##### 






SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

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,
2002

Commission File number 030525

HUDSON VALLEY HOLDING CORP.

(Exact name of registrant as specified in its
charter)




---

|                                                                                  |  |                                                        
|--------------------------------------------------------------------------------- |  | -------------------------------------------------------
|                                                                                 
|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



---

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 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
an accelerated filer (as defined in Rule 126-2 of the
Act.)  Yes  x  No  o

|                                   |  |                              |  | 
|---------------------------------- |  | ---------------------------- |  | 
|Class                              |  | Outstanding at March 3, 2003
|                                   |  |                             
|Common Stock
    ($0.20 par value) |  | 5,885,590 Shares            

The aggregate market value on June 30, 2002
of voting stock held by non-affiliates of the Registrant was
approximately $130,293,000.

Documents incorporated by reference:

Portions of the registrants definitive
Proxy Statement for the 2003 Annual Meeting of Stockholders is
incorporated by reference in Part III of this report.



---






---



##### 



FORM 10-K

TABLE OF CONTENTS


|                                             |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                             |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  | Page No.
|                                             |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |         
|PART I                                       |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|                                             |  | ITEM 1                                                                                                                                                                                                                                                                                                          |    | BUSINESS                                                                                  |  |          | 1  | 
|                                             |  | ITEM 2                                                                                                                                                                                                                                                                                                          |    | PROPERTIES                                                                                |  |          | 12 | 
|                                             |  | ITEM 3                                                                                                                                                                                                                                                                                                          |    | LEGAL PROCEEDINGS                                                                         |  |          | 12 | 
|                                             |  | ITEM 4                                                                                                                                                                                                                                                                                                          |    | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                   |  |          | 12 | 
|PART II                                      |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|                                             |  | ITEM 5                                                                                                                                                                                                                                                                                                          |    | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS                 |  |          | 13 | 
|                                             |  | ITEM 6                                                                                                                                                                                                                                                                                                          |    | SELECTED FINANCIAL DATA                                                                   |  |          | 16 | 
|                                             |  | ITEM 7                                                                                                                                                                                                                                                                                                          |    | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |          | 17 | 
|                                             |  | ITEM 7A                                                                                                                                                                                                                                                                                                         |    | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                            |  |          | 45 | 
|                                             |  | ITEM 8                                                                                                                                                                                                                                                                                                          |    | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                               |  |          | 49 | 
|                                             |  | ITEM 9                                                                                                                                                                                                                                                                                                          |    | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE  |  |          | 77 | 
|PART III                                     |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|                                             |  | ITEMS 10 THROUGH 13. (INCORPORATED BY REFERENCE
    TO THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
    SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
    WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
    NOT LATER THAN 120 DAYS AFTER THE END OF THAT FISCAL YEAR) |    |                                                                                           |  |         
|                                             |  | ITEM 14                                                                                                                                                                                                                                                                                                         |    | CONTROLS AND PROCEDURES                                                                   |  |          | 77 | 
|PART IV                                      |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|                                             |  | ITEM 15                                                                                                                                                                                                                                                                                                         |    | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K                      |  |          | 77 | 
|SIGNATURES                                   |  |                                                                                                                                                                                                                                                                                                                 | 79 |                                                                                          
|CERTIFICATION OF CHIEF EXECUTIVE
    OFFICER |  |                                                                                                                                                                                                                                                                                                                 | 80 |                                                                                          
|CERTIFICATION OF CHIEF FINANCIAL
    OFFICER |  |                                                                                                                                                                                                                                                                                                                 | 81 |                                                                                          



---



##### 



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 subsidiary, Hudson Valley Bank (the
Bank), a New York chartered commercial bank
established in 1972. The Bank is the largest independent bank
headquartered in Westchester County, New York. The Bank has 14
branch offices in Westchester County, New York, 2 in Bronx
County, New York and 1 in Manhattan, New York. The Bank has
received all necessary regulatory approval to open one new
branch office at 40 Church Street, White Plains, New York.
The Company and the Bank derive substantially all of their
revenue and income from providing banking and related services
to small and medium-sized businesses, professionals,
municipalities, not-for-profit organizations and individuals
located in Westchester County, the Bronx and, beginning in 2002,
in Manhattan.

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

The Banks principal customers are small and
medium-sized businesses, professionals, municipalities,
not-for-profit organizations and individuals, located in
Westchester County and Bronx County, New York and, to an
increasing extent, Manhattan, New York. The Banks strategy
is to operate as a community-oriented banking institution
dedicated to providing personalized service to customers and
focusing on products and services for selected segments of the
market. The Bank believes that its ability to attract and retain
customers is due primarily to its focused approach to its
markets, its personalized and professional services, its product
offerings, its experienced staff, its knowledge of its local
markets and its ability to provide responsive solutions to
customer needs. The Bank provides these products and services to
a diverse range of customers and does not rely on a single large
depositor for a significant percentage of deposits. The Bank
anticipates that it will continue to open new branch offices in
Westchester County and in New York City.

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 Risk Factors and
Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements.

Subsidiaries of the Bank

In 1987, the Bank formed a wholly-owned
subsidiary, Hudson Valley Mortgage Corp., for the purpose of
providing mortgage banking services primarily in Westchester
County and surrounding areas. This subsidiary discontinued
operations in 1995, sold its assets and transferred its
employees to the Bank. In late 2000, this subsidiary was renamed
HVB Leasing Corp. It commenced operations in early 2001,
originating lease financing transactions on behalf of the Bank.

1



---



##### 



In 1991, the Bank 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 the Bank.

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

In 1997, the Bank formed a subsidiary (of which
the Bank 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
the Bank.

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

The Company has no separate operations or
revenues apart from the Bank and its subsidiaries. The Bank and
its subsidiaries are referred to collectively as the
Bank.

Employees

At December 31, 2002, we employed 253
full-time employees and 35 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 2000 census data, was $60,882. The
Countys 1999 per capita income of $36,726 placed
Westchester County sixth highest among the 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 40,000 small and medium sized businesses, which
form a large portion of the Banks current and potential
customer base.

Bronx County is one of the five boroughs of New
York City and borders on Westchester County. While it also has a
large and varied economic base, the median household income in
the Bronx is much lower than Westchester County. The median
household income, based on 2000 census data was $27,547, while
the Countys 1998 per capita personal income was $19,841.
The northern part of Bronx County has a base of professionals
and small and medium size businesses. The Company believes that
this potential business customer base offers growth
opportunities similar to those the Bank has developed in
Westchester County, despite the differing demographic profiles
of the two counties as a whole. The Banks second branch
office in the Bronx opened during the first quarter of 2002.

Manhattan is one of the five boroughs of New York
City. It has a large and varied economic base. The median
household income in Manhattan, based on 2000 census data, was
$72,194, while Manhattans 1998 per capita personal income
was $35,201. Sections of Manhattan have a well-developed base of
professionals and small and medium sized businesses. The Company
believes that this potential customer base offers growth
opportunities similar to those the Bank has developed in
Westchester County and Bronx County. The Bank opened its first
branch office in Manhattan in the second quarter of 2002.

Competition

The banking and financial services business in
New York generally, and in Westchester and Bronx Counties
specifically, is highly competitive. There are approximately 19
commercial banks with branch banking offices in our Westchester
and Bronx market area and additional commercial banks have
branches in

2



---



##### 



Manhattan. 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. The Westchester and Bronx branches of the Bank
compete with local offices of large New York City commercial
banks due to their proximity to New York City. Other financial
institutions, such as mutual funds, finance companies, factoring
companies, mortgage bankers and insurance companies, also
compete with the Bank for both loans and deposits. The Bank is
smaller in size than most of its 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 light 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 the Bank 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
small 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.

The Companys strategy is to increase
earnings through moderate growth within its existing market. The
Banks primary market area, Westchester County, Bronx
County and Manhattan, has a high concentration of the types of
customers that the Bank desires to serve. The Bank expects to
continue to expand by opening new full service banking
facilities, by expanding loan originations in its market area,
by enhancing and expanding computerized and telephonic products
and through strategic alliances and contractual relationships.

During the past five years, the Company has
focused on maintaining existing customer relationships and
adding new relationships by providing products and services that
meet these customers needs. The focus of the Banks
products and services continues to be small and medium size
businesses, professionals, not-for-profit organizations and
municipalities. The Bank has expanded its market from
Westchester County to include sections of Bronx County and
Manhattan. The Bank has opened five new facilities during the
past five years, one in New Rochelle, Westchester County, one in
Yonkers, Westchester County, one in Manhattan, New York and two
in Bronx County, New York and anticipates opening one additional
facility during 2003. The Bank expects to continue to open
additional facilities in the future. The Bank has invested in
technology based products and services to meet customer needs.
In addition, the Bank has expanded products and services,
particularly in its lending programs, and its offering of
investment management and trust services. As a result, the Bank
has approximately doubled its total assets during this five year
period.

3



---



##### 



Lending

The Bank engages in a variety of lending
activities which are primarily categorized as real estate,
commercial and industrial, individual and lease financing. At
December 31, 2002, gross loans totaled $655.4 million.
Gross loans were comprised of the following loan types:

|                          |  |  |       |  
|------------------------- |  |  | ----- | -
|Real estate               |  |  | 69.0  | %
|Commercial and industrial |  |  | 27.4  |  
|Individuals               |  |  | 2.2   |  
|Lease financing           |  |  | 1.4   |  
|                          |  |  |       |  
|Total                     |  |  | 100.0 | %
|                          |  |  |       |  

At December 31, 2002, the Banks
unsecured lending limit to one borrower under applicable
regulations was approximately $20.1 million.

In managing its loan portfolio, the Bank focuses
on:



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



| |       |                                                                                                                                                           
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  | the establishment of individual lending
    authorities well below the Banks 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.

The Bank utilizes its credit department to assess
acceptable and unacceptable credit risks based upon the
Banks established underwriting criteria. The Bank utilizes
its 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, the Bank utilizes systems and
analysis which assist in monitoring loan delinquencies. The Bank
utilizes its 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 the Banks portfolio 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 the Companys loan portfolio and
lending activities.

Deposits

The Bank offers deposit products ranging in
maturity from demand-type accounts to certificates of deposit
with maturities of up to 5 years. The Banks deposits
are generally derived from customers within its primary
marketplace. The Bank solicits only certain types of deposits
from outside its market area, primarily from certain
professionals and government agencies.

The Bank sets its deposit rates to remain
generally competitive with other financial institutions in its
market, although the Bank does not generally seek to match the
highest rates paid by competing institutions. The Bank has
established a process to review interest rates on all deposit
products and, based upon this process, updates its deposit rates
weekly. The Companys Asset/ Liability Management Policy
and its 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 the Banks
primary source of liquidity.

4



---



##### 



The Bank offers deposit pick up services for
certain business customers. The Bank has 8 automated teller
machines, or ATMs, at various locations, which generate activity
fees based on use by other banks customers.

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

Portfolio Management Services

The Bank provides portfolio management services
to certain pension and retirement accounts and executes
securities transactions on behalf of certain customers by
utilizing administrative support, investment products and
methodologies provided to the Bank through an alliance with a
third party. The Bank terminated its relationship with this
third party, an unaffiliated commercial bank, during the first
quarter of 2002 and formed a relationship with an investment
advisor to provide similar services to the Bank. The Bank
believes the new relationship will improve the portfolio
management services offered. The Bank will continue to
periodically explore the possibility of developing relationships
with others that provide similar investment management services,
and the Bank believes that a number of alternative providers of
these services exist. The Bank also provides a software
application designed to meet specific administrative needs of
bankruptcy trustees through a marketing and licensing agreement
with the application vendor. The Banks licensing agreement
expired in February 2003. In February 2003, the Bank
entered into a new software licensing agreement with another
vendor. While the Bank is interested in developing new customer
relationships with bankruptcy trustees by offering them access
to software, the Bank does not believe that its relationship
with this or any other application vendor is material to its
business. In addition, the Bank has 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.

Regulations to which the Company is
subject

As a bank holding company, the Company is
regulated by and subject to the supervision of the Board of
Governors of the Federal Reserve System (the FRB)
and is 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

5



---



##### 



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

The Company believes it would meet the regulatory
criteria that would enable it to elect to become a financial
holding company. The Company has 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 offered by the
Bank.

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
the Bank. Federal and state bank regulatory agencies also have
the authority to limit further the Bank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, 2002, the Bank could have
declared additional dividends of approximately
$37.3 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 the Bank
and to commit resources to support the Bank in circumstances
where we might not do so absent such policy. In addition, any
subordinated loans by the Company to the Bank 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 Bank.

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 Bank described below. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Capital
Resources and Note 8 to the Consolidated Financial
Statements. As of December 31, 2002, our Tier 1 and
Total risk-based capital ratios were 17.0 percent and
18.3 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.

Regulations to which the Bank is
subject

The Bank is organized under the Banking Law of
the State of New York. Its 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 Bank is not a
member of the Federal Reserve System, it is subject to certain
regulations of the FRB. In addition to banking laws, regulations
and regulatory agencies, the Bank is subject to various other
laws, regulations and regulatory agencies, all of which directly
or indirectly affect the Banks operations. The New York
Superintendent of

6



---



##### 



Banks and the FDIC examine the affairs of the
Bank 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 Bank.

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. The Company does not expect such provisions
to have a material adverse effect on the Company or the Bank.

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 Bank, are
subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more
sensitive to the differences 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, the Bank 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, 2002, the most recent

7



---



##### 



notification from the FDIC categorized the Bank
as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions that we
believe have changed the Banks category.


See Note 8 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 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 Banks 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. The Bank 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.

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. Neither the
Company nor the Bank is 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

8



---



##### 



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 savings institution, 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 Compliance
considerations. As of its last CRA examination in
December 2001, the Bank received a rating of
Satisfactory.


Gramm-Leach-Bliley
Act

The present bank regulatory scheme is undergoing
significant change, both as it affects the banking industry
itself and as it affects competition between banks and
non-banking financial institutions. There has been a significant
regulatory change in the bank merger and acquisition area, in
the products and services banks can offer, and in the
non-banking activities in which bank holding companies may
engage. Under the Gramm-Leach-Bliley Act enacted by Congress on
November 12, 1999, banks and bank holding companies may now
affiliate with insurance and securities companies. In part as a
result of these changes, banks are now actively competing with
other types of non-depository institutions, such as money market
funds, brokerage firms, insurance companies and other financial
services enterprises. To date these changes in the regulatory
scheme have had little impact on the Bank.

Governmental
Monetary Policy

The Companys and Banks business and
earnings depend in large part on differences in interest rates.
One of the most significant factors affecting the Companys
and the Banks earnings is the difference between
(1) the interest rates paid by the Bank on its deposits and
its other borrowings (liabilities) and (2) the
interest rates received by the Bank on loans made to its
customers and securities held in its investment portfolio
(assets). The value of and yield on its assets and the rates
paid on its liabilities are sensitive to changes in prevailing
market rates of interest. Therefore, the earnings and growth of
the Company and the Bank 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, no prediction can be made by the Company as
to possible future changes in interest rates, deposit levels,
loan demand, or availability of investment securities and the
resulting effect on the business or earnings of the Company and
the Bank.

Risk Factors

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. The Westchester County, Bronx County, and
Manhattan area of New York has a very high density of financial
institutions, many of which are branches of institutions which
are significantly larger than us and have greater financial
resources and higher lending limits. Many of

9



---



##### 



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.

The Company, as a bank holding company, and the
Bank 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
the ability of the Bank 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 the Bank 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 income is sensitive to changes in interest
rates.

The Banks profitability, like that of most
banking institutions, depends to a large extent upon its 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, the
Banks results of operations and financial condition depend
largely on movements in market interest rates and its ability to
manage its assets and liabilities in response to such movements.

The Bank tries to manage its interest rate risk
exposure by closely monitoring its assets and liabilities in an
effort to reduce the effects of changes in interest rates
primarily by altering the mix and maturity of the Banks
loans, investments and funding sources.

Currently, the Banks income would be
minimally changed due to changes in the interest rate
environment. However, the current prolonged low rate environment
has had an adverse effect on the Banks 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 originated by the Bank, as well as the value of
its 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 the
Banks existing portfolio, 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 the Bank
does not pay competitive rates of interest. See
Quantitative and Qualitative Disclosures About Market Risk.

10



---



##### 



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

Approximately 80% of the loans held by the Bank
as of December 31, 2002 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. The Bank
currently does not own any property acquired on foreclosure.
However, the Bank has in the past and may in the future acquire
properties through foreclosure on loans in default. Under
federal and state environmental laws, the Bank could face
liability for some or all of the costs of removing hazardous
substances, contaminants or pollutants from properties acquired
by the Bank 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 lending market area is concentrated in
Westchester County, New York and, to a growing but lesser
extent, Bronx County, New York and Manhattan, New York with
a primary focus on small to medium-sized businesses 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.

Technological change may affect our ability to
compete.

The banking industry is undergoing 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 expose a bank to various risks,
particularly transaction, strategic, reputation and compliance
risk. 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 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.

11



---



##### 



Available Information

The Companys website address is
http://www.hudsonvalleybank.com. The Company does not yet post
its periodic reports filed with the Securities and Exchange
Commission on its website, but is investigating various ways to
make the reports available on or through its website. The
Company expects that, beginning sometime in the second quarter
of 2003, it will start to make available free of charge on or
through its website its 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. The Company provides electronic or paper copies of
its filings free of charge upon request.

ITEM 2  PROPERTIES

The principal executive offices of the Company
and the Bank, including administrative and operating
departments, are located at 21 Scarsdale Road, Yonkers, New
York, in premises that are owned by the Bank. The Banks
main branch is located at 35 East Grassy Sprain Road, Yonkers,
New York, in premises that are leased by the Bank.

In addition to the main branch, the Bank operates
13 branches in Westchester County, New York. The following
seven branches are owned by the Bank: 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. The following six branches are leased by the
Bank: 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, and Five
Huguenot Street, New Rochelle, New York.

In addition to the branches in Westchester
County, the Bank operates two branches in Bronx, New York, one
at 3130 East Tremont Avenue and one at 975 Allerton Avenue, both
in premises leased by the Bank. The Bank also operates one
branch in Manhattan, New York at 60 East 42nd
Street, New York, New York in premises leased by the
Bank.

Of the leased properties, 2 properties, located
in Thornwood and Bronx, New York, have lease terms that expire
within the next 2 years, with each lease subject to the
Banks renewal option. The Bank expects to exercise its
renewal option on the leases of each of these properties. Two
properties, located in White Plains and Yonkers, New York, have
leases expiring in 2003, with no additional renewals. The Bank
has negotiated new leases on both properties.

The Bank also operates 8 ATM machines, 6 of which
are located in the Banks facilities. Two ATMs are located
at different off-site locations  Yonkers General
Hospital in Yonkers, New York; and St. Josephs Hospital in
Yonkers, New York.

In the opinion of management, the premises,
fixtures and equipment used by the Company and the Bank are
adequate and suitable for the conduct of their businesses. 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 2002.

12



---



##### 



PART II

ITEM 5  MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Companys common stock was held of
record as of March 3, 2003 by approximately 737
shareholders. The Companys common stock trades on a
limited and sporadic basis in the over-the-counter market under
the symbol HUVL. A very limited and sporadic public
trading market has developed. The Company has historically
purchased shares of common stock from shareholders at a price
that the Company believes to be the fair market value at the
time. Some of these purchases are made pursuant to Stock
Restriction Agreements which give the Company a right of first
refusal if the shareholder wishes to sell his or her shares. The
majority of transactions in the Companys common stock are
sales to the Company or private transactions. There can be no
assurance that the Company will purchase any additional stock in
the future.

The table below sets forth the high and the low
prices per share at which the Company purchased shares of its
common stock from shareholders in 2002 and 2001. The price per
share has been adjusted to reflect the 10 percent stock
dividends to shareholders in December 2002 and 2001.

|               |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |      |       |     
|               |  | 2002 |       | 2001
|               |  |      |       |     
|               |  | High |       | Low  |  | High |       | Low
|               |  |      |       |      |  |      |       |    
|First Quarter  |  | $    | 36.82 |      |  | $    | 33.27 |     |  | $ | 32.03 |  |  | $ | 27.89 | 
|Second Quarter |  |      | 38.18 |      |  |      | 33.41 |     |  |   | 32.03 |  |  |   | 29.14 | 
|Third Quarter  |  |      | 41.82 |      |  |      | 34.55 |     |  |   | 37.19 |  |  |   | 30.16 | 
|Fourth Quarter |  |      | 39.09 |      |  |      | 33.18 |     |  |   | 35.45 |  |  |   | 31.41 | 

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 2002, $0.31 per share to holders of record on
February 4; $0.34 to shareholders of record May 6,
August 5 and November 4. In 2001, $0.26 per share to
holders of record on February 5; $0.28 to shareholders of
record May 7, August 6 and November 5. Dividends
per share have been adjusted to reflect the 10 percent
stock dividends to shareholders in December 2002 and 2001.

Stock dividends of 10 percent each (one
share for every 10 outstanding shares) were declared by the
Company for shareholders of record on December 2, 2002 and
December 3, 2001.

Effective December 2, 2002, the Board of
Directors of the Company adjusted the price at which the Company
would purchase shares to $36.50 per share, taking into
consideration the ten percent stock dividend to shareholders in
December 2002.

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 the Bank 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 Bank and its 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 Bank. The Companys right to participate in any
distribution of the assets or earnings of the Bank is
subordinate to prior claims of creditors of the Bank.

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

13



---



##### 



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 the 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.

The Company has historically created a secondary
market for its stock by issuing offers to repurchase shares from
any shareholder. However, the Company is not obligated to issue
such offers to repurchase shares in the future and may
discontinue or limit such offers at any time.

If the 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.

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 stock 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 the Bank are the only significant
source of cash for the Company. However, there are various
statutory and regulatory limitations regarding the extent to
which the Bank can pay dividends or otherwise transfer funds to
the Company. Federal and state bank regulatory agencies also
have the authority to limit further the Banks payment of
dividends based on such factors as the maintenance of adequate
capital for the Bank, which could reduce the amount of dividends
otherwise payable. The Company paid a cash dividend to our
shareholders of $1.32 per share in 2002, $1.10 per share in 2001
and $0.92 per share in 2000 (adjusted for subsequent stock
dividends). Under applicable banking statutes, at
December 31, 2002, the Bank could have declared dividends
of approximately $21.1 million to the Company without prior
regulatory approval. No assurance can be given that the Bank
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 the Company
and the Bank to maintain adequate levels of capital. The failure
to maintain adequate capital or to comply with applicable laws,
regulations and supervisory agreements could subject the
Company, the Bank or its subsidiaries to federal and state
enforcement provisions, such as

14



---



##### 



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 the Banks regulatory authorities
if the agency believes that the Banks financial condition
warrants such a restriction.


In addition, the Companys 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 Bank, the ability of holders of debt and equity
securities of the Company to benefit from the distribution of
assets from the Bank upon any such liquidation or reorganization
would be subordinate to prior claims of creditors of the Bank
(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 Bank.

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,
2002, and do not include awards made in January 2003. Additional
details related to the Companys equity compensation plans
are provided in Notes 1 and 8 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 |  |                      | 466,414 |                     |  | $                    | 23.96 |  |  |  | 703,458 | 
|                                                   |  |                      |         |                     |  |                      |       |  |  |  |         | 

15



---



##### 



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, 2002 and 2001, and for
the years ended December 31, 2002, 2001 and 2000, 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,
2000, 1999 and 1998 and for the years ended December 31,
1999 and 1998 are derived from our consolidated financial
statements that are not included in this Annual Report on
Form 10-K. The information set forth below 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,  
|                                             |  |                          
|                                             |  | 2002                      |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                                             |  |                           |           |      |  |      |           |      |  |     
|                                             |  |                          
|                                             |  | (000s except share data)
|Operating Results:                           |  |                           |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           |  
|Total interest income                        |  | $                         | 84,743    |      |  | $    | 89,878    |      |  | $    | 87,266    |  |  | $ | 70,816    |  |  | $ | 62,445    |  
|Total interest expense                       |  |                           | 22,982    |      |  |      | 32,517    |      |  |      | 40,785    |  |  |   | 29,658    |  |  |   | 27,622    |  
|                                             |  |                           |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           |  
|Net interest income                          |  |                           | 61,761    |      |  |      | 57,361    |      |  |      | 46,481    |  |  |   | 41,158    |  |  |   | 34,823    |  
|Provision (credit) for loan losses           |  |                           | 3,902     |      |  |      | 4,380     |      |  |      | 1,144     |  |  |   | 600       |  |  |   | (300      | )
|Income before income taxes                   |  |                           | 30,744    |      |  |      | 28,376    |      |  |      | 21,983    |  |  |   | 18,648    |  |  |   | 15,821    |  
|Net income                                   |  |                           | 21,584    |      |  |      | 18,881    |      |  |      | 16,158    |  |  |   | 14,004    |  |  |   | 12,254    |  
|Basic earnings per common share              |  |                           | 3.69      |      |  |      | 3.29      |      |  |      | 2.85      |  |  |   | 2.49      |  |  |   | 2.19      |  
|Diluted earning per common share             |  |                           | 3.59      |      |  |      | 3.20      |      |  |      | 2.77      |  |  |   | 2.43      |  |  |   | 2.13      |  
|Weighted average shares outstanding          |  |                           | 5,847,879 |      |  |      | 5,745,852 |      |  |      | 5,668,855 |  |  |   | 5,631,561 |  |  |   | 5,592,055 |  
|Adjusted weighted average shares outstanding |  |                           | 6,008,427 |      |  |      | 5,900,649 |      |  |      | 5,832,671 |  |  |   | 5,758,229 |  |  |   | 5,756,149 |  
|Cash dividends per common share              |  | $                         | 1.32      |      |  | $    | 1.10      |      |  | $    | 0.92      |  |  | $ | 0.76      |  |  | $ | 0.62      |  

|                     |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |         | 
|-------------------- |  | ------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | ------- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2002         |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                     |  |              |           |      |  |      |           |      |  |     
|Financial Position:  |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |         | 
|Securities           |  | $            | 743,884   |      |  | $    | 624,209   |      |  | $    | 655,029   |  |  | $ | 634,973   |  |  | $ | 565,616 | 
|Loans, net           |  |              | 642,438   |      |  |      | 600,377   |      |  |      | 506,101   |  |  |   | 412,914   |  |  |   | 308,131 | 
|Total assets         |  |              | 1,506,883 |      |  |      | 1,372,453 |      |  |      | 1,289,970 |  |  |   | 1,147,472 |  |  |   | 939,802 | 
|Deposits             |  |              | 1,027,176 |      |  |      | 888,377   |      |  |      | 879,575   |  |  |   | 754,846   |  |  |   | 627,297 | 
|Borrowings           |  |              | 327,383   |      |  |      | 352,720   |      |  |      | 285,831   |  |  |   | 313,718   |  |  |   | 223,683 | 
|Stockholders equity |  |              | 136,807   |      |  |      | 113,342   |      |  |      | 93,345    |  |  |   | 68,310    |  |  |   | 75,696  | 

Financial Ratios

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

|                                                                                            |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |       |  
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------ | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | -
|                                                                                            |                                                                              |             
|                                                                                            |                                                                              | December 31,
|                                                                                            |                                                                              |             
|                                                                                            |                                                                              | 2002         |        | 2001  |   | 2000 |        | 1999  |   | 1998
|                                                                                            |                                                                              |              |        |       |   |      |        |       |   |     
|Earnings Ratios                                                                             |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|Net income as a percentage of:                                                              |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|                                                                                            | Average earning assets                                                       |              |        | 1.58  | % |      |        | 1.51  | % |      |        | 1.41  | % |  |        | 1.39  | % |  |        | 1.40  | %
|                                                                                            | Average total assets                                                         |              |        | 1.50  |   |      |        | 1.43  |   |      |        | 1.32  |   |  |        | 1.31  |   |  |        | 1.32  |  
|                                                                                            | Average total stockholders equity(1)                                        |              |        | 18.72 |   |      |        | 18.74 |   |      |        | 18.61 |   |  |        | 18.60 |   |  |        | 18.44 |  
|Capital Ratios                                                                              |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|                                                                                            | Average total stockholders equity to
    average total assets(1)            |              |        | 8.02  | % |      |        | 7.64  | % |      |        | 7.12  | % |  |        | 7.06  | % |  |        | 7.16  | %
|                                                                                            | Average net loans as a multiple of average total
    stockholders equity(1) |              |        | 5.37  |   |      |        | 5.56  |   |      |        | 5.15  |   |  |        | 4.72  |   |  |        | 4.20  |  
|                                                                                            | Leverage capital                                                             |              |        | 8.28  |   |      |        | 7.90  |   |      |        | 7.30  |   |  |        | 7.20  |   |  |        | 7.40  |  
|                                                                                            | Tier 1 capital (to risk weighted assets)                                     |              |        | 17.05 |   |      |        | 15.36 |   |      |        | 14.80 |   |  |        | 15.70 |   |  |        | 19.40 |  
|                                                                                            | Total risk-based capital (to risk weighted assets)                           |              |        | 18.30 |   |      |        | 16.47 |   |      |        | 15.60 |   |  |        | 16.50 |   |  |        | 20.20 |  
|Other                                                                                       |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|Allowance for loan losses as a percentage of
    year-end loans                             |                                                                              |              | 1.76   | %     |   |      | 1.31   | %     |   |      | 0.94   | %     |   |  | 0.97   | %     |   |  | 1.00   | %    
|Loans (net) as a percentage of year-end
    total assets                                    |                                                                              |              | 42.63  |       |   |      | 43.74  |       |   |      | 39.23  |       |   |  | 35.98  |       |   |  | 32.79  |      
|Loans (net) as a percentage of year-end
    total deposits                                  |                                                                              |              | 62.54  |       |   |      | 67.58  |       |   |      | 57.54  |       |   |  | 54.70  |       |   |  | 49.12  |      
|Securities as a percentage of year-end total
    assets                                     |                                                                              |              | 49.37  |       |   |      | 45.48  |       |   |      | 50.78  |       |   |  | 55.34  |       |   |  | 60.18  |      
|Average interest earning assets as a percentage
    of average interest bearing liabilities |                                                                              |              | 147.71 |       |   |      | 138.43 |       |   |      | 133.91 |       |   |  | 134.46 |       |   |  | 134.74 |      
|Dividends per share as a percentage of diluted
    earnings per share                       |                                                                              |              | 36.69  |       |   |      | 34.38  |       |   |      | 33.21  |       |   |  | 31.28  |       |   |  | 29.11  |      






|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes unrealized gains in 2002, 2001, 2000 and
    1998 and unrealized losses in 1999, net of tax, on securities
    available for sale

16



---



##### 



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, 2002 and 2001, and consolidated results of
operations for each of the three years in the period ended
December 31, 2002. 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., and HVB Realty Corp. (collectively
the Bank). 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.

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 the Accounting Policy note
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 Bank maintains an allowance for
loan losses to absorb losses inherent in the loan portfolio
based on ongoing quarterly assessments of the estimated losses.
The Banks methodology for assessing the appropriateness of
the allowance consists of several key components, which include
a specific component for identified problem loans, a formula
component, and an unallocated component. The specific component
incorporates the results of measuring impaired loans as provided
in SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. These accounting standards
prescribe the measurement methods, income recognition and
disclosures related to impaired loans. A loan is recognized as
impaired when it is probable that principal and/or interest are
not collectible in accordance with the loans contractual
terms. A loan is not deemed to be impaired if there is a short
delay in receipt of payment or if, during a longer period of
delay, the Company expects to collect all amounts due including
interest accrued at the contractual rate during the period of
delay. Measurement of impairment can be based on the present
value of expected future cash flows discounted at the
loans effective interest rate, the loans observable
market price or the fair value of the collateral, if the loan is
collateral dependent. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to
significant change. If the fair value of the impaired loan is
less than the related recorded amount, a specific valuation
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

17



---



##### 



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


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

Management believes the allowance for loan losses
is the best estimate of probable losses which have been incurred
as of December 31, 2002 and 2001. There is no assurance
that the Company will not be required to make future adjustments
to the allowance in response to changing economic conditions,
particularly in the Banks service area, since the majority
of the Banks loans are collateralized by real estate. In
addition, various regulatory agencies, as an integral part of
the examination process, periodically review the Banks
allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments at
the time of their 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 for investment,
representing securities the Bank has the ability and positive
intent to hold until maturity. Securities available for sale are
reported at fair value with unrealized gains and losses (net of
tax) excluded from operations and reported in other
comprehensive income. Securities held for investment are stated
at amortized cost (specific identification). There were no
securities held for investment at December 31, 2002 and
2001. The amortization of premiums and accretion of discounts is
determined by using the level yield method to the earlier of the
call or maturity date. Securities are not acquired for purposes
of engaging in trading activities. Realized gains and losses
from sales of securities are determined using the specific
identification method.

Results of Operations for Each of the Three
Years in the Period Ended December 31, 2002

Summary of Results

The Company reported net income of $21.6 million
for the year ended December 31, 2002, a 14.3 percent
increase over 2001. Net income was $18.9 million for the
year ended December 31, 2001, a 16.9 percent increase
over 2000 net income of $16.2 million. The increase in 2002 net
income, compared to 2001, reflects higher net interest income,
higher non interest income and net gains on securities
transactions, a lower provision for loan losses and a lower
effective tax rate partially offset by higher operating
expenses. The increase in 2001 net income, compared to 2000,
primarily reflects higher net interest income and higher non
interest income partially offset by a higher provision for loan
losses, higher operating expenses, a higher effective tax rate
and net losses on security transactions.

18



---



##### 



Diluted earnings per share of $3.59 in 2002
increased 12.3 percent over the $3.20 recorded in 2001,
while diluted earnings per share increased 15.5 percent in
2001 compared to the $2.77 recorded in 2000, reflecting the
higher net income. Prior period per share amounts have been
adjusted to reflect the 10 percent stock dividend
distributed on December 4, 2002. Return on average equity
(excluding the available for sale securities unrealized gain in
2002, 2001 and 2000) was 18.72 percent in 2002, compared to
18.74 percent in 2001, and 18.61 percent in 2000.
Return on average assets (excluding the available for sale
securities unrealized gain in 2002, 2001 and 2000) was
1.50 percent in 2002, compared to 1.43 percent in
2001, and 1.32 percent in 2000.

Net interest income for 2002 rose to $61.8
million, a 7.8 percent increase over the $57.4 million
recorded in 2001, while 2001 net interest income increased
23.4 percent compared to the $46.5 million recorded in
2000. The 2002 increase over 2001 was primarily due to a
$117.1 million growth in the average balance of interest
earning assets which was in excess of the $22.5 million growth
in the average balance of interest bearing liabilities,
partially offset by a decrease in the tax equivalent basis net
interest margin. The 2001 increase over 2000 was primarily due
to a $105.5 million growth in the average balance of
interest earning assets, which was in excess of the
$48.2 million growth in the average balance of interest
bearing liabilities, together with an increase in the tax
equivalent basis interest rate margin. The 2002 increase in
average interest earning assets was due to growth in loans, the
Companys highest yielding asset, together with an increase
in short term federal funds. The increase in federal funds
resulted from managements caution in deploying available
liquidity from deposit growth and maturing assets into longer
term assets in light of the current low interest rate
environment. The 2001 increase in average interest earning
assets was primarily due to loan growth. The net interest rate
margin, on a tax equivalent basis, decreased in 2002 to 4.82%
compared to 4.89% in 2001, which increased compared to 4.36% in
2000. The decrease in the 2002 tax equivalent basis net interest
margin resulted primarily from a $2.6 million interest
penalty incurred as a result of managements decision to
prepay $21 million of the Companys long term
borrowings in an effort to reduce the impact of the current
trend of margin compression which has resulted from the
protracted period of low interest rates. Excluding the
prepayment penalty, the tax equivalent basis net interest margin
for 2002 was 5.01%. If interest rates continue at current
levels, management anticipates continued downward pressure on
the net interest margin as higher yielding fixed rate assets
prepay or mature. The increase in 2001 resulted from, in
addition to the aforementioned growth in net interest earning
assets, a generally faster repricing of certain interest bearing
liabilities than that of certain interest earning assets during
an extended period of declining interest rates. Non interest
income, excluding securities gains and losses, for 2002
increased to $3.3 million compared to $2.6 million in
2001, which increased from $1.9 million in 2000. The
increases were due to higher service charge income and increases
in the value of interest rate floor contracts. Sales of
investment securities resulted in a net gain of $54,000 in 2002,
net loss of $180,000 in 2001 and net gain of $692,000 in 2000,
respectively. The overall increases in revenues were partially
offset by increases in non interest expense of $3.5 million
and $1.1 million in 2002 and 2001, respectively, reflecting
increases in such expenses as employee salaries and benefits,
occupancy and equipment expense and other expenses, as a result
of the Companys continuing growth, investment in people,
technology, products and branch facilities. The effective tax
rate in 2002, compared to 2001, decreased primarily due to the
increase in tax exempt interest as a percentage of total
interest income and a reduction in the New York State Corporate
tax rate. The higher effective tax rate in 2001 compared to 2000
increased primarily due to the decrease in tax exempt income as
a percentage of total interest income and an increase in the
statutory federal income tax rate from 34% to 35%.

The Companys total capital ratio under the
risk-based capital guidelines exceeds regulatory guidelines
of 8 percent, as the total ratio equaled
18.3 percent and 16.5 percent at December 31,
2002 and 2001, respectively. The leverage capital ratio was
8.3 percent and 7.9 percent at December 31, 2002
and 2001, respectively.

19



---



##### 



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 2002 and
2001 and 34 percent in 2000.

|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |      |  
|------------------------------------------------------------------------------- | -------------------------------- | -------------------------- | --------- | ----------- |  | ------ | ------ | ------- |  | ----------- | ---- | ------ | - | ------- | --------- | ----------- |  | ------ | ------ | ------ |  |  | ---- | ---- | - | - | --------- | ------- |  | - | ------ | ------ |  |  | ---- | ---- | -
|                                                                                |                                  |                           
|                                                                                |                                  | (000s except percentages)
|                                                                                |                                  | Year ended December 31,   
|                                                                                |                                  |                           
|                                                                                |                                  |                            |           |             |  |       
|                                                                                |                                  | 2002                       |           | 2001        |  | 2000  
|                                                                                |                                  |                            |           |             |  |       
|                                                                                |                                  | 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                                                               |                                  | $                          | 3,201     |             |  | $      | 38     |         |  |             | 1.19 | %      |   |         |          |             |  |        |       |        |  |  |     |      |   |   |          |         |  |   |       |        |  |  |     |     
|Federal funds sold                                                              |                                  |                            | 80,747    |             |  |        | 1,364  |         |  |             | 1.69 |        |   | $       | 23,954    |             |  | $      | 759    |        |  |  | 3.17 | %    |   | $ | 11,661    |         |  | $ | 735    |        |  |  | 6.30 | %   
|Securities:(1)                                                                  |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Taxable                          |                            |           | 505,152     |  |        |        | 27,098  |  |             |      | 5.36   |   |         |           | 519,852     |  |        |        | 33,804 |  |  |      | 6.50 |   |   |           | 547,619 |  |   |        | 37,336 |  |  |      | 6.82 |  
|                                                                                | Exempt from federal income taxes |                            |           | 161,321     |  |        |        | 11,960  |  |             |      | 7.41   |   |         |           | 148,048     |  |        |        | 11,189 |  |  |      | 7.56 |   |   |           | 140,782 |  |   |        | 10,489 |  |  |      | 7.45 |  
|Loans, net(2)                                                                   |                                  |                            | 619,098   |             |  |        | 48,469 |         |  |             | 7.83 |        |   |         | 560,584   |             |  |        | 48,042 |        |  |  | 8.57 |      |   |   | 446,843   |         |  |   | 42,272 |        |  |  | 9.46 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total interest earning assets                                                   |                                  |                            | 1,369,519 |             |  |        | 88,929 |         |  |             | 6.49 |        |   |         | 1,252,438 |             |  |        | 93,794 |        |  |  | 7.49 |      |   |   | 1,146,905 |         |  |   | 90,832 |        |  |  | 7.92 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Non interest earning assets:                                                    |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Cash and due from banks          |                            |           | 35,012      |  |        |        |         |  |             |      |        |   |         |           | 31,485      |  |        |        |        |  |  |      |      |   |   |           | 28,509  |  |   |        |        |  |  |      |      |  
|                                                                                | Other assets                     |                            |           | 31,949      |  |        |        |         |  |             |      |        |   |         |           | 35,144      |  |        |        |        |  |  |      |      |   |   |           | 44,680  |  |   |        |        |  |  |      |      |  
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total non interest earning assets                                               |                                  |                            | 66,961    |             |  |        |        |         |  |             |      |        |   |         | 66,629    |             |  |        |        |        |  |  |      |      |   |   | 73,189    |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total assets                                                                    |                                  | $                          | 1,436,480 |             |  |        |        |         |  |             |      |        |   | $       | 1,319,067 |             |  |        |        |        |  |  |      |      |   | $ | 1,220,094 |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                        |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Interest bearing liabilities:                                                   |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Deposits:                                                                       |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Money market                     |                            | $         | 250,634     |  |        | $      | 3,439   |  |             |      | 1.37   | % |         | $         | 155,058     |  |        | $      | 3,802  |  |  |      | 2.45 | % |   | $         | 148,663 |  |   | $      | 4,323  |  |  |      | 2.91 | %
|                                                                                | Savings                          |                            |           | 57,629      |  |        |        | 347     |  |             |      | 0.60   |   |         |           | 52,988      |  |        |        | 610    |  |  |      | 1.15 |   |   |           | 51,472  |  |   |        | 777    |  |  |      | 1.51 |  
|                                                                                | Time                             |                            |           | 184,723     |  |        |        | 3,571   |  |             |      | 1.93   |   |         |           | 320,408     |  |        |        | 13,379 |  |  |      | 4.18 |   |   |           | 339,305 |  |   |        | 19,802 |  |  |      | 5.84 |  
|                                                                                | Checking with interest           |                            |           | 76,759      |  |        |        | 528     |  |             |      | 0.69   |   |         |           | 61,697      |  |        |        | 659    |  |  |      | 1.07 |   |   |           | 62,049  |  |   |        | 840    |  |  |      | 1.35 |  
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |                            | 148,555   |             |  |        | 2,317  |         |  |             | 1.56 |        |   |         | 154,311   |             |  |        | 5,855  |        |  |  | 3.79 |      |   |   | 165,993   |         |  |   | 10,181 |        |  |  | 6.13 |     
|Other borrowings                                                                |                                  |                            | 208,886   |             |  |        | 12,780 |         |  |             | 6.12 |        |   |         | 160,255   |             |  |        | 8,212  |        |  |  | 5.12 |      |   |   | 89,011    |         |  |   | 4,862  |        |  |  | 5.46 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total interest bearing liabilities                                              |                                  |                            | 927,186   |             |  |        | 22,982 |         |  |             | 2.48 |        |   |         | 904,717   |             |  |        | 32,517 |        |  |  | 3.59 |      |   |   | 856,493   |         |  |   | 40,785 |        |  |  | 4.76 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Non interest bearing liabilities:                                               |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Demand deposits                  |                            |           | 380,015     |  |        |        |         |  |             |      |        |   |         |           | 297,197     |  |        |        |        |  |  |      |      |   |   |           | 255,386 |  |   |        |        |  |  |      |      |  
|                                                                                | Other liabilities                |                            |           | 14,007      |  |        |        |         |  |             |      |        |   |         |           | 16,401      |  |        |        |        |  |  |      |      |   |   |           | 21,395  |  |   |        |        |  |  |      |      |  
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total non interest bearing liabilities                                          |                                  |                            | 394,022   |             |  |        |        |         |  |             |      |        |   |         | 313,598   |             |  |        |        |        |  |  |      |      |   |   | 276,781   |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Stockholders equity(1)                                                         |                                  |                            | 115,272   |             |  |        |        |         |  |             |      |        |   |         | 100,752   |             |  |        |        |        |  |  |      |      |   |   | 86,820    |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total liabilities and stockholders equity(1)                                   |                                  | $                          | 1,436,480 |             |  |        |        |         |  |             |      |        |   | $       | 1,319,067 |             |  |        |        |        |  |  |      |      |   | $ | 1,220,094 |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Net interest earnings                                                           |                                  |                            |           |             |  | $      | 65,947 |         |  |             |      |        |   |         |           |             |  | $      | 61,277 |        |  |  |      |      |   |   |           |         |  | $ | 50,047 |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Net yield on interest earning assets                                            |                                  |                            |           |             |  |        |        |         |  |             | 4.82 | %      |   |         |           |             |  |        |        |        |  |  | 4.89 | %    |   |   |           |         |  |   |        |        |  |  | 4.36 | %   




|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $4,186, $3,916 and $3,566 for the years ended
    December 31, 2002, 2001 and 2000, respectively.

20



---



##### 



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, 2002 and 2001,
and the years ended December 31, 2001 and 2000, on a tax
equivalent basis.

|                                                                                |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |        |  
|------------------------------------------------------------------------------- | -------------------------------- | --------------------- | ----- | --------------------- | - | -------- | ------- | ------ | - | ---- | ------ | -------- | - | - | ------ | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                                |                                  |                      
|                                                                                |                                  | (000s)              
|                                                                                |                                  |                      
|                                                                                |                                  |                       |       |                      
|                                                                                |                                  | 2002 Compared to 2001 |       | 2001 Compared to 2000
|                                                                                |                                  | 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                                                               |                                  | $                     | 120   |                       |   | $        | (82     | )      |   | $    | 38     |          |   |   |       |        |   |   |        |        |   |   |       |       
|Federal funds sold                                                              |                                  |                       | 1,800 |                       |   |          | (1,195  | )      |   |      | 605    |          |   | $ | 775    |        |   | $ | (751    | )      |   | $ | 24     |       
|Securities:                                                                     |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|                                                                                | Taxable                          |                       |       | (956                  | ) |          |         | (5,750 | ) |      |        | (6,706   | ) |   |        | (1,893 | ) |   |         | (1,639 | ) |   |        | (3,532 | )
|                                                                                | Exempt from federal income taxes |                       |       | 1,003                 |   |          |         | (232   | ) |      |        | 771      |   |   |        | 541    |   |   |         | 159    |   |   |        | 700    |  
|Loans, net                                                                      |                                  |                       | 5,015 |                       |   |          | (4,588  | )      |   |      | 427    |          |   |   | 10,760 |        |   |   | (4,990  | )      |   |   | 5,770  |       
|                                                                                |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|Total interest income                                                           |                                  |                       | 6,982 |                       |   |          | (11,847 | )      |   |      | (4,865 | )        |   |   | 10,183 |        |   |   | (7,221  | )      |   |   | 2,962  |       
|                                                                                |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|Interest expense:                                                               |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|Deposits:                                                                       |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|                                                                                | Money market                     |                       |       | 2,344                 |   |          |         | (2,707 | ) |      |        | (363     | ) |   |        | 186    |   |   |         | (707   | ) |   |        | (521   | )
|                                                                                | Savings                          |                       |       | 53                    |   |          |         | (316   | ) |      |        | (263     | ) |   |        | 23     |   |   |         | (190   | ) |   |        | (167   | )
|                                                                                | Time                             |                       |       | (5,666                | ) |          |         | (4,142 | ) |      |        | (9,808   | ) |   |        | (1,103 | ) |   |         | (5,320 | ) |   |        | (6,423 | )
|                                                                                | Checking with interest           |                       |       | 161                   |   |          |         | (292   | ) |      |        | (131     | ) |   |        | (5     | ) |   |         | (176   | ) |   |        | (181   | )
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |                       | (218  | )                     |   |          | (3,320  | )      |   |      | (3,538 | )        |   |   | (717   | )      |   |   | (3,609  | )      |   |   | (4,326 | )     
|Other borrowings                                                                |                                  |                       | 2,492 |                       |   |          | 2,076   |        |   |      | 4,568  |          |   |   | 3,892  |        |   |   | (542    | )      |   |   | 3,350  |       
|                                                                                |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|Total interest expense                                                          |                                  |                       | (834  | )                     |   |          | (8,701  | )      |   |      | (9,535 | )        |   |   | 2,276  |        |   |   | (10,544 | )      |   |   | (8,268 | )     
|                                                                                |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       
|Increase (decrease) in interest differential                                    |                                  | $                     | 7,816 |                       |   | $        | (3,146  | )      |   | $    | 4,670  |          |   | $ | 7,907  |        |   | $ | 3,323   |        |   | $ | 11,230 |       
|                                                                                |                                  |                       |       |                       |   |          |         |        |   |      |        |          |   |   |        |        |   |   |         |        |   |   |        |       




|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
impact of declining interest rates particularly in 2001 and
continuing throughout 2002 has presented challenges to the
Companys asset liability management efforts. This rate
environment has resulted in greatly accelerated prepayments of
loans and mortgage backed securities and calls of
U.S. agency securities as consumers and companies prepay or
refinance existing debt. Additionally, the Company has seen a
shift of customer time deposits into interest bearing demand
deposits and increases in the projected average lives of
callable longer term borrowings. The initial impact of the sharp
decline of interest rates on the Companys net interest
income throughout 2001, and to a lesser extent, in early 2002
was positive. This was due to repayment of higher yielding fixed
rate assets being considerably slower than the more immediate
impact on the repricing of interest bearing liabilities,
particularly interest bearing demand deposits and short term
time deposits. Throughout this period, the Company has made
efforts to appropriately reposition its securities portfolio and
funding sources in response to these changes to maintain or
minimize the decline of its net interest income while
maintaining prudence in its asset and interest rate risk

21



---



##### 



profiles. This resulted in an overall reduction
in the average life of the securities portfolio and generally
lower yields on interest earning assets as well as lower costs
on interest bearing liabilities. These efforts, when combined
with continued growth in the core businesses of loans and
deposits enabled the Company to maintain and grow net interest
income in 2002 and 2001. The Company anticipates continued
downward pressure on net interest income if interest rates
continue at these current low levels.


Net interest income of $65.9 million, on a
tax equivalent basis, for 2002 reflects a 7.5 percent
increase over the $61.3 million for 2001. Net interest
income, on a tax equivalent basis, for 2001 reflects an increase
of 22.4 percent over the $50.0 million for 2000. Tax
equivalent basis net interest income rose $4.7 million in
2002, compared to 2001, primarily as a result of an increase in
the excess of average interest earning assets over average
interest bearing liabilities to $442.3 million in 2002 from
$347.7 million in 2001 partially offset by a decrease in
net interest margin. The 2002 decrease in net interest margin
as, compared to 2001, resulted from a $2.6 million interest
penalty from a prepayment of $21 million of the
Companys long term borrowings incurred as part of ongoing
asset liability management. Tax equivalent net interest income
rose $11.2 million in 2001, compared to 2000 as a result of
an increase in the excess of average interest earning assets
over average interest bearing liabilities to $347.7 million
in 2001 from $290.4 million in 2000 and an increase in the
net interest margin for 2001 compared to 2000.

Interest income is determined by the volume of,
and related rates earned on, interest earning assets. Sharply
lower interest rates and a slight volume decrease in securities
available for sale, partially offset by volume increases in
loans and Federal funds sold contributed to lower interest
income in 2002, compared to 2001. Volume increases in loans and
Federal funds sold, partially offset by lower volume in
securities together with sharply lower overall interest rates
contributed to only slightly higher interest income in 2001
compared to 2000. Average interest earning assets increased in
2002 to $1,369.5 million from $1,252.4 million in 2001 and from
$1,146.9 million in 2000, reflecting a 9.3 percent and
9.2 percent increase in 2002 and 2001, respectively. 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. Average total securities, excluding average net
unrealized gains in 2002 and 2001 and losses in 2000 on
available for sale securities, decreased slightly in 2002 by
$1.4 million or 0.2 percent to $666.5 million
compared to $667.9 million in 2001, which decreased
$20.5 million or 3.0 percent compared to
$688.4 million in 2000. Total securities, excluding net
unrealized gains, increased at December 31, 2002 by
$107.5 million or 17.5 percent to $721.9 million
compared to $614.4 million at December 31, 2001, which
decreased $40.3 million or 6.2 percent compared to
December 31, 2000. The slight decrease in average total
securities in 2002 compared to 2001 reflects volume decreases in
U.S. agency securities essentially offset by volume
increases in mortgage backed securities, including
collateralized mortgage obligations (CMOs),
short-term U.S. Treasury securities and obligations of
states and political subdivisions. During 2002, the Company
experienced continued acceleration of paydowns and calls of
U.S. agency and mortgage backed securities due to the
persistence of the declining interest rate environment
throughout the year. The reinvestment of the majority of the
paydowns and calls into short term securities and shorter
duration mortgage backed securities and CMOs reflects
managements desire to maintain a securities portfolio with
a relatively short average life. Management believes this
strategy is appropriate in the current low interest rate
environment even though a shorter average life portfolio results
in lower yields. In the fourth quarter of 2002, the Bank
invested approximately $150 million of this liquidity into
short term Treasury securities, which resulted in the increase
in the total portfolio at year end 2002 compared to year end
2001. Therefore, tax equivalent basis income on securities
decreased in 2002 primarily due to lower interest rates. The
decrease in average total securities in 2001 compared to 2000 is
offset by an increase in short-term Federal funds. In 2001, due
to steadily declining interest rates particularly towards the
end of the year, the Company experienced an increase in calls
and an acceleration of paydowns in U.S. agency securities
and mortgage backed securities. The Company had not fully
redeployed these additional funds into longer-term instruments
due to the declining interest rate environment. Therefore, tax
equivalent basis interest income on securities decreased in 2001
as a result of both lower volume and lower interest rates.

Average net loans increased in 2002 by
$58.5 million or 10.4 percent to $619.1 million
compared to $560.6 million in 2001, which increased
$113.8 million or 25.5 percent compared to
$446.8 million in 2000. Net

22



---



##### 



loans increased $42.0 million or
7.0 percent to $642.4 million at December 31,
2002 compared to $600.4 million at December 31, 2001,
which increased $94.3 million or 18.6 percent compared
to $506.1 million at December 31, 2000. The increases
in average net loans in 2002 and 2001 were primarily due to the
Companys greater emphasis on making new loans through more
effective market penetration in its primary market. Interest
rates were considerably lower in 2002 than in 2001 and in 2001
than in 2000 and as a result, interest income on net loans
increased in 2002 and 2001 as a result of 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 in 2002 decreased
$9.5 million or 29.3 percent to $23.0 million
while interest expense in 2001 decreased $8.3 million, or
20.3 percent to $32.5 million, compared to
$40.8 million in 2000. Average balances of interest bearing
liabilities increased in 2002 by $22.5 million or 2.5
percent to $927.2 million compared to $904.7 million
in 2001, which increased $48.2 million or 5.6 percent
compared to $856.5 million in 2000. The increase in average
interest bearing liabilities in 2002 was due to increases in
interest bearing demand deposits and other borrowings, partially
offset by decreases in brokered certificates of deposit and time
deposits of municipalities, which are acquired on a bid basis,
other time deposits and short term borrowings. The increase in
interest bearing demand deposits resulted from growth in
existing customer relationships and branches as well as from new
relationships, including growth from three new branches opened
in 2002. The increase in average interest bearing liabilities in
2001 was due to increases in interest bearing demand deposits
and, excluding brokered certificates of deposit and time
deposits of municipalities, which are acquired on a bid basis,
increases in time deposits. These increases resulted from growth
in existing customer relationships and branches as well as from
new relationships, including growth from a new branch in the
Bronx, New York, opened in 1999. The combined aggregate balances
of brokered certificates of deposit, time deposits of
municipalities, short-term borrowings and other borrowings also
increased in 2001. This increase reflects managements
continuing effort to effectively leverage capital. Overall
increases in funding were invested in loans, securities or
short-term investments. Interest rates paid on average interest
bearing liabilities decreased in 2002, compared to 2001, and in
2001 compared to 2000 due primarily to a sharply lower interest
rate environment. In December 2002, the Company prepaid
$21 million of its long term borrowings as part of its
ongoing asset liability management. A prepayment penalty of
$2.6 million was incurred as a result of the transaction
and is included in interest expense on other borrowings. This
increased the average cost of other borrowings for 2002 to 6.1%.
Excluding this transaction, the average cost of other borrowings
in 2002 decreased to 4.85%, compared to 5.12% in 2001.
Therefore, interest expense on average interest bearing
liabilities decreased in 2002 and 2001 due to lower interest
rates, partially offset by higher volume. The average balance of
non interest bearing demand deposits which increased in 2002 to
$380.0 million from $297.2 million in 2001, compared
to $255.4 million in 2000, is an important component of the
Companys liability management and has a direct impact on
the determination of net interest income.

The interest rate spread on a tax equivalent
basis for each of the three years in the period ended
December 31, 2002 is as follows:

|                          |                                            |      |  |      |   |      |  |      |   |  |  |      |  
|------------------------- | ------------------------------------------ | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                          |                                            | 2002 |  | 2001 |   | 2000
|                          |                                            |      |  |      |   |     
|Average interest rate on: |                                            |      |  |      |   |      |  |      |   |  |  |     
|                          | Total average interest earning assets      |      |  | 6.49 | % |      |  | 7.49 | % |  |  | 7.92 | %
|                          | Total average interest bearing liabilities |      |  | 2.48 |   |      |  | 3.59 |   |  |  | 4.76 |  
|                          | Total interest rate spread                 |      |  | 4.01 |   |      |  | 3.90 |   |  |  | 3.16 |  

In 2002 and 2001, the interest rate spread
increased as the declining interest rate environment reduced the
average cost of interest bearing liabilities at a faster rate
than it reduced the yield on interest earning assets. Increases
in loans and non interest bearing demand deposits also
contributed to the increase interest rate spread in 2002 and
2001. 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.

23



---



##### 



Non Interest Income

Non interest income increased 39.9 percent
to $3,401,000 in 2002 from $2,431,000 in 2001. Non interest
income for 2001 was $2,431,000 compared to $2,548,000 for 2000.
The increase in non interest income in 2002 compared to 2001 was
the result of gains on security transactions, higher service
fees and higher other income. The decrease in non interest
income in 2001 compared to 2000 was the result of losses on
security transactions partially offset by slightly higher
services fees and higher other income.

Net gains on securities transactions of $54,000,
net losses on securities transactions of $180,000 and net gains
on securities transactions of $692,000 for the years ended
December 31, 2002, 2001 and 2000, respectively, principally
resulted from the sale of securities 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
composition of the balance sheet.

Service charges increased by 34.2 percent in
2002 and by 5.8 percent in 2001. The increases reflect a higher
level of accounts and fees charged.

Other income increased $329,000, or
23.2 percent, to $1,748,000 in 2002 from $1,419,000 in
2001. Other income increased to $1,419,000 in 2001 compared to
$729,000 in 2000. The increase in other income in 2002 and 2001
was primarily the result of an increase in the fair value of
interest rate floors contracts of $1,105,000 and $832,000,
respectively.

Non Interest Expense

Non interest expense rose to $30.5 million for
2002, or a 13.0 percent increase over the
$27.0 million for 2001, compared to a 4.4 percent
increase in 2001 over the $25.9 million in 2000. These increases
reflect 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 income, plus non interest
income, excluding gain or loss on security transactions) was
44.0 percent in 2002, compared to 42.3 percent in 2001
and 49.9 percent in 2000.

Salaries and employee benefits, the largest
component of non interest expense, rose 12.2 percent in
2002 to $17.1 million, compared to a 3.3 percent increase
in 2001 to $15.3 million from $14.8 million for 2000. The
Company opened three new branches in 2002, resulting in
increased staff. The increases in both 2002 and 2001 also
reflected the cost of additional personnel necessary for the
Bank to accommodate the growth in both deposits and loans, the
expansion of services and products available to customers,
increases in the number of customer relationships, and annual
merit increases. The 2002 increase included the effects of the
Companys election to expense employee stock options in
accordance with Statement of Financial Accounting Standards
No. 123 Accounting for Stock-Based
Compensation. Increases in salaries and employee benefits
in both 2002 and 2001 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.

|                          |  |      |     |      |  |      |     |  |  |  |     | 
|------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                          |  | 2002 |     | 2001 |  | 2000
|Employees at December 31, |  |      |     |      |  |     
|Full Time Employees       |  |      | 253 |      |  |      | 220 |  |  |  | 214 | 
|Part Time Employees       |  |      | 35  |      |  |      | 53  |  |  |  | 44  | 

|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|---------------------------------------- |  | -------------------------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                         |  |                           
|                                         |  | (000s except percentages)
|Salaries and Employee Benefits           |  |                            |        |   |  |   |        |   |  |   |        |  
|Salaries                                 |  | $                          | 12,448 |   |  | $ | 10,891 |   |  | $ | 10,431 |  
|Payroll Taxes                            |  |                            | 993    |   |  |   | 861    |   |  |   | 828    |  
|Medical Plans                            |  |                            | 802    |   |  |   | 705    |   |  |   | 737    |  
|Incentive Compensation Plans             |  |                            | 1,415  |   |  |   | 1,209  |   |  |   | 1,009  |  
|Deferred Compensation Plans              |  |                            | 74     |   |  |   | 67     |   |  |   | 64     |  
|Employee Retirement Plans                |  |                            | 1,059  |   |  |   | 1,050  |   |  |   | 825    |  
|Other                                    |  |                            | 327    |   |  |   | 479    |   |  |   | 886    |  
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|Total                                    |  | $                          | 17,118 |   |  | $ | 15,262 |   |  | $ | 14,780 |  
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|Percentage of total non interest expense |  |                            | 56.1   | % |  |   | 56.5   | % |  |   | 57.1   | %
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  

24



---



##### 



Occupancy expense increased 8.4 percent to
$2.5 million in 2002 from $2.3 million in 2001.
Occupancy expense was essentially unchanged in 2001 compared to
2000. The increase in 2002 was 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 32.7 percent
to $2.9 million in 2002 from $2.2 million in 2001, which was a
13.6 percent increase from $2.6 million for 2000. The
increase in 2002 was due to higher audit costs, higher legal
costs and professionals engaged to assist in the expansion of
the Companys management information services. The year
2001 professional services were lower than in 2000 due to
additional professionals engaged to assist with first-time
filings with the Securities and Exchange Commission and also due
to professionals engaged to perform a customer satisfaction
survey in 2000.

Equipment expense increased 2.6 percent to
$1,936,000 in 2002 from $1,887,000 in 2001, which was a 9.5
percent increase from $1,723,000 in 2000. The increase in 2002
reflected additional equipment necessary to support the three
new branch facilities which opened in 2002. The increase in 2001
reflected the early retirement of certain equipment.

Business development expense increased
33.2 percent to $1,490,000 in 2002 from $1,119,000 in 2001,
which was a 18.0 percent increase over $948,000 in 2000. The
increases reflected costs associated with increased general
promotion of products and services, expanded business
development efforts and promotion of three new branch offices
which opened in 2002.

FDIC assessment slightly decreased to $164,000
for 2002 compared to $166,000 for 2001 and $165,000 for 2000.
The decrease in 2002 resulted from a decrease in the Banks
assessment rate. The increase in 2001 primarily resulted from
increases in the Banks deposits subject to FDIC assessment
as well as a general increase in the overall assessment rate.

Other operating expenses, as reflected in the
following table, increased 7.1 percent in 2002 and
increased 17.7 percent in 2001.

|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|----------------------------------------- |  | -------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                          |  | 2002                       |       | 2001 |  | 2000
|                                          |  |                            |       |      |  |     
|                                          |  |                           
|                                          |  | (000s except percentages)
|Other Operating Expenses                  |  |                            |       |      |  |      |       |   |  |   |       |  
|Other insurance                           |  | $                          | (128  | )    |  | $    | (104  | ) |  | $ | (36   | )
|Stationery and printing                   |  |                            | 605   |      |  |      | 477   |   |  |   | 502   |  
|Communications expense                    |  |                            | 850   |      |  |      | 765   |   |  |   | 714   |  
|Courier expense                           |  |                            | 520   |      |  |      | 452   |   |  |   | 367   |  
|Other loan expense                        |  |                            | 194   |      |  |      | 248   |   |  |   | 160   |  
|Outside services                          |  |                            | 864   |      |  |      | 779   |   |  |   | 747   |  
|Dues, meetings and seminars               |  |                            | 353   |      |  |      | 308   |   |  |   | 351   |  
|Other                                     |  |                            | 1,115 |      |  |      | 1,158 |   |  |   | 664   |  
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|Total                                     |  | $                          | 4,373 |      |  | $    | 4,083 |   |  | $ | 3,469 |  
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|Percentages of total non interest expense |  |                            | 14.3  | %    |  |      | 15.1  | % |  |   | 13.4  | %
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  

The 2002 increases reflect higher outside service
fees, higher customer service related expenses including
communications and courier expenses, higher stationery and
printing costs, and an increase in dues and seminar expense due
to a expanded participation in such events, all related to the
opening of three new branches, growth in customer, and growth in
business activities. The 2002 decreases reflect a reduction in
the estimates of net costs of certain life insurance programs,
lower other loan expenses and slightly lower other expense.

The 2001 increases reflect higher outside service
fees, higher customer service related expenses including
communications and courier expenses, higher other loan expenses
including credit checking expense, and higher other expense, all
related to growth in customers, growth in business activities
and increases in charitable contributions. The 2001 decreases
reflect a reduction in the estimates of net costs of certain life

25



---



##### 



insurance programs, lower stationery and printing
costs, and a reduction in dues and seminar expense due to a
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 $9,160,000, $9,495,000 and
$5,825,000 were recorded in 2002, 2001 and 2000, respectively.
The Company is currently subject to a statutory incremental
Federal tax rate of 35 percent (34 percent for the
first $10 million of taxable income), a New York State tax rate
of 8.0 percent, plus a 17 percent surcharge and a New
York City tax rate of 9 percent. The Companys overall
effective tax rate was 29.8 percent, 33.5 percent and
26.5 percent in 2002, 2001 and 2000, respectively. The decrease
in the overall effective tax rate for 2002 reflects an increase
in tax exempt interest income as a percentage of total interest
income and a decrease in the New York State tax rate from 8.5%
to 8.0%. The increase in the overall effective tax rate for 2001
primarily reflects higher federal taxes and a decrease in tax
exempt interest income as a percentage of total interest income.
In the normal course of business, the Companys Federal and
New York State Corporation tax returns are subject to audit.
Currently, the Companys New York State Corporation tax
returns for tax years 1996 through 1998 are being audited by the
New York State Department of Taxation and Finance. Other
pertinent tax information is set forth in the Notes to
Consolidated Financial Statements included elsewhere herein.

Financial Condition at December 31, 2002
and 2001

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 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, effect the
stated strategies.

The securities portfolio consists of securities
available for sale totaling $743.9 million,
$624.2 million and $655.0 million and Federal Home
Loan Bank of New York (FHLB) stock totaling
$10.5 million, $10.5 million and $9.5 million at
December 31, 2002, 2001 and 2000, respectively.

In accordance with SFAS No. 115, the
Bank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. All securities
have been classified as available for sale at December 31,
2002, 2001 and 2000.

Securities represent 48.7 percent,
53.3 percent and 60.0 percent of average interest
earning assets in 2002, 2001 and 2000, 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.

26



---



##### 



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

2002 (000s)

|                                                 |  |           |         |                  |  |            |        |  |  |   |     |  |  |   |         | 
|------------------------------------------------ |  | --------- | ------- | ---------------- |  | ---------- | ------ |  |  | - | --- |  |  | - | ------- | 
|                                                 |  | Amortized |         |                  |  | Estimated 
|Classified as Available for Sale                 |  | Cost      |         | Gross Unrealized |  | Fair Value
|                                                 |  |           |         |                  |  |           
|                                                 |  |           |         | Gains            |  | Losses     |        | 
|                                                 |  |           |         |                  |  |            |        | 
|U.S. Treasury and government agencies            |  | $         | 223,005 |                  |  | $          | 1,671  |  |  | $ | 2   |  |  | $ | 224,674 | 
|Mortgage-backed securities                       |  |           | 323,898 |                  |  |            | 10,309 |  |  |   | 208 |  |  |   | 333,999 | 
|Obligations of states and political subdivisions |  |           | 167,346 |                  |  |            | 9,469  |  |  |   | 4   |  |  |   | 176,811 | 
|Other debt securities                            |  |           | 6,714   |                  |  |            | 288    |  |  |   |    |  |  |   | 7,002   | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |     |  |  |   |         | 
|Total debt securities                            |  |           | 720,963 |                  |  |            | 21,737 |  |  |   | 214 |  |  |   | 742,486 | 
|Equity securities                                |  |           | 970     |                  |  |            | 428    |  |  |   |    |  |  |   | 1,398   | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |     |  |  |   |         | 
|Total                                            |  | $         | 721,933 |                  |  | $          | 22,165 |  |  | $ | 214 |  |  | $ | 743,884 | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |     |  |  |   |         | 

2001 (000s)

|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 
|------------------------------------------------ |  | --------- | ------- | ---------------- |  | ---------- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                                 |  | Amortized |         |                  |  | Estimated 
|Classified as Available for Sale                 |  | Cost      |         | Gross Unrealized |  | Fair Value
|                                                 |  |           |         |                  |  |           
|                                                 |  |           |         | Gains            |  | Losses     |        | 
|                                                 |  |           |         |                  |  |            |        | 
|U.S. Treasury and government agencies            |  | $         | 105,838 |                  |  | $          | 1,344  |  |  | $ | 399   |  |  | $ | 106,783 | 
|Mortgage-backed securities                       |  |           | 348,116 |                  |  |            | 5,052  |  |  |   | 398   |  |  |   | 352,770 | 
|Obligations of states and political subdivisions |  |           | 155,742 |                  |  |            | 4,275  |  |  |   | 484   |  |  |   | 159,533 | 
|Other debt securities                            |  |           | 3,817   |                  |  |            | 25     |  |  |   | 40    |  |  |   | 3,802   | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 
|Total debt securities                            |  |           | 613,513 |                  |  |            | 10,696 |  |  |   | 1,321 |  |  |   | 622,888 | 
|Equity securities                                |  |           | 872     |                  |  |            | 449    |  |  |   |      |  |  |   | 1,321   | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 
|Total                                            |  | $         | 614,385 |                  |  | $          | 11,145 |  |  | $ | 1,321 |  |  | $ | 624,209 | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 

2000 (000s)

|                                                 |  |           |         |                  |  |            |       |  |  |   |       |  |  |   |         | 
|------------------------------------------------ |  | --------- | ------- | ---------------- |  | ---------- | ----- |  |  | - | ----- |  |  | - | ------- | 
|                                                 |  | Amortized |         |                  |  | Estimated 
|Classified as Available for Sale                 |  | Cost      |         | Gross Unrealized |  | Fair Value
|                                                 |  |           |         |                  |  |           
|                                                 |  |           |         | Gains            |  | Losses     |       | 
|                                                 |  |           |         |                  |  |            |       | 
|U.S. Treasury and government agencies            |  | $         | 225,591 |                  |  | $          | 546   |  |  | $ | 2,923 |  |  | $ | 223,214 | 
|Mortgage-backed securities                       |  |           | 281,663 |                  |  |            | 1,322 |  |  |   | 2,216 |  |  |   | 280,769 | 
|Obligations of states and political subdivisions |  |           | 144,024 |                  |  |            | 3,735 |  |  |   | 311   |  |  |   | 147,448 | 
|Other debt securities                            |  |           | 2,564   |                  |  |            |      |  |  |   | 182   |  |  |   | 2,382   | 
|                                                 |  |           |         |                  |  |            |       |  |  |   |       |  |  |   |         | 
|Total debt securities                            |  |           | 653,842 |                  |  |            | 5,603 |  |  |   | 5,632 |  |  |   | 653,813 | 
|Equity securities                                |  |           | 851     |                  |  |            | 365   |  |  |   |      |  |  |   | 1,216   | 
|                                                 |  |           |         |                  |  |            |       |  |  |   |       |  |  |   |         | 
|Total                                            |  | $         | 654,693 |                  |  | $          | 5,968 |  |  | $ | 5,632 |  |  | $ | 655,029 | 
|                                                 |  |           |         |                  |  |            |       |  |  |   |       |  |  |   |         | 

The following table presents the amortized cost
of securities available for sale at December 31, 2002,
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

27



---



##### 



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            |  | $                          | 212,796 |                    |  |                    | 2.63 | %              |  | $      | 10,209  |       |  |        | 4.83 | %     |  |        |        |       |  |  |     |   |  |   |      |  |  |  |     |   |  | $ | 223,005 |  |  |  | 2.73 | %
|Mortgage-backed securities                       |  |                            | 172,615 |                    |  |                    | 5.34 |                |  |        | 124,932 |       |  |        | 5.16 |       |  | $      | 23,716  |       |  |  | 5.68 | % |  | $ | 2,635 |  |  |  | 5.69 | % |  |   | 323,898 |  |  |  | 5.29 |  
|Obligations of states and political subdivisions |  |                            | 18,487  |                    |  |                    | 6.02 |                |  |        | 77,263  |       |  |        | 7.49 |       |  |        | 69,889  |       |  |  | 7.33 |   |  |   | 1,707 |  |  |  | 7.42 |   |  |   | 167,346 |  |  |  | 7.26 |  
|Other debt securities                            |  |                            | 750     |                    |  |                    | 5.07 |                |  |        | 1,567   |       |  |        | 7.71 |       |  |        | 3,885   |       |  |  | 5.31 |   |  |   | 512   |  |  |  | 7.42 |   |  |   | 6.714   |  |  |  | 6.01 |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |       |  |  |  |      |   |  |   |         |  |  |  |      |  
|Total                                            |  | $                          | 404,648 |                    |  |                    | 3.94 | %              |  | $      | 213,971 |       |  |        | 6.01 | %     |  | $      | 97,490  |       |  |  | 6.85 | % |  | $ | 4,854 |  |  |  | 6.48 | % |  | $ | 720,963 |  |  |  | 4.96 | %
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |       |  |  |  |      |   |  |   |         |  |  |  |      |  
|Estimated fair value                             |  | $                          | 412,701 |                    |  |                    |      |                |  | $      | 222,380 |       |  |        |      |       |  | $      | 102,350 |       |  |  |      |   |  | $ | 5,055 |  |  |  |      |   |  | $ | 742,486 |  |  |  |      |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |       |  |  |  |      |   |  |   |         |  |  |  |      |  

Obligations of U.S. Treasury and government
agencies principally include U.S. Treasury securities and
debentures and notes issued by the FHLB, the Federal National
Mortgage Association (FNMA) and the Federal Home
Loan Mortgage Corporation (FHLMC). The total
balances held of such securities was $224.7 million,
$106.8 million and $223.2 million at December 31,
2002, 2001 and 2000, respectively. The December 31, 2002
balance increased $117.9 million resulting from
$646.6 million in purchases, and other increases of
$2.0 million, offset by $530.7 million of maturities
and calls. The December 31, 2001 balance decreased
$116.4 million, resulting from $106.1 million in
purchases and other increases of $3.9 million offset by
$178.6 million of maturities and calls and sales of
$47.8 million. In 2002, purchases and maturities included
$574.2 million and $424.4 million, respectively, of
short-term U.S. Treasury and government agency obligations
with remaining maturities of less than 60 days at the time
of purchase. The Company has increased the amount of short-term
investments as part of its ongoing asset/liability
management during the current low interest rate environment. For
2001, purchases consisted primarily of callable
U.S. government agency bonds that offered attractive
yields. The calls resulted from generally lower interest rates
at the time of the calls. The sales were conducted as part of
the Companys ongoing portfolio management.

The Company invests in mortgage-backed
securities, including collateralized mortgage obligations
(CMOs), that are primarily issued by the Government
National Mortgage Association (GNMA), FNMA, FHLMC
and, to a lesser extent, 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. FNMA and FHLMC 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. At December 31, 2002 and 2001, the
Company held $12.8 million of mortgage-backed securities
issued by private issuers who have AAA ratings
issued by Standard and Poors, a nationally recognized credit
rating organization.

Mortgage-backed securities, including CMOs,
decreased $18.8 million to $334.0 million and
increased $72.0 million to $352.8 million at December 31,
2002 and 2001, respectively, as compared to the $280.8 million
at December 31, 2000. The decrease in 2002 was due to
principal paydowns and redemptions of $241.3 million and
sales of $0.8 million offset by purchases of
$220.4 million and other increases of $2.9 million.
The increase for 2001 results from purchases of $179.8 million
and other increases of $3.8 million, offset by principal
paydowns of $111.6 million. The purchases were fixed and
variable rate mortgage-backed securities with average lives of
less than ten years at the time of purchase.

During 2002, purchases of fixed rate
mortgage-backed securities of $170.8 million and other
increases of $3.8 million were offset by principal paydowns
of $226.3 million. During 2002, purchases of adjustable
rate mortgage-backed securities of $49.6 million were
partially offset by sales of $0.8 million, principal
paydowns of $15.0 million and other reductions of
$0.9 million. During 2001, purchases of fixed rate
mortgage-backed securities totaling $157.4 million and other
increases of $0.3 million were partially offset by
principal paydowns of $89.7 million. During 2001, purchases
of adjustable rate mortgage-backed securities totaling $22.4
million and other increases of $0.8 million were partially
offset by principal paydowns of $21.9 million.

28



---



##### 



The outstanding balances in obligations of states
and political subdivisions at December 31, 2002, 2001 and
2000 were $176.8 million, $159.5 million and
$147.4 million, respectively. The December 31, 2002
balance increased $17.3 million resulting from purchases of
$28.0 million and other increases of $5.6 million,
partially offset by maturities and redemptions of
$16.3 million. The December 31, 2001 balance increased
$12.1 million resulting from purchases of
$27.2 million, and other increases of $0.3 million
offset by maturities of $15.4 million. The obligations at
year end 2002 were comprised of approximately 64 percent
for New York State political subdivisions and 36 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.

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 credit. These non-rated securities outstanding at
December 31, 2002 totaled approximately $7.7 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, 2002.

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 Bank originates these
loans primarily for its portfolio, although a significant
portion of its residential real estate loans, in addition to
meeting the Bank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
Bank generally on a fixed or variable rate basis with
5 year terms and, exceptionally, up to 10 year terms.
Amortizations generally range up to 25 years.

In underwriting commercial real estate loans, the
Bank evaluates both the prospective borrowers ability to
make timely payments on the loan and the value of the property
securing the loan. The Bank generally utilizes licensed or
certified appraisers, previously approved by the Bank, 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 Bank
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 Bank
also evaluates the businesss ability to repay the loan on
a timely basis. In addition, the Bank may require personal
guarantees, lease assignments 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 Bank 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 24 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

29



---



##### 



interest, although some fixed rate financing is
provided on residential property. The loan amount is generally
limited to 75% of value. Most non-residential construction loans
require pre-approved permanent financing or pre-leasing with the
Bank providing the permanent financing. The Bank does not
generally fund construction loans for single family homes or
commercial real estate built by investors until the builder has
a firm sales contract for the building to be constructed,
although in certain projects, model homes may be financed within
the overall site improvement financing. Repayment of such loans
may be negatively impacted by the builders inability to
complete construction, by a downturn in the new construction
market, by a significant increase in interest rates or by a
decline in general economic conditions.


Residential real estate loans are offered by the
Bank with terms of up to 30 years and loan to value ratios
of up to 95%. However, for loan to value ratios in excess of
80%, the Bank generally requires private mortgage insurance. The
Bank 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 Federal
Home Loan Mortgage Corp. guidelines that allow for the sale of
such loans in the secondary market. 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.

During the fourth quarter of 2002, the Bank began
offering a home equity line of credit subject to minimum and
maximum limits of $50,000 and $1,000,000, respectively, for 1-4
family properties which are the borrowers primary residence. The
loan has a term of 30 years and does not convert to an
amortizing loan at any point. The loan is subject to a maximum
combined loan to value ratio of 80% and has an interest rate
equal to the prime rate, as published in the Wall Street
Journal, for the entire term of the loan. The Bank pays all
costs of origination for loans between $50,000 and $500,000,
subject to a minimum 25% utilization of the line during the
first two years.

The Bank also offers a home equity line of credit
subject to a limit of $500,000 with a maximum combined loan to
value ratio of 80%. The interest rate for the first year is the
Banks prime rate, with the rate changing to prime plus 1%
for the remaining term of the loan. The loan has a term of
25 years with the first 10 years structured as a line of
credit with payments of interest only, with the loan converting
to a fully amortizing term loan for the remaining 15 years.
The borrower pays all costs associated with originating this
loan. There are no prepayment penalties. The Bank also offers a
home secured loan subject to a limit of $100,000 with a maximum
combined loan to value ratio of 80%. The loan has a 15 year
term with a fixed rate of interest. The Bank pays the costs
associated with originating this loan and requires a prepayment
penalty during the first three years of the loan.

Commercial and Industrial Loans:The Banks commercial and
industrial loan portfolio consists primarily of commercial
business loans and lines of credit to small and medium sized
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 the terms of 1 to 5 years
with, exceptionally, a 7 year term. In granting this type
of loan, the Bank 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 Bank
generally requires a debt service coverage ratio of at least
125%. The Bank is an approved Small Business Administration
(SBA) lender and offers a variety of SBA products.
Commercial loans are often larger and may involve greater risks
than other types of loans offered by the Bank. 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 Banks claims
against assets, death or disability of the borrower or loss of
market for the borrowers products or services.

30



---



##### 



Loans to Individuals and Leasing:The Bank 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 5 year terms 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 Bank does not place an
emphasis on originating these types of loans.

In March 2000, the Company ended its
participation, which began in 1998, in an automobile leasing
program due to the sale of the company that originated and
serviced the leases and resulting changes to various aspects of
the program. The balance of $6.5 million of such leases at
December 31, 2002 will continue to decline as repayments of
existing leases continue. The Company has not determined if it
will seek to participate in a similar program in the future.

During the fourth quarter of 2000, the Bank began
originating 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 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.

During 2002, average net loans increased
$58.5 million to $619.1 million, and increased
$113.8 million in 2001 to $560.6 million, as compared
to $446.8 million in 2000. At December 31, 2002, gross
loans increased $45.5 million or 7.5 percent to
$655.4 million, compared to $609.9 million at
December 31, 2001, which increased $97.6 million, or
19.1 percent compared to $512.3 million at
December 31, 2000. This growth in gross loans resulted
primarily from:



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increases during 2002 and 2001 of
    $20.6 million and $29.1 million, respectively, in
    commercial real estate mortgages, due primarily to increased
    activity and greater market penetration,                                                                  
|
| |  | Increases in construction loans of
    $4.2 million and $19.6 million, respectively,
    resulting from a greater emphasis on this product including an
    expanded offering and focused marketing,                                                                   
|
| |  | Decreases in residential real estate mortgages of
    $10.6 million and increase of $19.4 million,
    respectively, primarily as a result of increased activity,
    offset in 2002 by accelerated prepayment experience due to the
    low interest rate environment,
|
| |  | Increases in commercial and industrial loans of
    $38.7 million and $33.3 million, respectively,
    primarily due to increased activity and a greater emphasis on
    this product with resulting increased market penetration,                                     
|
| |  | A decrease of $10.1 million and
    $1.7 million, respectively, in lease financings resulting
    from the participation in an automobile leasing program
    beginning in late 1998 and discontinued in March 2000, and                                               
|
| |  | Increases in loans to individuals of
    $2.7 million and $1.2 million, respectively.                                                                                                                                                                                  

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

|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |         | 
|------------------------- | ------------ | ------- | ------- | ------- |  | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                          |              |        
|                          |              | (000s)
|                          |              |        
|                          |              | 2002    |         | 2001    |  | 2000 |         | 1999    |  | 1998
|                          |              |         |         |         |  |      |         |         |  |     
|Real Estate:              |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|                          | Commercial   |         | $       | 231,411 |  |      | $       | 210,840 |  |      | $       | 181,735 |  |   | $       | 153,823 |  |   | $       | 111,397 | 
|                          | Construction |         |         | 56,691  |  |      |         | 52,496  |  |      |         | 32,869  |  |   |         | 26,526  |  |   |         | 12,311  | 
|                          | Residential  |         |         | 164,287 |  |      |         | 174,859 |  |      |         | 155,449 |  |   |         | 127,959 |  |   |         | 114,020 | 
|Commercial and industrial |              |         | 179,288 |         |  |      | 140,573 |         |  |      | 110,555 |         |  |   | 77,276  |         |  |   | 65,923  |        
|Individuals               |              |         | 14,509  |         |  |      | 11,824  |         |  |      | 10,677  |         |  |   | 9,280   |         |  |   | 5,801   |        
|Lease financing           |              |         | 9,224   |         |  |      | 19,282  |         |  |      | 20,970  |         |  |   | 23,543  |         |  |   | 2,755   |        
|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|Total                     |              |         | 655,410 |         |  |      | 609,874 |         |  |      | 512,255 |         |  |   | 418,407 |         |  |   | 312,207 |        
|Deferred loan fees        |              |         | (1,462  | )       |  |      | (1,479  | )       |  |      | (1,338  | )       |  |   | (1,446  | )       |  |   | (973    | )      
|Allowance for loan losses |              |         | (11,510 | )       |  |      | (8,018  | )       |  |      | (4,816  | )       |  |   | (4,047  | )       |  |   | (3,103  | )      
|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|Loans, net                |              | $       | 642,438 |         |  | $    | 600,377 |         |  | $    | 506,101 |         |  | $ | 412,914 |         |  | $ | 308,131 |        
|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        

31



---



##### 



The Companys primary lending emphasis is
for loans to businesses and developers, primarily in the form of
commercial 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 2002 and 2001, 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, 2002, the Company
had total gross loans with fixed rates of interest of
$374.3 million, or 57.1 percent, and total gross loans
with variable or floating rates of interest of
$281.1 million, or 42.9 percent, as compared to $355.1
million or 58.2 percent of fixed rate loans and $254.8
million or 41.8 percent of variable or floating rate loans
at December 31, 2001.

At December 31, 2002 and 2001, the Company
had approximately $129.4 million and $130.2 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, 2002 excluding loans to
individuals, real estate mortgages (other than construction
loans) and lease financings, and the amount of 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  construction            |  | $                          | 40,920 |            |  | $       | 8,857  |       |  | $       | 6,914  |   |  | $ | 56,691  |   |  |  | 24.0  | %
|Commercial and industrial             |  |                            | 53,494 |            |  |         | 82,634 |       |  |         | 43,160 |   |  |   | 179,288 |   |  |  | 76.0  | %
|                                      |  |                            |        |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Total                                 |  | $                          | 94,414 |            |  | $       | 91,491 |       |  | $       | 50,074 |   |  | $ | 235,979 |   |  |  | 100.0 | %
|                                      |  |                            |        |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Rate Sensitivity:                     |  |                            |        |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Fixed or predetermined interest rates |  | $                          | 5,085  |            |  | $       | 42,773 |       |  | $       | 37,202 |   |  | $ | 85,060  |   |  |  | 36.0  | %
|Floating or adjustable interest rates |  |                            | 89,329 |            |  |         | 48,718 |       |  |         | 12,872 |   |  |   | 150,919 |   |  |  | 64.0  | %
|                                      |  |                            |        |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Total                                 |  | $                          | 94,414 |            |  | $       | 91,491 |       |  | $       | 50,074 |   |  | $ | 235,979 |   |  |  | 100.0 | %
|                                      |  |                            |        |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Percent                               |  |                            | 40.0   | %          |  |         | 38.8   | %     |  |         | 21.2   | % |  |   | 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, other real estate owned
(OREO) and related interest income not recorded on
non-accrual loans as of and for the year ended December 31:

|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                                                                             |  |                           
|                                                                                                                             |  | (000s except percentages)
|                                                                                                                             |  |                           
|                                                                                                                             |  | 2002                       |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |     
|Non-accrual loans at year end                                                                                                |  | $                          | 4,758 |      |  | $    | 3,523 |      |  | $    | 4,584 |   |  | $ | 3,855 |   |  | $ | 633   |  
|OREO at year end                                                                                                             |  |                            | 1,831 |      |  |      | 2,021 |      |  |      | 2,117 |   |  |   | 2,193 |   |  |   | 2,102 |  
|Restructured loans at year end                                                                                               |  |                            |      |      |  |      |      |      |  |      |      |   |  |   | 323   |   |  |   | 428   |  
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Total nonperforming assets                                                                                                   |  | $                          | 6,589 |      |  | $    | 5,544 |      |  | $    | 6,701 |   |  | $ | 6,371 |   |  | $ | 3,163 |  
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Loans past due 90 days or more and still
    accruing                                                                        |  |                            | 1,596 |      |  |      | 137   |      |  |      | 469   |   |  |   | 264   |   |  |   | 1,442 |  
|Additional interest income that would have been
    recorded if these borrowers had complied with contractual loan
    terms |  |                            | 179   |      |  |      | 511   |      |  |      | 763   |   |  |   | 698   |   |  |   | 362   |  
|Nonperforming assets to total assets at year end                                                                             |  |                            | 0.43  | %    |  |      | 0.40  | %    |  |      | 0.52  | % |  |   | 0.56  | % |  |   | 0.34  | %

32



---



##### 



At December 31, 2002, the Company had no
commitments to lend additional funds to customers with
non-accrual or restructured loan balances. Non-accrual loans
increased in 2002 to $4.8 million from $3.5 million
and decreased in 2001 to $3.5 million, from $4.6 million in
2000. 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, 2002, loans that aggregated
approximately $1.2 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, 2002, 2001 and 2000.

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
$4.7 million, $2.5 million and $2.1 million at
December 31, 2002, 2001 and 2000, respectively, have been
measured based on the estimated fair value of the collateral
since these loans are all collateral dependent. The total
allowance for loan losses specifically allocated to impaired
loans was $1,282,000, $807,000 and $125,000 at December 31,
2002, 2001 and 2000, respectively. The average recorded
investment in impaired loans for the years ended
December 31, 2002, 2001 and 2000 was approximately
$3.5 million, $2.3 million and $2.2 million, respectively.
No income was recorded on impaired loans during the portion of
the year that they were impaired.

Allowance for Loan Losses and Provision for
Loan Losses

Allowance for Loan
Losses

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

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 allowance.

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 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 problem credits or portfolio
segments.

33



---



##### 



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,
|                             |  | 2002         |        | During 2002 |  | 2001         |       | During 2001 |  | 2000        
|                             |  |              |        |             |  |              |       |             |  |             
|Components:                  |  |              |        |             |  |              |       |             |  |              |       |  |  |   |        |   |  |   |       | 
|Specific                     |  | $            | 1,282  |             |  | $            | 475   |             |  | $            | 807   |  |  | $ | 682    |   |  | $ | 125   | 
|Formula                      |  |              | 1,328  |             |  |              | 817   |             |  |              | 511   |  |  |   | 120    |   |  |   | 391   | 
|Unallocated                  |  |              | 8,900  |             |  |              | 2,200 |             |  |              | 6,700 |  |  |   | 2,400  |   |  |   | 4,300 | 
|                             |  |              |        |             |  |              |       |             |  |              |       |  |  |   |        |   |  |   |       | 
|Total allowance              |  | $            | 11,510 |             |  |              |       |             |  | $            | 8,018 |  |  |   |        |   |  | $ | 4,816 | 
|                             |  |              |        |             |  |              |       |             |  |              |       |  |  |   |        |   |  |   |       | 
|Net change                   |  |              |        |             |  |              | 3,492 |             |  |              |       |  |  |   | 3,202  |   |  |   |       | 
|Net recoveries/(charge-offs) |  |              |        |             |  |              | (410  | )           |  |              |       |  |  |   | (1,178 | ) |  |   |       | 
|                             |  |              |        |             |  |              |       |             |  |              |       |  |  |   |        |   |  |   |       | 
|Provision (credit) amount    |  |              |        |             |  | $            | 3,902 |             |  |              |       |  |  | $ | 4,380  |   |  |   |       | 
|                             |  |              |        |             |  |              |       |             |  |              |       |  |  |   |        |   |  |   |       | 

|                             |  |             |       |              |  |             |       |              |  |             |     |              |  |   |       |  |  |   |      |   |  |   |       | 
|---------------------------- |  | ----------- | ----- | ------------ |  | ----------- | ----- | ------------ |  | ----------- | --- | ------------ |  | - | ----- |  |  | - | ---- | - |  | - | ----- | 
|                             |  | Change      |       | December 31, |  | Change      |       | December 31, |  | Change      |     | December 31,
|                             |  | During 2000 |       | 1999         |  | During 1999 |       | 1998         |  | During 1998 |     | 1997        
|                             |  |             |       |              |  |             |       |              |  |             |     |             
|Components:                  |  |             |       |              |  |             |       |              |  |             |     |              |  |   |       |  |  |   |      |   |  |   |       | 
|Specific                     |  | $           | 68    |              |  | $           | 57    |              |  | $           | (21 | )            |  | $ | 78    |  |  | $ | (65  | ) |  | $ | 143   | 
|Formula                      |  |             | (476  | )            |  |             | 867   |              |  |             | 124 |              |  |   | 743   |  |  |   | 50   |   |  |   | 693   | 
|Unallocated                  |  |             | 1,177 |              |  |             | 3,123 |              |  |             | 841 |              |  |   | 2,282 |  |  |   | (415 | ) |  |   | 2,697 | 
|                             |  |             |       |              |  |             |       |              |  |             |     |              |  |   |       |  |  |   |      |   |  |   |       | 
|Total allowance              |  |             |       |              |  | $           | 4,047 |              |  |             |     |              |  | $ | 3,103 |  |  |   |      |   |  | $ | 3,533 | 
|                             |  |             |       |              |  |             |       |              |  |             |     |              |  |   |       |  |  |   |      |   |  |   |       | 
|Net change                   |  |             | 769   |              |  |             |       |              |  |             | 944 |              |  |   |       |  |  |   | (430 | ) |  |   |       | 
|Net recoveries/(charge-offs) |  |             | (375  | )            |  |             |       |              |  |             | 344 |              |  |   |       |  |  |   | (130 | ) |  |   |       | 
|                             |  |             |       |              |  |             |       |              |  |             |     |              |  |   |       |  |  |   |      |   |  |   |       | 
|Provision (credit) amount    |  | $           | 1,144 |              |  |             |       |              |  | $           | 600 |              |  |   |       |  |  | $ | (300 | ) |  |   |       | 
|                             |  |             |       |              |  |             |       |              |  |             |     |              |  |   |       |  |  |   |      |   |  |   |       | 

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

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:

2002



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic and business conditions  The
    decline in the economy during the year ended December 31,
    2002 as evidenced by increased unemployment and increased
    bankruptcy filings throughout the country and in the
    Companys market area has, in managements judgement,
    caused a slowdown in economic and business activity within the
    Companys primary market, caused a softening in demand for
    certain commercial real estate, which has negatively impacted
    valuations of the Companys primary collateral for loans,
    and has created greater uncertainty regarding the ability of
    borrowers to repay their loans. Therefore, consideration of
    events that trigger economic uncertainty is a part of the
    determination of the unallocated component of the allowance.

34



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Concentration  Concentration in
    commercial and industrial loans increased to 27.4 percent
    of the portfolio from 23.1 percent at the prior year end,
    an increase of $38.7 million. These types of loans
    generally have a higher degree of risk than other types of loans
    which the Bank makes since repayment of the loans is largely
    dependent on the borrowers ability to successfully operate
    their businesses. An increase in such concentration, and the
    associated increase in risk, is not reflected in the formula
    component of the allowance due to the lag caused by using three
    year historical losses in determining the loss factors.
    Therefore, consideration of increases in concentration is a part
    of the determination of the unallocated component of the
    allowance.                                                         
|
| |  | Credit quality  Non-accrual loans and
    loans past due 90 days or more and still accruing increased
    at December 31, 2002 by $2.7 million, or
    73.6 percent to $6.4 million from $3.7 million at
    December 31, 2001. Further, as the result of the
    Banks regular periodic loan review process, certain loans
    were downgraded due to potential deterioration of collateral
    values, the borrowers cash flows or other specific factors
    that negatively impact the borrowers ability to meet their
    loan obligations. Certain of these loans are also considered in
    connection with the analysis of impaired loans performed to
    determine the specific component of the allowance. However, due
    to the uncertainty of that determination, such loans are also
    considered in the process of determining the unallocated
    component of the allowance.
|
| |  | New loan products  The Bank began
    financing business equipment leases during the fourth quarter of
    2000. Any probable losses with respect to business equipment
    leases are not reflected in the formula component of the
    allowance for loan losses since there is no loss history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that an increase in the unallocated component of the
allowance of $2.2 million reflects our best estimate of
probable losses which have been incurred as of December 31,
2002.

2001



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic and business conditions  The
    decline in the economy during the year ended December 31,
    2001 as evidenced by increased unemployment and increased
    bankruptcy filings throughout the country and in the
    Companys market area and the sudden and unprecedented
    destruction of the World Trade Center on September 11, 2001
    has, in managements judgement, caused a slowdown in
    economic and business activity within the Companys primary
    market, caused a softening in demand for commercial real estate,
    which has negatively impacted valuations of the Companys
    primary collateral for loans, and has created greater
    uncertainty regarding the ability of borrowers to repay their
    loans. Therefore, consideration of events that trigger economic
    uncertainty is a part of the determination of the unallocated
    component of the allowance.                                                                                                                                                                                                                                                                                  
|
| |  | Concentration  Net loans increased by
    $94.3 million to $600.4 million during the year ended
    December 31, 2001 from $506.1 million as of
    December 31, 2000. This represented 43.7 percent of
    total assets as of December 31, 2001, up from
    39.2 percent as of the prior year-end. Although the
    concentration in commercial real estate decreased to
    34.6 percent of total loans as of December 31, 2001
    from 35.5 percent as of the prior year-end, commercial
    loans increased $29.1 million. Concentration in
    construction loans increased to 8.6 percent of total loans
    as of December 31, 2001 from 6.4 percent as of the
    prior year-end, an increase of $19.6 million. These
    increases have created greater exposure to volatility in real
    estate values in a limited geographic area. Increases in such
    concentrations are not reflected in the formula component of the
    allowance due to the lag caused by using three-year historical
    losses in determining the loss factors. Therefore, consideration
    of increases in concentrations 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 were $3.7 million after net
    loan charge-offs for the year of $1.2 million. Certain
    other 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

35



---



##### 



| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | determining the unallocated component of the
    allowance. The increase in charge-off experience will result in
    future increases of the formula component of the allowance.                                                                                                                 
|
| |  | New loan products  The Bank began
    financing business equipment leases during the last quarter of
    2000. Any probable losses with respect to business equipment
    leases are not reflected in the formula component of the
    allowance for loan losses since there is no loss history.

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that an increase in the unallocated component of the
allowance of $2.4 million reflects our best estimate of
probable losses which have been incurred as of December 31,
2001.

2000



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Concentration  Concentration in
    commercial and industrial loans increased to 21.6 percent
    of the portfolio from 18.5 percent at the prior year end,
    an increase of $33.3 million. These types of loans generally
    have a higher degree of risk than other types of loans which the
    Bank makes since the repayment of the loans is largely dependent
    on the borrowers ability to successfully operate their
    businesses. An increase in such concentration, and the
    associated increase in risk, is not reflected in the formula
    component of the allowance due to the lag caused by using three
    year historical losses in determining the loss factors.
    Therefore, consideration of increases in concentration is a part
    of the determination of the unallocated component of the
    allowance.
|
| |  | Credit quality  Non-accrual loans and
    loans past due 90 days or more increased by $0.9 million.
    Certain of the 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.                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Change in underwriting criteria  The
    Bank increased its loan to value ratio guidelines on all loans
    secured by real estate (except for loans secured by 1-4 family
    residential real estate) to remain competitive for such loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | New loan products  The Bank began
    financing business equipment leases during the period. Any
    probable losses with respect to business equipment leases are
    not reflected in the formula component of the allowance for loan
    losses since there is no loss history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Economic and business conditions 
    Increasing interest rates negatively affected the general
    ability of borrowers to repay their loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that an increase in the unallocated component of the
allowance of $1.2 million reflects our best estimate of probable
losses which have been incurred as of December 31, 2000.

1999



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Concentration  The Banks
    concentration in construction loans increased to
    6.3 percent of the portfolio from 3.9 percent of the
    portfolio at the end of the prior year, an increase of $14.2
    million. The Bank has had no charge-offs of such loans during
    the past three years, and therefore, there is no formula
    component of the allowance for loan losses for construction
    loans.                                                                                                                                         
|
| |  | Credit quality  Non-accrual loans and
    loans past due 90 days or more increased by $2.0 million.
    Other loans aggregating approximately $2.5 million, which are
    not in a non-accrual status, were identified at
    December 31, 1999 as potential problem loans. An analysis
    of impaired loans is 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  Automobile lease
    financing, with which the Bank has no historical loss
    experience, increased by $20.1 million. Any probable losses with
    respect to automobile lease financing                                                                                                                                                                                                                                                                                                                                               

36



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | are not reflected in the formula component of the
    allowance for loan losses since there is no loss history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |   | The Bank introduced an SBA loan product, and
    hired an employee designated to originate such loans. While the
    Bank has made several SBA loans in the past, this new emphasis
    is designed to aggressively increase these types of loans. While
    these loans contain a guarantee from the SBA for a major portion
    of the loan, there is increased exposure due to the credit
    profile of the businesses that generally obtain such loans. In
    addition, the Banks general lack of familiarity with such
    loans, including the extensive documentation and compliance
    process that, if deficient, could void the SBA guarantee, adds
    to increased risk.
|
| |  | Geographic expansion  The Bank made
    construction loans on Long Island, New York, a geographic area
    with which the Bank has little experience. In addition, the Bank
    established a physical presence in Bronx County, New York,
    through the opening of a full service branch and, as a result,
    expanded its general lending activities in a new market.                                                                                                                                                                                                                                                                                                             
|
| |  | Increase in Loans to One Borrower
    limits  The Bank increased its lending limits to
    select customers to as high as the Banks legal lending
    limit. This increased the Banks exposure to certain
    customers and increased concentrations to certain customers.                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Economic and business conditions 
    Increasing collateral values resulting from a favorable real
    estate market were partially offset by the effect of increasing
    interest rates on the general ability of borrowers to repay
    their loans.                                                                                                                                                                                                                                                                                                                                                                                                                                

As a result of our detailed review process and
consideration of the identified relevant factors, management
determined that an increase in the unallocated component of the
allowance of $841,000 reflects our best estimate of probable
losses which have been incurred as of December 31, 1999.

1998



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Credit quality  Non-accrual loans and
    loans past due 90 days or more decreased by $1.1 million.
    Certain of the loans are also considered in connection with the
    analysis of impaired loans performed to determine the specific
    component of the allowance. However, due to the uncertainty of
    that determination such loans are also considered in the process
    of determining the unallocated component of the allowance.
|
| |  | New loan products  The Bank introduced
    limited new loan products during 1998.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Economic and business conditions 
    Declining interest rates increased the general ability of
    borrowers to repay their loans.                                                                                                                                                                                                                                                                                                              

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 $415,000 reflects our best estimate of probable
losses which have been incurred as of December 31, 1998.

37



---



##### 



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

|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |      |     |  
|------------------------------------------------------------------------------------ | ------------------------------- | -------------------------- | ------- | ---- | - | ---- | ------- | ------ | - | ---- | ------- | ---- | --- | - | ------- | --- | --- | - | ------- | ---- | --- | -
|                                                                                     |                                 |                           
|                                                                                     |                                 | (000s except percentages)
|                                                                                     |                                 |                           
|                                                                                     |                                 | 2002                       |         | 2001 |   | 2000 |         | 1999   |   | 1998
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |     
|Net loans outstanding at end of year                                                 |                                 | $                          | 642,438 |      |   | $    | 600,377 |        |   | $    | 506,101 |      |     | $ | 412,914 |     |     | $ | 308,131 |     
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Average net loans outstanding during the year                                        |                                 |                            | 619,098 |      |   |      | 560,584 |        |   |      | 446,843 |      |     |   | 355,628 |     |     |   | 279,378 |     
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Allowance for loan losses:                                                           |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Balance, beginning of year                                                           |                                 | $                          | 8,018   |      |   | $    | 4,816   |        |   | $    | 4,047   |      |     | $ | 3,103   |     |     | $ | 3,533   |     
|Provision (credit) charged to expense                                                |                                 |                            | 3,902   |      |   |      | 4,380   |        |   |      | 1,144   |      |     |   | 600     |     |     |   | (300    | )   
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|                                                                                     |                                 |                            | 11,920  |      |   |      | 9,196   |        |   |      | 5,191   |      |     |   | 3,703   |     |     |   | 3,233   |     
|Charge-offs and recoveries during the year:                                          |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Charge offs:                                                                         |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|                                                                                     | Real estate:                    |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |      |    
|                                                                                     |                                 | Commercial                 |         |      |  |      |         |        |  |      |         |      |    |   |         |     |    |   |         |      |    |  
|                                                                                     |                                 | Construction               |         |      |  |      |         |        |  |      |         |      |    |   |         |     |    |   |         |      |    |  
|                                                                                     |                                 | Residential                |         |      |  |      |         |        |  |      |         |      | (29 | ) |         |     | (11 | ) |         |      | (70 | )
|                                                                                     | Commercial and industrial       |                            |         | (290 | ) |      |         | (1,407 | ) |      |         | (378 | )   |   |         | (85 | )   |   |         | (250 | )  
|                                                                                     | Lease financing and individuals |                            |         | (189 | ) |      |         | (21    | ) |      |         | (21  | )   |   |         | (14 | )   |   |         | (18  | )  
|Recoveries:                                                                          |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|                                                                                     | Real estate:                    |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |      |    
|                                                                                     |                                 | Commercial                 |         |      |  |      |         |        |  |      |         |      |    |   |         |     | 381 |   |         |      | 36  |  
|                                                                                     |                                 | Construction               |         |      |  |      |         |        |  |      |         |      |    |   |         |     |    |   |         |      |    |  
|                                                                                     |                                 | Residential                |         |      |  |      |         |        | 6 |      |         |      |    |   |         |     |    |   |         |      | 35  |  
|                                                                                     | Commercial and industrial       |                            |         | 66   |   |      |         | 242    |   |      |         | 49   |     |   |         | 73  |     |   |         | 135  |    
|                                                                                     | Lease financing and individuals |                            |         | 3    |   |      |         | 2      |   |      |         | 4    |     |   |         |    |     |   |         | 2    |    
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Net (charge-offs) recoveries during the year                                         |                                 |                            | (410    | )    |   |      | (1,178  | )      |   |      | (375    | )    |     |   | 344     |     |     |   | (130    | )   
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Balance, end of year                                                                 |                                 | $                          | 11,510  |      |   | $    | 8,018   |        |   | $    | 4,816   |      |     | $ | 4,047   |     |     | $ | 3,103   |     
|                                                                                     |                                 |                            |         |      |   |      |         |        |   |      |         |      |     |   |         |     |     |   |         |     
|Ratio of net charge-offs to average net loans
    outstanding during the year        |                                 |                            | 0.07    | %    |   |      | 0.21    | %      |   |      | 0.08    | %    |     |   |        |     |     |   | 0.05    | %   
|Ratio of allowance for loan losses to gross loans
    outstanding at end of the year |                                 |                            | 1.76    | %    |   |      | 1.31    | %      |   |      | 0.94    | %    |     |   | 0.97    | %   |     |   | 1.00    | %   

38



---



##### 



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

|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |       |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |       |  
|------------------------------- | ------------ | -------------------------- | ------ | ---------- |  | -------- | ------- | --------- |  | ---------- | ------ | -------- | - | --------- | ----- | ---------- |  | -------- | ------- | ------- |  |  | ------ | ----- | - | - | ----- | --- |  | - | ------- | ------- |  |  | ------ | ----- | -
|                                |              |                           
|                                |              | (000s except percentages)
|                                |              |                           
|                                |              |                            |        |            |  |         
|                                |              | 2002                       |        | 2001       |  | 2000    
|                                |              |                            |        |            |  |         
|                                |              |                            |        | Percent    |  |          |         | Percent   |  |            |        | Percent 
|                                |              |                            |        | of Loans   |  |          |         | of Loans  |  |            |        | of Loans
|                                |              |                            |        | in each    |  |          |         | in each   |  |            |        | in each 
|                                |              | Amount of                  |        | Loan       |  | Category |         | Amount of |  | Loan       |        | Category |   | Amount of |       | Loan       |  | Category
|                                |              | Loan Loss                  |        | Amounts by |  | by Total |         | Loan Loss |  | Amounts by |        | by Total |   | Loan Loss |       | Amounts by |  | by Total
|                                |              | Allowance                  |        | Category   |  | Loans    |         | Allowance |  | Category   |        | Loans    |   | Allowance |       | Category   |  | Loans   
|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |       |            |  |         
|Real Estate:                    |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |       |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      
|                                | Commercial   |                            | $      | 375        |  |          | $       | 231,411   |  |            |        | 35.31    | % |           | $     | 807        |  |          | $       | 210,840 |  |  |        | 34.57 | % |   |       |    |  |   | $       | 181,735 |  |  |        | 35.48 | %
|                                | Construction |                            |        | 100        |  |          |         | 56,691    |  |            |        | 8.65     |   |           |       | 189        |  |          |         | 52,496  |  |  |        | 8.61  |   |   | $     | 125 |  |   |         | 32,869  |  |  |        | 6.42  |  
|                                | Residential  |                            |        | 12         |  |          |         | 164,287   |  |            |        | 25.07    |   |           |       | 41         |  |          |         | 174,859 |  |  |        | 28.67 |   |   |       | 27  |  |   |         | 155,449 |  |  |        | 30.35 |  
|Commercial and industrial       |              |                            | 2,116  |            |  |          | 179,288 |           |  |            | 27.36  |          |   |           | 239   |            |  |          | 140,573 |         |  |  | 23.05  |       |   |   | 322   |     |  |   | 110,555 |         |  |  | 21.58  |      
|Lease financing and individuals |              |                            | 7      |            |  |          | 23,733  |           |  |            | 3.61   |          |   |           | 42    |            |  |          | 31,106  |         |  |  | 5.10   |       |   |   | 42    |     |  |   | 31,647  |         |  |  | 6.17   |      
|Unallocated                     |              |                            | 8,900  |            |  |          |        |           |  |            |       |          |   |           | 6,700 |            |  |          |        |         |  |  |       |       |   |   | 4,300 |     |  |   |        |         |  |  |       |      
|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |       |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      
|Total                           |              | $                          | 11,510 |            |  | $        | 655,410 |           |  |            | 100.00 | %        |   | $         | 8,018 |            |  | $        | 609,874 |         |  |  | 100.00 | %     |   | $ | 4,816 |     |  | $ | 512,255 |         |  |  | 100.00 | %    
|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |       |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      

|                                |              |                            |       |            |  |          |         |           |  |          |        |          |   |   |       |     |  |   |         |         |  |  |        |       |  
|------------------------------- | ------------ | -------------------------- | ----- | ---------- |  | -------- | ------- | --------- |  | -------- | ------ | -------- | - | - | ----- | --- |  | - | ------- | ------- |  |  | ------ | ----- | -
|                                |              |                           
|                                |              | (000s except percentages)
|                                |              |                           
|                                |              |                            |       |           
|                                |              | 1999                       |       | 1998      
|                                |              |                            |       |           
|                                |              |                            |       | Percent    |  |          |         | Percent  
|                                |              |                            |       | of Loans   |  |          |         | of Loans 
|                                |              |                            |       | in each    |  |          |         | Loan      |  | in each 
|                                |              | Amount of                  |       | Loan       |  | Category |         | Amount of |  | Amounts  |        | Category
|                                |              | Loan Loss                  |       | Amounts by |  | by Total |         | Loan Loss |  | by       |        | by Total
|                                |              | Allowance                  |       | Category   |  | Loans    |         | Allowance |  | Category |        | Loans   
|                                |              |                            |       |            |  |          |         |           |  |          |        |         
|Real Estate:                    |              |                            |       |            |  |          |         |           |  |          |        |          |   |   |       |     |  |   |         |         |  |  |        |      
|                                | Commercial   |                            |       |           |  |          | $       | 153,823   |  |          |        | 36.77    | % |   | $     | 180 |  |   | $       | 111,397 |  |  |        | 35.68 | %
|                                | Construction |                            |       |           |  |          |         | 26,526    |  |          |        | 6.34     |   |   |       |    |  |   |         | 12,311  |  |  |        | 3.94  |  
|                                | Residential  |                            | $     | 167        |  |          |         | 127,959   |  |          |        | 30.58    |   |   |       | 148 |  |   |         | 114,020 |  |  |        | 36.52 |  
|Commercial and industrial       |              |                            | 520   |            |  |          | 77,276  |           |  |          | 18.47  |          |   |   | 437   |     |  |   | 65,923  |         |  |  | 21.12  |      
|Lease financing and individuals |              |                            | 237   |            |  |          | 32,823  |           |  |          | 7.84   |          |   |   | 56    |     |  |   | 8,556   |         |  |  | 2.74   |      
|Unallocated                     |              |                            | 3,123 |            |  |          |        |           |  |          |       |          |   |   | 2,282 |     |  |   |        |         |  |  |       |      
|                                |              |                            |       |            |  |          |         |           |  |          |        |          |   |   |       |     |  |   |         |         |  |  |        |      
|Total                           |              | $                          | 4,047 |            |  | $        | 418,407 |           |  |          | 100.00 | %        |   | $ | 3,103 |     |  | $ | 312,207 |         |  |  | 100.00 | %    
|                                |              |                            |       |            |  |          |         |           |  |          |        |          |   |   |       |     |  |   |         |         |  |  |        |      

Actual losses can vary significantly from the
estimated amounts. The Banks methodology permits
adjustments to the allowance in the event that, in
managements judgment, significant factors which affect the
collectibility of the loan portfolio as of the evaluation date
have changed. 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, 2002. There is no assurance that the
Company will not be required to make future adjustments to the
allowance in response to changing economic conditions or
regulatory examinations. During 2002, the FDIC, and during 2001,
the New York State Banking Department, completed examinations of
the Bank. In 1999, the Federal Reserve completed an off-site
examination of the Company. The regulatory agencies concluded
that the process of internal asset review and the allowance for
loan losses were adequate.

Provision for Loan
Losses

The Bank recorded a provision for loan losses of
$3,902,000 during 2002, compared to $4,380,000 during 2001 and
$1,144,000 during 2000. The provision for loan losses is charged
to income to bring the Banks allowance for loan losses to
a level deemed appropriate by management based on the factors
previously discussed under Allowance for Loan Losses.

39



---



##### 



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)
|                                    |  |        
|                                    |  | 2002    |           | 2001 |  | 2000
|                                    |  |         |           |      |  |     
|Demand deposits                     |  | $       | 446,370   |      |  | $    | 342,112 |  |  | $ | 274,738 | 
|Money market accounts               |  |         | 272,141   |      |  |      | 194,306 |  |  |   | 145,294 | 
|Savings accounts                    |  |         | 60,398    |      |  |      | 53,998  |  |  |   | 51,623  | 
|Time deposits of $100,000 or more   |  |         | 92,605    |      |  |      | 155,650 |  |  |   | 288,094 | 
|Time deposits of less than $100,000 |  |         | 73,078    |      |  |      | 77,644  |  |  |   | 60,541  | 
|Checking with interest              |  |         | 82,584    |      |  |      | 64,667  |  |  |   | 59,285  | 
|                                    |  |         |           |      |  |      |         |  |  |   |         | 
|Total                               |  | $       | 1,027,176 |      |  | $    | 888,377 |  |  | $ | 879,575 | 
|                                    |  |         |           |      |  |      |         |  |  |   |         | 

At December 31, 2002 and 2001, certificates
of deposits and other time deposits of $100,000 or more totaled
$92.6 million and $155.7 million, respectively. At
December 31, 2002, such deposits classified by time
remaining to maturity were as follows:

|                         |  |         |        | 
|------------------------ |  | ------- | ------ | 
|                         |  | (000s)
|                         |  |        
|3 months or less         |  | $       | 63,539 | 
|Over 3 through 6 months  |  |         | 15,880 | 
|Over 6 through 12 months |  |         | 12,858 | 
|Over 12 months           |  |         | 328    | 
|                         |  |         |        | 
|Total                    |  | $       | 92,605 | 
|                         |  |         |        | 

Total deposits at December 31, 2002
increased 15.6 percent to $1,027.2 million, from
$888.4 million at December 31, 2001, an increase of
1.0 percent from $879.6 million at the end of 2000. Average
deposits outstanding increased 7.5 percent in 2002 and
3.6 percent in 2001. Excluding municipal CDs, which
are acquired on a bid basis, total deposits increased
24.8 percent and 15.7 percent, and average deposits
increased 24.6 percent and 9.4 percent in 2002 and
2001, respectively.

Average non interest bearing deposits increased
27.8 percent or $82.8 million for 2002 compared to
2001, and 16.4 percent or $41.8 million in 2001 compared to
2000, due to the Companys continuing emphasis on
developing this funding source. Average interest bearing
deposits in 2002 decreased 3.5 percent or
$20.4 million reflecting increases in checking with
interest accounts, money market accounts, savings accounts and
consumer time deposits offset by decreases in time deposits of
$100,000 or more. Average interest bearing deposits in 2001
decreased 1.9 percent or $11.3 million, reflecting
increases in money market accounts, consumer time deposits and
savings account offset by decreases in time deposits of $100,000
or more.

Average money market deposits increased
$95.6 million in 2002 and $6.4 million in 2001, due in
part to new customer accounts, increased activity and,
particularly in 2002, due to the addition of three new branches.

40



---



##### 



Average checking with interest deposits increased
$15.1 million in 2002 primarily as a result of new customer
accounts and increased activity in existing accounts. Average
checking with interest deposits were virtually unchanged in
2001, compared to the prior year.

Average time deposits decreased
$135.7 million and $18.9 million in 2002 and 2001,
respectively. These decreases resulted primarily from decreases
in average time deposits of over $100,000, including municipal
CDs, of $135.3 million in 2002 and $28.9 million
in 2001. The decreases 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 $4.6 million and $1.5 million in
2002 and 2001, respectively.

In general, deposit rates decreased in both 2002
and 2001 due to a steadily declining interest rate environment.

Time deposits of over $100,000, including
municipal CDs, decreased $63.0 million and
$132.4 million at December 31, 2002 and 2001,
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. Non municipal time deposits over $100,000 increased
in 2002 by $1.5 million compared to 2001 and decreased
$30.0 million in 2001 compared to 2000. 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 fundings, 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,   
|                                       |  |                           
|                                       |  |                            |         |         |  |        
|                                       |  | 2002                       |         | 2001    |  | 2000   
|                                       |  | Average                    |         | Average |  | Average
|                                       |  |                            |         |         |  |        
|                                       |  | Amount                     |         | Rate    |  | Amount  |      | Rate |  | Amount |         | Rate
|                                       |  |                            |         |         |  |         |      |      |  |        |         |     
|Demand deposits  Non interest bearing |  | $                          | 380,015 |         |  |         |     |      |  | $      | 297,197 |      |  |  |     |   |  | $ | 255,386 |  |  |  |     |  
|Money market accounts                  |  |                            | 250,634 |         |  |         | 1.37 | %    |  |        | 155,058 |      |  |  | 2.45 | % |  |   | 148,663 |  |  |  | 2.91 | %
|Savings accounts                       |  |                            | 57,629  |         |  |         | 0.60 |      |  |        | 52,988  |      |  |  | 1.15 |   |  |   | 51,472  |  |  |  | 1.51 |  
|Time deposits                          |  |                            | 184,723 |         |  |         | 1.93 |      |  |        | 320,408 |      |  |  | 4.18 |   |  |   | 339,305 |  |  |  | 5.84 |  
|Checking with interest                 |  |                            | 76,759  |         |  |         | 0.69 |      |  |        | 61,697  |      |  |  | 1.07 |   |  |   | 62,049  |  |  |  | 1.35 |  
|                                       |  |                            |         |         |  |         |      |      |  |        |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|Total                                  |  | $                          | 949,760 |         |  |         | 0.83 | %    |  | $      | 887,348 |      |  |  | 2.08 | % |  | $ | 856,875 |  |  |  | 3.00 | %
|                                       |  |                            |         |         |  |         |      |      |  |        |         |      |  |  |      |   |  |   |         |  |  |  |      |  

Borrowings

Borrowings with original maturities of one year
or less totaled $139.2 million and $143.5 million at
December 31, 2002 and 2001, respectively. Such short-term
borrowings consisted of securities sold under agreements to
repurchase and borrowings from the FHLB and other correspondent
banks. Other borrowings totaled $188.2 million and
$209.2 million at December 31, 2002 and 2001,
respectively, consisting of borrowings from the FHLB with stated
maturities of ten years and 1 to 4 year call options.

Interest expense on all borrowings totaled
$15.1 million, $14.1 million and $15.0 million in
2002, 2001 and 2000, respectively. The following table
summarizes the average balances, weighted average interest rates

41



---



##### 



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)
|                                               |  |  |                  |                           
|                                               |  |  |                  | 2002                       |  | 2001 |         | 2000
|                                               |  |  |                  |                            |  |      |         |     
|Average balance:                               |  |  | Short-term       |                            |  | $    | 148,555 |      |  | $ | 154,311 |   |  | $ | 165,993 |  
|                                               |  |  | Other borrowings |                            |  |      | 208,886 |      |  |   | 160,255 |   |  |   | 89,011  |  
|Weighted average interest rate (for the year): |  |  | Short-term       |                            |  |      | 1.6     | %    |  |   | 3.8     | % |  |   | 6.1     | %
|                                               |  |  | Other borrowings |                            |  |      | 6.1     |      |  |   | 5.1     |   |  |   | 5.5     |  
|Weighted average interest rate (at year end):  |  |  | Short-term       |                            |  |      | 1.3     | %    |  |   | 1.8     | % |  |   | 6.1     | %
|                                               |  |  | Other borrowings |                            |  |      | 4.7     |      |  |   | 4.8     |   |  |   | 5.6     |  
|Maximum month-end outstanding amount:          |  |  | Short-term       |                            |  | $    | 161,757 |      |  | $ | 164,222 |   |  | $ | 197,889 |  
|                                               |  |  | Other borrowings |                            |  |      | 209,191 |      |  |   | 209,191 |   |  |   | 94,229  |  

In December 2002, the Company prepaid
$21 million of its long term borrowings as part of its
ongoing asset liability management. A prepayment penalty of
$2.6 million was incurred as a result of the transaction
and is included in interest expense on other borrowings. This
increased the average cost of other borrowings for 2002 to
6.1 percent. Excluding this transaction, the average cost
of other borrowings in 2002 decreased to 4.9 percent,
compared to 5.1 percent in 2001.

In addition, at December 31, 2002, the Bank
had available unused lines of credit of $120 million from
the FHLB, and $25 million from correspondent banks. Also,
the Bank has $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 to $136.8
million or 20.7 percent at December 31, 2002 from $113.3
million at December 31, 2001, which was an increase of
21.4 percent from $93.3 million at December 31, 2000.
In each year, stockholders equity was increased by net
income and the exercise of stock options, offset by cash
dividends of $7.7 million and $6.4 million in 2002 and
2001, respectively, and repurchases of outstanding shares of
stock. Stockholders equity also increased by $7.8 million
at December 31, 2002 and increased by $5.5 million at
December 31, 2001 as a result of the effect of the net
unrealized gains on securities available for sale, net
of tax.

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. The Bank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, 2002, 2001 and 2000 included elsewhere
herein.

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

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

42



---



##### 



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:

|                |         |      |  |      |   |      |  |      |   |  |  |      |  
|--------------- | ------- | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                |         | 2002 |  | 2001 |   | 2000
|                |         |      |  |      |   |     
|Tier 1 capital: |         |      |  |      |   |      |  |      |   |  |  |     
|                | Company |      |  | 17.0 | % |      |  | 15.4 | % |  |  | 14.8 | %
|                | Bank    |      |  | 17.0 |   |      |  | 15.3 |   |  |  | 14.9 |  
|Total capital:  |         |      |  |      |   |      |  |      |   |  |  |     
|                | Company |      |  | 18.3 | % |      |  | 16.5 | % |  |  | 15.6 | %
|                | Bank    |      |  | 18.3 |   |      |  | 16.5 |   |  |  | 15.7 |  

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:

|        |  |      |     |      |  |      |     |   |  |  |     |  
|------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|        |  | 2002 |     | 2001 |  | 2000
|        |  |      |     |      |  |     
|Company |  |      | 8.3 | %    |  |      | 7.9 | % |  |  | 7.3 | %
|Bank    |  |      | 8.3 |      |  |      | 7.9 |   |  |  | 7.4 |  

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. The Bank exceeds all
current regulatory capital requirements and was in the
well capitalized category at December 31, 2002.
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 the Bank
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 Banks liquid assets, at
December 31, 2002, include cash and due from banks of $48
million, Federal funds sold of $29 million, and
$150 million of short term U.S. Treasury securities with
remaining maturities of less than 30 days. Federal funds sold
represents the Bank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
re-investable assets, which can be converted into cash should
the need arise. The ability to redeploy these funds is an
important source of medium to long term liquidity. The amortized
cost of securities available for sale, excluding short term
securities discussed in the preceding paragraph, having
contractual maturities, expected call dates or average lives of
one year or less amounted to $254.6 million at December 31,
2002. This represented 44.6 percent of the amortized cost
of that portion of the securities portfolio. Excluding
installment loans to individuals, real estate loans other than
construction loans and lease financing, $94.4 million, or
14.4 percent of loans at December 31, 2002, mature in
one year or less. The Bank may increase liquidity by selling
certain residential mortgages, or exchanging them for
mortgage-backed securities that may be sold, in the secondary
market.

43



---



##### 



The Bank is a member of the FHLB. The Bank has a
borrowing capacity of up to $120 million under two lines of
credit at December 31, 2002, at various terms secured by
FHLB stock owned and to be purchased and certain other assets of
the Bank. The Bank had no advances under these lines from the
FHLB at December 31, 2002. The Bank borrowed
$138.2 million under securities sold under agreements to
repurchase at December 31, 2002, and had securities
totaling $63.6 million at December 31, 2002 that could
be sold under agreements to repurchase, thereby increasing
liquidity. In addition, the Bank has agreements with two
investment firms to borrow up to $110 million under Retail CD
Brokerage Agreements and has agreements with two correspondent
banks for purchasing Federal funds up to $15 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 Bank 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 Bank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 Bank is also obligated under leases for certain
of its branches and equipment. A summary of lease obligations
and credit commitments at December 31, 2002 follows:

|                   |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |         | 
|------------------ | --------------------------- | ------ | ------ | ------------ |  | ------------- | ------ | ------- |  | ----- | ----- | ----- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                   |                             |        |        | After 1 Year |  | After 3 Years |        |         |  |      
|                   |                             | Within |        | but Within   |  | but Within    |        | After   |  |      
|                   |                             | 1 Year |        | 3 Years      |  | 5 Years       |        | 5 Years |  | Total
|                   |                             |        |        |              |  |               |        |         |  |      
|Lease Obligations  |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|                   | Operating lease obligations |        | $      | 631          |  |               | $      | 596     |  |       | $     | 180   |  |   | $      | 223    |  |   | $       | 1,630   | 
|                   |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|Total              |                             | $      | 631    |              |  | $             | 596    |         |  | $     | 180   |       |  | $ | 223    |        |  | $ | 1,630   |        
|                   |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|Credit Commitments |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|                   | Available lines of credit   |        | $      | 64,086       |  |               | $      | 25,593  |  |       | $     | 1,999 |  |   | $      | 10,452 |  |   | $       | 102,130 | 
|                   | Other loan commitments      |        |        | 27,312       |  |               |        |        |  |       |       |      |  |   |        |       |  |   |         | 27,312  | 
|                   | Letters of credit           |        |        | 4,727        |  |               |        | 560     |  |       |       |      |  |   |        |       |  |   |         | 5,287   | 
|                   |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|Total              |                             | $      | 96,125 |              |  | $             | 26,153 |         |  | $     | 1,999 |       |  | $ | 10,452 |        |  | $ | 134,729 |        
|                   |                             |        |        |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        

The Bank 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
Bank 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.

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.

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.

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.

44



---



##### 



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

Set forth below are certain quarterly results of
operations for 2002 and 2001.

|                                  |  |                               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|--------------------------------- |  | ----------------------------- | ------ | ------------- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                  |  |                              
|                                  |  | (000s except per share data)
|                                  |  |                              
|                                  |  |                               |        |              
|                                  |  | 2002 Quarters                 |        | 2001 Quarters
|                                  |  |                               |        |              
|                                  |  | Fourth                        |        | Third         |  | Second |        | First |  | Fourth |        | Third |  | Second |        | First
|                                  |  |                               |        |               |  |        |        |       |  |        |        |       |  |        |        |      
|Interest income                   |  | $                             | 19,862 |               |  | $      | 21,946 |       |  | $      | 21,891 |       |  | $      | 21,044 |       |  | $ | 21,252 |  |  | $ | 22,683 |  |  | $ | 22,766 |  |  | $ | 23,177 | 
|Net interest income               |  |                               | 12,615 |               |  |        | 16,795 |       |  |        | 16,613 |       |  |        | 15,738 |       |  |   | 16,712 |  |  |   | 13,770 |  |  |   | 13,839 |  |  |   | 13,040 | 
|Provision for loan losses         |  |                               | 383    |               |  |        | 813    |       |  |        | 1,906  |       |  |        | 800    |       |  |   | 1,916  |  |  |   | 1,404  |  |  |   | 710    |  |  |   | 350    | 
|Income before income taxes        |  |                               | 4,977  |               |  |        | 9,419  |       |  |        | 7,702  |       |  |        | 8,646  |       |  |   | 6,845  |  |  |   | 7,980  |  |  |   | 6,300  |  |  |   | 7,251  | 
|Net income                        |  |                               | 3,919  |               |  |        | 6,393  |       |  |        | 5,263  |       |  |        | 6,009  |       |  |   | 4,324  |  |  |   | 5,122  |  |  |   | 4,200  |  |  |   | 5,235  | 
|Basic earnings per common share   |  |                               | 0.66   |               |  |        | 1.09   |       |  |        | 0.90   |       |  |        | 1.04   |       |  |   | 0.75   |  |  |   | 0.89   |  |  |   | 0.73   |  |  |   | 0.92   | 
|Diluted earnings per common share |  |                               | 0.63   |               |  |        | 1.07   |       |  |        | 0.88   |       |  |        | 1.01   |       |  |   | 0.73   |  |  |   | 0.87   |  |  |   | 0.71   |  |  |   | 0.89   | 

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, 2002. The Company
cautions that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, and that
statements relating to subsequent periods increasingly are
subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions.
Actual results could differ materially from forward-looking
statements.

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



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | competitive pressure on loan and deposit product
    pricing;                                      
|
| |  | other actions of competitors;                                                                      
|
| |  | changes in economic conditions;                                                                    
|
| |  | the extent and timing of actions of the Federal
    Reserve Board;                                 
|
| |  | a loss of customer deposits;                                                                       
|
| |  | changes in customers acceptance of the
    Banks products and services;                          
|
| |  | increases in federal and state income taxes
    and/or the Companys effective income tax rate; and
|
| |  | the extent and timing of legislative and
    regulatory actions and reform.                        

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,

45



---



##### 



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. The
Companys management of liquidity and interest rate
sensitivity has been successful in the past, as evidenced by the
continued net interest income growth. Continuing to establish
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 two methods to evaluate market
risk to changes in interest rates, a Static Gap
analysis and a Simulation analysis. The Static Gap
analysis shows the Company as asset-sensitive in the one-year
time frame as of December 31, 2002. The simulation analysis
also indicates an asset-sensitive position at that same date.
The Company believes the simulation analysis is a more accurate
analysis of interest rate risk.

The Static Gap as of
December 31, 2002 and 2001 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 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, 2002, the Static
Gap showed a positive cumulative gap of
$217.8 million in the one day to one year repricing period,
as compared to a negative cumulative gap of $0.9 million at
December 31, 2001. The cumulative gap at December 31,
2002 is due principally to mortgage backed and other securities
included in the one day to one year repricing categories, and
the treatment of deposit accounts and other borrowings, as
discussed above. The change in the cumulative static gap between
December 31, 2002 and December 31, 2001 reflects
increased expectation of prepayments and calls of securities
with such provisions, thereby shortening the estimated repricing
dates, as well as increases in other short term securities,
reflecting managements efforts to exercise caution in
redeploying maturing funds. These shifts in estimated and actual
repricing dates resulted from the effects of continued declines
in interest rates during 2002 and 2001. Management believes that
this strategy, together with additional restructuring of the
average life of the securities portfolio, has enabled the
Company to be well positioned for the next rising rate cycle.
Consistent with this strategy, in the first quarter of 2003, the
Company sold approximately $100 million of rapidly
prepaying securities, realized a $4.0 million pre-tax gain
on disposition, and redeployed the proceeds into securities with
more predictable cash flows.

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
charges on non contractual

46



---



##### 



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 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 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, 2002 and 2001. For 2002, a 100 basis
point downward change in interest rates was substituted for the
200 basis point downward scenario, as management believes that a
200 basis point downward change is not meaningful in light of
the current 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, 2002      |      | December 31, 2001     
|                                              |  |                        |      |                       
|+200 basis points                             |  |                        | 5.5  | %                      |  |  | (0.3 | )%
|-200 basis points (-100 basis points in 2002) |  |                        | (3.1 | )%                     |  |  | (0.5 | )%

The percentage change in estimated net interest
income for the subsequent 12 month measurement period from
December 31, 2002 in the +200 basis points
and  100 basis points scenarios of 5.5% and
(3.1%), 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 purchases 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 Banks

47



---



##### 



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 tables below set forth the interest rate
sensitivity analysis by repricing date at year end 2002 and 2001.

Interest Rate Sensitivity Analysis By
Repricing Date

December 31, 2002

|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|------------------------------------------ |  | -------------------------- | ------- | -------- |  | ---------- | ------- | ---------- |  | --------- | ------- | -------- |  | ----- | ------- | - |  | - | -------- | - |  | - | -------- | - |  | - | --------- | 
|                                           |  |                           
|                                           |  | (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                                 |  |                            |        |          |  | $          | 280,365 |            |  | $         | 48,283  |          |  | $     | 229,841 |   |  | $ | 79,191   |   |  | $ | 4,758    |   |  | $ | 642,438   | 
|Mortgage-backed securities                 |  |                            |        |          |  |            | 67,333  |            |  |           | 112,708 |          |  |       | 123,394 |   |  |   | 20,463   |   |  |   |         |   |  |   | 323,898   | 
|Other securities                           |  |                            |        |          |  |            | 172,481 |            |  |           | 70,011  |          |  |       | 89,039  |   |  |   | 98,914   |   |  |   |         |   |  |   | 430,445   | 
|Other earning assets                       |  | $                          | 29,393  |          |  |            |        |            |  |           |        |          |  |       |        |   |  |   | 312      |   |  |   |         |   |  |   | 29,705    | 
|Other assets                               |  |                            |        |          |  |            |        |            |  |           |        |          |  |       |        |   |  |   |         |   |  |   | 80,397   |   |  |   | 80,397    | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Total assets                               |  |                            | 29,393  |          |  |            | 520,179 |            |  |           | 231,002 |          |  |       | 442,274 |   |  |   | 198,880  |   |  |   | 85,155   |   |  |   | 1,506,883 | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Liabilities and stockholders equity:      |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Interest bearing deposits                  |  |                            |        |          |  |            | 373,559 |            |  |           | 50,935  |          |  |       | 12,564  |   |  |   | 143,748  |   |  |   |         |   |  |   | 580,806   | 
|Other borrowed funds                       |  |                            | 43,409  |          |  |            | 72,478  |            |  |           | 22,434  |          |  |       | 104     |   |  |   | 188,958  |   |  |   |         |   |  |   | 327,383   | 
|Demand deposits                            |  |                            |        |          |  |            |        |            |  |           |        |          |  |       |        |   |  |   |         |   |  |   | 446,370  |   |  |   | 446,370   | 
|Other liabilities                          |  |                            |        |          |  |            |        |            |  |           |        |          |  |       |        |   |  |   |         |   |  |   | 15,517   |   |  |   | 15,517    | 
|Stockholders equity                       |  |                            |        |          |  |            |        |            |  |           |        |          |  |       |        |   |  |   |         |   |  |   | 136,807  |   |  |   | 136,807   | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Total liabilities and stockholders equity |  |                            | 43,409  |          |  |            | 446,037 |            |  |           | 73,369  |          |  |       | 12,668  |   |  |   | 332,706  |   |  |   | 598,694  |   |  |   | 1,506,883 | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Net interest rate sensitivity gap          |  | $                          | (14,016 | )        |  | $          | 74,142  |            |  | $         | 157,633 |          |  | $     | 429,606 |   |  | $ | (133,826 | ) |  | $ | (513,539 | ) |  |   |          | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Cumulative gap                             |  | $                          | (14,016 | )        |  | $          | 60,126  |            |  | $         | 217,759 |          |  | $     | 647,365 |   |  | $ | 513,539  |   |  |   |         |   |  |   |          | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 
|Cumulative gap to interest-earning assets  |  |                            | (0.98   | )%       |  |            | 4.21    | %          |  |           | 15.27   | %        |  |       | 45.38   | % |  |   | 36.00    | % |  |   |          |   |  |   |           | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 

December 31, 2001

|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|------------------------------------------ |  | -------------------------- | ------ | -------- |  | ---------- | -------- | ---------- |  | --------- | ------- | -------- |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | 
|                                           |  |                           
|                                           |  | (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                                 |  |                            |       |          |  | $          | 256,517  |            |  | $         | 45,328  |          |  | $     | 197,809 |   |  | $ | 100,723 |   |  |   |         |   |  | $ | 600,377   | 
|Mortgage-backed securities                 |  |                            |       |          |  |            | 27,233   |            |  |           | 61,182  |          |  |       | 137,942 |   |  |   | 121,759 |   |  |   |         |   |  |   | 348,116   | 
|Other securities                           |  |                            |       |          |  |            | 31,859   |            |  |           | 58,877  |          |  |       | 108,734 |   |  |   | 87,083  |   |  |   |         |   |  |   | 286,553   | 
|Other earning assets                       |  | $                          | 76,300 |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   |         |   |  |   | 76,300    | 
|Other assets                               |  |                            |       |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  | $ | 61,107   |   |  |   | 61,107    | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total assets                               |  |                            | 76,300 |          |  |            | 315,609  |            |  |           | 165,387 |          |  |       | 444,485 |   |  |   | 309,565 |   |  |   | 61,107   |   |  |   | 1,372,453 | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Liabilities and stockholders equity:      |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Interest bearing deposits                  |  |                            |       |          |  |            | 364,322  |            |  |           | 51,437  |          |  |       | 10,893  |   |  |   | 119,613 |   |  |   |         |   |  |   | 546,265   | 
|Other borrowed funds                       |  |                            | 38,401 |          |  |            | 103,984  |            |  |           | 22      |          |  |       | 30,371  |   |  |   | 179,942 |   |  |   |         |   |  |   | 352,720   | 
|Demand deposits                            |  |                            |       |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 342,112  |   |  |   | 342,112   | 
|Other liabilities                          |  |                            |       |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 18,014   |   |  |   | 18,014    | 
|Stockholders equity                       |  |                            |       |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 113,342  |   |  |   | 113,342   | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total liabilities and stockholders equity |  |                            | 38,401 |          |  |            | 468,306  |            |  |           | 51,459  |          |  |       | 41,264  |   |  |   | 299,555 |   |  |   | 473,468  |   |  | $ | 1,372,453 | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Net interest rate sensitivity gap          |  | $                          | 37,899 |          |  | $          | (152,697 | )          |  | $         | 113,928 |          |  | $     | 403,221 |   |  | $ | 10,010  |   |  | $ | (412,361 | ) |  |   |          | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap                             |  | $                          | 37,899 |          |  | $          | (114,798 | )          |  | $         | (870    | )        |  | $     | 402,351 |   |  | $ | 412,361 |   |  |   |         |   |  |   |          | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap to interest-earning assets  |  |                            | 2.89   | %        |  |            | (8.75    | )%         |  |           | (0.07   | )%       |  |       | 30.68   | % |  |   | 30.98   | % |  |   |          |   |  |   |           | 
|                                           |  |                            |        |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 

48



---



##### 



ITEM 8  FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                  |                                                                |  |    |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  | -- | -- | 
|INDEPENDENT AUDITORS REPORT                                                                                                                      |                                                                |  | 50 |   
|                                                                                                                                                 
|CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
    31, 2002 AND 2001 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
    ENDED DECEMBER 31, 2002: |                                                                |  |    |   
|                                                                                                                                                  | Consolidated Statements of Income                              |  |    | 51 | 
|                                                                                                                                                  | Consolidated Statements of Comprehensive Income                |  |    | 52 | 
|                                                                                                                                                  | Consolidated Balance Sheets                                    |  |    | 53 | 
|                                                                                                                                                  | Consolidated Statements of Changes in
    Stockholders Equity |  |    | 54 | 
|                                                                                                                                                  | Consolidated Statements of Cash Flows                          |  |    | 55 | 
|                                                                                                                                                  | Notes to Consolidated Financial Statements                     |  |    | 56 | 
|MANAGEMENTS REPORT TO THE STOCKHOLDERS                                                                                                           |                                                                |  | 74 |   
|INDEPENDENT ACCOUNTANTS REPORT                                                                                                                   |                                                                |  | 76 |   

49



---



##### 



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders

Hudson Valley Holding Corp.


We have audited the accompanying consolidated
balance sheets of Hudson Valley Holding Corp. and its
subsidiary, Hudson Valley Bank, (collectively the
Company), as of December 31, 2002 and 2001 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,
2002. 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
auditing standards generally accepted in the United States of
America. 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 its
subsidiary at December 31, 2002 and 2001 and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United
States of America.

DELOITTE & TOUCHE LLP

Stamford, Connecticut

January 27, 2003


50



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2002,
2001 and 2000


Dollars in thousands, except per share
amounts


|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------------- | -------------------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                |                                  | 2002 |        | 2001   |  | 2000
|                                                                                |                                  |      |        |        |  |     
|Interest Income:                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Loans, including fees                                                           |                                  | $    | 48,469 |        |  | $    | 48,042 |        |  | $ | 42,272 |       
|Securities:                                                                     |                                  |      |        |        |  |      |        |        |  |   |        |       
|                                                                                | Taxable                          |      |        | 27,098 |  |      |        | 33,804 |  |   |        | 37,336 | 
|                                                                                | Exempt from Federal income taxes |      |        | 7,774  |  |      |        | 7,273  |  |   |        | 6,923  | 
|Federal funds sold                                                              |                                  |      | 1,364  |        |  |      | 759    |        |  |   | 735    |       
|Deposits in banks                                                               |                                  |      | 38     |        |  |      |       |        |  |   |       |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total interest income                                                           |                                  |      | 84,743 |        |  |      | 89,878 |        |  |   | 87,266 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Interest Expense:                                                               |                                  |      |        |        |  |      |        |        |  |   |        |       
|Deposits                                                                        |                                  |      | 7,885  |        |  |      | 18,450 |        |  |   | 25,742 |       
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |      | 2,317  |        |  |      | 5,855  |        |  |   | 10,181 |       
|Other borrowings                                                                |                                  |      | 12,780 |        |  |      | 8,212  |        |  |   | 4,862  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total interest expense                                                          |                                  |      | 22,982 |        |  |      | 32,517 |        |  |   | 40,785 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Net Interest Income                                                             |                                  |      | 61,761 |        |  |      | 57,361 |        |  |   | 46,481 |       
|Provision for loan losses                                                       |                                  |      | 3,902  |        |  |      | 4,380  |        |  |   | 1,144  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Net interest income after provision for loan
    losses                         |                                  |      | 57,859 |        |  |      | 52,981 |        |  |   | 45,337 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Non Interest Income:                                                            |                                  |      |        |        |  |      |        |        |  |   |        |       
|Service charges                                                                 |                                  |      | 1,599  |        |  |      | 1,192  |        |  |   | 1,127  |       
|Realized gain (loss) on sales of securities, net                                |                                  |      | 54     |        |  |      | (180   | )      |  |   | 692    |       
|Other income                                                                    |                                  |      | 1,748  |        |  |      | 1,419  |        |  |   | 729    |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total non interest income                                                       |                                  |      | 3,401  |        |  |      | 2,431  |        |  |   | 2,548  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Non Interest Expense:                                                           |                                  |      |        |        |  |      |        |        |  |   |        |       
|Salaries and employee benefits                                                  |                                  |      | 17,118 |        |  |      | 15,262 |        |  |   | 14,780 |       
|Occupancy                                                                       |                                  |      | 2,501  |        |  |      | 2,307  |        |  |   | 2,257  |       
|Professional services                                                           |                                  |      | 2,934  |        |  |      | 2,212  |        |  |   | 2,560  |       
|Equipment                                                                       |                                  |      | 1,936  |        |  |      | 1,887  |        |  |   | 1,723  |       
|Business development                                                            |                                  |      | 1,490  |        |  |      | 1,119  |        |  |   | 948    |       
|FDIC assessment                                                                 |                                  |      | 164    |        |  |      | 166    |        |  |   | 165    |       
|Other operating expenses                                                        |                                  |      | 4,373  |        |  |      | 4,083  |        |  |   | 3,469  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total non interest expense                                                      |                                  |      | 30,516 |        |  |      | 27,036 |        |  |   | 25,902 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Income Before Income Taxes                                                      |                                  |      | 30,744 |        |  |      | 28,376 |        |  |   | 21,983 |       
|Income Taxes                                                                    |                                  |      | 9,160  |        |  |      | 9,495  |        |  |   | 5,825  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Net Income                                                                      |                                  | $    | 21,584 |        |  | $    | 18,881 |        |  | $ | 16,158 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Basic Earnings Per Common Share                                                 |                                  | $    | 3.69   |        |  | $    | 3.29   |        |  | $ | 2.85   |       
|Diluted Earnings Per Common Share                                               |                                  | $    | 3.59   |        |  | $    | 3.20   |        |  | $ | 2.77   |       

See notes to consolidated financial statements.

51



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

For the years ended December 31, 2002,
2001 and 2000


Dollars in thousands


|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                              |  | 2002 |        | 2001 |  | 2000
|                                                                                              |  |      |        |      |  |     
|Net Income                                                                                    |  | $    | 21,584 |      |  | $    | 18,881 |   |  | $ | 16,158 |  
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Other comprehensive income (loss), net of
    tax:                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Unrealized holding gain on securities
    available for sale arising during the year          |  |      | 12,182 |      |  |      | 9,307  |   |  |   | 22,847 |  
|Income tax effect                                                                             |  |      | (4,340 | )    |  |      | (3,867 | ) |  |   | (9,365 | )
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|                                                                                              |  |      | 7,842  |      |  |      | 5,440  |   |  |   | 13,482 |  
|Reclassification adjustment for net
    (gain) loss realized on securities available for sale |  |      | (54    | )    |  |      | 180    |   |  |   | (692   | )
|Income tax effect                                                                             |  |      | 22     |      |  |      | (75    | ) |  |   | 284    |  
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|                                                                                              |  |      | (32    | )    |  |      | 105    |   |  |   | (408   | )
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Unrealized holding gain on securities, net                                                    |  |      | 7,810  |      |  |      | 5,545  |   |  |   | 13,074 |  
|Minimum pension liability adjustment                                                          |  |      | (235   | )    |  |      | (17    | ) |  |   | (17    | )
|Income tax effect                                                                             |  |      | 98     |      |  |      | 7      |   |  |   | 7      |  
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|                                                                                              |  |      | (137   | )    |  |      | (10    | ) |  |   | (10    | )
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Other comprehensive income                                                                    |  |      | 7,673  |      |  |      | 5,535  |   |  |   | 13,064 |  
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Comprehensive Income                                                                          |  | $    | 29,257 |      |  | $    | 24,416 |   |  | $ | 29,222 |  
|                                                                                              |  |      |        |      |  |      |        |   |  |   |        |  

See notes to consolidated financial statements.

52



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001


Dollars in thousands, except per share and
share amounts


|                                                                                                                                               |                      |      |           |           |  |   |           |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ---- | --------- | --------- |  | - | --------- | ------- | 
|                                                                                                                                               |                      | 2002 |           | 2001     
|                                                                                                                                               |                      |      |           |          
|ASSETS                                                                                                                                         |                      |      |           |           |  |   |           |        
|Cash and due from banks                                                                                                                        |                      | $    | 48,350    |           |  | $ | 29,821    |        
|Federal funds sold                                                                                                                             |                      |      | 29,393    |           |  |   | 76,300    |        
|Securities available for sale, at estimated fair
    value (amortized cost of $721,933 in 2002 and $614,385 in 2001)                           |                      |      | 743,884   |           |  |   | 624,209   |        
|Federal Home Loan Bank of New York
    (FHLB) stock                                                                                            |                      |      | 10,459    |           |  |   | 10,459    |        
|Loans (net of allowance for loan losses of
    $11,510 in 2002 and $8,018 in 2001)                                                             |                      |      | 642,438   |           |  |   | 600,377   |        
|Accrued interest and other receivables                                                                                                         |                      |      | 9,043     |           |  |   | 8,976     |        
|Premises and equipment, net                                                                                                                    |                      |      | 12,629    |           |  |   | 12,129    |        
|Other real estate owned                                                                                                                        |                      |      | 1,831     |           |  |   | 2,021     |        
|Other assets                                                                                                                                   |                      |      | 8,856     |           |  |   | 8,161     |        
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|TOTAL ASSETS                                                                                                                                   |                      | $    | 1,506,883 |           |  | $ | 1,372,453 |        
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|LIABILITIES                                                                                                                                    |                      |      |           |           |  |   |           |        
|Deposits:                                                                                                                                      |                      |      |           |           |  |   |           |        
|                                                                                                                                               | Non interest-bearing |      | $         | 446,370   |  |   | $         | 342,112 | 
|                                                                                                                                               | Interest-bearing     |      |           | 580,806   |  |   |           | 546,265 | 
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|                                                                                                                                               | Total deposits       |      |           | 1,027,176 |  |   |           | 888,377 | 
|Securities sold under repurchase agreements and
    other short-term borrowings                                                                |                      |      | 139,212   |           |  |   | 143,529   |        
|Other borrowings                                                                                                                               |                      |      | 188,171   |           |  |   | 209,191   |        
|Deferred income taxes, net                                                                                                                     |                      |      | 825       |           |  |   | 3,958     |        
|Accrued interest and other liabilities                                                                                                         |                      |      | 14,692    |           |  |   | 14,056    |        
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|TOTAL LIABILITIES                                                                                                                              |                      |      | 1,370,076 |           |  |   | 1,259,111 |        
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|Commitments and contingencies (Note
    10)                                                                                                    |                      |      |           |           |  |   |           |        
|                                                                                                                                              
|STOCKHOLDERS EQUITY                                                                                                                           |                      |      |           |           |  |   |           |        
|Common Stock, $0.20 par value; authorized
    10,000,000 shares; outstanding 5,887,600 and 5,260,158 shares in
    2002 and 2001, respectively |                      |      | 1,366     |           |  |   | 1,232     |        
|Additional paid-in capital                                                                                                                     |                      |      | 146,393   |           |  |   | 125,057   |        
|Retained earnings                                                                                                                              |                      |      | 894       |           |  |   | 4,829     |        
|Accumulated other comprehensive income                                                                                                         |                      |      | 12,688    |           |  |   | 5,015     |        
|Treasury stock, at cost                                                                                                                        |                      |      | (24,534   | )         |  |   | (22,791   | )      
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|Total stockholders equity                                                                                                                     |                      |      | 136,807   |           |  |   | 113,342   |        
|                                                                                                                                               |                      |      |           |           |  |   |           |        
|TOTAL LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                 |                      | $    | 1,506,883 |           |  | $ | 1,372,453 |        
|                                                                                                                                               |                      |      |           |           |  |   |           |        

See notes to consolidated financial statements.

53



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the years ended December 31, 2002,
2001 and 2000


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, 2000                               |  |             | 4,223,599 |        |  | $        | 1,011 |            |  | $        | (20,083 | )             |  | $     | 87,011  |  |  | $ | 13,955  |   |  | $ | (13,584 | ) |  | $ | 68,310  |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 16,158  |   |  |   |         |   |  |   | 16,158  |  
|Exercise of stock options, net of tax                    |  |             | 85,112    |        |  |          | 17    |            |  |          |         |               |  |       | 2,209   |  |  |   |         |   |  |   |         |   |  |   | 2,226   |  
|Purchase of treasury stock                               |  |             | (40,897   | )      |  |          |       |            |  |          | (1,436  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (1,436  | )
|Sale of treasury stock                                   |  |             | 6,825     |        |  |          |       |            |  |          | 166     |               |  |       | 68      |  |  |   |         |   |  |   |         |   |  |   | 234     |  
|Stock dividend                                           |  |             | 428,021   |        |  |          | 86    |            |  |          |         |               |  |       | 15,537  |  |  |   | (15,623 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (5,211  | ) |  |   |         |   |  |   | (5,211  | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (10     | ) |  |   | (10     | )
|Net unrealized gain on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | 13,074  |   |  |   | 13,074  |  
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                             |  |             | 4,702,660 |        |  |          | 1,114 |            |  |          | (21,353 | )             |  |       | 104,825 |  |  |   | 9,279   |   |  |   | (520    | ) |  |   | 93,345  |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 18,881  |   |  |   |         |   |  |   | 18,881  |  
|Exercise of stock options, net of tax                    |  |             | 112,646   |        |  |          | 23    |            |  |          |         |               |  |       | 3,155   |  |  |   |         |   |  |   |         |   |  |   | 3,178   |  
|Purchase of treasury stock                               |  |             | (48,677   | )      |  |          |       |            |  |          | (1,819  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (1,819  | )
|Sale of treasury stock                                   |  |             | 15,225    |        |  |          |       |            |  |          | 381     |               |  |       | 192     |  |  |   |         |   |  |   |         |   |  |   | 573     |  
|Stock dividend                                           |  |             | 478,304   |        |  |          | 95    |            |  |          |         |               |  |       | 16,885  |  |  |   | (16,980 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (6,351  | ) |  |   |         |   |  |   | (6,351  | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (10     | ) |  |   | (10     | )
|Net unrealized gain on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | 5,545   |   |  |   | 5,545   |  
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                             |  |             | 5,260,158 |        |  |          | 1,232 |            |  |          | (22,791 | )             |  |       | 125,057 |  |  |   | 4,829   |   |  |   | 5,015   |   |  |   | 113,342 |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 21,584  |   |  |   |         |   |  |   | 21,584  |  
|Exercise of stock options, net of tax                    |  |             | 132,706   |        |  |          | 27    |            |  |          |         |               |  |       | 3,565   |  |  |   |         |   |  |   |         |   |  |   | 3,592   |  
|Purchase of treasury stock                               |  |             | (48,672   | )      |  |          |       |            |  |          | (1,949  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (1,949  | )
|Sale of treasury stock                                   |  |             | 8,001     |        |  |          |       |            |  |          | 206     |               |  |       | 96      |  |  |   |         |   |  |   |         |   |  |   | 302     |  
|Stock dividend                                           |  |             | 535,407   |        |  |          | 107   |            |  |          |         |               |  |       | 17,675  |  |  |   | (17,782 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (7,737  | ) |  |   |         |   |  |   | (7,737  | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (137    | ) |  |   | (137    | )
|Net unrealized gain on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | 7,810   |   |  |   | 7,810   |  
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                             |  |             | 5,887,600 |        |  | $        | 1,366 |            |  | $        | (24,534 | )             |  | $     | 146,393 |  |  |   | $894    |   |  | $ | 12,688  |   |  | $ | 136,807 |  
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  

See notes to consolidated financial statements.

54



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the years ended December 31, 2002,
2001 and 2000


Dollars in thousands


|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |       |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---- | -------- | ----- | - | ---- | -------- | ----- |  | - | -------- | ----- | -
|                                                                                                |                                                    | 2002 |          | 2001  |   | 2000
|                                                                                                |                                                    |      |          |       |   |     
|Operating Activities:                                                                           |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Net income                                                                                      |                                                    | $    | 21,584   |       |   | $    | 18,881   |       |  | $ | 16,158   |      
|Adjustments to reconcile net income to net cash
    provided by operating activities:           |                                                    |      |          |       |   |      |          |       |  |   |          |      
|                                                                                                | Provision for loan losses                          |      |          | 3,902 |   |      |          | 4,380 |  |   |          | 1,144 |  
|                                                                                                | Depreciation and amortization                      |      |          | 1,703 |   |      |          | 1,841 |  |   |          | 1,697 |  
|                                                                                                | Realized (gain) loss on security transactions, net |      |          | (54   | ) |      |          | 180   |  |   |          | (692  | )
|                                                                                                | Amortization of premiums on securities, net        |      |          | 1,340 |   |      |          | 1,217 |  |   |          | 188   |  
|                                                                                                | Realized gains on sale of loans held for sale, net |      |          |      |   |      |          |      |  |   |          | (5    | )
|                                                                                                | Stock option expense and related tax benefits      |      |          | 592   |   |      |          | 321   |  |   |          |      |  
|Originations of loans held for sale                                                             |                                                    |      |         |       |   |      |         |       |  |   | (612     | )    
|Proceeds from sale of loans held for sale                                                       |                                                    |      |         |       |   |      |         |       |  |   | 617      |      
|Deferred taxes (benefit)                                                                        |                                                    |      | (7,353   | )     |   |      | (1,629   | )     |  |   | 4,207    |      
|Increase (decrease) in deferred loan fees                                                       |                                                    |      | (17      | )     |   |      | 141      |       |  |   | (108     | )    
|(Increase) decrease in accrued interest and other
    receivables                               |                                                    |      | (67      | )     |   |      | 5,628    |       |  |   | (5,048   | )    
|Increase in other assets                                                                        |                                                    |      | (695     | )     |   |      | (894     | )     |  |   | (1,238   | )    
|Increase (decrease) in accrued interest and
    other liabilities                               |                                                    |      | 636      |       |   |      | (598     | )     |  |   | 4,039    |      
|Other changes, net                                                                              |                                                    |      | (45      | )     |   |      | 79       |       |  |   | 169      |      
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Net cash provided by operating
    activities                                                   |                                                    |      | 21,526   |       |   |      | 29,547   |       |  |   | 20,516   |      
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Investing Activities:                                                                           |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Net (increase) decrease in short-term
    investments                                           |                                                    |      | 46,907   |       |   |      | (69,000  | )     |  |   | 13,600   |      
|Increase in FHLB stock                                                                          |                                                    |      |         |       |   |      | (998     | )     |  |   | (100     | )    
|Proceeds from maturities of securities available
    for sale                                   |                                                    |      | 788,712  |       |   |      | 311,796  |       |  |   | 79,330   |      
|Proceeds from sales of securities available for
    sale                                        |                                                    |      | 775      |       |   |      | 47,835   |       |  |   | 44,320   |      
|Purchases of securities available for sale                                                      |                                                    |      | (898,320 | )     |   |      | (320,721 | )     |  |   | (121,047 | )    
|(Increase) decrease in receivable for securities
    sold                                       |                                                    |      |         |       |   |      | 44,326   |       |  |   | (44,326  | )    
|Increase (decrease) in payable for securities
    purchased                                     |                                                    |      |         |       |   |      | (14,913  | )     |  |   | 14,913   |      
|Net increase in loans                                                                           |                                                    |      | (45,946  | )     |   |      | (98,797  | )     |  |   | (94,223  | )    
|Net purchases of premises and equipment                                                         |                                                    |      | (2,203   | )     |   |      | (625     | )     |  |   | (1,310   | )    
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Net cash used in investing
    activities                                                       |                                                    |      | (110,075 | )     |   |      | (101,097 | )     |  |   | (108,843 | )    
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Financing Activities:                                                                           |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Proceeds from issuance of common stock                                                          |                                                    |      | 3,000    |       |   |      | 2,857    |       |  |   | 2,133    |      
|Proceeds from sale of treasury stock                                                            |                                                    |      | 302      |       |   |      | 573      |       |  |   | 234      |      
|Net increase in deposits                                                                        |                                                    |      | 138,799  |       |   |      | 8,802    |       |  |   | 124,729  |      
|Cash dividends paid                                                                             |                                                    |      | (7,737   | )     |   |      | (6,351   | )     |  |   | (5,211   | )    
|Repayment of other borrowings                                                                   |                                                    |      | (21,020  | )     |   |      | (18      | )     |  |   | (30,275  | )    
|Proceeds from other borrowings                                                                  |                                                    |      |         |       |   |      | 121,250  |       |  |   | 24,000   |      
|Net decrease in securities sold under repurchase
    agreements and other short-term borrowings |                                                    |      | (4,317   | )     |   |      | (54,343  | )     |  |   | (21,612  | )    
|Purchase of treasury stock                                                                      |                                                    |      | (1,949   | )     |   |      | (1,819   | )     |  |   | (1,436   | )    
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Net cash provided by financing
    activities                                                   |                                                    |      | 107,078  |       |   |      | 70,951   |       |  |   | 92,562   |      
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Increase (decrease) in Cash and Due from
    Banks                                              |                                                    |      | 18,529   |       |   |      | (599     | )     |  |   | 4,235    |      
|Cash and due from banks, beginning of year                                                      |                                                    |      | 29,821   |       |   |      | 30,420   |       |  |   | 26,185   |      
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Cash and due from banks, end of year                                                            |                                                    | $    | 48,350   |       |   | $    | 29,821   |       |  | $ | 30,420   |      
|                                                                                                |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Supplemental Disclosures:                                                                       |                                                    |      |          |       |   |      |          |       |  |   |          |      
|Interest paid                                                                                   |                                                    | $    | 23,452   |       |   | $    | 34,021   |       |  | $ | 39,055   |      
|Income tax payments                                                                             |                                                    |      | 17,332   |       |   |      | 10,031   |       |  |   | 4,331    |      
|Change in unrealized gain on securities available
    for sale  net of tax                     |                                                    |      | 7,810    |       |   |      | 5,545    |       |  |   | 13,074   |      

See notes to consolidated financial statements.

55



---



##### 



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 (the Bank), (collectively the
Company). The Bank offers a broad range of lending
and depository products to businesses, individuals and
government units through 13 branches and a business center in
Westchester County, New York, two branches in Bronx County, New
York and one branch in Manhattan, New York. 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 Bank may sell in
the ordinary course of business, or as held for investment,
representing securities the Bank has the ability and positive
intent to hold until maturity. Securities available for sale are
reported at fair value with unrealized gains and losses (net of
tax) excluded from operations and reported in other
comprehensive income. Securities held for investment are stated
at amortized cost (specific identification). There were no
securities held for investment at December 31, 2002 and
2001. The amortization of premiums and accretion of discounts is
determined by using the level yield method to the earlier of the
call or maturity date. Securities are not acquired for purposes
of engaging in trading activities. Realized gains and losses
from sales of securities are determined using the specific
identification method.

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.

Loans Held for Sale Loans held for sale are valued at the
lower of cost or market, decreases in the carrying value, if
any, are reported in earnings. Realized gains or losses on sales
of loans are reported in earnings in the period the sale occurs.
There were no loans held for sale at December 31, 2002 and
2001.

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 (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS
No. 137, Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS
Statement No. 133, which became effective on
January 1, 2001, requires that all derivative instruments,
including interest rate contracts, be recorded on the balance
sheet at their fair value. Changes in the fair value of
derivative instruments are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. The Company has two
interest rate floor contracts, one with a notional value of
$25 million with a 4.5% strike rate and one with a notional
value of $25 million with a 4.0% strike rate, which do not
qualify for hedge accounting under SFAS No. 133.
Accordingly, the contracts were accounted for at fair value with
the resulting net gain of $1,105,000 and $832,000 included in
other income as of December 31, 2002 and 2001,
respectively. Under prior accounting, these contracts were
accounted for as hedges, with the premiums paid for them being
amortized against interest income over the life of the contract.
The transition adjustment resulting from the adoption of SFAS
No. 133 as of January 1, 2001 was not significant.

56



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

Actual losses can vary significantly from the
estimated amounts. The Banks methodology permits
adjustments to the allowance in the event that, in
managements judgment, significant factors which affect the
collectibility of the loan portfolio as 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, 2002 and 2001. There is no assurance
that the Company will not be required to make future adjustments
to the allowance in response to changing economic conditions,
particularly in the Banks service area, since the majority
of the Banks loans are collateralized by real estate. In
addition, various regulatory agencies, as an integral part of
the examination process, periodically review the Banks
allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments at
the time of their 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

57



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
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
31.5 years. 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.

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.

Transfers of Financial Assets In September 2000, FASB issued SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,
replacing SFAS No. 125. SFAS No. 140 revises the
standard for accounting and reporting for transfers and
servicing of financial assets and extinguishments of
liabilities, providing consistent guidelines for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 140 is effective for
transfers, servicing, or extinguishments occurring after
March 31, 2001, except for certain provisions relating to
the accounting and disclosure for secured borrowings and
collateral, for which the effective date was December 15,
2000. The adoption of the remaining provisions of this statement
did not have a material impact on the Companys financial
position or results of operations.

Business Combinations In July 2001, the FASB issued SFAS
No. 141, Business Combination (SFAS
No. 141). SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests
method. The adoption of SFAS No. 141 by the Company on
July 1, 2001 did not have a significant impact on its
financial position or results of operations.

Stock-Based Compensation The Company has stock option plans
that provide for the granting of options to directors, certain
officers and to all eligible employees. SFAS No. 123,
Accounting for Stock-Based Compensation, encourages
but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. In
December 2002, the FASB issued SFAS No. 148,

58



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 in 2001 or 2000 as all employee options granted during
those years had an exercise price equal to the market value of
the underlying common stock on the dates of grant. Non-employee
stock options were expensed as of the date of grant. Effective
January 1, 2002, the Company adopted the fair value
recognition provisions of SFAS No. 123 prospectively for
all stock options granted, modified or settled on or after
January 1, 2002. Certain stock options under the
Companys plans vest over a five year period commencing one
year from date of grant. Therefore, the cost related to
stock-based employee compensation included in the determination
of 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 effective date of SFAS
No. 123. The following table illustrates the effect on net
income and earnings per share if the fair value based method had
been applied to all outstanding and unvested awards in each
period.

|                                                                                                                                                        |                       |                          |        |      |  |      |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                        |                       |                         
|                                                                                                                                                        |                       | Years Ended December 31,
|                                                                                                                                                        |                       |                         
|                                                                                                                                                        |                       | 2002                     |        | 2001 |  | 2000
|                                                                                                                                                        |                       |                          |        |      |  |     
|Net income, as reported                                                                                                                                 |                       | $                        | 21,584 |      |  | $    | 18,881 |      |  | $ | 16,158 |     
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                          |                       |                          | 204    |      |  |      |       |      |  |   |       |     
|Deduct: Total stock-based employee compensation
    expense determined under the fair value based method for all
    awards, net of related tax effects |                       |                          | (256   | )    |  |      | (222   | )    |  |   | (351   | )   
|                                                                                                                                                        |                       |                          |        |      |  |      |        |      |  |   |        |     
|Pro forma net income                                                                                                                                    |                       | $                        | 21,532 |      |  | $    | 18,659 |      |  | $ | 15,807 |     
|                                                                                                                                                        |                       |                          |        |      |  |      |        |      |  |   |        |     
|                                                                                                                                                       
|Earnings per share:                                                                                                                                     |                       |                          |        |      |  |      |        |      |  |   |        |     
|                                                                                                                                                        | Basic  as reported   |                          | $      | 3.69 |  |      | $      | 3.29 |  |   | $      | 2.85 | 
|                                                                                                                                                        | Basic  pro forma     |                          |        | 3.68 |  |      |        | 3.25 |  |   |        | 2.79 | 
|                                                                                                                                                       
|                                                                                                                                                        | Diluted  as reported |                          | $      | 3.59 |  |      | $      | 3.20 |  |   | $      | 2.77 | 
|                                                                                                                                                        | Diluted  pro forma   |                          |        | 3.58 |  |      |        | 3.16 |  |   |        | 2.71 | 

The fair value (present value of the estimated
future benefit to the option holder) of each option grant in
2002, 2001 and 2000 is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2002, 2001 and 2000,
respectively: dividend yield of 3.8%, 3.5% and 3.5%; average
expected volatility of 9%, 10% and 10%; average risk-free
interest rates of 4.11%, 4.36% and 5.05% and expected life of
5 years for 2002, and 6 years for 2001 and 2000. All
option grants expire within 10 years of the date of grant.
The weighted average fair value of options granted during 2002,
2001 and 2000 was $2.84, $3.08 and $3.42, 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

59



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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:

|                                |  |      |           |      |  |      |           |  |  |  |           | 
|------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                |  | 2002 |           | 2001 |  | 2000
|                                |  |      |           |      |  |     
|Weighted average common shares: |  |      |           |      |  |      |           |  |  |  |           | 
|Basic                           |  |      | 5,847,879 |      |  |      | 5,745,852 |  |  |  | 5,668,855 | 
|Effect of stock options         |  |      | 160,548   |      |  |      | 154,796   |  |  |  | 163,816   | 
|Diluted                         |  |      | 6,008,427 |      |  |      | 5,900,648 |  |  |  | 5,832,671 | 

In December 2002, 2001 and 2000, 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 in annual financial
statements and requires that those enterprises report selected
information about operating segments in subsequent interim
financial reports issued to shareholders. It also 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 statement also
requires that business enterprises report a measure of segment
profit or loss, certain specific revenue and expense items and
segment assets. It also requires that information be reported
about revenues derived from the enterprises products or
services, or about the countries in which the enterprises earn
revenues and holds assets, and about major customers, regardless
of whether that information is used in making operating
decisions. The Company has one operating segment,
Community Banking.

Goodwill and Other Intangible
Assets In July 2001, the
FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142) which
became effective January 1, 2002. SFAS No. 142
requires, among other things, the discontinuance of goodwill
amortization as well as provisions for the reclassification of
certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized
intangibles and the identification of reporting units for
purposes of assessing future impairments of goodwill. SFAS
No. 142 also required a transitional goodwill impairment
test six months from the date of adoption. The adoption of SFAS
No. 142 by the Company on January 1, 2002 did not have
a significant impact on its financial positions or results of
operations.

Accounting for the Impairment or Disposal of
Long-Lived Assets In
August 2001, the FASB issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144) which supersedes SFAS
No. 121 and portions of APB Opinion No. 30. This
statement addresses the recognition of an impairment loss for
long-lived assets to be held and used, or disposed of by sale or
otherwise. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. The adoption of
SFAS No. 144 by the Company on January 1, 2002 did not
have a significant impact on its financial positions or results
of operations.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections
(SFAS No. 145). This statement clarifies guidance
related to the reporting of gains and losses from extinguishment
of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. The
provisions of this statement relating to the extinguishment of
debt become effective for financial statements issued for fiscal

60



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

years beginning after May 15, 2002. The
provisions of this statement relating to lease modification are
effective for transactions occurring after May 15, 2002. The
adoption of the effective provisions of SFAS No. 145 did
not have a significant impact on the Companys financial
position or results of operations and the Company does not
believe that the adoption of the remaining provisions will have
a significant impact on its financial position or results of
operations.

Acquisitions of Certain Financial
Institutions In
October 2002, the FASB issued SFAS No. 147, Acquisitions
of Certain Financial Institutions (SFAS No.
147) which became effective October 1, 2002. SFAS No. 147
removes acquisitions of financial institutions from the scope of
SFAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions and FASB Interpretation No.
9, Applying APB Opinions No. 16 and 17 When a
Savings and Loan Association or Similar Association is Acquired
in a Business Combination Accounted for by the Purchase
Method and requires that those transactions be accounted
for in accordance with SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. In addition, SFAS No. 147 amends SFAS
No. 144, Accounting for the Impairment and Disposal of
Long-Lived Assets, to include in its scope long-term
customer relationship intangible assets of financial
institutions. The adoption of SFAS No. 147 by the Company on
October 1, 2002 did not have a significant effect on the
Companys financial position or results of operations.

Other Certain 2001 and 2000 amounts have
been reclassified to conform to the 2002 presentation.

Pending Accounting Pronouncements

Accounting for Costs Associated with Exit or
Disposal
Activities In June
2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS
No. 146). The statement specifies the accounting for
certain employee termination benefits, contract termination
costs and costs to consolidate facilities or relocate employees
and is effective for exit and disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 by the
Company on January 1, 2003 will not have a significant effect on
the Companys financial position or results of operations.

2  Securities

|                                                 |  |             |         |                  |  |        |        |           |  |                  |     |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |       |  |  |   |         | 
|------------------------------------------------ |  | ----------- | ------- | ---------------- |  | ------ | ------ | --------- |  | ---------------- | --- | ----- |  | ------ | ------- | ----- |  | - | ------- |  |  | - | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                                 |  |            
|                                                 |  | December 31
|                                                 |  |            
|                                                 |  |             |         |                 
|                                                 |  | 2002        |         | 2001            
|                                                 |  |             |         |                 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |     |      
|                                                 |  |             |         | Gross Unrealized |  |        |        |           |  | Gross Unrealized |     |      
|                                                 |  | Amortized   |         |                  |  | Fair   |        | Amortized |  |                  |     | Fair 
|                                                 |  | Cost        |         | Gains            |  | Losses |        | Value     |  | Cost             |     | Gains |  | Losses |         | Value
|                                                 |  |             |         |                  |  |        |        |           |  |                  |     |       |  |        |         |      
|Classified as Available for Sale                 |  |             |         |                  |  |        |        |           |  |                  |     |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |       |  |  |   |         | 
|U.S. Treasury and government agencies            |  | $           | 223,005 |                  |  | $      | 1,671  |           |  | $                | 2   |       |  | $      | 224,674 |       |  | $ | 105,838 |  |  | $ | 1,344  |  |  | $ | 399   |  |  | $ | 106,783 | 
|Mortgage-backed securities                       |  |             | 323,898 |                  |  |        | 10,309 |           |  |                  | 208 |       |  |        | 333,999 |       |  |   | 348,116 |  |  |   | 5,052  |  |  |   | 398   |  |  |   | 352,770 | 
|Obligations of states and political subdivisions |  |             | 167,346 |                  |  |        | 9,469  |           |  |                  | 4   |       |  |        | 176,811 |       |  |   | 155,742 |  |  |   | 4,275  |  |  |   | 484   |  |  |   | 159,533 | 
|Other debt securities                            |  |             | 6,714   |                  |  |        | 288    |           |  |                  |    |       |  |        | 7,002   |       |  |   | 3,817   |  |  |   | 25     |  |  |   | 40    |  |  |   | 3,802   | 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |     |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |       |  |  |   |         | 
|Total debt securities                            |  |             | 720,963 |                  |  |        | 21,737 |           |  |                  | 214 |       |  |        | 742,486 |       |  |   | 613,513 |  |  |   | 10,696 |  |  |   | 1,321 |  |  |   | 622,888 | 
|Equity securities                                |  |             | 970     |                  |  |        | 428    |           |  |                  |    |       |  |        | 1,398   |       |  |   | 872     |  |  |   | 449    |  |  |   |      |  |  |   | 1,321   | 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |     |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |       |  |  |   |         | 
|Total                                            |  | $           | 721,933 |                  |  | $      | 22,165 |           |  | $                | 214 |       |  | $      | 743,884 |       |  | $ | 614,385 |  |  | $ | 11,145 |  |  | $ | 1,321 |  |  | $ | 624,209 | 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |     |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |       |  |  |   |         | 

At December 31, 2002, securities having a
stated value of approximately $398,176 were pledged to secure
public deposits, securities sold under agreements to repurchase,
and for other purposes as required or permitted by law.

Gross gains of $54, gross losses of $180 and
gross gains of $692 were recorded as a result of securities
available for sale sold or redeemed in 2002, 2001 and 2000
respectively. Applicable income taxes relating to such
transactions were $22, $(75) and $284 in 2002, 2001 and 2000,
respectively.

61



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The contractual maturity of all debt securities
held at December 31, 2002 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               |  | $                  | 161,344 |       |  | $ | 161,450 | 
|After 1 but within 5 years  |  |                    | 50,882  |       |  |   | 53,558  | 
|After 5 but within 10 years |  |                    | 69,959  |       |  |   | 73,934  | 
|After 10 years              |  |                    | 114,880 |       |  |   | 119,545 | 
|Mortgage-backed Securities  |  |                    | 323,898 |       |  |   | 333,999 | 
|                            |  |                    |         |       |  |   |         | 
|Total                       |  | $                  | 720,963 |       |  | $ | 742,486 | 
|                            |  |                    |         |       |  |   |         | 

3  Credit Commitments and
Concentrations of Credit Risk

The Bank 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 Bank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.

|                   |  |          |         |          |  |   |         | 
|------------------ |  | -------- | ------- | -------- |  | - | ------- | 
|                   |  | 2002     |         | 2001    
|                   |  | Contract |         | Contract
|                   |  | Amount   |         | Amount  
|                   |  |          |         |         
|Credit commitments |  | $        | 129,442 |          |  | $ | 130,191 | 
|Guarantees written |  | $        | 5,287   |          |  | $ | 4,749   | 

The majority of loan commitments have terms up to
one year, with either a floating interest rate or contracted
fixed interest rates ranging from 3.75% to 8.50%. 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 Banks policy is to require customers to
provide collateral prior to the disbursement of approved loans.
For loans and financial guarantees, the Bank 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 Bank does not have a
significant exposure to any individual customer or counterparty.
A geographic concentration arises because the Bank operates
principally

62



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
|                   |  |             |         |            |  |      
|2002               |  |             |         |            |  |       |         |  |  |   |         | 
|Loans              |  | $           | 181,564 |            |  | $     | 342,360 |  |  | $ | 523,924 | 
|Credit commitments |  |             | 27,269  |            |  |       | 76,223  |  |  |   | 103,492 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 
|                   |  | $           | 208,833 |            |  | $     | 418,583 |  |  | $ | 627,416 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 
|2001               |  |             |         |            |  |       |         |  |  |   |         | 
|Loans              |  | $           | 183,160 |            |  | $     | 300,082 |  |  | $ | 483,242 | 
|Credit commitments |  |             | 24,307  |            |  |       | 78,693  |  |  |   | 103,000 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 
|                   |  | $           | 207,467 |            |  | $     | 378,775 |  |  | $ | 586,242 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 

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 Bank has
experienced little difficulty in accessing collateral when
required.

4  Loans

The loan portfolio is comprised of the following:

|                          |              |             |         |         |  |   |         |         | 
|------------------------- | ------------ | ----------- | ------- | ------- |  | - | ------- | ------- | 
|                          |              |            
|                          |              | December 31
|                          |              |            
|                          |              | 2002        |         | 2001   
|                          |              |             |         |        
|Real Estate:              |              |             |         |         |  |   |         |        
|                          | Commercial   |             | $       | 231,411 |  |   | $       | 210,840 | 
|                          | Construction |             |         | 56,691  |  |   |         | 52,496  | 
|                          | Residential  |             |         | 164,287 |  |   |         | 174,859 | 
|Commercial and industrial |              |             | 179,288 |         |  |   | 140,573 |        
|Individuals               |              |             | 14,509  |         |  |   | 11,824  |        
|Lease financing           |              |             | 9,224   |         |  |   | 19,282  |        
|                          |              |             |         |         |  |   |         |        
|Total                     |              |             | 655,410 |         |  |   | 609,874 |        
|Deferred loan fees        |              |             | (1,462  | )       |  |   | (1,479  | )      
|Allowance for loan losses |              |             | (11,510 | )       |  |   | (8,018  | )      
|                          |              |             |         |         |  |   |         |        
|Loans, net                |              | $           | 642,438 |         |  | $ | 600,377 |        
|                          |              |             |         |         |  |   |         |        

The Bank 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 Bank
ordinarily requires the primary source of payment to be based on
the borrowers ability to generate continuing cash flows.

63



---



##### 



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
|                           |                                            |            
|                           |                                            | 2002        |        | 2001  |   | 2000
|                           |                                            |             |        |       |   |     
|Balance, beginning of year |                                            | $           | 8,018  |       |   | $    | 4,816 |        |   | $ | 4,047 |      
|Add (deduct):              |                                            |             |        |       |   |      |       |        |   |   |       |      
|                           | Provision for loan losses                  |             |        | 3,902 |   |      |       | 4,380  |   |   |       | 1,144 |  
|                           | Recoveries on loans previously charged-off |             |        | 69    |   |      |       | 250    |   |   |       | 53    |  
|                           | Charge-offs                                |             |        | (479  | ) |      |       | (1,428 | ) |   |       | (428  | )
|                           |                                            |             |        |       |   |      |       |        |   |   |       |      
|Balance, end of year       |                                            | $           | 11,510 |       |   | $    | 8,018 |        |   | $ | 4,816 |      
|                           |                                            |             |        |       |   |      |       |        |   |   |       |      

The recorded investment in impaired loans at
December 31, 2002 was $4,672 for which an allowance of
$1,282 has been established. The recorded investment in impaired
loans at December 31, 2001 was $2,485, for which an
allowance of $807 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
2002, 2001 and 2000 was $3,519, $2,317 and $2,154, respectively.
During the years reported, no income was recorded on impaired
loans during the portion of the year that they were impaired.

Non-accrual and restructured loans at
December 31, 2002, 2001 and 2000 and related interest
income are summarized as follows:

|                                                                                    |  |             |       |              |  |             |   |              |  |             |       |              |  |  |   |  |  |   |       |  |  |  |   | 
|----------------------------------------------------------------------------------- |  | ----------- | ----- | ------------ |  | ----------- | - | ------------ |  | ----------- | ----- | ------------ |  |  | - |  |  | - | ----- |  |  |  | - | 
|                                                                                    |  |             |       |              |  |            
|                                                                                    |  | 2002        |       | 2001         |  | 2000       
|                                                                                    |  |             |       |              |  |            
|                                                                                    |  | Non-Accrual |       | Restructured |  | Non-Accrual |   | Restructured |  | Non-Accrual |       | Restructured
|                                                                                    |  | Loans       |       | Loans        |  | Loans       |   | Loans        |  | Loans       |       | Loans       
|                                                                                    |  |             |       |              |  |             |   |              |  |             |       |             
|Amount                                                                              |  | $           | 4,758 |              |  |             |  |              |  | $           | 3,523 |              |  |  |  |  |  | $ | 4,584 |  |  |  |  | 
|Interest income recorded                                                            |  |             |      |              |  |             |  |              |  |             |      |              |  |  |  |  |  |   |      |  |  |  |  | 
|Interest income that would have been recorded
    under the original contract terms |  |             | 179   |              |  |             |  |              |  |             | 334   |              |  |  |  |  |  |   | 586   |  |  |  |  | 

Non-accrual loans at December 31, 2002 and
2001 include $4,172 and $2,485, respectively, of loans
considered to be impaired under SFAS No. 114.

Loans made directly or indirectly to employees,
directors or principal shareholders were approximately $17,192
and $17,239 at December 31, 2002 and 2001, respectively.
During 2002, new loans granted to these individuals and the
effects of changes in board member composition totaled $688 and
payments totaled $735.

64



---



##### 



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
|                                               |  |            
|                                               |  | 2002        |        | 2001
|                                               |  |             |        |     
|Land                                           |  | $           | 1,139  |      |  | $ | 1,139  | 
|Buildings                                      |  |             | 10,715 |      |  |   | 10,452 | 
|Leasehold improvements                         |  |             | 2,485  |      |  |   | 2,106  | 
|Furniture, fixtures and equipment              |  |             | 13,011 |      |  |   | 11,592 | 
|Automobiles                                    |  |             | 447    |      |  |   | 321    | 
|                                               |  |             |        |      |  |   |        | 
|Total                                          |  |             | 27,797 |      |  |   | 25,610 | 
|Less accumulated depreciation and amortization |  |             | 15,168 |      |  |   | 13,481 | 
|                                               |  |             |        |      |  |   |        | 
|Premises and equipment, net                    |  | $           | 12,629 |      |  | $ | 12,129 | 
|                                               |  |             |        |      |  |   |        | 

6  Borrowings

Borrowings with original maturities of one year
or less totaled $139,212 and $143,529 at December 31, 2002
and 2001, respectively. Such short-term borrowings consisted of
securities sold under agreements to repurchase of $139,212 and
$143,529 at December 31, 2002 and 2001, respectively. Other
borrowings totaled $188,171 and $209,191 at December 31,
2002 and 2001, respectively, consisting of borrowings from FHLB
with stated maturities of ten years and 1 to 4 year
call options.

Interest expense on all borrowings totaled
$15,097, $14,067 and $15,043 in 2002, 2001 and 2000,
respectively. In December 2002, the Company prepaid
$21 million of its FHLB borrowings resulting in a
prepayment penalty of $2.6 million. This penalty is
included in interest expense on other borrowings in the 2002
Consolidated Statement of Income. Excluding the aforementioned
prepayment penalty, the weighted average interest rate on other
borrowings for 2002 was 4.9%. 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:

|                                      |                  |      |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------- | ---------------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                      |                  | 2002 |   | 2001    |   | 2000
|                                      |                  |      |   |         |   |     
|Average balance:                      |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      | $ | 148,555 |   |      | $ | 154,311 |   |  | $ | 165,993 |  
|                                      | Other Borrowings |      |   | 208,886 |   |      |   | 160,255 |   |  |   | 89,011  |  
|Weighted average interest rate:       |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      |   | 1.6     | % |      |   | 3.8     | % |  |   | 6.1     | %
|                                      | Other Borrowings |      |   | 6.1     |   |      |   | 5.1     |   |  |   | 5.5     |  
|Maximum month-end outstanding amount: |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      | $ | 161,757 |   |      | $ | 164,222 |   |  | $ | 197,889 |  
|                                      | Other Borrowings |      |   | 209,191 |   |      |   | 209,191 |   |  |   | 94,229  |  

As of December 31, 2002 and 2001, these
borrowings were collateralized by loans and securities with an
estimated fair value of $343,752 and $370,356, respectively.

In addition, at December 31, 2002, the Bank
had available unused lines of credit of $120 million from
FHLB, and $25 million from correspondent banks. In
addition, the Bank has $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.

65



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7  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
|                                         |  |                        
|                                         |  |                         |        |      |  |     
|                                         |  | 2002                    |        | 2001 |  | 2000
|                                         |  |                         |        |      |  |     
|                                         |  |                         |        |      |  |      |      |   |  |  
|Income tax at statutory rate             |  | $                       | 10,761 |      |  |      | 35.0 | % |  | $ | 9,932  |   |  |  | 35.0 | % |  | $ | 7,474  |   |  |  | 34.0 | %
|State income tax, net of Federal benefit |  |                         | 1,038  |      |  |      | 3.4  |   |  |   | 1,036  |   |  |  | 3.7  |   |  |   | 472    |   |  |  | 2.1  |  
|Tax-exempt interest income               |  |                         | (2,592 | )    |  |      | (8.4 | ) |  |   | (2,334 | ) |  |  | (8.2 | ) |  |   | (2,032 | ) |  |  | (9.2 | )
|Non-deductible expenses and other        |  |                         | (47    | )    |  |      | (0.2 | ) |  |   | 861    |   |  |  | 3.0  |   |  |   | (89    | ) |  |  | (0.4 | )
|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  
|Provision for income taxes               |  | $                       | 9,160  |      |  |      | 29.8 | % |  | $ | 9,495  |   |  |  | 33.5 | % |  | $ | 5,825  |   |  |  | 26.5 | %
|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  

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

|         |          |                         |       |        |   |      |       |        |   |   |       |       | 
|-------- | -------- | ----------------------- | ----- | ------ | - | ---- | ----- | ------ | - | - | ----- | ----- | 
|         |          |                        
|         |          | Years Ended December 31
|         |          |                        
|         |          | 2002                    |       | 2001   |   | 2000
|         |          |                         |       |        |   |     
|Federal: |          |                         |       |        |   |      |       |        |   |   |       |      
|         | Current  |                         | $     | 14,194 |   |      | $     | 9,113  |   |   | $     | 866   | 
|         | Deferred |                         |       | (6,398 | ) |      |       | (1,164 | ) |   |       | 4,218 | 
|State:   |          |                         |       |        |   |      |       |        |   |   |       |      
|         | Current  |                         |       | 2,319  |   |      |       | 2,011  |   |   |       | 206   | 
|         | Deferred |                         |       | (955   | ) |      |       | (465   | ) |   |       | 535   | 
|         |          |                         |       |        |   |      |       |        |   |   |       |      
|Total    |          | $                       | 9,160 |        |   | $    | 9,495 |        |   | $ | 5,825 |      
|         |          |                         |       |        |   |      |       |        |   |   |       |      

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

|                                     |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   |       | 
|------------------------------------ |  | ----------------- | ----- | ----------------- |  | ----- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|                                     |  |                   |       |                  
|                                     |  | December 31, 2002 |       | December 31, 2001
|                                     |  |                   |       |                  
|                                     |  | Asset             |       | Liability         |  | Asset |       | Liability
|                                     |  |                   |       |                   |  |       |       |          
|Allowance for loan losses            |  | $                 | 4,652 |                   |  |       |       |           |  | $ | 3,243 |  |  |   |       | 
|Treasury securities                  |  |                   |       |                   |  |       |       |           |  |   |       |  |  | $ | 375   | 
|Supplemental pension benefit         |  |                   | 1,519 |                   |  |       |       |           |  |   | 1,334 |  |  |   |       | 
|Minimum pension liability            |  |                   | 579   |                   |  |       |       |           |  |   | 480   |  |  |   |       | 
|Deferred compensation                |  |                   | 702   |                   |  |       |       |           |  |   | 697   |  |  |   |       | 
|Securities available for sale        |  |                   |       |                   |  | $     | 8,406 |           |  |   |       |  |  |   | 4,088 | 
|Interest on non-accrual loans        |  |                   | 200   |                   |  |       |       |           |  |   | 263   |  |  |   |       | 
|Undistributed income from subsidiary |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   | 5,345 | 
|SFAS 123 compensation cost           |  |                   | 87    |                   |  |       |       |           |  |   |       |  |  |   |       | 
|Depreciation                         |  |                   |       |                   |  |       | 158   |           |  |   |       |  |  |   | 188   | 
|Other                                |  |                   |       |                   |  |       |       |           |  |   | 21    |  |  |   |       | 
|                                     |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   |       | 
|                                     |  | $                 | 7,739 |                   |  | $     | 8,564 |           |  | $ | 6,038 |  |  | $ | 9,996 | 
|                                     |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   |       | 

8  Stockholders Equity and
Stock Options

The Company and the Bank 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

66



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

effect on their financial statements. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank 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 the Bank 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).

Management believes, as of December 31,
2002, that both the Company and the Bank meet all capital
adequacy requirements to which they are subject.

The following summarizes the capital requirements
and capital position at December 31, 2002 and 2001:

|                                         |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------------- | ---- | ----------------- |  | ------- | ------ | ----- |  |  | --- | - |  | - | ------ |  |  |  | ---- | -
|                                         |  |        |         |                   |  |                   |      |                   |  |        
|                                         |  |        |         |                   |  |                   |      |                   |  | Minimum
|                                         |  |        |         |                   |  |                   |      | To Be Well       
|                                         |  |        |         |                   |  | Minimum For       |      | Capitalized Under
|                                         |  |        |         | Capital           |  | Prompt Corrective
|                                         |  | Actual |         | Adequacy Purposes |  | Action Provision 
|                                         |  |        |         |                   |  |                  
|Bank Only                                |  | Amount |         | Ratio             |  | Amount            |      | Ratio             |  | Amount  |        | Ratio
|                                         |  |        |         |                   |  |                   |      |                   |  |         |        |      
|As of December 31, 2001:                 |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 114,590 |                   |  |                   | 16.5 | %                 |  | $       | 55,667 |       |  |  | 8.0 | % |  | $ | 69,583 |  |  |  | 10.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 106,572 |                   |  |                   | 15.3 |                   |  |         | 27,833 |       |  |  | 4.0 |   |  |   | 41,750 |  |  |  | 6.0  |  
|Tier 1 Capital (To Average Assets)       |  |        | 106,572 |                   |  |                   | 7.9  |                   |  |         | 53,992 |       |  |  | 4.0 |   |  |   | 67,490 |  |  |  | 5.0  |  
|As of December 31, 2002:                 |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 131,497 |                   |  |                   | 18.3 | %                 |  | $       | 57,554 |       |  |  | 8.0 | % |  | $ | 71,943 |  |  |  | 10.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 122,504 |                   |  |                   | 17.0 |                   |  |         | 28,777 |       |  |  | 4.0 |   |  |   | 43,165 |  |  |  | 6.0  |  
|Tier 1 Capital (To Average Assets)       |  |        | 122,504 |                   |  |                   | 8.3  |                   |  |         | 59,318 |       |  |  | 4.0 |   |  |   | 74,148 |  |  |  | 5.0  |  

|                                         |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------- | ---- | ----- |  | - | ------ |  |  |  | --- | -
|                                         |  |        |         |                   |  |            
|                                         |  |        |         |                   |  | Minimum For
|                                         |  |        |         | Capital          
|                                         |  | Actual |         | Adequacy Purposes
|                                         |  |        |         |                  
|Consolidated                             |  | Amount |         | Ratio             |  | Amount      |      | Ratio
|                                         |  |        |         |                   |  |             |      |      
|As of December 31, 2001:                 |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 115,059 |                   |  |             | 16.5 | %     |  | $ | 55,735 |  |  |  | 8.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 107,041 |                   |  |             | 15.4 |       |  |   | 27,867 |  |  |  | 4.0 |  
|Tier 1 Capital (To Average Assets)       |  |        | 107,041 |                   |  |             | 7.9  |       |  |   | 54,027 |  |  |  | 4.0 |  
|As of December 31, 2002:                 |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 131,839 |                   |  |             | 18.3 | %     |  | $ | 57,630 |  |  |  | 8.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 122,834 |                   |  |             | 17.0 |       |  |   | 28,815 |  |  |  | 4.0 |  
|Tier 1 Capital (To Average Assets)       |  |        | 122,834 |                   |  |             | 8.3  |       |  |   | 59,341 |  |  |  | 4.0 |  

As of December 31, 2002, the most recent
notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the 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 2002 and 2001 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.

67



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
466,414 shares of common stock were outstanding at
December 31, 2002 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.

Stock option transactions under the Plans were as
follows:

|                                    |  |            |          |                  |  |   |       | 
|----------------------------------- |  | ---------- | -------- | ---------------- |  | - | ----- | 
|                                    |  | Shares     |          | Weighted        
|                                    |  | Underlying |          | Average Exercise
|Outstanding Options                 |  | Options    |          | Price Per Share 
|                                    |  |            |          |                 
|As of January 1, 2000               |  |            | 348,932  |                  |  | $ | 13.89 | 
|Granted                             |  |            | 186,729  |                  |  |   | 24.11 | 
|Cancelled or expired                |  |            | (5,326   | )                |  |   | 21.70 | 
|Exercised                           |  |            | (112,814 | )                |  |   | 18.91 | 
|                                    |  |            |          |                  |  |   |       | 
|As of December 31, 2000             |  |            | 417,521  |                  |  |   | 17.01 | 
|Granted                             |  |            | 174,463  |                  |  |   | 28.01 | 
|Cancelled or expired                |  |            | (4,301   | )                |  |   | 25.51 | 
|Exercised                           |  |            | (135,796 | )                |  |   | 21.03 | 
|                                    |  |            |          |                  |  |   |       | 
|As of December 31, 2001             |  |            | 451,887  |                  |  |   | 19.96 | 
|Granted                             |  |            | 164,335  |                  |  |   | 32.29 | 
|Cancelled or expired                |  |            | (4,854   | )                |  |   | 31.24 | 
|Exercised                           |  |            | (144,954 | )                |  |   | 20.70 | 
|                                    |  |            |          |                  |  |   |       | 
|As of December 31, 2002             |  |            | 466,414  |                  |  |   | 23.96 | 
|Exercisable as of December 31, 2002 |  |            | 423,323  |                  |  |   | 23.32 | 
|Available for future grant          |  |            | 703,458  |                  |  |   |       | 

The following table summarizes the range of
exercise prices of the Companys stock options outstanding
and exercisable at December 31, 2002:

|                |  |                |                  |           |  |                  |         |          |  |  |     |  |  |   |       | 
|--------------- |  | -------------- | ---------------- | --------- |  | ---------------- | ------- | -------- |  |  | --- |  |  | - | ----- | 
|                |  |                |                  |           |  |                 
|                |  |                |                  |           |  | Weighted Average
|                |  |                |                  |           |  |                 
|                |  |                |                  | Number of |  | Remaining        |         | Exercise
|                |  | Exercise Price |                  | Options   |  | Life (yrs)       |         | Price   
|                |  |                |                  |           |  |                  |         |         
|                |  |                | $ 8.49 to $20.98 |           |  |                  | 146,852 |          |  |  | 3.7 |  |  | $ | 14.43 | 
|                |  |                | 21.02 to  27.91  |           |  |                  | 181,115 |          |  |  | 7.2 |  |  |   | 25.78 | 
|                |  |                | 27.92 to  33.21  |           |  |                  | 138,447 |          |  |  | 8.9 |  |  |   | 31.69 | 
|                |  |                |                  |           |  |                  |         |          |  |  |     |  |  |   |       | 
|                |  |                | $ 8.49 to $33.21 |           |  |                  | 466,414 |          |  |  | 6.6 |  |  | $ | 23.96 | 
|Exercisable     |  |                | $ 8.49 to $33.21 |           |  |                  | 423,323 |          |  |  | 6.4 |  |  | $ | 23.32 | 
|Not Exercisable |  |                | $19.40 to $33.21 |           |  |                  | 43,091  |          |  |  | 8.5 |  |  | $ | 30.28 | 

9  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
(including pension costs for directors) totaled approximately
$756, $785 and $400 in 2002, 2001 and 2000, respectively.

The Hudson Valley Bank Employees Savings
Plan covers substantially all employees. The Bank matches
25 percent of employee contributions annually, up to
4 percent of base salary. Savings Plan costs charged to
expense totaled approximately $74, $67 and $64 in 2002, 2001 and
2000, respectively.

68



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 pursuant to supplemental plans. Costs for the
officers supplemental pension plan totaled approximately
$617, $650 and $605 in 2002, 2001 and 2000, respectively. The
Bank 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
liabilities. This additional minimum pension liability is offset
by an intangible asset, not to exceed prior service costs and 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 following tables set forth the status of the
Banks plans as of December 31, 2002 and 2001:

|                                               |                         |      |        |      |   |   |        |      |  
|---------------------------------------------- | ----------------------- | ---- | ------ | ---- | - | - | ------ | ---- | -
|                                               |                         | 2002 |        | 2001
|                                               |                         |      |        |     
|Change in benefit obligation:                  |                         |      |        |      |   |   |        |     
|Benefit obligation at beginning of year        |                         | $    | 5,709  |      |   | $ | 4,995  |     
|                                               | Service cost            |      |        | 180  |   |   |        | 223  |  
|                                               | Interest cost           |      |        | 396  |   |   |        | 356  |  
|                                               | Actuarial (gain) loss   |      |        | 813  |   |   |        | 634  |  
|                                               | Benefits paid           |      |        | (482 | ) |   |        | (499 | )
|                                               |                         |      |        |      |   |   |        |     
|Benefit obligation at end of year              |                         |      | 6,616  |      |   |   | 5,709  |     
|                                               |                         |      |        |      |   |   |        |     
|Change in plan assets:                         |                         |      |        |      |   |   |        |     
|Fair value of plan assets at beginning of year |                         |      |       |      |   |   |       |     
|                                               | Actual return on assets |      |        |     |   |   |        |     |  
|                                               | Employer contributions  |      |        | 482  |   |   |        | 499  |  
|                                               | Benefits paid           |      |        | (482 | ) |   |        | (499 | )
|                                               |                         |      |        |      |   |   |        |     
|Fair value of plan assets at end of year       |                         |      |       |      |   |   |       |     
|                                               |                         |      |        |      |   |   |        |     
|Funded status                                  |                         |      | (6,616 | )    |   |   | (5,709 | )   
|Unrecognized transition obligation             |                         |      | 227    |      |   |   | 318    |     
|Unrecognized prior service cost                |                         |      | 273    |      |   |   | 317    |     
|Unrecognized net loss                          |                         |      | 2,250  |      |   |   | 1,665  |     
|                                               |                         |      |        |      |   |   |        |     
|Accrued benefit cost                           |                         | $    | (3,866 | )    |   | $ | (3,409 | )   
|                                               |                         |      |        |      |   |   |        |     
|Weighted average assumptions:                  |                         |      |        |      |   |   |        |     
|Discount rate                                  |                         |      | 6.25   | %    |   |   | 7.00   | %   
|Expected return on plan assets                 |                         |      |       |      |   |   |       |     
|Rate of compensation increase                  |                         |      | 5.00   | %    |   |   | 4.00   | %   
|Components of net periodic benefit
    cost:   |                         |      |        |      |   |   |        |     
|Service cost                                   |                         | $    | 180    |      |   | $ | 223    |     
|Interest cost                                  |                         |      | 396    |      |   |   | 356    |     
|Expected return on plan assets                 |                         |      |       |      |   |   |       |     
|Amortization of transition obligation          |                         |      | 91     |      |   |   | 91     |     
|Amortization of prior service cost             |                         |      | 44     |      |   |   | 44     |     
|Amortization of net loss                       |                         |      | 220    |      |   |   | 321    |     
|                                               |                         |      |        |      |   |   |        |     
|Net periodic benefit cost                      |                         | $    | 931    |      |   | $ | 1,035  |     
|                                               |                         |      |        |      |   |   |        |     

69



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                             |  |      |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                             |  | 2002 |        | 2001
|                                                                             |  |      |        |     
|Accrued benefit liability                                                    |  | $    | (5,795 | )    |  | $ | (5,245 | )
|Intangible asset                                                             |  |      | 500    |      |  |   | 635    |  
|Accumulated other comprehensive income (pre-tax
    net reduction in equity) |  |      | 1,429  |      |  |   | 1,201  |  
|                                                                             |  |      |        |      |  |   |        |  
|Accrued benefit cost                                                         |  | $    | (3,866 | )    |  | $ | (3,409 | )
|                                                                             |  |      |        |      |  |   |        |  

10  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,     |  |  
|                             |  |  
|2003                         |  | $ | 631   | 
|2004                         |  |   | 338   | 
|2005                         |  |   | 258   | 
|2006                         |  |   | 122   | 
|2007                         |  |   | 58    | 
|Thereafter                   |  |   | 223   | 
|                             |  |   |       | 
|Total minimum future rentals |  | $ | 1,630 | 
|                             |  |   |       | 

Rent expense for premises and equipment was
approximately $993, $833 and $783 in 2002, 2001 and 2000,
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.

At December 31, 2002, the Company was a
party to two interest rate floor agreements, as more fully
discussed in Note 1 to these consolidated financial
statements. These agreements are subject to the
counterparties ability to perform in accordance with the
terms of the agreements.

Cash Reserve Requirements

The Bank is required to maintain average reserve
balances under the Federal Reserve Act and Regulation D
issued thereunder. Such reserves totaled approximately $1,559 at
December 31, 2002 and $941 at December 31, 2001.

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 the Bank in any year exceed the net
profits of that year, as defined, combined with the retained net
profits for the two preceding years.

11  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 Bank to fund itself with
retail deposits and other borrowings and to manage interest rate
and credit risk. This situation is also

70



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002,
2001 and 2000, there is no customer that accounted for more than
10% of the Companys revenue.

12  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, 2002 and 2001 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  
|                                                                                                     |  |              
|                                                                                                     |  |               |       |           
|                                                                                                     |  | 2002          |       | 2001      
|                                                                                                     |  |               |       |           
|                                                                                                     |  | Carrying      |       | Estimated  |  | Carrying |       | Estimated 
|                                                                                                     |  | Amount        |       | Fair Value |  | Amount   |       | Fair Value
|                                                                                                     |  |               |       |            |  |          |       |           
|                                                                                                     |  |              
|                                                                                                     |  | (In millions)
|Assets:                                                                                              |  |               |       |            |  |          |       |            |  |   |       |  |  |   |       | 
|Financial assets for which carrying value
    approximates fair value                                |  | $             | 79.6  |            |  | $        | 79.6  |            |  | $ | 108.1 |  |  | $ | 108.1 | 
|Securities, FHLB stock and accrued interest                                                          |  |               | 758.7 |            |  |          | 758.7 |            |  |   | 640.1 |  |  |   | 640.1 | 
|Loans and accrued interest                                                                           |  |               | 656.8 |            |  |          | 660.9 |            |  |   | 611.1 |  |  |   | 614.1 | 
|Interest Rate Floor Contracts                                                                        |  |               | 0.7   |            |  |          | 0.7   |            |  |   | 0.8   |  |  |   | 0.8   | 
|Liabilities:                                                                                         |  |               |       |            |  |          |       |            |  |   |       |  |  |   |       | 
|Deposits with no stated maturity and accrued
    interest                                            |  |               | 862.3 |            |  |          | 862.3 |            |  |   | 655.8 |  |  |   | 655.8 | 
|Time deposits and accrued interest                                                                   |  |               | 166.0 |            |  |          | 164.5 |            |  |   | 234.1 |  |  |   | 233.0 | 
|Securities sold under repurchase agreements and
    other short-term borrowings and accrued interest |  |               | 139.3 |            |  |          | 139.3 |            |  |   | 143.8 |  |  |   | 143.8 | 
|Other borrowings and accrued interest                                                                |  |               | 189.3 |            |  |          | 176.0 |            |  |   | 210.3 |  |  |   | 208.2 | 
|Financial liabilities for which carrying value
    approximates fair value                           |  |               |      |            |  |          |      |            |  |   |      |  |  |   |      | 

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.                                                                                                           
|
| | 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.                                                                                                                                                                                                                                                            
|
| | 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.
|
| | 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.                                                                                                                                                                                                                                                 

71



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                       
|
| | 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.
|
| | 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.             
|
| | Interest rate floor
    contracts The fair
    value was estimated using quoted market prices or dealer
    quotations.                                                                                                                                                                                

13  Condensed Financial Information
of Hudson Valley Holding Corp.

(Parent Company Only)


Condensed Balance Sheets

December 31, 2002 and 2001


Dollars in thousands


|                                               |  |      |         |      |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                               |  | 2002 |         | 2001
|                                               |  |      |         |     
|Assets                                         |  |      |         |      |  |   |         | 
|Cash                                           |  | $    | 249     |      |  | $ | 444     | 
|Investment in subsidiary                       |  |      | 136,224 |      |  |   | 112,625 | 
|Equity securities                              |  |      | 998     |      |  |   | 896     | 
|                                               |  |      |         |      |  |   |         | 
|Total Assets                                   |  | $    | 137,471 |      |  | $ | 113,965 | 
|                                               |  |      |         |      |  |   |         | 
|Liabilities and Stockholders
    Equity       |  |      |         |      |  |   |         | 
|Other liabilities                              |  | $    | 664     |      |  | $ | 623     | 
|Stockholders equity                           |  |      | 136,807 |      |  |   | 113,342 | 
|                                               |  |      |         |      |  |   |         | 
|Total Liabilities and Stockholders
    Equity |  | $    | 137,471 |      |  | $ | 113,965 | 
|                                               |  |      |         |      |  |   |         | 

Condensed Statements of Income

For the years ended December 31, 2002, 2001 and
2000


Dollars in thousands


|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                               |  | 2002 |        | 2001 |  | 2000
|                                                               |  |      |        |      |  |     
|Dividends from the Bank                                        |  | $    | 6,406  |      |  | $    | 5,058  |  |  | $ | 3,926  | 
|Dividends from equity securities                               |  |      | 38     |      |  |      | 56     |  |  |   | 29     | 
|Other income                                                   |  |      | 1      |      |  |      |       |  |  |   | 25     | 
|Operating expenses                                             |  |      | 200    |      |  |      | 291    |  |  |   | 375    | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Income before equity in undistributed earnings in
    the Bank |  |      | 6,245  |      |  |      | 4,823  |  |  |   | 3,605  | 
|Equity in undistributed earnings of the Bank                   |  |      | 15,339 |      |  |      | 14,058 |  |  |   | 12,553 | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Net Income                                                     |  | $    | 21,584 |      |  | $    | 18,881 |  |  | $ | 16,158 | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 

72



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Condensed Statements of Cash Flows

For the years ended December 31, 2002, 2001 and
2000


Dollars in thousands


|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |         |  
|------------------------------------------------------------------------------------- | -------------------------------------------- | ---- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------ | ------- | -
|                                                                                      |                                              | 2002 |        | 2001    |   | 2000
|                                                                                      |                                              |      |        |         |   |     
|Operating Activities:                                                                 |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net income                                                                            |                                              | $    | 21,584 |         |   | $    | 18,881 |         |   | $ | 16,158 |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |      |        |         |   |      |        |         |   |   |        |        
|                                                                                      | Equity in undistributed earnings of the Bank |      |        | (15,339 | ) |      |        | (14,058 | ) |   |        | (12,553 | )
|                                                                                      | Increase in other liabilities                |      |        | 41      |   |      |        | 174     |   |   |        | 83      |  
|                                                                                      | (Increase) decrease in other assets          |      |        |        |   |      |        |        |   |   |        | 26      |  
|                                                                                      | Other changes, net                           |      |        |        |   |      |        |        |   |   |        | 2       |  
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net cash provided by operating
    activities                                         |                                              |      | 6,286  |         |   |      | 4,997  |         |   |   | 3,716  |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Investing Activities:                                                                 |                                              |      |        |         |   |      |        |         |   |   |        |        
|Proceeds from sales of equity securities                                              |                                              |      | 3      |         |   |      |       |         |   |   | 275    |        
|Purchase of equity securities                                                         |                                              |      | (100   | )       |   |      | (21    | )       |   |   | (23    | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net cash (used) provided by investing
    activities                                  |                                              |      | (97    | )       |   |      | (21    | )       |   |   | 252    |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Financing Activities:                                                                 |                                              |      |        |         |   |      |        |         |   |   |        |        
|Proceeds from issuance of common stock and sale
    of treasury stock                 |                                              |      | 3,302  |         |   |      | 3,430  |         |   |   | 2,367  |        
|Purchase of treasury stock                                                            |                                              |      | (1,949 | )       |   |      | (1,819 | )       |   |   | (1,436 | )      
|Cash dividends paid                                                                   |                                              |      | (7,737 | )       |   |      | (6,351 | )       |   |   | (5,211 | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net cash used in financing
    activities                                             |                                              |      | (6,384 | )       |   |      | (4,740 | )       |   |   | (4,280 | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Increase (decrease) in Cash and Due from
    Banks                                    |                                              |      | (195   | )       |   |      | 236    |         |   |   | (312   | )      
|Cash and due from banks, beginning of year                                            |                                              |      | 444    |         |   |      | 208    |         |   |   | 520    |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Cash and due from banks, end of year                                                  |                                              | $    | 249    |         |   | $    | 444    |         |   | $ | 208    |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        

73



---



##### 



MANAGEMENTS REPORT TO THE
STOCKHOLDERS

January 27, 2003

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 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, 2002. This
assessment was based on criteria for effective internal control
over financial reporting, including safeguarding of assets,
established 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, 2002.

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.

74



---



##### 



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, 2002.

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

75



---



##### 



INDEPENDENT ACCOUNTANTS REPORT

To the Board of Directors and Stockholders

Hudson Valley Holding Corp.


We have examined managements assertion,
included in the accompanying Managements Report to
Stockholders, that Hudson Valley Holding Corp. and its
subsidiary, Hudson Valley Bank (collectively 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 Federal Financial Institutions Examination
Council Instructions for Consolidated Reports of Condition and
Income as of December 31, 2002 based on the criteria
established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO report).
Management is responsible for maintaining effective internal
control over financial reporting. Our responsibility is to
express an opinion on managements assertion based on our
examination.

Our examination was conducted in accordance with
attestation standards established by the American Institute of
Certified Public Accountants and, accordingly, included
obtaining an understanding of internal control over financial
reporting, testing, and evaluating the design and operating
effectiveness of the internal control, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our examination provides a reasonable basis for our
opinion.

Because of inherent limitations in any internal
control, misstatements due to error or fraud may occur and not
be detected. Also, projections of any evaluation of internal
control over financial reporting to future periods are subject
to the risk that the internal control 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 assertion 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 Federal Financial Institutions Examination
Council Instructions for Consolidated Reports of Condition and
Income as of December 31, 2002, is fairly stated, in all
material respects, based on the criteria established in the COSO
report.

Deloitte & Touche LLP

Stamford, Connecticut

January 27, 2003


76



---



##### 



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

None.

ITEM 14.     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. Within
90 days prior to the filing of this report, 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.
Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Companys
disclosure controls and procedures are effective in bringing to
their attention on a timely basis information required to be
disclosed by the Company in reports that the Company files or
submits under the Exchange Act. Also, since the date of the
evaluation, there have not been any significant changes in the
Companys internal controls or in other factors that could
significantly affect those controls, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

PART IV

ITEM 15.  EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)1. Financial Statements

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



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | Independent Auditors Report                                                                                           
|
| |  | Consolidated Statements of Income for the Years
    Ended December 31, 2002, 2001 and 2000                             
|
| |  | Consolidated Statements of Comprehensive Income
    for the Years Ended December 31, 2002, 2001 and 2000               
|
| |  | Consolidated Balance Sheets at December 31,
    2002 and 2001                                                          
|
| |  | Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended December 31,
    2002, 2001 and 2000
|
| |  | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001 and 2000                         
|
| |  | Notes to Consolidated Financial Statements                                                                             

(A)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.

(B) Reports on Form 8-K Filed During
the Quarter ended December 31, 2002

None

77



---



##### 



(C) 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 Directors Retirement
    Plan*(1)                                                                                                       
|       | 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*(1)                                                                                                           
|       | 10.7 |               |  | Consulting Agreement Between the Company and
    Director John A. Pratt, Jr.*(1)                                                                            
|       | 11   |               |  | Statements re: Computation of Per Share
    Earnings(3)                                                                                                     
|       | 21   |               |  | Subsidiaries of the Company(3)                                                                                                                              
|       | 23   |               |  | Consents of Experts and Counsel(3)                                                                                                                          
|       | 99.1 |               |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002(3)
|       | 99.2 |               |  | Certification of Chief Financial Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002(3)




*  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) | Filed herewith                                                                                                                                                                         

78



---



##### 



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 27, 2003

| |     |                   
| | --- | ------------------
| | 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 27, 2003 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 Operating


Officer, Chief Financial Officer and Director


(Principal Financial and Accounting 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/ RONALD F. POE




Ronald F. Poe


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


79



---



##### 



CERTIFICATIONS

I, James J. Landy, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Hudson Valley Holding
    Corp.;                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ JAMES J. LANDY                       
| |                                          
| | James J. Landy                           
| | President and Chief Executive
    Officer

Date: March 27, 2003

80



---



##### 



I, Stephen R. Brown, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Hudson Valley Holding
    Corp.;                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                               
| | ----------------------------------------------
| | /s/ STEPHEN R. BROWN                          
| |                                               
| | Stephen R. Brown                              
| | Senior Executive Vice President,
    Chief    
| | Operating Officer, Chief Financial
    Officer

Date: March 27, 2003

81