audit. The New York State
Department of Taxation and Finance has completed audits of the
Companys New York State corporation tax returns for the
years 1996 through 2004. The Company has reached a tentative
agreement with New York State on all open issues for tax years
1996 through 2004, and does not believe the final resolution of
this matter will have a significant impact on its financial
position or results of operations.

10  Stockholders Equity and
Stock Options

The Company and HVB are subject to various
regulatory capital requirements administered by the Federal
banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory  and possibly
additional discretionary  actions by regulators that,
if undertaken, could have a direct material effect on their
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
and HVB must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

Quantitative measures established by regulation
to ensure capital adequacy require the Company and HVB to
maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined).

77



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Management believes, as of December 31,
2005, that both the Company and HVB meet all capital adequacy
requirements to which they are subject.

The following summarizes the capital requirements
and capital position at December 31, 2005 and 2004:

|                                         |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |         |  |  |  |      |  
|---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------------- | ---- | ----------------- |  | ------- | ------ | ----- |  |  | --- | - |  | - | ------- |  |  |  | ---- | -
|                                         |  |        |         |                   |  |                   |      |                   |  |        
|                                         |  |        |         |                   |  |                   |      |                   |  | Minimum
|                                         |  |        |         |                   |  |                   |      | To Be Well       
|                                         |  |        |         |                   |  | Minimum For       |      | Capitalized Under
|                                         |  |        |         | Capital           |  | Prompt Corrective
|                                         |  | Actual |         | Adequacy Purposes |  | Action Provision 
|                                         |  |        |         |                   |  |                  
|HVB Only                                 |  | Amount |         | Ratio             |  | Amount            |      | Ratio             |  | Amount  |        | Ratio
|                                         |  |        |         |                   |  |                   |      |                   |  |         |        |      
|As of December 31, 2005:                 |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |         |  |  |  |      |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 179,852 |                   |  |                   | 14.9 | %                 |  | $       | 96,355 |       |  |  | 8.0 | % |  | $ | 120,444 |  |  |  | 10.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 166,327 |                   |  |                   | 13.8 |                   |  |         | 48,177 |       |  |  | 4.0 |   |  |   | 72,266  |  |  |  | 6.0  |  
|Tier 1 Capital (To Average Assets)       |  |        | 166,327 |                   |  |                   | 8.3  |                   |  |         | 80,194 |       |  |  | 4.0 |   |  |   | 100,243 |  |  |  | 5.0  |  
|As of December 31, 2004:                 |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |         |  |  |  |      |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 161,397 |                   |  |                   | 15.5 | %                 |  | $       | 83,214 |       |  |  | 8.0 | % |  | $ | 104,017 |  |  |  | 10.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 149,596 |                   |  |                   | 14.4 |                   |  |         | 41,607 |       |  |  | 4.0 |   |  |   | 62,410  |  |  |  | 6.0  |  
|Tier 1 Capital (To Average Assets)       |  |        | 149,596 |                   |  |                   | 8.1  |                   |  |         | 73,578 |       |  |  | 4.0 |   |  |   | 91,972  |  |  |  | 5.0  |  

|                                         |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------- | ---- | ----- |  | - | ------ |  |  |  | --- | -
|                                         |  |        |         |                   |  |            
|                                         |  |        |         |                   |  | Minimum For
|                                         |  |        |         | Capital          
|                                         |  | Actual |         | Adequacy Purposes
|                                         |  |        |         |                  
|Consolidated                             |  | Amount |         | Ratio             |  | Amount      |      | Ratio
|                                         |  |        |         |                   |  |             |      |      
|As of December 31, 2005:                 |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 180,074 |                   |  |             | 14.9 | %     |  | $ | 96,400 |  |  |  | 8.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 166,549 |                   |  |             | 13.8 |       |  |   | 48,200 |  |  |  | 4.0 |  
|Tier 1 Capital (To Average Assets)       |  |        | 166,549 |                   |  |             | 8.3  |       |  |   | 80,228 |  |  |  | 4.0 |  
|As of December 31, 2004:                 |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 162,538 |                   |  |             | 15.6 | %     |  | $ | 83,200 |  |  |  | 8.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 150,737 |                   |  |             | 14.5 |       |  |   | 41,600 |  |  |  | 4.0 |  
|Tier 1 Capital (To Average Assets)       |  |        | 150,737 |                   |  |             | 8.2  |       |  |   | 73,615 |  |  |  | 4.0 |  

As of December 31, 2005, the most recent
notification from the FDIC categorized HVB as well capitalized
under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, a bank must maintain minimum
total risk based, Tier 1 risk based, and Tier 1
leverage ratios as set forth in the table. There are no
conditions or events since that notification that management
believes have changed the institutions category.

Stock Dividend

In December 2005 and 2004 the Board of
Directors of the Company declared 10 percent stock
dividends. Share and per share amounts have been retroactively
restated to reflect the issuance of the additional shares.

Stock Options

The Company has stock option plans that provide
for the granting of options to directors, certain officers, and
to all eligible employees. Options to purchase
773,868 shares of common stock were outstanding at
December 31, 2005 under all plans. The stock options are
exercisable at prices that approximate the market value of the
Companys stock at dates of grant. Certain options become
exercisable in up to five annual installments, commencing one
year from date of grant. Other options become exercisable in
their entirety, upon completion of 5 years of service.
Options have a maximum duration of 10 years.

78



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock option transactions under the Plans were as
follows:

|                                    |  |            |          |                  |  |  |       | 
|----------------------------------- |  | ---------- | -------- | ---------------- |  |  | ----- | 
|                                    |  | Shares     |          | Weighted        
|                                    |  | Underlying |          | Average Exercise
|Outstanding Options                 |  | Options    |          | Price Per Share 
|                                    |  |            |          |                 
|As of January 1, 2003               |  |            | 619,286  |                  |  |  | 18.05 | 
|Granted                             |  |            | 211,340  |                  |  |  | 27.48 | 
|Cancelled or expired                |  |            | (7,232   | )                |  |  | 25.24 | 
|Exercised                           |  |            | (224,429 | )                |  |  | 17.44 | 
|                                    |  |            |          |                  |  |  |       | 
|As of December 31, 2003             |  |            | 598,965  |                  |  |  | 21.52 | 
|Granted                             |  |            | 306,843  |                  |  |  | 30.55 | 
|Cancelled or expired                |  |            | (5,605   | )                |  |  | 27.62 | 
|Exercised                           |  |            | (162,201 | )                |  |  | 22.96 | 
|                                    |  |            |          |                  |  |  |       | 
|As of December 31, 2004             |  |            | 738,002  |                  |  |  | 24.91 | 
|Granted                             |  |            | 230,695  |                  |  |  | 33.57 | 
|Cancelled or expired                |  |            | (38,313  | )                |  |  | 30.15 | 
|Exercised                           |  |            | (156,516 | )                |  |  | 26.68 | 
|                                    |  |            |          |                  |  |  |       | 
|As of December 31, 2005             |  |            | 773,868  |                  |  |  | 26.87 | 
|Exercisable as of December 31, 2005 |  |            | 502,352  |                  |  |  | 24.29 | 
|Available for future grant          |  |            | 237,566  |                  |  |  |       | 

The following table summarizes the range of
exercise prices of the Companys stock options outstanding
and exercisable at December 31, 2005:

|                          |  |                      |       |           |  |            |       |                  |  |  |         |  |  |  |     |  |  |   |       | 
|------------------------- |  | -------------------- | ----- | --------- |  | ---------- | ----- | ---------------- |  |  | ------- |  |  |  | --- |  |  | - | ----- | 
|                          |  |                      |       |           |  |            |       |                 
|                          |  |                      |       |           |  |            |       | Weighted Average
|                          |  |                      |       |           |  |            |       |                 
|                          |  |                      |       | Number of |  | Remaining  |       | Exercise        
|                          |  | Exercise Price Range |       | Options   |  | Life (yrs) |       | Price           
|                          |  |                      |       |           |  |            |       |                 
|                          |  | $                    | 9.41  |           |  | $          | 22.86 |                  |  |  | 200,486 |  |  |  | 3.9 |  |  | $ | 17.99 | 
|                          |  | $                    | 23.68 |           |  | $          | 30.21 |                  |  |  | 306,905 |  |  |  | 7.0 |  |  | $ | 27.26 | 
|                          |  | $                    | 30.26 |           |  | $          | 41.14 |                  |  |  | 266,477 |  |  |  | 8.9 |  |  | $ | 33.10 | 
|                          |  |                      |       |           |  |            |       |                  |  |  |         |  |  |  |     |  |  |   |       | 
|Total Options Outstanding |  | $                    | 9.41  |           |  | $          | 41.14 |                  |  |  | 773,868 |  |  |  | 6.9 |  |  | $ | 26.87 | 
|Exercisable               |  | $                    | 9.41  |           |  | $          | 41.14 |                  |  |  | 502,352 |  |  |  | 6.0 |  |  | $ | 24.29 | 
|Not Exercisable           |  | $                    | 20.99 |           |  | $          | 41.14 |                  |  |  | 271,516 |  |  |  | 8.4 |  |  | $ | 31.65 | 

11  Benefit Plans

The Hudson Valley Bank Employees Defined
Contribution Pension Plan covers substantially all employees.
Pension costs accrued and charged to current operations include
5 percent of each participants earnings during the
year. Pension costs charged to other operating expenses totaled
approximately $694, $478 and $556 in 2005, 2004 and 2003,
respectively.

The Hudson Valley Bank Employees Savings
Plan covers substantially all employees. The Company matches
25 percent of employee contributions annually, up to
4 percent of base salary. Savings Plan costs charged to
expense totaled approximately $113, $100 and $85 in 2005, 2004
and 2003, respectively.

The Company does not offer its own stock as an
investment to participants of the Employees Savings Plan.
The Companys matching contribution under the
Employees Savings Plan as well as its contribution to the
Defined Contribution Pension Plan is in the form of cash.
Neither plan holds any shares of the Companys Stock.

Additional retirement benefits are provided to
certain officers and directors of HVB pursuant to supplemental
plans. Costs for the supplemental pension plans totaled $1,140,
$1,019 and $1,067 in 2005, 2004 and 2003, respectively. The
Company records an additional minimum pension liability to the
extent that its accumulated pension benefit obligation exceeds
the fair value of pension plan assets and accrued pension

79



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

liabilities. This additional minimum pension
liability is offset by an intangible asset, not to exceed prior
service costs of the pension plan. Amounts in excess of prior
service costs are reflected as a reduction in other
comprehensive income net of related tax benefits. The estimated
contribution expected to be paid to these plans in 2006 is $513.

The following tables set forth the status of the
Companys plans as of December 31:

|                                               |                         |      |        |      |   |   |        |      |  
|---------------------------------------------- | ----------------------- | ---- | ------ | ---- | - | - | ------ | ---- | -
|                                               |                         | 2005 |        | 2004
|                                               |                         |      |        |     
|Change in benefit obligation:                  |                         |      |        |      |   |   |        |     
|Benefit obligation at beginning of year        |                         | $    | 7,699  |      |   | $ | 7,537  |     
|                                               | Service cost            |      |        | 262  |   |   |        | 223  |  
|                                               | Interest cost           |      |        | 479  |   |   |        | 452  |  
|                                               | Amendments              |      |        | 247  |   |   |        | 8    |  
|                                               | Actuarial (gain) loss   |      |        | 145  |   |   |        | (8   | )
|                                               | Benefits paid           |      |        | (522 | ) |   |        | (513 | )
|                                               |                         |      |        |      |   |   |        |     
|Benefit obligation at end of year              |                         |      | 8,310  |      |   |   | 7,699  |     
|                                               |                         |      |        |      |   |   |        |     
|Change in plan assets:                         |                         |      |        |      |   |   |        |     
|Fair value of plan assets at beginning of year |                         |      |       |      |   |   |       |     
|                                               | Actual return on assets |      |        |     |   |   |        |     |  
|                                               | Employer contributions  |      |        | 522  |   |   |        | 513  |  
|                                               | Benefits paid           |      |        | (522 | ) |   |        | (513 | )
|                                               |                         |      |        |      |   |   |        |     
|Fair value of plan assets at end of year       |                         |      |       |      |   |   |       |     
|                                               |                         |      |        |      |   |   |        |     
|Funded status                                  |                         |      | (8,310 | )    |   |   | (7,699 | )   
|Unrecognized transition obligation             |                         |      | 108    |      |   |   | 46     |     
|Unrecognized prior service cost                |                         |      | 428    |      |   |   | 463    |     
|Unrecognized net loss                          |                         |      | 2,283  |      |   |   | 2,316  |     
|                                               |                         |      |        |      |   |   |        |     
|Accrued benefit cost                           |                         |      | (5,491 | )    |   |   | (4,874 | )   
|                                               |                         |      |        |      |   |   |        |     
|Weighted average assumptions:                  |                         |      |        |      |   |   |        |     
|Discount rate                                  |                         |      | 6.25   | %    |   |   | 6.25   | %   
|Expected return on plan assets                 |                         |      |       |      |   |   |       |     
|Rate of compensation increase                  |                         |      | 5.00   | %    |   |   | 5.00   | %   
|Components of net periodic benefit
    cost:   |                         |      |        |      |   |   |        |     
|Service cost                                   |                         | $    | 262    |      |   | $ | 223    |     
|Interest cost                                  |                         |      | 479    |      |   |   | 452    |     
|Expected return on plan assets                 |                         |      |       |      |   |   |       |     
|Amortization of transition obligation          |                         |      | 73     |      |   |   | 91     |     
|Amortization of prior service cost             |                         |      | 147    |      |   |   | 139    |     
|Amortization of net loss                       |                         |      | 179    |      |   |   | 114    |     
|                                               |                         |      |        |      |   |   |        |     
|Net periodic benefit cost                      |                         | $    | 1,140  |      |   | $ | 1,019  |     
|                                               |                         |      |        |      |   |   |        |     

80



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Set forth below is a summary of the amounts
reflected in the Companys balance sheets as of
December 31:

|                                                                             |  |      |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                             |  | 2005 |        | 2004
|                                                                             |  |      |        |     
|Accrued benefit liability                                                    |  | $    | (7,186 | )    |  | $ | (6,978 | )
|Intangible asset                                                             |  |      | 536    |      |  |   | 509    |  
|Accumulated other comprehensive income (pre-tax
    net reduction in equity) |  |      | 1,159  |      |  |   | 1,595  |  
|                                                                             |  |      |        |      |  |   |        |  
|Accrued benefit cost                                                         |  | $    | (5,491 | )    |  | $ | (4,874 | )
|                                                                             |  |      |        |      |  |   |        |  

The following benefit payments, which reflect
expected future service, as appropriate, are expected to be paid:

|                |  |          |       | 
|--------------- |  | -------- | ----- | 
|                |  | Pension 
|                |  | Benefits
|                |  |         
|2006            |  | $        | 513   | 
|2007            |  |          | 513   | 
|2008            |  |          | 579   | 
|2009            |  |          | 613   | 
|2010            |  |          | 752   | 
|Years 2011-2015 |  |          | 4,754 | 

12  Commitments, Contingent
Liabilities and Other Disclosures

The Company is obligated under leases for certain
of its branches and equipment. Minimum rental commitments for
bank premises and equipment under noncancelable operating leases
are as follows:

|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|Year ending December 31,     |  |  
|                             |  |  
|2006                         |  | $ | 1,998  | 
|2007                         |  |   | 1,132  | 
|2008                         |  |   | 1,045  | 
|2009                         |  |   | 978    | 
|2010                         |  |   | 944    | 
|Thereafter                   |  |   | 4,638  | 
|                             |  |   |        | 
|Total minimum future rentals |  | $ | 10,735 | 
|                             |  |   |        | 

Rent expense for premises and equipment was
approximately $1,597, $1,207 and $987 in 2005, 2004 and 2003,
respectively.

In the normal course of business, there are
various outstanding commitments and contingent liabilities which
are not reflected in the consolidated balance sheets. No losses
are anticipated as a result of these transactions.

In the ordinary course of business, the Company
is party to various legal proceedings, none of which, in the
opinion of management, will have a material effect on the
Companys consolidated financial position or results of
operations.

Cash Reserve Requirements

HVB is required to maintain average reserve
balances under the Federal Reserve Act and Regulation D
issued thereunder. Such reserves totaled approximately $3,053 at
December 31, 2005 and $2,106 at December 31, 2004.

81



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Restrictions on Funds Transfers

There are various restrictions which limit the
ability of a bank subsidiary to transfer funds in the form of
cash dividends, loans or advances to the parent company. Under
federal law, the approval of the primary regulator is required
if dividends declared by a bank in any year exceed the net
profits of that year, as defined, combined with the retained net
profits for the two preceding years.

13  Segment Information

The Company has one reportable segment,
Community Banking. All of the Companys
activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company
supports the others. For example, commercial lending is
dependent upon the ability of the Company to fund itself with
retail deposits and other borrowings and to manage interest rate
and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Company as
one operating segment or unit.

General information required by SFAS No. 131
is disclosed in the Consolidated Financial Statements and
accompanying notes. The Company operates only in the U.S.
domestic market, primarily the counties of Westchester and
Bronx, New York. For the years ended December 31, 2005,
2004 and 2003, there is no customer that accounted for more than
10% of the Companys revenue.

14  Fair Value of Financial
Instruments

SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, requires the disclosure of
the estimated fair value of certain financial instruments. These
estimated fair values as of December 31, 2005 and 2004 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.

|                                                                                                     |  |               |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|---------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---------- |  | -------- | ------- | ---------- |  | - | ------- |  |  | - | ------- | 
|                                                                                                     |  |              
|                                                                                                     |  | December 31  
|                                                                                                     |  |              
|                                                                                                     |  |               |         |           
|                                                                                                     |  | 2005          |         | 2004      
|                                                                                                     |  |               |         |           
|                                                                                                     |  | Carrying      |         | Estimated  |  | Carrying |         | Estimated 
|                                                                                                     |  | Amount        |         | Fair Value |  | Amount   |         | Fair Value
|                                                                                                     |  |               |         |            |  |          |         |           
|                                                                                                     |  |              
|                                                                                                     |  | (In millions)
|Assets:                                                                                              |  |               |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|Financial assets for which carrying value
    approximates fair value                                |  | $             | 65.1    |            |  | $        | 65.1    |            |  | $ | 38.1    |  |  | $ | 38.1    | 
|Securities, FHLB stock and accrued interest                                                          |  |               | 903.2   |            |  |          | 902.7   |            |  |   | 895.1   |  |  |   | 896.0   | 
|Loans and accrued interest                                                                           |  |               | 1,029.3 |            |  |          | 1,024.0 |            |  |   | 878.5   |  |  |   | 891.9   | 
|Liabilities:                                                                                         |  |               |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|Deposits with no stated maturity and accrued
    interest                                            |  |               | 1,202.2 |            |  |          | 1,202.2 |            |  |   | 1,066.0 |  |  |   | 1,066.0 | 
|Time deposits and accrued interest                                                                   |  |               | 206.9   |            |  |          | 207.5   |            |  |   | 169.7   |  |  |   | 170.00  | 
|Securities sold under repurchase agreements and
    other short-term borrowings and accrued interest |  |               | 172.8   |            |  |          | 172.8   |            |  |   | 164.8   |  |  |   | 164.8   | 
|Other borrowings and accrued interest                                                                |  |               | 264.4   |            |  |          | 262.3   |            |  |   | 264.3   |  |  |   | 256.7   | 
|Financial liabilities for which carrying value
    approximates fair value                           |  |               |        |            |  |          |        |            |  |   | 0.5     |  |  |   | 0.5     | 

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.

82



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Securities, FHLB stock and accrued
    interest The fair
    value was estimated based on quoted market prices or dealer
    quotations. FHLB stock and accrued interest are stated at their
    carrying amounts which approximates fair value.                                                                                                                                                                                                                                                            
|
| | 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,
    reduced by specific and general loan loss allowances.
    Additionally, under SFAS No. 114, all loans considered
    impaired are reported at either the fair value of collateral or
    present value of expected future cash flows. 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.                                                                                                                                                                                    

15  Condensed Financial Information
of Hudson Valley Holding Corp.

(Parent Company Only)


Condensed Balance Sheets

December 31, 2005 and 2004


Dollars in thousands


|                                               |  |      |         |      |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                               |  | 2005 |         | 2004
|                                               |  |      |         |     
|Assets                                         |  |      |         |      |  |   |         | 
|Cash                                           |  | $    | 95      |      |  | $ | 825     | 
|Investment in subsidiary                       |  |      | 169,208 |      |  |   | 158,145 | 
|Equity securities                              |  |      | 1,270   |      |  |   | 1,294   | 
|                                               |  |      |         |      |  |   |         | 
|Total Assets                                   |  | $    | 170,573 |      |  | $ | 160,264 | 
|                                               |  |      |         |      |  |   |         | 
|Liabilities and Stockholders
    Equity       |  |      |         |      |  |   |         | 
|Other liabilities                              |  | $    | 784     |      |  | $ | 602     | 
|Stockholders equity                           |  |      | 169,789 |      |  |   | 159,662 | 
|                                               |  |      |         |      |  |   |         | 
|Total Liabilities and Stockholders
    Equity |  | $    | 170,573 |      |  | $ | 160,264 | 
|                                               |  |      |         |      |  |   |         | 

Condensed Statements of Income

For the years ended December 31, 2005, 2004 and
2003


Dollars in thousands


|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                               |  | 2005 |        | 2004 |  | 2003
|                                                               |  |      |        |      |  |     
|Dividends from the Bank                                        |  | $    | 14,255 |      |  | $    | 10,105 |  |  | $ | 8,706  | 
|Dividends from equity securities                               |  |      | 50     |      |  |      | 39     |  |  |   | 40     | 
|Other income                                                   |  |      | 3      |      |  |      | 6      |  |  |   |       | 
|Operating expenses                                             |  |      | 506    |      |  |      | 162    |  |  |   | 181    | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Income before equity in undistributed earnings in
    the Bank |  |      | 13,802 |      |  |      | 9,988  |  |  |   | 8,565  | 
|Equity in undistributed earnings of the Bank                   |  |      | 17,143 |      |  |      | 17,552 |  |  |   | 15,642 | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Net Income                                                     |  | $    | 30,945 |      |  | $    | 27,540 |  |  | $ | 24,207 | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 

83



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HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Condensed Statements of Cash Flows

For the years ended December 31, 2005, 2004 and
2003


Dollars in thousands


|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |         |  
|------------------------------------------------------------------------------------- | -------------------------------------------- | ---- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------ | ------- | -
|                                                                                      |                                              | 2005 |         | 2004    |   | 2003
|                                                                                      |                                              |      |         |         |   |     
|Operating Activities:                                                                 |                                              |      |         |         |   |      |         |         |   |   |        |        
|Net income                                                                            |                                              | $    | 30,945  |         |   | $    | 27,540  |         |   | $ | 24,207 |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |      |         |         |   |      |         |         |   |   |        |        
|                                                                                      | Equity in undistributed earnings of the Bank |      |         | (17,143 | ) |      |         | (17,552 | ) |   |        | (15,642 | )
|                                                                                      | (Decrease) increase in other liabilities     |      |         | 195     |   |      |         | 48      |   |   |        | (198    | )
|                                                                                      | Other changes, net                           |      |         | (3      | ) |      |         | (5      | ) |   |        |        |  
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Net cash (used in) provided by operating
    activities                               |                                              |      | 13,994  |         |   |      | 10,031  |         |   |   | 8,367  |        
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Investing Activities:                                                                 |                                              |      |         |         |   |      |         |         |   |   |        |        
|Proceeds from sales of equity securities                                              |                                              |      | 3       |         |   |      | 11      |         |   |   |       |        
|Purchase of equity securities                                                         |                                              |      | (6      | )       |   |      | (84     | )       |   |   | (6     | )      
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Net cash used in investing
    activities                                             |                                              |      | (3      | )       |   |      | (73     | )       |   |   | (6     | )      
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Financing Activities:                                                                 |                                              |      |         |         |   |      |         |         |   |   |        |        
|Proceeds from issuance of common stock and sale
    of treasury stock                 |                                              |      | 4,458   |         |   |      | 4,252   |         |   |   | 4,758  |        
|Purchase of treasury stock                                                            |                                              |      | (5,492  | )       |   |      | (1,854  | )       |   |   | (3,833 | )      
|Cash dividends paid                                                                   |                                              |      | (13,687 | )       |   |      | (11,533 | )       |   |   | (9,533 | )      
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Net cash used in financing
    activities                                             |                                              |      | (14,721 | )       |   |      | (9,135  | )       |   |   | (8,608 | )      
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Increase (decrease) in Cash and Due from
    Banks                                    |                                              |      | (730    | )       |   |      | 823     |         |   |   | (247   | )      
|Cash and due from banks, beginning of year                                            |                                              |      | 825     |         |   |      | 2       |         |   |   | 249    |        
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        
|Cash and due from banks, end of year                                                  |                                              | $    | 95      |         |   | $    | 825     |         |   | $ | 2      |        
|                                                                                      |                                              |      |         |         |   |      |         |         |   |   |        |        

16  Subsequent Event

Effective January 1, 2006, the Company
acquired New York National Bank, N.A., (NYNB, N.A.),
a national banking association with approximately
$130 million of total assets, which operates five branch
locations in Manhattan, New York and the Bronx, New York. As
part of the acquisition, the Company converted NYNB, N.A. to a
New York State chartered banking institution which will operate
as a separate wholly-owned subsidiary of the Company under the
name NYNB Bank. Management believes that the
acquisition will serve to support the Companys ongoing
strategy to expand its presence in the Manhattan and Bronx
markets. Pro-forma effects of this acquisition are not presented
herein as it is not deemed a significant subsidiary
as defined by Regulation S-X of the Securities and Exchange
Commission.

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ITEM 9  CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.



ITEM 9A.     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 of
December 31, 2005. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2005, 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 year ended
December 31, 2005, there has not been any change that has
effected, or is reasonably likely to materially effect, the
Companys internal control over financial reporting.




ITEM 9B.  OTHER
INFORMATION

Not applicable.

PART IV



ITEM 15.  EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES

1. Financial Statements

The following financial statements of the Company
are included in this document in Item 8 
Financial Statements and Supplementary Data:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | Report of Independent Registered Public
    Accounting Firm                                                            
|
| |  | Consolidated Statements of Income for the Years
    Ended December 31, 2005, 2004 and 2003                             
|
| |  | Consolidated Statements of Comprehensive Income
    for the Years Ended December 31, 2005, 2004 and 2003               
|
| |  | Consolidated Balance Sheets at December 31,
    2005 and 2004                                                          
|
| |  | Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended December 31,
    2005, 2004 and 2003
|
| |  | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2005, 2004 and 2003                         
|
| |  | Notes to Consolidated Financial Statements                                                                             

2. Financial Statement Schedules

Financial Statement Schedules have been omitted
because they are not applicable or the required information is
shown elsewhere in the document in the Financial Statements or
Notes thereto, or in Managements Discussion and
Analysis of Financial Condition and Results of Operations.

85



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##### Table of Contents



3. Exhibits Required by Securities and
Exchange Commission Regulation S-K

|       |      |               |  |                                                                                                                                                                                                                                         
|------ | ---- | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |      | Exhibit Title
|       |      |              
|       | 3.1  |               |  | Amended and Restated Certificate of Incorporation
    of Hudson Valley Holding Corp.(1)                                                                                                                                                 
|       | 3.2  |               |  | By-Laws of Hudson Valley Holding
    Corp.(1)                                                                                                                                                                                           
|       | 3.3  |               |  | Specimen of Common Stock Certificate(1)                                                                                                                                                                                                 
|       | 4.1  |               |  | Specimen Stock Restriction Agreement Between the
    Company and a Shareholder Granted Stock Options(1)                                                                                                                                 
|       | 4.2  |               |  | Specimen Stock Restriction Agreement Between the
    Company and a Shareholder who Acquired Such Shares from a
    Shareholder Subject to the Agreement(1)                                                                              
|       | 10.1 |               |  | Hudson Valley Bank Amended and Restated Directors
    Retirement Plan Effective May 1, 2004(3)                                                                                                                                          
|       | 10.2 |               |  | Hudson Valley Bank Restated and Amended
    Supplemental Retirement Plan, effective
    December 1, 1995*(1)                                                                                                                            
|       | 10.3 |               |  | Hudson Valley Bank Supplemental Retirement Plan
    of 1997* (1)                                                                                                                                                                        
|       | 10.4 |               |  | 2002 Stock Option Plan*(2)                                                                                                                                                                                                              
|       | 10.5 |               |  | Specimen Non-Statutory Stock Option
    Agreement*(1)                                                                                                                                                                                   
|       | 10.6 |               |  | Specimen Incentive Stock Option
    Agreement*(6)                                                                                                                                                                                       
|       | 10.7 |               |  | Consulting Agreement Between the Company and
    Director John A. Pratt, Jr.*(1)                                                                                                                                                        
|       | 10.8 |               |  | Acquisition Agreement dated June 29, 2004 by
    and among the shareholders of A. R. Schmeidler & Co., Inc.,
    as Sellers, A. R. Schmeidler & Co., Inc., Hudson Valley
    Bank, as Buyer, and Hudson Valley Holding Corp.(4)         
|       | 10.9 |               |  | Agreement and Plan of Consolidation, dated
    December 23, 2004, between Hudson Valley Holding Corp., a
    New York corporation and registered bank holding company and New
    York National Bank, a national banking association.(5)
|       | 11   |               |  | Statements re: Computation of Per Share
    Earnings(7)                                                                                                                                                                                 
|       | 21   |               |  | Subsidiaries of the Company(7)                                                                                                                                                                                                          
|       | 23   |               |  | Consents of Experts and Counsel(7)                                                                                                                                                                                                      
|       | 31.1 |               |  | Certification of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of
    2002(7)                                                                                                                           
|       | 31.2 |               |  | Certification of Chief Financial Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of
    2002(7)                                                                                                                           
|       | 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(7)                                                                            
|       | 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(7)                                                                            




*  Management compensation plan




|    |                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference in this document
    to the Registration Statement on Form 10 initially filed on
    May 1, 2000                                                      
|   
|(2) | Incorporated herein by reference in this document
    to Appendix A and Exhibit A to Appendix A to the
    Registrants Proxy Statement for the 2002 Annual Meeting of
    Stockholders
|   
|(3) | Incorporated herein by reference in this document
    to the Form 10-Q filed on May 10, 2004                                                                                           
|   
|(4) | Incorporated herein by reference in this document
    to the Form 8-K filed on June 30, 2004                                                                                           
|   
|(5) | Incorporated herein by reference in this document
    to the Form 8-K filed on December 27, 2004                                                                                       
|   
|(6) | Incorporated herein by reference in this document
    to the Form 10-K filed on March 11, 2005                                                                                         
|   
|(7) | Filed herewith                                                                                                                                                                         

86



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.

March 13, 2006

| |     |                   
| | --- | ------------------
| | By: | /s/ JAMES J. LANDY

| |                                      
| | -------------------------------------
| | James J. Landy                       
| | President and Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below on
March 13, 2006 by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ JAMES J. LANDY




James J. Landy


President, Chief Executive Officer and Director


/s/ STEPHEN R. BROWN




Stephen R. Brown


Senior Executive Vice President, Chief Financial
Officer, Treasurer and Director


(Principal Financial Officer)


/s/ WILLIAM E. GRIFFIN




William E. Griffin


Chairman of the Board and Director


/s/ JAMES M. COOGAN




James M. Coogan


Director


/s/ GREGORY F. HOLCOMBE




Gregory F. Holcombe


Director


/s/ ANGELO R. MARTINELLI




Angelo R. Martinelli


Director


/s/ WILLIAM J. MULROW




William J. Mulrow


Director


/s/ JOHN A. PRATT JR.




John A. Pratt Jr.


Director


/s/ CECILE D. SINGER




Cecile D. Singer


Director


/s/ CRAIG S. THOMPSON




Craig S. Thompson


Director


/s/ ANDREW J. REINHART




Andrew J. Reinhart


Senior Vice President and Controller


(Principal Accounting Officer)


87