##### 






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,
2003

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, 2004
|                                   |  |                             
|Common Stock
    ($0.20 par value) |  | 6,620,557 Shares            

The aggregate market value on June 30, 2003
of voting stock held by non-affiliates of the Registrant was
approximately $154,331,000.

Documents incorporated by reference:

Portions of the registrants definitive
Proxy Statement for the 2004 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                            |  |          | 47 | 
|           |  | ITEM 8                                                                                                                                                                                                                                                                                                          |    | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                               |  |          | 51 | 
|           |  | ITEM 9                                                                                                                                                                                                                                                                                                          |    | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE  |  |          | 79 | 
|           |  | ITEM 9A                                                                                                                                                                                                                                                                                                         |    | CONTROLS AND PROCEDURES                                                                   |  |          | 79 | 
|PART III   |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|           |  | ITEMS 10 THROUGH 14. (INCORPORATED BY REFERENCE
    TO THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
    SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
    WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
    NOT LATER THAN 120 DAYS AFTER THE END OF THAT FISCAL YEAR) |    |                                                                                           |  |         
|PART IV    |  |                                                                                                                                                                                                                                                                                                                 |    |                                                                                           |  |          |    | 
|           |  | ITEM 15                                                                                                                                                                                                                                                                                                         |    | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K                      |  |          | 79 | 
|SIGNATURES |  |                                                                                                                                                                                                                                                                                                                 | 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 15
branch offices in Westchester County, New York, 2 in Bronx
County, New York and 1 in Manhattan, New York. In addition, the
Bank has 2 loan production offices, one located in Dutchess
County, New York and one located in Queens County, New York. The
Bank has received all necessary regulatory approval to open one
new branch office at 233 Broadway, New York, 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 within its market
area. See Our Market Area.

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. 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 expand in its current market and surrounding area by
adding staff and continuing to open new branch offices and loan
production offices.

Forward-Looking Statements

This Annual Report on Form 10-K contains
forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. These statements relate to future events or our future
financial performance. We have attempted to identify
forward-looking statements by terminology including
anticipates, believes, can,
continue, could, estimates,
expects, intends, may,
plans, potential, predicts,
should or will or the negative of these
terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties
and other factors, that may cause our or the banking
industrys actual results, levels of activity, performance
or achievements to be materially different from any future
results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
For a discussion of some factors that could adversely effect our
future performance, see 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 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. This subsidiary will be liquidated
in March, 2004 in a transaction designed to be treated as
tax-free for Federal, New York State and New York City purposes.
All assets and liabilities will be transferred to the Bank.

1



---



##### 



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

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, 2003, we employed 263
full-time employees and 31 part-time employees. We provide a
variety of benefit plans, including group life, health, dental,
disability, retirement and stock option plans. We consider our
employee relations to be satisfactory.

Our Market Area

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

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

The city has many attractive attributes and the
Bank believes that there is an opportunity for a community bank
to service the small business and professionals niches very
effectively. The Bank expanded into the New York City market
with the opening of its first branch in the Bronx in 1999 and
subsequently opened a second branch in this borough in 2002.
Hudson Valley entered the Manhattan market with the opening of
its full-service branch in the Lincoln Building in 2002. The
Bank has received regulatory approval to open a second
full-service branch in lower Manhattan in the Woolworth
Building. This branch will open in 2004. Further expansion in
the city continued in 2003 with the opening of a loan production
office in Rego Park Queens. The Bank will continue to evaluate
expansion opportunities in these three, as well as the other two
boroughs of New York City.

Competition

The banking and financial services business in
the Banks market area, is highly competitive. There are
approximately 19 commercial banks with branch banking offices in
our Westchester County and New York City market area. In
addition, a number of other depository institutions compete in
our market area including savings banks, savings and loan
associations, credit unions and brokerage houses. The branches
of the Bank

2



---



##### 



compete with local offices of large New York City
commercial banks due to their proximity to and location within
New York City. Other financial institutions, such as mutual
funds, finance companies, factoring companies, mortgage bankers
and insurance companies, also compete with 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 to medium-sized 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, and New
York City, 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 and loan
production offices, 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 New York City. The
Bank has opened seven new facilities during the past five years,
one in White Plains, Westchester County, one in Yonkers,
Westchester County, one in Manhattan, New York, one in Dutchess
County, one in Queens County, and two in Bronx County, New York
and anticipates opening at least one additional facility during
2004. 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 in its deposit gathering
and 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, 2003, gross loans totaled $720.4 million.
Gross loans were comprised of the following loan types:

|                          |  |  |       |  
|------------------------- |  |  | ----- | -
|Real estate               |  |  | 66.8  | %
|Commercial and industrial |  |  | 30.3  |  
|Individuals               |  |  | 2.1   |  
|Lease financing           |  |  | 0.8   |  
|                          |  |  |       |  
|Total                     |  |  | 100.0 | %
|                          |  |  |       |  

At December 31, 2003, the Banks
unsecured lending limit to one borrower under applicable
regulations was approximately $22.5 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 10 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 investment advisor. 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. 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. Further, due to the competition for
this type of business and the dominance of large banks in this
business, the Bank did not increase deposits relating to this
business during 2003. 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 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

5



---



##### 



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, 2003, the Bank could have
declared additional dividends of approximately
$27.8 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, 2003, our Tier 1 and
Total risk-based capital ratios were 15.6 percent and
16.9 percent, respectively, and our leverage capital ratio
was 8.4 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 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

6



---



##### 



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, 2003, the most recent 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

7



---



##### 



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 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

8



---



##### 



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.

USA
Patriot Act

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

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.

9



---



##### 



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. Westchester County and New York City have
a very high density of financial institutions, many of which are
branches of institutions which are significantly larger than us
and have greater financial resources and higher lending limits.
Many of these institutions offer services that we do not or
cannot provide. Nearly all such institutions compete with us to
varying degrees.

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

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

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

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 in the twelve months following
December 31, 2003 due to changes in the interest rate
environment. However, the current prolonged low interest 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

10



---



##### 



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
may not pay rates of interest competitive with these alternative
investments. See Quantitative and Qualitative Disclosures
About Market Risk.

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

Approximately 82% of the loans held by the Bank
as of December 31, 2003 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 primary lending market area is concentrated
in Westchester County, New York and New York City with a primary
focus on small to medium-sized businesses, professionals and
not-for-profit organizations located in this area. Accordingly,
the asset quality of our loan portfolio is largely dependent
upon the areas economy and real estate markets. A downturn
in the economy in our primary lending area would adversely
affect our operations and limit our future growth potential.

Technological change may affect our ability to
compete.

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

In addition, because of the demand for
technology-driven products, banks are increasingly contracting
with outside vendors to provide data processing and core banking
functions. The use of technology-related products, services,
delivery channels and processes 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 for loan losses is based upon a number of assumptions
which we believe to be reasonable but which may or may not prove
to be correct. Thus, there can

11



---



##### 



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.


Available Information

The Companys website address is
http://www.hudsonvalleybank.com. The Company makes available
free of charge on 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
14 branches in Westchester County, New York. The following
eight 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; 664 Main Street, Mount Kisco,
New York and 40 Church Street, White Plains, 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. The Bank operates two loan production offices, one located
at 300 Westage Business Center Drive, Fishkill, New York
(Dutchess County) and one located at 97-77 Queens Boulevard,
Rego Park, New York (Queens County), both in premises leased by
the Bank.

The Bank has signed a lease with an initial term
of 10 years to operate a branch facility to be located at
233 Broadway, New York, New York. The branch is expected to
open during the second quarter of 2004.

Of the leased properties, 4 properties, located
in Thornwood, Peekskill, Port Chester and Fishkill, New York,
have lease terms that expire within the next 2 years, with each
lease subject to the Banks renewal option. The Bank
currently expects to exercise its renewal option on the leases
of each of these properties.

The Bank also operates 10 ATM machines, 8 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 2003.

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, 2004 by approximately
788 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 2003 and 2002. The price per
share has been adjusted to reflect the 10 percent stock
dividends to shareholders in December 2003 and 2002.

|               |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |      |       |     
|               |  | 2003 |       | 2002
|               |  |      |       |     
|               |  | High |       | Low  |  | High |       | Low
|               |  |      |       |      |  |      |       |    
|First Quarter  |  | $    | 37.50 |      |  | $    | 33.18 |     |  | $ | 33.47 |  |  | $ | 30.25 | 
|Second Quarter |  |      | 40.23 |      |  |      | 34.09 |     |  |   | 34.71 |  |  |   | 30.37 | 
|Third Quarter  |  |      | 40.91 |      |  |      | 35.00 |     |  |   | 38.02 |  |  |   | 31.41 | 
|Fourth Quarter |  |      | 46.36 |      |  |      | 32.95 |     |  |   | 35.54 |  |  |   | 30.16 | 

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

In 1998, the Board of Directors of the Company
adopted a policy of paying quarterly cash dividends to holders
of its common stock. Quarterly cash dividends were paid as
follows: In 2003, $0.34 per share to holders of record on
February 3; $0.37 to shareholders of record May 12,
August 8 and November 7. In 2002, $0.28 per share to
holders of record on February 4; $0.31 to shareholders of
record May 6, August 5 and November 4. Dividends
per share have been adjusted to reflect the 10 percent
stock dividends to shareholders in December 2003 and 2002.

Stock dividends of 10 percent each (one
share for every 10 outstanding shares) were declared by the
Company for shareholders of record on December 10, 2003 and
December 2, 2002.

Effective December 11, 2003, the Board of
Directors of the Company adjusted the price at which the Company
would purchase shares to $36.25 per share, or $41.75 per share
for a transaction of at least 2,000 shares, taking into
consideration the ten percent stock dividend to shareholders in
December 2003. This offer was limited to 75,000 shares, it
expired February 24, 2004, at which time the Company
offered to repurchase up to 75,000 shares at a price of
$37.25 per share or $43.00 per share for a transaction of at
least 2,000 shares. This offer expires May 25, 2004.

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

13



---



##### 



stock, there can be no assurance that a
shareholder will be able to find a buyer for his or her shares.
Stock prices as a whole may also be lower than they would be if
an active market were to develop, and may tend to fluctuate more
dramatically.


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

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

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 shares in the
future. If we continue to exercise our right to repurchase
shares subject to the Stock Restriction Agreements, this will
limit the availability of shares in public markets.

Government regulation restricts our ability to
pay cash dividends.

Dividends from 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 $1.45 per share in 2003, and $1.20 per share in
2002 (adjusted for subsequent stock dividends). Under applicable
banking statutes, at December 31, 2003, the Bank could have
declared dividends of approximately $27.8 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 the termination of deposit
insurance, the imposition of substantial fines and other civil
penalties and, in the

14



---



##### 



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,
2003, and do not include awards made subsequent to that date.
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 |  |                      | 495,839 |                     |  | $                    | 25.99 |  |  |  | 604,760 | 
|                                                   |  |                      |         |                     |  |                      |       |  |  |  |         | 

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, 2003 and 2002, and for
the years ended December 31, 2003, 2002 and 2001, 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,
2001, 2000 and 1999 and for the years ended December 31,
2000 and 1999 are derived from our consolidated financial
statements that are not included in this Annual Report on
Form 10-K. Share and per share data have been restated to
reflect the effects of 10 percent stock dividends issued in
2003, 2002, 2001 and 2000. 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,  
|                                             |  |                          
|                                             |  | 2003                      |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                                             |  |                           |           |      |  |      |           |      |  |     
|                                             |  |                          
|                                             |  | (000s except share data)
|Operating Results:                           |  |                           |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Total interest income                        |  | $                         | 76,520    |      |  | $    | 84,743    |      |  | $    | 89,878    |  |  | $ | 87,266    |  |  | $ | 70,816    | 
|Total interest expense                       |  |                           | 15,444    |      |  |      | 22,982    |      |  |      | 32,517    |  |  |   | 40,785    |  |  |   | 29,658    | 
|                                             |  |                           |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Net interest income                          |  |                           | 61,076    |      |  |      | 61,761    |      |  |      | 57,361    |  |  |   | 46,481    |  |  |   | 41,158    | 
|Provision for loan losses                    |  |                           | 437       |      |  |      | 3,902     |      |  |      | 4,380     |  |  |   | 1,144     |  |  |   | 600       | 
|Income before income taxes                   |  |                           | 35,962    |      |  |      | 30,744    |      |  |      | 28,376    |  |  |   | 21,983    |  |  |   | 18,648    | 
|Net income                                   |  |                           | 24,207    |      |  |      | 21,584    |      |  |      | 18,881    |  |  |   | 16,158    |  |  |   | 14,004    | 
|Basic earnings per common share              |  |                           | 3.71      |      |  |      | 3.36      |      |  |      | 2.99      |  |  |   | 2.59      |  |  |   | 2.26      | 
|Diluted earning per common share             |  |                           | 3.62      |      |  |      | 3.27      |      |  |      | 2.91      |  |  |   | 2.52      |  |  |   | 2.21      | 
|Weighted average shares outstanding          |  |                           | 6,532,625 |      |  |      | 6,432,667 |      |  |      | 6,320,437 |  |  |   | 6,235,740 |  |  |   | 6,194,717 | 
|Adjusted weighted average shares outstanding |  |                           | 6,682,236 |      |  |      | 6,609,270 |      |  |      | 6,490,713 |  |  |   | 6,415,938 |  |  |   | 6,334,052 | 
|Cash dividends per common share              |  | $                         | 1.45      |      |  | $    | 1.20      |      |  | $    | 1.00      |  |  | $ | 0.83      |  |  | $ | 0.70      | 

|                     |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|-------------------- |  | ------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                     |  |             
|                     |  | December 31,
|                     |  |             
|                     |  | 2003         |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                     |  |              |           |      |  |      |           |      |  |     
|Financial Position:  |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Securities           |  | $            | 861,410   |      |  | $    | 743,884   |      |  | $    | 624,209   |  |  | $ | 655,029   |  |  | $ | 634,973   | 
|Loans, net           |  |              | 707,104   |      |  |      | 642,438   |      |  |      | 600,377   |  |  |   | 506,101   |  |  |   | 412,914   | 
|Total assets         |  |              | 1,669,513 |      |  |      | 1,506,883 |      |  |      | 1,372,453 |  |  |   | 1,289,970 |  |  |   | 1,147,472 | 
|Deposits             |  |              | 1,124,900 |      |  |      | 1,027,176 |      |  |      | 888,377   |  |  |   | 879,575   |  |  |   | 754,846   | 
|Borrowings           |  |              | 386,400   |      |  |      | 327,383   |      |  |      | 352,720   |  |  |   | 285,831   |  |  |   | 313,718   | 
|Stockholders equity |  |              | 142,361   |      |  |      | 136,807   |      |  |      | 113,342   |  |  |   | 93,345    |  |  |   | 68,310    | 

Financial Ratios

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

|                                                                                               |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |       |  
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------ | ------ | ----- | - | ---- | ------ | ----- | - | ---- | ------ | ----- | - |  | ------ | ----- | - |  | ------ | ----- | -
|                                                                                               |                                                                              |             
|                                                                                               |                                                                              | December 31,
|                                                                                               |                                                                              |             
|                                                                                               |                                                                              | 2003         |        | 2002  |   | 2001 |        | 2000  |   | 1999
|                                                                                               |                                                                              |              |        |       |   |      |        |       |   |     
|Earnings Ratios                                                                                |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|Net income as a percentage of:                                                                 |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|                                                                                               | Average earning assets                                                       |              |        | 1.62  | % |      |        | 1.58  | % |      |        | 1.51  | % |  |        | 1.41  | % |  |        | 1.39  | %
|                                                                                               | Average total assets                                                         |              |        | 1.54  |   |      |        | 1.50  |   |      |        | 1.43  |   |  |        | 1.32  |   |  |        | 1.31  |  
|                                                                                               | Average total stockholders equity(1)                                        |              |        | 18.51 |   |      |        | 18.72 |   |      |        | 18.74 |   |  |        | 18.61 |   |  |        | 18.60 |  
|Capital Ratios                                                                                 |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|                                                                                               | Average total stockholders equity to
    average total assets(1)            |              |        | 8.31  | % |      |        | 8.02  | % |      |        | 7.64  | % |  |        | 7.12  | % |  |        | 7.06  | %
|                                                                                               | Average net loans as a multiple of average total
    stockholders equity(1) |              |        | 5.07  |   |      |        | 5.37  |   |      |        | 5.56  |   |  |        | 5.15  |   |  |        | 4.72  |  
|                                                                                               | Leverage capital                                                             |              |        | 8.43  |   |      |        | 8.28  |   |      |        | 7.90  |   |  |        | 7.30  |   |  |        | 7.20  |  
|                                                                                               | Tier 1 capital (to risk weighted assets)                                     |              |        | 15.63 |   |      |        | 17.05 |   |      |        | 15.36 |   |  |        | 14.80 |   |  |        | 15.70 |  
|                                                                                               | Total risk-based capital (to risk weighted assets)                           |              |        | 16.88 |   |      |        | 18.30 |   |      |        | 16.47 |   |  |        | 15.60 |   |  |        | 16.50 |  
|Other                                                                                          |                                                                              |              |        |       |   |      |        |       |   |      |        |       |   |  |        |       |   |  |        |      
|Allowance for loan losses as a percentage of
    year-end loans                                |                                                                              |              | 1.59   | %     |   |      | 1.76   | %     |   |      | 1.31   | %     |   |  | 0.94   | %     |   |  | 0.97   | %    
|Loans (net) as a percentage of year-end
    total assets                                       |                                                                              |              | 42.35  |       |   |      | 42.63  |       |   |      | 43.74  |       |   |  | 39.23  |       |   |  | 35.98  |      
|Loans (net) as a percentage of year-end
    total deposits                                     |                                                                              |              | 62.86  |       |   |      | 62.54  |       |   |      | 67.58  |       |   |  | 57.54  |       |   |  | 54.70  |      
|Securities as a percentage of year-end total
    assets                                        |                                                                              |              | 51.60  |       |   |      | 49.37  |       |   |      | 45.48  |       |   |  | 50.78  |       |   |  | 55.34  |      
|Average interest earning assets as a percentage
    of average interest bearing liabilities(1) |                                                                              |              | 153.18 |       |   |      | 147.71 |       |   |      | 138.43 |       |   |  | 133.91 |       |   |  | 134.46 |      
|Dividends per share as a percentage of diluted
    earnings per share                          |                                                                              |              | 40.06  |       |   |      | 36.69  |       |   |      | 34.38  |       |   |  | 33.21  |       |   |  | 31.28  |      






|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes unrealized gains in 2003, 2002, 2001 and
    2000 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, 2003 and 2002, and consolidated results of
operations for each of the three years in the period ended
December 31, 2003. The Company is consolidated with its
wholly-owned subsidiary, Hudson Valley Bank, and the Banks
subsidiaries, Hudson Valley Investment Corp., Grassy Sprain Real
Estate Holdings, Inc., Sprain Brook Realty Corp., HVB 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.

Overview of Managements Discussion and
Analysis

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

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

Net income for 2003 was $24.2 million or
$3.62 per diluted share, an increase of $2.6 million or
12.2 percent compared to $21.6 million or $3.27 per
diluted share in 2002. The Company achieved substantial growth
in both of its core businesses, loans and deposits, during 2003.
Overall asset quality continued to be good as a result of the
Companys conservative underwriting and investment
standards. The declining interest rate environment which began
in 2001 and continued through the first half of 2003 resulted in
continued downward pressure on net interest income as higher
yielding loans and investments prepaid or matured and were
reinvested at substantially lower rates. The Company was unable
to reduce the cost of its core funding base, a large percentage
of which is non-interest bearing demand deposits, to offset the
decline in asset yields. As a result, tax equivalent basis net
interest income declined slightly in 2003 from 2002 levels.
Throughout the period of declining interest rates, the Company
exercised caution in redeploying maturing funds by investing
excess funds not utilized for loan growth, into shorter term
investments in order to preserve flexibility in its interest
rate risk management. While this had a negative impact on net
interest income in the short term, it allowed the Company to
quickly react to longer term investment opportunities as
interest rates began to stabilize in the second half of 2003. As
part of this strategy, in 2003, the Company sold approximately
$124 million of rapidly repaying mortgage-backed securities
and U.S. Government agency securities expected to be called
within twelve months, which resulted in a pretax gain of $5.4
million. The gain contributed to the 2003 growth in net income.

Non interest expense for 2003 was
$33.3 million, an increase of $2.8 million or
9.2 percent compared to $30.5 million in 2002. The
increase reflects the Companys continued investment in its
branch network, technology and personnel to accommodate growth
in both loans and deposits and the expansion of services and
products available to new and existing customers.

The Company uses a simulation analysis to
estimate the effect that specific movements in interest rates
would have on net interest income. Excluding the effects of
planned growth and anticipated new business, the

17



---



##### 



simulation analysis at December 31, 2003
reflects minimal near term interest rate risk with the
Companys net interest income declining slightly if rates
rise or fall.


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

The Company and the Bank are subject to various
regulatory capital guidelines. To be considered well
capitalized, an institution must generally have a leverage
ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a
Total capital ratio of 10 percent. Both the Company and the Bank
exceeded all current regulatory capital requirements and were in
the well-capitalized category at December 31, 2003.
Management plans to conduct the affairs of the Company and the
Bank so as to maintain a strong capital position in the future.

Critical Accounting Policies

Application of Critical Accounting
Policies The
Companys consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States. The Companys significant accounting
policies are more fully described in Note 1 to the
Consolidated Financial Statements. Certain accounting policies
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expense during the reporting period. On an on-going basis,
management evaluates its estimates and assumptions, and the
effects of revisions are reflected in the financial statements
in the period in which they are determined to be necessary. The
accounting policies described below are those that most
frequently require management to make estimates and judgements,
and therefore, are critical to understanding the Companys
results of operations. Senior management has discussed the
development and selection of these accounting estimates and the
related disclosures with the Audit Committee of the
Companys Board of Directors.

Allowance for Loan Losses The 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.

18



---



##### 



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, 2003 and 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,
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
their 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, 2003 and
2002. 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, 2003

Summary of Results

The Company reported net income of
$24.2 million for the year ended December 31, 2003, a
12.2 percent increase over 2002. Net income was
$21.6 million for the year ended December 31, 2002, a
14.3% increase over 2001 net income of $18.9 million. The
increase in 2003 net income, compared to 2002, reflects higher
net gains on securities transactions and a lower provision for
loan losses partially offset by slightly lower net interest
income, lower non interest income, higher non interest expense
and a higher effective tax rate. 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.

19



---



##### 



Diluted earnings per share of $3.62 in 2003
increased 10.7 percent over the $3.27 recorded in 2002,
which increased 12.4 percent over the $2.91 recorded in
2001, reflecting the higher net income. Prior period per share
amounts have been adjusted to reflect the 10% stock dividend
distributed on December 10, 2003. Return on average equity,
excluding securities available for sale net unrealized gains,
was 18.51 percent in 2003, compared to 18.72 percent
in 2002 and 18.74 percent in 2001. Return on average
assets, excluding securities available for sale net unrealized
gains, was 1.54 percent in 2003, compared to
1.50 percent in 2002 and 1.43 percent in 2001.

Net interest income for 2003 was
$61.1 million, a slight decrease of 1.1 percent from
the $61.8 million recorded in 2002, which increased
7.8 percent over the $57.4 million recorded in 2001.
The 2003 decrease, compared to 2002, was primarily due to a
decrease in the tax equivalent basis net interest margin to
4.37% from 4.82%, partially offset by a $128.9 million
growth in the average balance of interest earning assets which
was in excess of the $51.0 million growth in the average
balance of interest bearing liabilities. 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 to 4.82% from 4.89%.

The 2003 decrease in the tax equivalent basis net
interest margin was primarily due to the impact of the current
trend of margin compression resulting from a protracted period
of low interest rates. The Company has taken steps to reposition
its portfolios and has exercised caution in redeploying maturing
assets in reaction to these conditions, in an effort to minimize
the effects. The 2003 increase in the average balance of
interest earning assets was due to growth in loans, the
Companys highest yielding asset, together with an increase
in securities, partially offset by a decrease in Federal funds
sold as the Company began to redeploy short term funds into
longer term assets as interest rates began to stabilize in the
latter part of the year. The 2002 decrease in the tax equivalent
basis net interest margin resulted primarily from a
$2.6 million interest penalty incurred as a result of the
Companys decision to prepay $21 million of its higher
cost long term borrowings in anticipation of margin compression
resulting from the protracted period of declining interest
rates. The 2002 increase in the average balance of interest
earning assets also reflected growth in loans, together with
increases in short term Federal funds. The increase in Federal
funds resulted from the Companys caution in deploying
available liquidity from deposit growth and maturing assets into
longer term assets in light of the declining interest rate
environment throughout 2002.

Non interest income, excluding securities gains
and losses, decreased slightly in 2003 to $3.2 million from
$3.3 million in 2002, which increased from
$2.6 million in 2001. Non interest income includes a gain
on sale of other real estate owned of $0.9 million in 2003,
and increases in the value of interest rate floor contracts of
$25,000, $1.1 million and $0.8 million in years 2003,
2002 and 2001, respectively. The remaining increases in 2003 and
2002, compared to the prior year periods were primarily due to
increased service charges. Sales of investment securities
resulted in net gains of $5.4 million and $54,000 in 2003
and 2002, respectively, and net losses of $180,000 in 2001. The
sales were conducted as part of the Companys ongoing
asset/liability management process.

Non interest expenses increased $2.8 million
to $33.3 million in 2003 from $30.5 million in 2002,
which increased $3.5 million from $27.0 million in
2001, reflecting increases in such expenses as employee salaries
and benefits, occupancy and equipment expense and other expenses
resulting from the Companys continuing growth and
investments in people, technology, products and branch
facilities. The effective tax rate in 2003, compared to 2002,
increased primarily as a result of an increase in income subject
to Federal, New York State, and New York City taxes, partially
offset by a reduction in the New York State Corporate tax rate.
The effective tax rate in 2002, compared to 2001, decreased
primarily due to an increase in tax exempt income as a
percentage of total interest income and a reduction in the New
York State Corporate tax rate.

The Companys total capital ratio under the
risk-based capital guidelines exceeds regulatory guidelines of
8.0 percent, as the total ratio equaled 16.9 percent
and 18.3 percent at December 31, 2003 and 2002,
respectively. The Companys leverage capital ratio was
8.4 percent and 8.3 percent at December 31, 2003
and 2002, respectively.

20



---



##### 



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 2003, 2002
and 2001.

|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |      |  
|------------------------------------------------------------------------------- | -------------------------------- | -------------------------- | --------- | ----------- |  | ------ | ------ | ------- |  | ----------- | ---- | ------ | - | ------- | --------- | ----------- |  | ------ | ------ | ------ |  |  | ---- | ---- | - | - | --------- | ------- |  | - | ------ | ------ |  |  | ---- | ---- | -
|                                                                                |                                  |                           
|                                                                                |                                  | (000s except percentages)
|                                                                                |                                  | Year ended December 31,   
|                                                                                |                                  |                           
|                                                                                |                                  |                            |           |             |  |       
|                                                                                |                                  | 2003                       |           | 2002        |  | 2001  
|                                                                                |                                  |                            |           |             |  |       
|                                                                                |                                  | Average                    |           |             |  | Yield/ |        | Average |  |             |      | Yield/ |   | Average |           |             |  | Yield/
|                                                                                |                                  | Balance                    |           | Interest(3) |  | Rate   |        | Balance |  | Interest(3) |      | Rate   |   | Balance |           | Interest(3) |  | Rate  
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |       
|ASSETS                                                                          |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Interest earning assets:                                                        |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Deposits in banks                                                               |                                  | $                          | 2,492     |             |  | $      | 14     |         |  |             | 0.56 | %      |   | $       | 3,201     |             |  | $      | 38     |        |  |  | 1.19 | %    |   |   |          |         |  |   |       |        |  |  |     |     
|Federal funds sold                                                              |                                  |                            | 51,658    |             |  |        | 555    |         |  |             | 1.07 |        |   |         | 80,747    |             |  |        | 1,364  |        |  |  | 1.69 |      |   | $ | 23,954    |         |  | $ | 759    |        |  |  | 3.17 | %   
|Securities:(1)                                                                  |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Taxable                          |                            |           | 608,965     |  |        |        | 19,707  |  |             |      | 3.24   |   |         |           | 505,152     |  |        |        | 27,098 |  |  |      | 5.36 |   |   |           | 519,852 |  |   |        | 33,804 |  |  |      | 6.50 |  
|                                                                                | Exempt from federal income taxes |                            |           | 172,503     |  |        |        | 12,532  |  |             |      | 7.26   |   |         |           | 161,321     |  |        |        | 11,960 |  |  |      | 7.41 |   |   |           | 148,048 |  |   |        | 11,189 |  |  |      | 7.56 |  
|Loans, net(2)                                                                   |                                  |                            | 662,800   |             |  |        | 48,098 |         |  |             | 7.26 |        |   |         | 619,098   |             |  |        | 48,469 |        |  |  | 7.83 |      |   |   | 560,584   |         |  |   | 48,042 |        |  |  | 8.57 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total interest earning assets                                                   |                                  |                            | 1,498,418 |             |  |        | 80,906 |         |  |             | 5.40 |        |   |         | 1,369,519 |             |  |        | 88,929 |        |  |  | 6.49 |      |   |   | 1,252,438 |         |  |   | 93,794 |        |  |  | 7.49 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Non interest earning assets:                                                    |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Cash and due from banks          |                            |           | 38,634      |  |        |        |         |  |             |      |        |   |         |           | 35,012      |  |        |        |        |  |  |      |      |   |   |           | 31,485  |  |   |        |        |  |  |      |      |  
|                                                                                | Other assets                     |                            |           | 36,513      |  |        |        |         |  |             |      |        |   |         |           | 31,949      |  |        |        |        |  |  |      |      |   |   |           | 35,144  |  |   |        |        |  |  |      |      |  
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total non interest earning assets                                               |                                  |                            | 75,147    |             |  |        |        |         |  |             |      |        |   |         | 66,961    |             |  |        |        |        |  |  |      |      |   |   | 66,629    |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total assets                                                                    |                                  | $                          | 1,573,565 |             |  |        |        |         |  |             |      |        |   | $       | 1,436,480 |             |  |        |        |        |  |  |      |      |   | $ | 1,319,067 |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                        |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Interest bearing liabilities:                                                   |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Deposits:                                                                       |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Money market                     |                            | $         | 300,566     |  |        | $      | 2,050   |  |             |      | 0.68   | % |         | $         | 250,634     |  |        | $      | 3,439  |  |  |      | 1.37 | % |   | $         | 155,058 |  |   | $      | 3,802  |  |  |      | 2.45 | %
|                                                                                | Savings                          |                            |           | 64,184      |  |        |        | 149     |  |             |      | 0.23   |   |         |           | 57,629      |  |        |        | 347    |  |  |      | 0.60 |   |   |           | 52,988  |  |   |        | 610    |  |  |      | 1.15 |  
|                                                                                | Time                             |                            |           | 169,435     |  |        |        | 2,213   |  |             |      | 1.31   |   |         |           | 184,723     |  |        |        | 3,571  |  |  |      | 1.93 |   |   |           | 320,408 |  |   |        | 13,379 |  |  |      | 4.18 |  
|                                                                                | Checking with interest           |                            |           | 98,852      |  |        |        | 259     |  |             |      | 0.26   |   |         |           | 76,759      |  |        |        | 528    |  |  |      | 0.69 |   |   |           | 61,697  |  |   |        | 659    |  |  |      | 1.07 |  
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |                            | 156,989   |             |  |        | 1,730  |         |  |             | 1.10 |        |   |         | 148,555   |             |  |        | 2,317  |        |  |  | 1.56 |      |   |   | 154,311   |         |  |   | 5,855  |        |  |  | 3.79 |     
|Other borrowings                                                                |                                  |                            | 188,159   |             |  |        | 9,043  |         |  |             | 4.81 |        |   |         | 208,886   |             |  |        | 12,780 |        |  |  | 6.12 |      |   |   | 160,255   |         |  |   | 8,212  |        |  |  | 5.12 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total interest bearing liabilities                                              |                                  |                            | 978,185   |             |  |        | 15,444 |         |  |             | 1.58 |        |   |         | 927,186   |             |  |        | 22,982 |        |  |  | 2.48 |      |   |   | 904,717   |         |  |   | 32,517 |        |  |  | 3.59 |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Non interest bearing liabilities:                                               |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|                                                                                | Demand deposits                  |                            |           | 451,282     |  |        |        |         |  |             |      |        |   |         |           | 380,015     |  |        |        |        |  |  |      |      |   |   |           | 297,197 |  |   |        |        |  |  |      |      |  
|                                                                                | Other liabilities                |                            |           | 13,291      |  |        |        |         |  |             |      |        |   |         |           | 14,007      |  |        |        |        |  |  |      |      |   |   |           | 16,401  |  |   |        |        |  |  |      |      |  
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total non interest bearing liabilities                                          |                                  |                            | 464,573   |             |  |        |        |         |  |             |      |        |   |         | 394,022   |             |  |        |        |        |  |  |      |      |   |   | 313,598   |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Stockholders equity(1)                                                         |                                  |                            | 130,807   |             |  |        |        |         |  |             |      |        |   |         | 115,272   |             |  |        |        |        |  |  |      |      |   |   | 100,752   |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Total liabilities and stockholders equity(1)                                   |                                  | $                          | 1,573,565 |             |  |        |        |         |  |             |      |        |   | $       | 1,436,480 |             |  |        |        |        |  |  |      |      |   | $ | 1,319,067 |         |  |   |        |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Net interest earnings                                                           |                                  |                            |           |             |  | $      | 65,462 |         |  |             |      |        |   |         |           |             |  | $      | 65,947 |        |  |  |      |      |   |   |           |         |  | $ | 61,277 |        |  |  |      |     
|                                                                                |                                  |                            |           |             |  |        |        |         |  |             |      |        |   |         |           |             |  |        |        |        |  |  |      |      |   |   |           |         |  |   |        |        |  |  |      |     
|Net yield on interest earning assets                                            |                                  |                            |           |             |  |        |        |         |  |             | 4.37 | %      |   |         |           |             |  |        |        |        |  |  | 4.82 | %    |   |   |           |         |  |   |        |        |  |  | 4.89 | %   




|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $4,386, $4,186 and $3,916 for the years ended
    December 31, 2003, 2002 and 2001, respectively.

21



---



##### 



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, 2003 and 2002,
and the years ended December 31, 2002 and 2001, on a tax
equivalent basis.

|                                                                                |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |        |  
|------------------------------------------------------------------------------- | -------------------------------- | --------------------- | ------ | --------------------- | - | -------- | ------- | ------- | - | ---- | ------ | -------- | - | - | ----- | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                                |                                  |                      
|                                                                                |                                  | (000s)              
|                                                                                |                                  |                      
|                                                                                |                                  |                       |        |                      
|                                                                                |                                  | 2003 Compared to 2002 |        | 2002 Compared to 2001
|                                                                                |                                  | 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                                                               |                                  | $                     | (8     | )                     |   | $        | (16     | )       |   | $    | (24    | )        |   | $ | 120   |        |   | $ | (82     | )      |   | $ | 38     |       
|Federal funds sold                                                              |                                  |                       | (491   | )                     |   |          | (318    | )       |   |      | (809   | )        |   |   | 1,800 |        |   |   | (1,195  | )      |   |   | 605    |       
|Securities:                                                                     |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|                                                                                | Taxable                          |                       |        | 5,569                 |   |          |         | (12,960 | ) |      |        | (7,391   | ) |   |       | (956   | ) |   |         | (5,750 | ) |   |        | (6,706 | )
|                                                                                | Exempt from federal income taxes |                       |        | 829                   |   |          |         | (257    | ) |      |        | 572      |   |   |       | 1,003  |   |   |         | (232   | ) |   |        | 771    |  
|Loans, net                                                                      |                                  |                       | 3,421  |                       |   |          | (3,792  | )       |   |      | (371   | )        |   |   | 5,015 |        |   |   | (4,588  | )      |   |   | 427    |       
|                                                                                |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|Total interest income                                                           |                                  |                       | 9,320  |                       |   |          | (17,343 | )       |   |      | (8,023 | )        |   |   | 6,982 |        |   |   | (11,847 | )      |   |   | (4,865 | )     
|                                                                                |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|Interest expense:                                                               |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|Deposits:                                                                       |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|                                                                                | Money market                     |                       |        | 685                   |   |          |         | (2,074  | ) |      |        | (1,389   | ) |   |       | 2,344  |   |   |         | (2,707 | ) |   |        | (363   | )
|                                                                                | Savings                          |                       |        | 39                    |   |          |         | (237    | ) |      |        | (198     | ) |   |       | 53     |   |   |         | (316   | ) |   |        | (263   | )
|                                                                                | Time                             |                       |        | (296                  | ) |          |         | (1,062  | ) |      |        | (1,358   | ) |   |       | (5,666 | ) |   |         | (4,142 | ) |   |        | (9,808 | )
|                                                                                | Checking with interest           |                       |        | 152                   |   |          |         | (421    | ) |      |        | (269     | ) |   |       | 161    |   |   |         | (292   | ) |   |        | (131   | )
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |                       | 132    |                       |   |          | (719    | )       |   |      | (587   | )        |   |   | (218  | )      |   |   | (3,320  | )      |   |   | (3,538 | )     
|Other borrowings                                                                |                                  |                       | (1,268 | )                     |   |          | (2,469  | )       |   |      | (3,737 | )        |   |   | 2,492 |        |   |   | 2,076   |        |   |   | 4,568  |       
|                                                                                |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|Total interest expense                                                          |                                  |                       | (556   | )                     |   |          | (6,982  | )       |   |      | (7,538 | )        |   |   | (834  | )      |   |   | (8,701  | )      |   |   | (9,535 | )     
|                                                                                |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       
|Increase (decrease) in interest differential                                    |                                  | $                     | 9,876  |                       |   | $        | (10,361 | )       |   | $    | (485   | )        |   | $ | 7,816 |        |   | $ | (3,146  | )      |   | $ | 4,670  |       
|                                                                                |                                  |                       |        |                       |   |          |         |         |   |      |        |          |   |   |       |        |   |   |         |        |   |   |        |       




|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 an extended period of declining interest rates which
began in 2001 and continued through the first half of 2003 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 experienced a shift of customer time deposits into
interest bearing demand deposits, and increases in the average
lives of callable longer term borrowings. The initial impact of
the sharp decline in 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. The Company experienced additional
downward pressure on net interest income as the impact of the
declining rate environment continued throughout 2002 and 2003.

22



---



##### 



The Company has made efforts throughout this
period to minimize the decline of its net interest income by
appropriately repositioning its securities portfolio and funding
sources while maintaining prudence in its asset and interest
rate risk profiles. The initial stages of this program resulted
in a systematic reduction of the average life of the securities
portfolio throughout 2002 by investing maturing funds and
deposit growth into shorter term securities and the prepayment
of $21 million of the Companys long term borrowings.
In addition, during the first half of 2003, the Company sold the
remainder of its rapidly prepaying fixed rate mortgage backed
securities portfolio and callable U.S. agency securities
which management believed would be called within the ensuing
twelve months. Proceeds from these sales, which included the
recognition of pretax gains of $5.4 million, were
reinvested primarily in variable rate mortgage backed securities
and collateralized mortgage obligations
(CMOs). As rates began to stabilize after the
second quarter of 2003, The Company redeployed the maturing
short term securities into fixed rate mortgage backed securities
and U.S. agency securities with expected average lives of
less than four years. The result of these efforts, together with
continued growth in the core businesses of loans and deposits,
enabled the Company to maintain and grow net interest income in
2002, and to minimize the decline in net interest income in
2003. The downward pressure on net interest income had begun to
slow by the end of 2003. The Company believes that the
aforementioned asset liability management efforts have
effectively repositioned its portfolios from both asset
and interest rate risk perspectives. The Company will, however,
continue to experience challenges in growing net interest income
if interest rates continue at these current low levels.

Net interest income, on a tax equivalent basis,
of $65.5 million for 2003 reflects a $0.5 million or
0.7 percent decrease from the $65.9 million for 2002,
which reflects a $4.7 million or 7.5 percent increase
over the $61.3 million for 2001. Net interest income, on a
tax equivalent basis, for 2003, compared to 2002, decreased
slightly as a result of an overall lower net interest margin of
4.37 percent in 2003 from 4.82 percent in 2002
partially offset by an increase of $77.9 million or
17.6 percent in the excess of average interest earning
assets over average interest bearing liabilities to
$520.2 million in 2003 from $442.3 million in 2002.
Net interest income, on a tax equivalent basis, for 2002,
compared to 2001 increased primarily as a result of an increase
of $94.6 million or 27.2 percent in the excess of
interest earning assets over interest bearing liabilities to
$442.3 million in 2002 from $347.7 million in 2001
partially offset by a decrease in the net interest margin to
4.82 percent in 2002 from 4.89 percent in 2001. The
2002 decrease in net interest margin, compared to 2001, resulted
from a $2.6 million interest penalty from prepayment of
$21 million of the Companys long term borrowings
incurred as part of ongoing asset liability management.

Interest income is determined by the volume of
and related rates earned on interest earning assets. Lower
interest rates and a volume decrease in Federal funds sold
partially offset by volume increases in loans and securities
available for sale resulted in lower interest income in 2003,
compared to 2002. Sharply lower interest rates and a slight
decrease in securities available for sale partially offset by
volume increases in loans and Federal funds sold resulted in
lower interest income in 2002, compared to 2001. Average
interest earning assets in 2003 increased $128.9 million or
9.4 percent to $1,498.4 million from
$1,369.5 million in 2002, which increased
$117.1 million or 9.3 percent from
$1,252.4 million in 2001. 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 net
unrealized gains, increased $115.0 million or
17.3 percent to $781.5 million in 2003 from
$666.5 million in 2002, which decreased slightly by
$1.4 million or 0.2 percent from $667.9 million
in 2001. Total securities, excluding net unrealized gains,
increased $134.7 million or 18.7 percent to
$856.7 million at December 31, 2003 from
$721.9 million at December 31, 2002, which increased
$107.5 million or 17.5 percent from
$614.4 million at December 31, 2001. The increase in
average total securities in 2003 compared to 2002 reflects
volume increases in short term U.S. Treasury securities,
mortgage backed securities including CMOs, obligations of states
and political subdivisions, and other securities, partially
offset by a volume decrease in U.S. agency securities. The
increase in average short term U.S. Treasury securities
reflects managements caution in redeploying maturing funds
during the continued decline in interest rates in the first half
of 2003. Increases in average mortgage backed securities,
obligations of state and political subdivisions and other
investments reflect investment of deposit growth and the
redeployment of maturing funds from callable

23



---



##### 



U.S. agency securities. During 2003, the
majority of short term U.S. Treasury securities had been
redeployed primarily into mortgage backed securities, and the
fixed rate mortgage backed securities held at the beginning of
the year had been sold and redeployed into shorter average life
and lower yielding mortgage backed securities. The Federal Home
Loan Bank of New York (FHLB) suspended its quarterly
dividend to shareholders in the fourth quarter of 2003. The FHLB
prior quarterly dividend paid to the Company was approximately
$120,000. The Company has been informed that quarterly dividends
will be reinstated beginning in the first quarter of 2004 at,
initially, a substantially reduced rate. As a result of the
aforementioned factors, tax equivalent basis interest income
from securities decreased in 2003, compared to 2002, due to
lower average rates partially offset by higher volume. 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 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 majority of the funds from
repayments and calls were reinvested into shorter duration
mortgage backed securities and CMOs, Federal funds, and, in the
fourth quarter of 2002, short term U.S. Treasury
securities. This reflected the Companys strategy to
shorten the average life of the total portfolio in light of
declining interest rates. Therefore, tax equivalent basis income
on securities decreased in 2002, compared to 2001, primarily due
to lower interest rates.


Average net loans increased $43.7 million or
7.1 percent to $662.8 million in 2003 from
$619.1 million in 2002, which increased $58.5 million
or 10.4 percent from $560.6 million in 2001. Net loans
increased $64.7 million or 10.1 percent to
$707.1 million at December 31, 2003 from
$642.4 million at December 31, 2002, which increased
$42.0 million or 7.0 percent from $600.4 million
at December 31, 2001. The increases in average net loans in
2003 and 2002 were primarily due to the Companys emphasis
on making new loans through more effective market penetration in
its primary market. Interest rates were considerably lower in
2003 than in 2002 and in 2002 than in 2001. As a result,
interest income in 2003 was slightly lower than in 2002 due to
lower interest rates partially offset by higher volume, and
interest income in 2002 was slightly higher than in 2001 due to
higher volume partially offset by lower interest rates.

Interest expense is a function of the volume of,
and rates paid for, interest bearing liabilities, comprised of
deposits and borrowings. Interest expense decreased
$7.5 million or 32.8 percent to $15.4 million in
2003 from $23.0 million in 2002, which decreased
$9.5 million or 29.3 percent from $32.5 million
in 2001. Average balances of interest bearing liabilities
increased $51.0 million or 5.5 percent to
$978.2 million in 2003 from $927.2 million in 2002,
which increased $22.5 million or 2.5 percent from
$904.7 million in 2001. The increase in average interest
bearing liabilities in 2003, compared to 2002, was due to
increases in interest bearing demand deposits and short term
borrowings partially offset by decreases in time deposits and
other borrowings. Deposits increased from existing customers,
new customers and the continued growth resulting from the
opening of new branches. Overall increases in funding in 2003
were invested in loans and securities. The decrease in average
time deposits in 2003, compared to 2002, resulted primarily from
a decrease in short term jumbo certificates of deposit from
municipal customers which are acquired on a bid basis. The
decrease in average other borrowings in 2003, compared to 2002,
resulted from the prepayment in December 2002 of
$21 million of higher cost borrowings conducted as part of
the Companys ongoing asset liability management efforts. A
prepayment penalty of $2.6 million was incurred as a result
of the transaction which is included in 2002 interest expense on
other borrowings. This increased the 2002 average cost of other
borrowings to 6.1%. Excluding this transaction, the 2002 average
cost of other borrowings would have been 4.9%. The increase in
average interest bearing liabilities in 2002, compared to 2001,
was due to increases in interest bearing demand deposits and
other borrowings, partially offset by decreases in time deposits
and short term borrowings. The increase in interest bearing
demand deposits in 2002, compared to 2001, resulted from growth
in existing customers, new customers and continuing growth
resulting from the opening of new branches. The increase in
other borrowings in 2002, compared to 2001, reflects the
Companys efforts to effectively leverage its balance
sheet. The decrease in time deposits in 2002, compared to 2001
resulted from decreases in brokered certificates of deposit and
short term jumbo certificates of deposit from municipal
customers which are acquired on a bid basis. Overall increases
in funding in 2002 were invested in loans, securities and short
term investments. Interest rates were lower in 2003 than in 2002
and lower in 2002 than in 2001. Therefore, interest

24



---



##### 



expense on average interest bearing liabilities
was lower in both 2003 compared to 2002 and 2002 compared to
2001 as a result of lower interest rates partially offset by
higher volume.


Average non interest bearing demand deposits
increased $71.3 million or 18.8 percent to
$451.3 million in 2003 from $380.0 million in 2002,
which increased $82.8 million or 27.9 percent from
$297.2 million in 2001. Non interest bearing demand
deposits are an important component of the Companys
ongoing asset liability management, and also have a direct
impact on the determination of net interest income.

The interest rate spread on a tax equivalent
basis for each of the three years in the period ended
December 31, 2003 is as follows:

|                          |                                            |      |  |      |   |      |  |      |   |  |  |      |  
|------------------------- | ------------------------------------------ | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                          |                                            | 2003 |  | 2002 |   | 2001
|                          |                                            |      |  |      |   |     
|Average interest rate on: |                                            |      |  |      |   |      |  |      |   |  |  |     
|                          | Total average interest earning assets      |      |  | 5.40 | % |      |  | 6.49 | % |  |  | 7.49 | %
|                          | Total average interest bearing liabilities |      |  | 1.58 |   |      |  | 2.48 |   |  |  | 3.59 |  
|                          | Total interest rate spread                 |      |  | 3.82 |   |      |  | 4.01 |   |  |  | 3.90 |  

In 2003 the interest rate spread decreased as the
declining interest environment reduced the yield on interest
earning assets at a faster rate than the cost of interest
bearing liabilities. In 2002, 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 helped to minimize the
decrease in the interest rate spread in 2003 and contributed to
the increase interest rate spread in 2002. The leveraging of
capital generally tends to decrease the interest rate spread,
however, it adds net interest income without adding significant
operating costs. Management cannot predict what impact market
conditions will have on its interest rate spread and future
compression in net interest rate spread may occur.

Non Interest Income

The Company recorded non interest income of
$8.7 million, $3.4 million and $2.4 million in
2003, 2002 and 2001, respectively. Non interest income includes
service charge income, gains and losses on securities
transactions and other income.

Service charges increased $0.1 million or
6.3 percent to $1.7 million in 2003 from
$1.6 million in 2002, which increased $0.4 million or
34.2 percent from $1.2 million in 2001. The increases
reflect higher levels of accounts and fees charged.

Sales of investment securities resulted in net
gains of $5.4 million and $54,000 in 2003 and 2002,
respectively, and net losses of $0.2 million in 2001. Sales
are generally conducted as part of the Companys overall
asset/liability management efforts designed to restructure the
portfolio, manage cash flow and enhance portfolio yield, and
efforts to manage the Companys overall interest rate risk
in response to changes in interest rates or changes in the
composition of the balance sheet.

Other income decreased $0.2 million or
11.8 percent to $1.5 million in 2003 from
$1.7 million in 2002, which increased $0.3 million or
23.2 percent from $1.4 million in 2001. Other income
includes a gain on sale of other real estate owned of
$0.9 million in 2003, increases in the fair value of
interest rate floor contracts of $25,000, $1.1 million and
$0.8 million in 2003, 2002 and 2001, respectively, and
miscellaneous income of $0.7 million, $0.6 million and
$0.5 million in 2003, 2002 and 2001, respectively.

Non Interest Expense

Non interest expense rose to $33.3 million
for 2003, or a 9.2 percent increase over the
$30.5 million for 2002, compared to a 13.0 percent
increase in 2002 over the $27.0 million in 2001. 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 48.5 percent in 2003, compared to
44.0 percent in 2002 and 42.3 percent in 2001.

25



---



##### 



Salaries and employee benefits, the largest
component of non interest expense, rose 11.0 percent in
2003 to $19.0 million, compared to a 12.2 percent
increase in 2002 to $17.1 million from $15.3 million
for 2001. The Company opened one new branch and two loan
production offices in 2003 and three new branches in 2002,
resulting in increased staff. The increases in both 2003 and
2002 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 2003 and 2002 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.

|                          |  |      |     |      |  |      |     |  |  |  |     | 
|------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                          |  | 2003 |     | 2002 |  | 2001
|Employees at December 31, |  |      |     |      |  |     
|Full Time Employees       |  |      | 263 |      |  |      | 253 |  |  |  | 220 | 
|Part Time Employees       |  |      | 31  |      |  |      | 35  |  |  |  | 53  | 

|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|---------------------------------------- |  | -------------------------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                         |  |                           
|                                         |  | (000s except percentages)
|Salaries and Employee Benefits           |  |                            |        |   |  |   |        |   |  |   |        |  
|Salaries                                 |  | $                          | 13,665 |   |  | $ | 12,448 |   |  | $ | 10,891 |  
|Payroll Taxes                            |  |                            | 1,103  |   |  |   | 993    |   |  |   | 861    |  
|Medical Plans                            |  |                            | 1,048  |   |  |   | 802    |   |  |   | 705    |  
|Incentive Compensation Plans             |  |                            | 1,497  |   |  |   | 1,415  |   |  |   | 1,209  |  
|Deferred Compensation Plans              |  |                            | 85     |   |  |   | 74     |   |  |   | 67     |  
|Employee Retirement Plans                |  |                            | 1,167  |   |  |   | 1,059  |   |  |   | 1,050  |  
|Other                                    |  |                            | 441    |   |  |   | 327    |   |  |   | 479    |  
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|Total                                    |  | $                          | 19,006 |   |  | $ | 17,118 |   |  | $ | 15,262 |  
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  
|Percentage of total non interest expense |  |                            | 57.0   | % |  |   | 56.1   | % |  |   | 56.5   | %
|                                         |  |                            |        |   |  |   |        |   |  |   |        |  

Occupancy expense increased 15.1 percent to
$2.9 million in 2003 from $2.5 million in 2002 which
was a 8.4 percent increase from $2.3 million in 2001. The
increases in both 2003 and 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 10.9 percent
to $3.3 million in 2003 from $2.9 million in 2002,
which was a 32.7 percent increase from $2.2 million for
2001. The increases in both 2003 and 2002 were due to higher
audit costs, higher legal costs and professionals engaged to
assist in the expansion of the Companys management
information services.

Equipment expense decreased 9.1 percent to
$1.8 million in 2003 from $1.9 million in 2002, which
was unchanged from $1.9 million in 2001. The decrease in
2003 reflected a reduction in equipment rental expense. The
increase in 2002 reflected additional equipment necessary to
support the three new branch facilities which opened in 2002.

Business development expense decreased
4.6 percent to $1.4 million in 2003 from
$1.5 million in 2002, which was a 33.2 percent
increase over $1.1 million in 2001. 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 increased to $177,000 for 2003
compared to $164,000 for 2002 and $166,000 for 2001. The
increase in 2003 and 2002 primarily resulted from increases in
the Banks deposits subject to FDIC assessment as well as a
general increase in the overall assessment rate.

26



---



##### 



Other operating expenses, as reflected in the
following table, increased 10.6 percent in 2003 and
increased 7.1 percent in 2002.

|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|----------------------------------------- |  | -------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                          |  | 2003                       |       | 2002 |  | 2001
|                                          |  |                            |       |      |  |     
|                                          |  |                           
|                                          |  | (000s except percentages)
|Other Operating Expenses                  |  |                            |       |      |  |      |       |   |  |   |       |  
|Other insurance                           |  | $                          | (55   | )    |  | $    | (128  | ) |  | $ | (104  | )
|Stationery and printing                   |  |                            | 541   |      |  |      | 605   |   |  |   | 477   |  
|Communications expense                    |  |                            | 911   |      |  |      | 850   |   |  |   | 765   |  
|Courier expense                           |  |                            | 617   |      |  |      | 520   |   |  |   | 452   |  
|Other loan expense                        |  |                            | 267   |      |  |      | 194   |   |  |   | 248   |  
|Outside services                          |  |                            | 1,053 |      |  |      | 864   |   |  |   | 779   |  
|Dues, meetings and seminars               |  |                            | 461   |      |  |      | 353   |   |  |   | 308   |  
|Other                                     |  |                            | 1,042 |      |  |      | 1,115 |   |  |   | 1,158 |  
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|Total                                     |  | $                          | 4,837 |      |  | $    | 4,373 |   |  | $ | 4,083 |  
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  
|Percentages of total non interest expense |  |                            | 14.5  | %    |  |      | 14.3  | % |  |   | 15.1  | %
|                                          |  |                            |       |      |  |      |       |   |  |   |       |  

The 2003 increases reflect higher outside
services fees, higher customer service related expenses
including communications and courier expenses, higher loan
expenses relating to loan collection, an increase in dues and
seminar expense due to expanded participation in such events and
increase in the estimates in net costs of certain life insurance
programs, all related to the opening of one new branch and two
loan production offices, growth in customers and growth in
business activities. The 2003 decreases reflect lower stationery
and printing expense and slightly lower other expense.

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.

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 $11.8 million,
$9.2 million and $9.5 million were recorded in 2003,
2002 and 2001, respectively. The Company is currently subject to
a statutory Federal tax rate of 35 percent, a New York
State tax rate of 7.5 percent plus a 17 percent
surcharge, and a New York City tax rate of 9 percent. The
Companys overall effective tax rate was 32.7 percent,
29.8 percent and 33.5 percent in 2003, 2002 and 2001,
respectively. The increase in the overall effective tax rate for
2003, compared to 2002, resulted from increases in income
subject to Federal, New York State, and New York City taxes
partially offset by a reduction in the New York State Corporate
tax rate from 8 percent to 7.5 percent. The decrease
in the overall effective tax rate for 2002, compared to 2001
resulted from an increase in tax exempt interest income as a
percentage of total interest income and a decrease in the New
York State Corporate tax rate from 8.5 percent to
8 percent.

In the normal course of business, the
Companys Federal, New York State and New York City
Corporation tax returns are subject to audit. The New York State
Department of Taxation and Finance has completed an audit of the
Companys New York State Corporation Tax returns for the
years 1996 through 1998, and has assessed additional tax,
interest and penalties of approximately $1.5 million. The
Company is contesting this assessment. The Company does not
believe the resolution of this matter will have a significant
impact on its financial position. Other pertinent tax
information is set forth in the Notes to Consolidated Financial
Statements included elsewhere herein.

27



---



##### 



Financial Condition at December 31, 2003
and 2002

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 $861.4 million,
$743.9 million and $624.2 million and Federal Home
Loan Bank of New York (FHLB) stock totaling
$11.2 million, $10.5 million and $10.5 million at
December 31, 2003, 2002 and 2001, 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,
2003, 2002 and 2001.

Securities represent 52.2 percent,
48.7 percent and 53.3 percent of average interest
earning assets in 2003, 2002 and 2001, respectively. Emphasis on
the securities portfolio will continue to be an important part
of the Companys investment strategy. The size of the
securities portfolio will depend on loan and deposit growth, the
level of capital and the Companys ability to take
advantage of leveraging opportunities.

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

2003 (000s)

|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 
|------------------------------------------------ |  | --------- | ------- | ---------------- |  | ---------- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                                 |  | Amortized |         |                  |  | Estimated 
|Classified as Available for Sale                 |  | Cost      |         | Gross Unrealized |  | Fair Value
|                                                 |  |           |         |                  |  |           
|                                                 |  |           |         | Gains            |  | Losses     |        | 
|                                                 |  |           |         |                  |  |            |        | 
|U.S. Treasury and government agencies            |  | $         | 187,388 |                  |  | $          | 420    |  |  | $ | 742   |  |  | $ | 187,066 | 
|Mortgage-backed securities                       |  |           | 437,200 |                  |  |            | 1,935  |  |  |   | 4,983 |  |  |   | 434,152 | 
|Obligations of states and political subdivisions |  |           | 183,057 |                  |  |            | 8,188  |  |  |   | 544   |  |  |   | 190,701 | 
|Other debt securities                            |  |           | 28,030  |                  |  |            | 365    |  |  |   | 379   |  |  |   | 28,016  | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 
|Total debt securities                            |  |           | 835,675 |                  |  |            | 10,908 |  |  |   | 6,648 |  |  |   | 839,935 | 
|Mutual funds and other equity securities         |  |           | 20,976  |                  |  |            | 581    |  |  |   | 82    |  |  |   | 21,475  | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 
|Total                                            |  | $         | 856,651 |                  |  | $          | 11,489 |  |  | $ | 6,730 |  |  | $ | 861,410 | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 

28



---



##### 



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 | 
|                                                 |  |           |         |                  |  |            |        |  |  |   |       |  |  |   |         | 

The following table presents the amortized cost
of securities available for sale at December 31, 2003,
distributed based on contractual maturity or earlier call date
for securities expected to be called, and weighted average
yields computed on a tax equivalent basis. Mortgage-backed
securities which may have principal prepayments are distributed
to a maturity category based on estimated average lives. Actual
maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.

|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  
|------------------------------------------------ |  | -------------------------- | ------- | ------------------ |  | ------------------ | ---- | -------------- |  | ------ | ------- | ----- |  | ------ | ---- | ----- |  | ------ | ------- | ----- |  |  | ---- | - |  | - | ------ |  |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |      
|                                                 |  |                            |         | After 1 but within |  | After 5 but within |      |                |  |       
|                                                 |  | Within 1 Year              |         | 5 Years            |  | 10 Years           |      | After 10 Years |  | Total 
|                                                 |  |                            |         |                    |  |                    |      |                |  |       
|                                                 |  | Amount                     |         | Yield              |  | Amount             |      | Yield          |  | Amount |         | Yield |  | Amount |      | Yield |  | Amount |         | Yield
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |      
|                                                 |  |                           
|                                                 |  | (000s except percentages)
|U.S. Treasury and government agencies            |  | $                          | 65,684  |                    |  |                    | 4.15 | %              |  | $      | 118,614 |       |  |        | 3.12 | %     |  | $      | 3,090   |       |  |  | 5.06 | % |  |   |       |  |  |  |     |   |  | $ | 187,388 |  |  |  | 3.51 | %
|Mortgage-backed securities                       |  |                            | 86,799  |                    |  |                    | 3.74 |                |  |        | 243,704 |       |  |        | 3.75 |       |  |        | 96,027  |       |  |  | 3.90 |   |  | $ | 10,670 |  |  |  | 3.93 | % |  |   | 437,200 |  |  |  | 3.79 |  
|Obligations of states and political subdivisions |  |                            | 23,211  |                    |  |                    | 7.32 |                |  |        | 75,058  |       |  |        | 7.37 |       |  |        | 83,550  |       |  |  | 6.72 |   |  |   | 1,238  |  |  |  | 5.90 |   |  |   | 183,057 |  |  |  | 7.06 |  
|Other debt securities                            |  |                            | 9,623   |                    |  |                    | 2.97 |                |  |        | 17,550  |       |  |        | 4.25 |       |  |        | 345     |       |  |  | 7.46 |   |  |   | 512    |  |  |  | 7.42 |   |  |   | 28,030  |  |  |  | 3.91 |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  
|Total                                            |  | $                          | 185,317 |                    |  |                    | 4.29 | %              |  | $      | 454,926 |       |  |        | 4.20 | %     |  | $      | 183,012 |       |  |  | 5.22 | % |  | $ | 12,420 |  |  |  | 4.27 | % |  | $ | 835,675 |  |  |  | 4.45 | %
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  
|Estimated fair value                             |  | $                          | 185,562 |                    |  |                    |      |                |  | $      | 456,148 |       |  |        |      |       |  | $      | 185,827 |       |  |  |      |   |  | $ | 12,398 |  |  |  |      |   |  | $ | 839,935 |  |  |  |      |  
|                                                 |  |                            |         |                    |  |                    |      |                |  |        |         |       |  |        |      |       |  |        |         |       |  |  |      |   |  |   |        |  |  |  |      |   |  |   |         |  |  |  |      |  

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 $187.1 million,
$224.7 million and $106.8 million at December 31,
2003, 2002 and 2001, respectively. The December 31, 2003
balance decreased $37.6 million resulting from
$1,108.8 million in purchases, offset by
$1,131.9 million of maturities and calls,
$13.2 million of sales and other decreases of
$1.3 million. 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. In 2003, purchases
and maturities

29



---



##### 



included $964.0 million and
$1,105.0 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. By the end of 2003, the Company had redeployed the
majority of its short term U.S. Treasury investments into
longer term securities as interest rates began to stabilize and
more attractive medium term yields were available. 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 had increased the amount of short-term
investments as part of its ongoing asset/liability
management during the current low interest rate environment.


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, 2003 and 2002, the
Company held $3.3 and $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,
increased $100.2 million to $434.2 million and
decreased $18.8 million to $334.0 million at
December 31, 2003 and 2002, respectively, as compared to
$352.8 million at December 31, 2001. The increase in
2003 was due to purchases of $436.6 million offset by
principal paydowns of $207.2 million, sales of
$111.1 million and other decreases of $18.1 million.
The decrease in 2002 was due to principal paydowns 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 purchases were fixed and variable rate
mortgage-backed securities with average lives of less than ten
years at the time of purchase. The sales were conducted as a
result of asset/liability management efforts to reposition the
portfolio during the extended period of low interest rates.

During 2003, purchases of fixed rate mortgage
backed securities of $285.8 million were partially offset
by sales of $110.7 million, paydowns of $144.7 million
and other changes of $14.0 million. During 2003, purchases
of adjustable rate mortgage-backed securities of
$150.8 million were partially offset by sales of
$0.4 million, paydowns of $62.5 million and other
changes of $4.1 million. 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.

The outstanding balances in obligations of states
and political subdivisions at December 31, 2003, 2002 and
2001 were $190.7 million, $176.8 million and
$159.5 million, respectively. The December 31, 2003
balance increased $13.9 million resulting from purchases of
$34.2 million, partially offset by maturities and
redemptions of $18.5 million and other decreases of
$1.8 million. 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 obligations at year end 2003 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.

Other debt securities increased
$21.0 million to $28.0 million and increased
$3.2 million to $7.0 million at December 31, 2003
and 2002, respectively. The increase in 2003 was due to
purchases of $21.6 offset by maturities and calls of
$0.3 million and other changes of $0.3 million. The
increase in 2002 was due to purchases of $3.2 million
offset by maturities and calls of $0.4 million and other
changes of $0.4 million. The purchases consisted of
variable rate trust preferred securities acquired as part of the
Companys redeployment of the proceeds from maturing short
term investments.

Mutual funds and other equities increased $20.1
million to $21.5 million at December 31, 2003 from $1.4
million at December 31, 2002. The increase was due to
purchases of $20.0 million and other increases of $0.1

30



---



##### 



million. The purchases were shares of a mutual
fund which invests primarily in variable rate mortgage-backed
securities with characteristics consistent with the
Companys investment strategy.


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, 2003 totaled approximately $6.5 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, 2003.

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 interest, although some
fixed rate financing is provided. The loan amount is generally
limited to 65% to 75% of completed value, depending on the type
of property. Most non-residential construction loans require
pre-approved permanent financing or pre-leasing with the Bank
providing the permanent financing. The Bank does not generally
fund construction loans for single family subdivisions or
condominiums built by investors until the builder has a firm
sales contract for the unit to be constructed, although in
certain projects, model homes may be financed within the overall
site improvement financing. The Bank funds construction of
single family homes and commercial real estate, when no contract
of sale exists, based upon the experience of the builder,

31



---



##### 



the type and location of the property and other
factors. 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 generally subject to
minimum and maximum limits of $50,000 and $1,000,000,
respectively, for 1-4 family properties which are the borrowers
primary or secondary 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 costs of origination, subject to certain
limitations, 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
generally subject to a limit of $1,000,000 with a maximum
combined loan to value ratio of 80%. The interest rate is the
Banks prime rate plus 1% for the 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.

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 terms of 1 to 5 years with,
exceptionally, longer terms. 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.

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.

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

32



---



##### 



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 2003, average net loans increased
$43.7 million to $662.8 million, and increased
$58.5 million in 2002 to $619.1 million, as compared
to $560.6 million in 2001. At December 31, 2003, gross
loans increased $65.0 million or 9.9 percent to
$720.4 million, compared to $655.4 million at
December 31, 2002, which increased $45.5 million, or
7.5 percent compared to $609.9 million at
December 31, 2001. This growth in gross loans resulted
primarily from:



| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increases during 2003 and 2002 of
    $10.2 million and $20.6 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 $4.2 million, respectively, resulting
    from a greater emphasis on this product including an expanded
    offering and focused marketing,                                                                   
|
| |  | Increase in residential real estate mortgages of
    $14.2 million and decrease of $10.6 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
    $38.8 million and $38.7 million, respectively,
    primarily due to increased activity and a greater emphasis on
    this product with resulting increased market penetration,                                    
|
| |  | A decrease of $3.2 million and
    $10.1 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
    $0.8 million and $2.7 million, respectively.                                                                                                                                                                                 

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

|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |         | 
|------------------------- | ------------ | ------- | ------- | ------- |  | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                          |              |        
|                          |              | (000s)
|                          |              |        
|                          |              | 2003    |         | 2002    |  | 2001 |         | 2000    |  | 1999
|                          |              |         |         |         |  |      |         |         |  |     
|Real Estate:              |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|                          | Commercial   |         | $       | 241,566 |  |      | $       | 231,411 |  |      | $       | 210,840 |  |   | $       | 181,735 |  |   | $       | 153,823 | 
|                          | Construction |         |         | 60,892  |  |      |         | 56,691  |  |      |         | 52,496  |  |   |         | 32,869  |  |   |         | 26,526  | 
|                          | Residential  |         |         | 178,518 |  |      |         | 164,287 |  |      |         | 174,859 |  |   |         | 155,449 |  |   |         | 127,959 | 
|Commercial and industrial |              |         | 218,130 |         |  |      | 179,288 |         |  |      | 140,573 |         |  |   | 110,555 |         |  |   | 77,276  |        
|Individuals               |              |         | 15,256  |         |  |      | 14,509  |         |  |      | 11,824  |         |  |   | 10,677  |         |  |   | 9,280   |        
|Lease financing           |              |         | 6,000   |         |  |      | 9,224   |         |  |      | 19,282  |         |  |   | 20,970  |         |  |   | 23,543  |        
|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|Total                     |              |         | 720,362 |         |  |      | 655,410 |         |  |      | 609,874 |         |  |   | 512,255 |         |  |   | 418,407 |        
|Deferred loan fees        |              |         | (1,817  | )       |  |      | (1,462  | )       |  |      | (1,479  | )       |  |   | (1,338  | )       |  |   | (1,446  | )      
|Allowance for loan losses |              |         | (11,441 | )       |  |      | (11,510 | )       |  |      | (8,018  | )       |  |   | (4,816  | )       |  |   | (4,047  | )      
|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        
|Loans, net                |              | $       | 707,104 |         |  | $    | 642,438 |         |  | $    | 600,377 |         |  | $ | 506,101 |         |  | $ | 412,914 |        
|                          |              |         |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |        

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 2003 and 2002, 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, 2003, the Company
had total gross loans with fixed rates of interest of
$395.6 million, or 54.9 percent, and total gross loans
with variable or floating rates of interest of
$324.8 million, or 45.1 percent, as compared to $374.3
million or 57.1 percent of fixed rate loans and $281.1
million or 42.9 percent of variable or floating rate loans
at December 31, 2002.

At December 31, 2003 and 2002, the Company
had approximately $197.6 million and $129.4 million,
respectively, of committed but unissued lines of credit,
commercial mortgages, construction loans and commercial and
industrial loans.

33



---



##### 



The following table presents the maturities of
loans outstanding at December 31, 2003 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            |  | $                          | 49,882  |            |  | $       | 11,010 |       |  |         |       |   |  | $ | 60,892  |   |  |  | 21.8  | %
|Commercial and industrial             |  |                            | 82,857  |            |  |         | 73,460 |       |  | $       | 61,813 |   |  |   | 218,130 |   |  |  | 78.2  |  
|                                      |  |                            |         |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Total                                 |  |                            | 132,739 |            |  |         | 84,470 |       |  |         | 61,813 |   |  |   | 279,022 |   |  |  | 100.0 | %
|                                      |  |                            |         |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Rate Sensitivity:                     |  |                            |         |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Fixed or predetermined interest rates |  |                            | 8,465   |            |  |         | 50,430 |       |  |         | 43,504 |   |  |   | 102,399 |   |  |  | 36.7  |  
|Floating or adjustable interest rates |  |                            | 124,274 |            |  |         | 34,040 |       |  |         | 18,309 |   |  |   | 176,623 |   |  |  | 63.3  |  
|                                      |  |                            |         |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Total                                 |  | $                          | 132,739 |            |  | $       | 84,470 |       |  | $       | 61,813 |   |  | $ | 279,022 |   |  |  | 100.0 | %
|                                      |  |                            |         |            |  |         |        |       |  |         |        |   |  |   |         |   |  |  |       |  
|Percent                               |  |                            | 47.6    | %          |  |         | 30.3   | %     |  |         | 22.1   | % |  |   | 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)
|                                                                                                                             |  |                           
|                                                                                                                             |  | 2003                       |       | 2002 |  | 2001 |       | 2000 |  | 1999
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |     
|Non-accrual loans at year end                                                                                                |  | $                          | 2,913 |      |  | $    | 4,758 |      |  | $    | 3,523 |   |  | $ | 4,584 |   |  | $ | 3,855 |  
|OREO at year end                                                                                                             |  |                            |      |      |  |      | 1,831 |      |  |      | 2,021 |   |  |   | 2,117 |   |  |   | 2,193 |  
|Restructured loans at year end                                                                                               |  |                            |      |      |  |      |      |      |  |      |      |   |  |   |      |   |  |   | 323   |  
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Total nonperforming assets                                                                                                   |  | $                          | 2,913 |      |  | $    | 6,589 |      |  | $    | 5,544 |   |  | $ | 6,701 |   |  | $ | 6,371 |  
|                                                                                                                             |  |                            |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Loans past due 90 days or more and still
    accruing                                                                        |  |                            | 1,431 |      |  |      | 1,596 |      |  |      | 137   |   |  |   | 469   |   |  |   | 264   |  
|Additional interest income that would have been
    recorded if these borrowers had complied with contractual loan
    terms |  |                            | 188   |      |  |      | 179   |      |  |      | 511   |   |  |   | 763   |   |  |   | 698   |  
|Nonperforming assets to total assets at year end                                                                             |  |                            | 0.17  | %    |  |      | 0.43  | %    |  |      | 0.40  | % |  |   | 0.52  | % |  |   | 0.56  | %

At December 31, 2003, the Company had no
commitments to lend additional funds to customers with
non-accrual or restructured loan balances. Non-accrual loans
decreased in 2003 to $2.9 million from $4.8 million
and increased in 2002 to $4.8 million, from
$3.5 million in 2001. 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, 2003, loans that aggregated
approximately $9.3 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, 2003, 2002 and 2001.

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
$2.9 million, $4.7 million and $2.5 million at
December 31, 2003, 2002 and 2001, respectively, have been
measured based on the estimated fair value of the

34



---



##### 



collateral since these loans are all collateral
dependent. At December 31, 2003, the Company had two
borrowers with accruing loans totaling $3.2 million and
$0.7 million, respectively, which were not deemed to be
impaired within the scope of SFAS No. 114, but to
which specific reserves were considered appropriate. The
$0.7 million loan was subsequently placed on non-accrual
status. The total allowance for loan losses specifically
allocated to impaired and other identified problem loans was
$1.5 million, $1.3 million and $0.8 million at
December 31, 2003, 2002 and 2001, respectively. The average
recorded investment in impaired loans for the years ended
December 31, 2003, 2002 and 2001 was approximately
$5.1 million, $3.5 million and $2.3 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 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. 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.

35



---



##### 



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,
|                             |  | 2003         |        | During 2003 |  | 2002         |      | During 2002 |  | 2001        
|                             |  |              |        |             |  |              |      |             |  |             
|Components:                  |  |              |        |             |  |              |      |             |  |              |        |  |  |   |       |   |  |   |       | 
|Specific                     |  | $            | 1,532  |             |  |              | 250  |             |  | $            | 1,282  |  |  | $ | 475   |   |  | $ | 807   | 
|Formula                      |  |              | 1,309  |             |  |              | (19  | )           |  |              | 1,328  |  |  |   | 817   |   |  |   | 511   | 
|Unallocated                  |  |              | 8,600  |             |  |              | (300 | )           |  |              | 8,900  |  |  |   | 2,200 |   |  |   | 6,700 | 
|                             |  |              |        |             |  |              |      |             |  |              |        |  |  |   |       |   |  |   |       | 
|Total allowance              |  | $            | 11,441 |             |  |              |      |             |  | $            | 11,510 |  |  |   |       |   |  | $ | 8,018 | 
|                             |  |              |        |             |  |              |      |             |  |              |        |  |  |   |       |   |  |   |       | 
|Net change                   |  |              |        |             |  |              | (69  | )           |  |              |        |  |  |   | 3,492 |   |  |   |       | 
|Net recoveries/(charge-offs) |  |              |        |             |  |              | (506 | )           |  |              |        |  |  |   | (410  | ) |  |   |       | 
|                             |  |              |        |             |  |              |      |             |  |              |        |  |  |   |       |   |  |   |       | 
|Provision for loan losses    |  |              |        |             |  | $            | 437  |             |  |              |        |  |  | $ | 3,902 |   |  |   |       | 
|                             |  |              |        |             |  |              |      |             |  |              |        |  |  |   |       |   |  |   |       | 

|                             |  |             |        |              |  |             |       |              |  |             |       |              |  |   |       |  |  |   |     |   |  |   |       | 
|---------------------------- |  | ----------- | ------ | ------------ |  | ----------- | ----- | ------------ |  | ----------- | ----- | ------------ |  | - | ----- |  |  | - | --- | - |  | - | ----- | 
|                             |  | Change      |        | December 31, |  | Change      |       | December 31, |  | Change      |       | December 31,
|                             |  | During 2001 |        | 2000         |  | During 2000 |       | 1999         |  | During 1999 |       | 1998        
|                             |  |             |        |              |  |             |       |              |  |             |       |             
|Components:                  |  |             |        |              |  |             |       |              |  |             |       |              |  |   |       |  |  |   |     |   |  |   |       | 
|Specific                     |  | $           | 682    |              |  | $           | 125   |              |  | $           | 68    |              |  | $ | 57    |  |  | $ | (21 | ) |  | $ | 78    | 
|Formula                      |  |             | 120    |              |  |             | 391   |              |  |             | (476  | )            |  |   | 867   |  |  |   | 124 |   |  |   | 743   | 
|Unallocated                  |  |             | 2,400  |              |  |             | 4,300 |              |  |             | 1,177 |              |  |   | 3,123 |  |  |   | 841 |   |  |   | 2,282 | 
|                             |  |             |        |              |  |             |       |              |  |             |       |              |  |   |       |  |  |   |     |   |  |   |       | 
|Total allowance              |  |             |        |              |  | $           | 4,816 |              |  |             |       |              |  | $ | 4,047 |  |  |   |     |   |  | $ | 3,103 | 
|                             |  |             |        |              |  |             |       |              |  |             |       |              |  |   |       |  |  |   |     |   |  |   |       | 
|Net change                   |  |             | 3,202  |              |  |             |       |              |  |             | 769   |              |  |   |       |  |  |   | 944 |   |  |   |       | 
|Net recoveries/(charge-offs) |  |             | (1,178 | )            |  |             |       |              |  |             | (375  | )            |  |   |       |  |  |   | 344 |   |  |   |       | 
|                             |  |             |        |              |  |             |       |              |  |             |       |              |  |   |       |  |  |   |     |   |  |   |       | 
|Provision for loan losses    |  | $           | 4,380  |              |  |             |       |              |  | $           | 1,144 |              |  |   |       |  |  | $ | 600 |   |  |   |       | 
|                             |  |             |        |              |  |             |       |              |  |             |       |              |  |   |       |  |  |   |     |   |  |   |       | 

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

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

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

2003



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic and business conditions  The
    general softness in the economy experienced during the first
    half of 2003 has shown signs of improvement during the second
    half of the year, as evidenced by reduced unemployment and
    improvements in productivity and corporate profits. Management
    believes that this condition has had positive impacts on
    economic and business activity within the Companys primary
    market area, has strengthened the demand for commercial real
    estate, which is the primary collateral for the Banks
    loans, and has generally improved the ability of borrowers to
    repay their loans. Consideration of such economic and business
    conditions is part of the determination of the unallocated
    component of the allowance.

36



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Concentration  Concentration in
    commercial and industrial loans increased to 30.3 percent
    of the portfolio from 27.4 percent at the prior year end,
    an increase of $38.8 million. These types of loans
    generally have a higher degree of risk than other types of loans
    which the 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 changes in concentration is a part
    of the determination of the unallocated component of the
    allowance.                                                                                                                                                                       
|
| |  | Credit quality  Non-accrual loans and
    loans past due 90 days or more and still accruing decreased at
    December 31, 2003 by $2.0 million or 31.6 percent to $4.4
    million from $6.4 million at December 31, 2002. Although
    improvement occurred in delinquencies and nonperforming loans in
    the aggregate, certain loans were downgraded as a result of the
    Companys regular periodic loan review process. These
    downgrades resulted from potential deterioration of collateral
    values, the borrowers cash flows or other specific factors
    that negatively impact the borrowers ability to meet their
    loan obligations. Certain of these loans are also considered in
    connection with the analysis of impaired loans performed to
    determine the specific component of the allowance. However, due
    to the uncertainty of that determination, such loans are also
    considered in the process of determining the unallocated
    component of the allowance.
|
| |  | New loan products  The Bank introduced
    a no cost home equity product during the fourth quarter of 2002
    and began financing business equipment leases during the fourth
    quarter of 2000. Any probable losses with respect to these
    products are not reflected in the formula component of the
    allowance for loan losses since there is no loss history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

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.                     
|
| |  | 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                                                                       

37



---



##### 



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

38



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                           

39



---



##### 





| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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

|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |     |     |  
|------------------------------------------------------------------------------------ | ------------------------------- | -------------------------- | ------- | ---- | ---- | ---- | ------- | ---- | - | ---- | ------- | ------ | - | - | ------- | ---- | --- | - | ------- | --- | --- | -
|                                                                                     |                                 |                           
|                                                                                     |                                 | (000s except percentages)
|                                                                                     |                                 |                           
|                                                                                     |                                 | 2003                       |         | 2002 |      | 2001 |         | 2000 |   | 1999
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |     
|Net loans outstanding at end of year                                                 |                                 | $                          | 707,104 |      |      | $    | 642,438 |      |   | $    | 600,377 |        |   | $ | 506,101 |      |     | $ | 412,914 |    
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Average net loans outstanding during the year                                        |                                 |                            | 662,800 |      |      |      | 619,098 |      |   |      | 560,584 |        |   |   | 446,843 |      |     |   | 355,628 |    
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Allowance for loan losses:                                                           |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Balance, beginning of year                                                           |                                 | $                          | 11,510  |      |      | $    | 8,018   |      |   | $    | 4,816   |        |   | $ | 4,047   |      |     | $ | 3,103   |    
|Provision (credit) charged to expense                                                |                                 |                            | 437     |      |      |      | 3,902   |      |   |      | 4,380   |        |   |   | 1,144   |      |     |   | 600     |    
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|                                                                                     |                                 |                            | 11,947  |      |      |      | 11,920  |      |   |      | 9,196   |        |   |   | 5,191   |      |     |   | 3,703   |    
|Charge-offs and recoveries during the year:                                          |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Charge offs:                                                                         |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|                                                                                     | Real estate:                    |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |     |    
|                                                                                     |                                 | Commercial                 |         |      | (540 | )    |         |      |  |      |         |        |  |   |         |      |    |   |         |     |    |  
|                                                                                     |                                 | Construction               |         |      |     |      |         |      |  |      |         |        |  |   |         |      |    |   |         |     |    |  
|                                                                                     |                                 | Residential                |         |      |     |      |         |      |  |      |         |        |  |   |         |      | (29 | ) |         |     | (11 | )
|                                                                                     | Commercial and industrial       |                            |         | (176 | )    |      |         | (290 | ) |      |         | (1,407 | ) |   |         | (378 | )   |   |         | (85 | )  
|                                                                                     | Lease financing and individuals |                            |         | (1   | )    |      |         | (189 | ) |      |         | (21    | ) |   |         | (21  | )   |   |         | (14 | )  
|Recoveries:                                                                          |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|                                                                                     | Real estate:                    |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |     |    
|                                                                                     |                                 | Commercial                 |         |      |     |      |         |      |  |      |         |        |  |   |         |      |    |   |         |     | 381 |  
|                                                                                     |                                 | Construction               |         |      |     |      |         |      |  |      |         |        |  |   |         |      |    |   |         |     |    |  
|                                                                                     |                                 | Residential                |         |      |     |      |         |      |  |      |         |        | 6 |   |         |      |    |   |         |     |    |  
|                                                                                     | Commercial and industrial       |                            |         | 197  |      |      |         | 66   |   |      |         | 242    |   |   |         | 49   |     |   |         | 73  |    
|                                                                                     | Lease financing and individuals |                            |         | 14   |      |      |         | 3    |   |      |         | 2      |   |   |         | 4    |     |   |         |    |    
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Net (charge-offs) recoveries during the year                                         |                                 |                            | (506    | )    |      |      | (410    | )    |   |      | (1,178  | )      |   |   | (375    | )    |     |   | 344     |    
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Balance, end of year                                                                 |                                 | $                          | 11,441  |      |      | $    | 11,510  |      |   | $    | 8,018   |        |   | $ | 4,816   |      |     | $ | 4,047   |    
|                                                                                     |                                 |                            |         |      |      |      |         |      |   |      |         |        |   |   |         |      |     |   |         |    
|Ratio of net charge-offs to average net loans
    outstanding during the year        |                                 |                            | 0.08    | %    |      |      | 0.07    | %    |   |      | 0.21    | %      |   |   | 0.08    | %    |     |   |        |    
|Ratio of allowance for loan losses to gross loans
    outstanding at end of the year |                                 |                            | 1.59    | %    |      |      | 1.76    | %    |   |      | 1.31    | %      |   |   | 0.94    | %    |     |   | 0.97    | %  

40



---



##### 



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

|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |        |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |       |  
|------------------------------- | ------------ | -------------------------- | ------ | ---------- |  | -------- | ------- | --------- |  | ---------- | ------ | -------- | - | --------- | ------ | ---------- |  | -------- | ------- | ------- |  |  | ------ | ----- | - | - | ----- | --- |  | - | ------- | ------- |  |  | ------ | ----- | -
|                                |              |                           
|                                |              | (000s except percentages)
|                                |              |                           
|                                |              |                            |        |            |  |         
|                                |              | 2003                       |        | 2002       |  | 2001    
|                                |              |                            |        |            |  |         
|                                |              |                            |        | 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   |                            | $      | 167        |  |          | $       | 241,566   |  |            |        | 33.53    | % |           | $      | 375        |  |          | $       | 231,411 |  |  |        | 35.31 | % |   | $     | 807 |  |   | $       | 210,840 |  |  |        | 34.57 | %
|                                | Construction |                            |        | 79         |  |          |         | 60,892    |  |            |        | 8.45     |   |           |        | 100        |  |          |         | 56,691  |  |  |        | 8.65  |   |   |       | 189 |  |   |         | 52,496  |  |  |        | 8.61  |  
|                                | Residential  |                            |        | 85         |  |          |         | 178,518   |  |            |        | 24.78    |   |           |        | 12         |  |          |         | 164,287 |  |  |        | 25.07 |   |   |       | 41  |  |   |         | 174,859 |  |  |        | 28.67 |  
|Commercial and industrial       |              |                            | 2,498  |            |  |          | 218,130 |           |  |            | 30.28  |          |   |           | 2,116  |            |  |          | 179,288 |         |  |  | 27.36  |       |   |   | 239   |     |  |   | 140,573 |         |  |  | 23.05  |      
|Lease financing and individuals |              |                            | 12     |            |  |          | 21,256  |           |  |            | 2.96   |          |   |           | 7      |            |  |          | 23,733  |         |  |  | 3.61   |       |   |   | 42    |     |  |   | 31,106  |         |  |  | 5.10   |      
|Unallocated                     |              |                            | 8,600  |            |  |          |        |           |  |            |        |          |   |           | 8,900  |            |  |          |        |         |  |  |       |       |   |   | 6,700 |     |  |   |        |         |  |  |       |      
|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |        |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      
|Total                           |              | $                          | 11,441 |            |  | $        | 720,362 |           |  |            | 100.00 | %        |   | $         | 11,510 |            |  | $        | 655,410 |         |  |  | 100.00 | %     |   | $ | 8,018 |     |  | $ | 609,874 |         |  |  | 100.00 | %    
|                                |              |                            |        |            |  |          |         |           |  |            |        |          |   |           |        |            |  |          |         |         |  |  |        |       |   |   |       |     |  |   |         |         |  |  |        |      

|                                |              |                            |       |            |  |          |         |           |  |          |        |          |   |   |       |     |  |   |         |         |  |  |        |       |  
|------------------------------- | ------------ | -------------------------- | ----- | ---------- |  | -------- | ------- | --------- |  | -------- | ------ | -------- | - | - | ----- | --- |  | - | ------- | ------- |  |  | ------ | ----- | -
|                                |              |                           
|                                |              | (000s except percentages)
|                                |              |                           
|                                |              |                            |       |           
|                                |              | 2000                       |       | 1999      
|                                |              |                            |       |           
|                                |              |                            |       | 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   |                            |       |           |  |          | $       | 181,735   |  |          |        | 35.48    | % |   |       |    |  |   | $       | 153,823 |  |  |        | 36.77 | %
|                                | Construction |                            | $     | 125        |  |          |         | 32,869    |  |          |        | 6.42     |   |   |       |    |  |   |         | 26,526  |  |  |        | 6.34  |  
|                                | Residential  |                            |       | 27         |  |          |         | 155,449   |  |          |        | 30.35    |   |   | $     | 167 |  |   |         | 127,959 |  |  |        | 30.58 |  
|Commercial and industrial       |              |                            | 322   |            |  |          | 110,555 |           |  |          | 21.58  |          |   |   | 520   |     |  |   | 77,276  |         |  |  | 18.47  |      
|Lease financing and individuals |              |                            | 42    |            |  |          | 31,647  |           |  |          | 6.17   |          |   |   | 237   |     |  |   | 32,823  |         |  |  | 7.84   |      
|Unallocated                     |              |                            | 4,300 |            |  |          |        |           |  |          |       |          |   |   | 3,123 |     |  |   |        |         |  |  |       |      
|                                |              |                            |       |            |  |          |         |           |  |          |        |          |   |   |       |     |  |   |         |         |  |  |        |      
|Total                           |              | $                          | 4,816 |            |  | $        | 512,255 |           |  |          | 100.00 | %        |   | $ | 4,047 |     |  | $ | 418,407 |         |  |  | 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, 2003. 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
$0.4 million during 2003, compared to $3.9 million
during 2002 and $4.4 million during 2001. 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.

41



---



##### 



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)
|                                    |  |        
|                                    |  | 2003    |           | 2002 |  | 2001
|                                    |  |         |           |      |  |     
|Demand deposits                     |  | $       | 484,956   |      |  | $    | 446,370   |  |  | $ | 342,112 | 
|Money market accounts               |  |         | 297,332   |      |  |      | 272,141   |  |  |   | 194,306 | 
|Savings accounts                    |  |         | 68,713    |      |  |      | 60,398    |  |  |   | 53,998  | 
|Time deposits of $100,000 or more   |  |         | 88,415    |      |  |      | 92,605    |  |  |   | 155,650 | 
|Time deposits of less than $100,000 |  |         | 70,247    |      |  |      | 73,078    |  |  |   | 77,644  | 
|Checking with interest              |  |         | 115,237   |      |  |      | 82,584    |  |  |   | 64,667  | 
|                                    |  |         |           |      |  |      |           |  |  |   |         | 
|Total                               |  | $       | 1,124,900 |      |  | $    | 1,027,176 |  |  | $ | 888,377 | 
|                                    |  |         |           |      |  |      |           |  |  |   |         | 

At December 31, 2003 and 2002, certificates
of deposits and other time deposits of $100,000 or more totaled
$88.4 million and $92.6 million, respectively. At
December 31, 2003, such deposits classified by time
remaining to maturity were as follows:

|                         |  |         |        | 
|------------------------ |  | ------- | ------ | 
|                         |  | (000s)
|                         |  |        
|3 months or less         |  | $       | 64,636 | 
|Over 3 through 6 months  |  |         | 12,975 | 
|Over 6 through 12 months |  |         | 10,525 | 
|Over 12 months           |  |         | 279    | 
|                         |  |         |        | 
|Total                    |  | $       | 88,415 | 
|                         |  |         |        | 

Total deposits at December 31, 2003
increased 9.5 percent to $1,124.9 million, from
$1,027.2 million at December 31, 2002, an increase of
15.6 percent from $888.4 million at the end of 2001.
Average deposits outstanding increased 14.2 percent in
2003, and 7.5 percent in 2002. Excluding municipal
CDs, which are acquired on a bid basis, total deposits
increased 9.6 percent and 24.8 percent, and average
deposits increased 16.7 percent and 24.6 percent in
2003 and 2002, respectively.

Average non interest bearing deposits increased
18.8 percent or $71.3 million for 2003 compared to
2002, and 27.8 percent or $82.8 million in 2002 compared to
2001, due to the Companys continuing emphasis on
developing this funding source. Average interest bearing
deposits in 2003 increased 11.1 percent or $63.3 million
reflecting increases in checking with interest accounts, money
market accounts, and savings accounts partially offset by
decreases in time deposits. 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 money market deposits increased
$49.9 million in 2003 and $95.6 million in 2002, due
in part to new customer accounts, increased activity and the
addition of new branches.

42



---



##### 



Average checking with interest deposits increased
$22.1 million in 2003 and $15.1 million in 2002
primarily as a result of new customer accounts and increased
activity in existing accounts.

Average time deposits decreased
$15.3 million and $135.7 million in 2003 and 2002,
respectively. These decreases resulted primarily from decreases
in average time deposits of over $100,000, including municipal
CDs, of $16.4 million in 2003 and $135.3 million
in 2002. 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 $6.6 million and $4.6 million in
2003 and 2002, respectively.

In general, deposit rates decreased in both 2003
and 2002 due to a steadily declining interest rate environment.

Time deposits of over $100,000, including
municipal CDs, decreased $4.2 million and
$63.0 million at December 31, 2003 and 2002,
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 decreased
in 2003 by $3.5 million compared to 2002 and increased
$1.5 million in 2002 compared to 2001. 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,   
|                                       |  |                           
|                                       |  |                            |           |         |  |        
|                                       |  | 2003                       |           | 2002    |  | 2001   
|                                       |  | Average                    |           | Average |  | Average
|                                       |  |                            |           |         |  |        
|                                       |  | Amount                     |           | Rate    |  | Amount  |      | Rate |  | Amount |         | Rate
|                                       |  |                            |           |         |  |         |      |      |  |        |         |     
|Demand deposits  Non interest bearing |  | $                          | 451,282   |         |  |         |     |      |  | $      | 380,015 |      |  |  |     |   |  | $ | 297,197 |  |  |  |     |  
|Money market accounts                  |  |                            | 300,566   |         |  |         | 0.68 | %    |  |        | 250,634 |      |  |  | 1.37 | % |  |   | 155,058 |  |  |  | 2.45 | %
|Savings accounts                       |  |                            | 64,184    |         |  |         | 0.23 |      |  |        | 57,629  |      |  |  | 0.60 |   |  |   | 52,988  |  |  |  | 1.15 |  
|Time deposits                          |  |                            | 169,435   |         |  |         | 1.31 |      |  |        | 184,723 |      |  |  | 1.93 |   |  |   | 320,408 |  |  |  | 4.18 |  
|Checking with interest                 |  |                            | 98,852    |         |  |         | 0.26 |      |  |        | 76,759  |      |  |  | 0.69 |   |  |   | 61,697  |  |  |  | 1.07 |  
|                                       |  |                            |           |         |  |         |      |      |  |        |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|Total                                  |  | $                          | 1,084,319 |         |  |         | 0.43 | %    |  | $      | 949,760 |      |  |  | 0.83 | % |  | $ | 887,348 |  |  |  | 2.08 | %
|                                       |  |                            |           |         |  |         |      |      |  |        |         |      |  |  |      |   |  |   |         |  |  |  |      |  

Borrowings

Borrowings with original maturities of one year
or less totaled $198.3 million and $139.2 million at
December 31, 2003 and 2002, 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 $188.1 million and
$188.2 million at December 31, 2003 and 2002,
respectively, consisting of borrowings from the FHLB with
initial stated maturities of ten years and 1 to 4 year
call options.

Interest expense on all borrowings totaled
$10.8 million, $15.1 million and $14.1 million in
2003, 2002 and 2001, respectively. The following table
summarizes the average balances, weighted average interest rates

43



---



##### 



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)
|                                               |  |  |                  |                           
|                                               |  |  |                  | 2003                       |  | 2002 |         | 2001
|                                               |  |  |                  |                            |  |      |         |     
|Average balance:                               |  |  | Short-term       |                            |  | $    | 156,990 |      |  | $ | 148,555 |   |  | $ | 154,311 |  
|                                               |  |  | Other borrowings |                            |  |      | 188,159 |      |  |   | 208,886 |   |  |   | 160,255 |  
|Weighted average interest rate (for the year): |  |  | Short-term       |                            |  |      | 1.1     | %    |  |   | 1.6     | % |  |   | 3.8     | %
|                                               |  |  | Other borrowings |                            |  |      | 4.8     |      |  |   | 6.1     |   |  |   | 5.1     |  
|Weighted average interest rate (at year end):  |  |  | Short-term       |                            |  |      | 1.0     | %    |  |   | 1.3     | % |  |   | 1.8     | %
|                                               |  |  | Other borrowings |                            |  |      | 4.7     |      |  |   | 4.7     |   |  |   | 4.8     |  
|Maximum month-end outstanding amount:          |  |  | Short-term       |                            |  | $    | 198,436 |      |  | $ | 161,757 |   |  | $ | 164,222 |  
|                                               |  |  | Other borrowings |                            |  |      | 188,169 |      |  |   | 209,191 |   |  |   | 209,191 |  

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, 2003, the Bank
had available unused lines of credit of $85 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 $142.4
million or 4.1 percent at December 31, 2003 from $136.8
million at December 31, 2002, which was an increase of
20.7 percent from $113.3 million at December 31, 2001.
In each year, stockholders equity was increased by net
income and the exercise of stock options, partially offset by
cash dividends of $9.5 million and $7.7 million in 2003 and
2002, respectively, and repurchases of outstanding shares of
stock. Stockholders equity also decreased by $10.8 million
at December 31, 2003 and increased by $7.8 million at
December 31, 2002 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, 2003, 2002 and 2001 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

44



---



##### 



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:

|                |         |      |  |      |   |      |  |      |   |  |  |      |  
|--------------- | ------- | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                |         | 2003 |  | 2002 |   | 2001
|                |         |      |  |      |   |     
|Tier 1 capital: |         |      |  |      |   |      |  |      |   |  |  |     
|                | Company |      |  | 15.6 | % |      |  | 17.0 | % |  |  | 15.4 | %
|                | Bank    |      |  | 15.6 |   |      |  | 17.0 |   |  |  | 15.3 |  
|Total capital:  |         |      |  |      |   |      |  |      |   |  |  |     
|                | Company |      |  | 16.9 | % |      |  | 18.3 | % |  |  | 16.5 | %
|                | Bank    |      |  | 16.9 |   |      |  | 18.3 |   |  |  | 16.5 |  

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:

|        |  |      |     |      |  |      |     |   |  |  |     |  
|------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|        |  | 2003 |     | 2002 |  | 2001
|        |  |      |     |      |  |     
|Company |  |      | 8.4 | %    |  |      | 8.3 | % |  |  | 7.9 | %
|Bank    |  |      | 8.4 |      |  |      | 8.3 |   |  |  | 7.9 |  

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, 2003.
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, 2003, include cash and due from banks of
$42.6 million, Federal funds sold of $6.0 million and
$10.0 million of short term U.S. Treasury securities
with 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 $175.3 million at
December 31, 2003. This represented 20.7 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,
$132.7 million, or 18.4 percent of loans at
December 31, 2003, 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.

45



---



##### 



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, 2003, at various terms secured by
FHLB stock owned and to be purchased and certain other assets of
the Bank. The Bank had $35.0 million in advances
outstanding under these lines from the FHLB at December 31,
2003. The Bank borrowed $162.5 million under securities
sold under agreements to repurchase at December 31, 2003,
and had securities totaling $141.1 million at
December 31, 2003 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 three correspondent banks for purchasing Federal funds up
to $30 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, 2003 follows:

|                            |                           |        |         |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |         | 
|--------------------------- | ------------------------- | ------ | ------- | ------------ |  | ------------- | ------ | ------- |  | ----- | ----- | ----- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                            |                           |        |         | After 1 Year |  | After 3 Years |        |         |  |      
|                            |                           | Within |         | but Within   |  | but Within    |        | After   |  |      
|                            |                           | 1 Year |         | 3 Years      |  | 5 Years       |        | 5 Years |  | Total
|                            |                           |        |         |              |  |               |        |         |  |      
|Operating lease obligations |                           | $      | 912     |              |  | $             | 1,533  |         |  | $     | 1,332 |       |  | $ | 4,043  |        |  | $ | 7,820   |        
|                            |                           |        |         |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|Credit Commitments          |                           |        |         |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|                            | Available lines of credit |        | $       | 91,424       |  |               | $      | 22,696  |  |       | $     | 3,552 |  |   | $      | 27,927 |  |   | $       | 145,599 | 
|                            | Other loan commitments    |        |         | 52,041       |  |               |        |        |  |       |       |      |  |   |        |       |  |   |         | 52,041  | 
|                            | Letters of credit         |        |         | 2,490        |  |               |        | 4       |  |       |       |      |  |   |        |       |  |   |         | 2,494   | 
|                            |                           |        |         |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        
|Total                       |                           | $      | 145,955 |              |  | $             | 22,700 |         |  | $     | 3,552 |       |  | $ | 27,927 |        |  | $ | 200,134 |        
|                            |                           |        |         |              |  |               |        |         |  |       |       |       |  |   |        |        |  |   |         |        

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.

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.

46



---



##### 



Quarterly Results of Operations

Set forth below are certain quarterly results of
operations for 2003 and 2002.

|                                  |  |                               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|--------------------------------- |  | ----------------------------- | ------ | ------------- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                  |  |                              
|                                  |  | (000s except per share data)
|                                  |  |                              
|                                  |  |                               |        |              
|                                  |  | 2003 Quarters                 |        | 2002 Quarters
|                                  |  |                               |        |              
|                                  |  | Fourth                        |        | Third         |  | Second |        | First |  | Fourth |        | Third |  | Second |        | First
|                                  |  |                               |        |               |  |        |        |       |  |        |        |       |  |        |        |      
|Interest income                   |  | $                             | 20,596 |               |  | $      | 18,099 |       |  | $      | 18,633 |       |  | $      | 19,192 |       |  | $ | 19,862 |  |  | $ | 21,946 |  |  | $ | 21,891 |  |  | $ | 21,044 | 
|Net interest income               |  |                               | 16,906 |               |  |        | 14,364 |       |  |        | 14,607 |       |  |        | 15,199 |       |  |   | 12,615 |  |  |   | 16,795 |  |  |   | 16,613 |  |  |   | 15,738 | 
|Provision for loan losses         |  |                               | 43     |               |  |        |       |       |  |        | 27     |       |  |        | 367    |       |  |   | 383    |  |  |   | 813    |  |  |   | 1,906  |  |  |   | 800    | 
|Income before income taxes        |  |                               | 9,008  |               |  |        | 7,198  |       |  |        | 8,387  |       |  |        | 11,369 |       |  |   | 4,977  |  |  |   | 9,419  |  |  |   | 7,702  |  |  |   | 8,646  | 
|Net income                        |  |                               | 6,036  |               |  |        | 4,953  |       |  |        | 5,580  |       |  |        | 7,638  |       |  |   | 3,919  |  |  |   | 6,393  |  |  |   | 5,263  |  |  |   | 6,009  | 
|Basic earnings per common share   |  |                               | 0.92   |               |  |        | 0.75   |       |  |        | 0.86   |       |  |        | 1.18   |       |  |   | 0.66   |  |  |   | 1.09   |  |  |   | 0.90   |  |  |   | 1.04   | 
|Diluted earnings per common share |  |                               | 0.90   |               |  |        | 0.73   |       |  |        | 0.84   |       |  |        | 1.15   |       |  |   | 0.63   |  |  |   | 1.07   |  |  |   | 0.88   |  |  |   | 1.01   | 

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, 2003. 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, 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

47



---



##### 



prime rate and federal discount rate, are the
most market sensitive and have the most stable fair values. The
least sensitive instruments include long-term fixed rate loans
and securities and fixed rate savings deposits, which have the
least stable fair value. On those types falling between these
extremes, the management of maturity distributions is as
important as the balances maintained. Management of maturity
distributions involve the matching of interest rate maturities,
as well as principal maturities, and is a key determinant of net
interest income. In periods of rapidly changing interest rates,
an imbalance (gap) between the rate sensitive assets
and liabilities can cause major fluctuations in net interest
income and in earnings. Establishing patterns of sensitivity
which will enhance future growth regardless of frequent shifts
in the market conditions is one of the objectives of the
Companys asset/liability management strategy.


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

The Company uses the simulation analysis to
estimate the effect that specific movements in interest rates
would have on net interest income. This analysis incorporates
management assumptions about the levels of future balance sheet
trends, different patterns of interest rate movements, and
changing relationships between interest rates (i.e. basis risk).
These assumptions have been developed through a combination of
historical analysis and future expected pricing behavior. For a
given level of market interest rate changes, the simulation can
consider the impact of the varying behavior of cash flows from
principal prepayments on the loan portfolio and mortgage-backed
securities, call activities on investment securities, balance
changes on non contractual maturity deposit products (demand
deposits, checking with interest, money market and savings
accounts), and embedded option risk by taking into account the
effects of interest rate caps and floors. The impact of planned
growth and anticipated new business activities is not integrated
into the simulation analysis. The Company can assess the results
of the simulation and, if necessary, implement suitable
strategies to adjust the structure of its assets and liabilities
to reduce potential unacceptable risks to net interest income.
The simulation analysis at December 31, 2003 shows the
Companys net interest income declining slightly if rates
rise or fall.

The Companys policy limit on interest rate
risk is that if interest rates were to gradually increase or
decrease 200 basis points from current rates, the percentage
change in estimated net interest income for the subsequent
12 month measurement period should not decline by more than
5.0 percent. Net interest income is 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, 2003 and 2002. For 2003 and 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, 2003      |      | December 31, 2002     
|                                 |  |                        |      |                       
|+200 basis points                |  |                        | (0.2 | )%                     |  |  | 5.5  | % 
|-100 basis points                |  |                        | (1.4 | )%                     |  |  | (3.1 | )%

The percentage change in estimated net interest
income for the subsequent 12 month measurement period from
December 31, 2003 in the +200 basis points
and  100 basis points scenarios of (0.2)% and
(1.4)%, 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

48



---



##### 



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 Asset/
Liability policy, which has been approved by the Board of
Directors. Additional information on derivative financial
instruments is presented in Note 1 to the Consolidated
Financial Statements.

The Company also prepares a static gap analysis.
The Static Gap as of December 31, 2003 and 2002
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, 2003, the Static
Gap showed a negative cumulative gap of $29.7 million
in the one day to one year repricing period, as compared to a
positive cumulative gap of $217.8 million at
December 31, 2002. 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, 2003 and December 31, 2002 reflects the
results of the Companys efforts to reposition its
portfolios as a result of the continued decline of interest
rates experienced from 2001 through the first half of 2003.
During 2003, the Company sold approximately $124.3 million
of rapidly prepaying mortgage backed securities and
U.S. Agency securities which management believed were
likely to be called within 12 months. The proceeds from
these sales were redeployed into securities with more
predictable cash flows. In addition, during 2003, the Company
gradually reinvested the proceeds from $140 million of
maturing short term U.S. Treasury securities into higher
yielding fixed rate mortgage backed securities with average
lives of less than five years as interest rates began to
stabilize in the second half of the year. Management believes
that this strategy has enabled the Company to be well positioned
for the next cycle of interest rate changes.

49



---



##### 



The tables below set forth the interest rate
sensitivity analysis by repricing date at year end 2003 and 2002.

Interest Rate Sensitivity Analysis By
Repricing Date

December 31, 2003

|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|------------------------------------------ |  | -------------------------- | ------- | -------- |  | ---------- | -------- | ---------- |  | --------- | ------- | -------- |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | 
|                                           |  |                           
|                                           |  | (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                                 |  |                            |        |          |  | $          | 313,974  |            |  | $         | 57,030  |          |  | $     | 257,636 |   |  | $ | 75,551  |   |  | $ | 2,913    |   |  | $ | 707,104   | 
|Mortgage-backed securities                 |  |                            |        |          |  |            | 30,736   |            |  |           | 91,033  |          |  |       | 247,387 |   |  |   | 64,996  |   |  |   |         |   |  |   | 434,152   | 
|Other securities                           |  | $                          | 10,000  |          |  |            | 48,846   |            |  |           | 50,829  |          |  |       | 211,222 |   |  |   | 117,518 |   |  |   |         |   |  |   | 438,415   | 
|Other earning assets                       |  |                            | 6,000   |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   | 1,383   |   |  |   |         |   |  |   | 7,383     | 
|Other assets                               |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 82,459   |   |  |   | 82,459    | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total assets                               |  |                            | 16,000  |          |  |            | 393,556  |            |  |           | 198,892 |          |  |       | 716,245 |   |  |   | 259,448 |   |  |   | 85,372   |   |  |   | 1,669,513 | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Liabilities and stockholders equity:      |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Interest bearing deposits                  |  |                            |        |          |  |            | 396,352  |            |  |           | 43,478  |          |  |       | 15,736  |   |  |   | 184,378 |   |  |   |         |   |  |   | 639,944   | 
|Other borrowed funds                       |  |                            | 75,138  |          |  |            | 100,144  |            |  |           | 22,998  |          |  |       | 50,107  |   |  |   | 138,013 |   |  |   |         |   |  |   | 386,400   | 
|Demand deposits                            |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 484,956  |   |  |   | 484,956   | 
|Other liabilities                          |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 15,853   |   |  |   | 15,853    | 
|Stockholders equity                       |  |                            |        |          |  |            |         |            |  |           |        |          |  |       |        |   |  |   |        |   |  |   | 142,360  |   |  |   | 142,360   | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Total liabilities and stockholders equity |  |                            | 75,138  |          |  |            | 496,496  |            |  |           | 66,476  |          |  |       | 65,843  |   |  |   | 322,391 |   |  |   | 643,169  |   |  |   | 1,669,513 | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Net interest rate sensitivity gap          |  | $                          | (59,138 | )        |  | $          | (102,940 | )          |  | $         | 132,416 |          |  | $     | 650,402 |   |  | $ | (62,943 | ) |  | $ | (557,797 | ) |  |   |          | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap                             |  | $                          | (59,138 | )        |  | $          | (162,078 | )          |  | $         | (29,662 | )        |  | $     | 620,740 |   |  | $ | 557,797 |   |  |   |         |   |  |   |          | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 
|Cumulative gap to interest-earning assets  |  |                            | (3.73   | )%       |  |            | (10.21   | )%         |  |           | (1.87   | )%       |  |       | 39.11   | % |  |   | 35.15   | % |  |   |          |   |  |   |           | 
|                                           |  |                            |         |          |  |            |          |            |  |           |         |          |  |       |         |   |  |   |         |   |  |   |          |   |  |   |           | 

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 |   |  |   | 30,564   |   |  |   |         |   |  |   | 333,999   | 
|Other securities                           |  |                            |        |          |  |            | 172,481 |            |  |           | 70,011  |          |  |       | 89,039  |   |  |   | 88,813   |   |  |   |         |   |  |   | 420,344   | 
|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    | % |  |   |          |   |  |   |           | 
|                                           |  |                            |         |          |  |            |         |            |  |           |         |          |  |       |         |   |  |   |          |   |  |   |          |   |  |   |           | 

50



---



##### 



ITEM 8  FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                                  |                                                                |  |    |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  | -- | -- | 
|INDEPENDENT AUDITORS REPORT                                                                                                                      |                                                                |  | 52 |   
|                                                                                                                                                 
|CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
    31, 2003 AND 2002 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
    ENDED DECEMBER 31, 2003: |                                                                |  |    |   
|                                                                                                                                                  | Consolidated Statements of Income                              |  |    | 53 | 
|                                                                                                                                                  | Consolidated Statements of Comprehensive Income                |  |    | 54 | 
|                                                                                                                                                  | Consolidated Balance Sheets                                    |  |    | 55 | 
|                                                                                                                                                  | Consolidated Statements of Changes in
    Stockholders Equity |  |    | 56 | 
|                                                                                                                                                  | Consolidated Statements of Cash Flows                          |  |    | 57 | 
|                                                                                                                                                  | Notes to Consolidated Financial Statements                     |  |    | 58 | 
|MANAGEMENTS REPORT TO THE STOCKHOLDERS                                                                                                           |                                                                |  | 76 |   
|INDEPENDENT ACCOUNTANTS REPORT                                                                                                                   |                                                                |  | 78 |   

51



---



##### 



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, 2003 and 2002 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,
2003. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United
States of America.

DELOITTE & TOUCHE LLP

Stamford, Connecticut

February 9, 2004


52



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2003,
2002 and 2001


Dollars in thousands, except per share
amounts


|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------------- | -------------------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                |                                  | 2003 |        | 2002   |  | 2001
|                                                                                |                                  |      |        |        |  |     
|Interest Income:                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Loans, including fees                                                           |                                  | $    | 48,098 |        |  | $    | 48,469 |        |  | $ | 48,042 |       
|Securities:                                                                     |                                  |      |        |        |  |      |        |        |  |   |        |       
|                                                                                | Taxable                          |      |        | 19,707 |  |      |        | 27,098 |  |   |        | 33,804 | 
|                                                                                | Exempt from Federal income taxes |      |        | 8,146  |  |      |        | 7,774  |  |   |        | 7,273  | 
|Federal funds sold                                                              |                                  |      | 555    |        |  |      | 1,364  |        |  |   | 759    |       
|Deposits in banks                                                               |                                  |      | 14     |        |  |      | 38     |        |  |   |       |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total interest income                                                           |                                  |      | 76,520 |        |  |      | 84,743 |        |  |   | 89,878 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Interest Expense:                                                               |                                  |      |        |        |  |      |        |        |  |   |        |       
|Deposits                                                                        |                                  |      | 4,671  |        |  |      | 7,885  |        |  |   | 18,450 |       
|Securities sold under repurchase agreements and
    other short-term borrowings |                                  |      | 1,730  |        |  |      | 2,317  |        |  |   | 5,855  |       
|Other borrowings                                                                |                                  |      | 9,043  |        |  |      | 12,780 |        |  |   | 8,212  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total interest expense                                                          |                                  |      | 15,444 |        |  |      | 22,982 |        |  |   | 32,517 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Net Interest Income                                                             |                                  |      | 61,076 |        |  |      | 61,761 |        |  |   | 57,361 |       
|Provision for loan losses                                                       |                                  |      | 437    |        |  |      | 3,902  |        |  |   | 4,380  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Net interest income after provision for loan
    losses                         |                                  |      | 60,639 |        |  |      | 57,859 |        |  |   | 52,981 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Non Interest Income:                                                            |                                  |      |        |        |  |      |        |        |  |   |        |       
|Service charges                                                                 |                                  |      | 1,715  |        |  |      | 1,599  |        |  |   | 1,192  |       
|Realized gain (loss) on sales of securities, net                                |                                  |      | 5,408  |        |  |      | 54     |        |  |   | (180   | )     
|Other income                                                                    |                                  |      | 1,534  |        |  |      | 1,748  |        |  |   | 1,419  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total non interest income                                                       |                                  |      | 8,657  |        |  |      | 3,401  |        |  |   | 2,431  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Non Interest Expense:                                                           |                                  |      |        |        |  |      |        |        |  |   |        |       
|Salaries and employee benefits                                                  |                                  |      | 19,006 |        |  |      | 17,118 |        |  |   | 15,262 |       
|Occupancy                                                                       |                                  |      | 2,879  |        |  |      | 2,501  |        |  |   | 2,307  |       
|Professional services                                                           |                                  |      | 3,254  |        |  |      | 2,934  |        |  |   | 2,212  |       
|Equipment                                                                       |                                  |      | 1,759  |        |  |      | 1,936  |        |  |   | 1,887  |       
|Business development                                                            |                                  |      | 1,422  |        |  |      | 1,490  |        |  |   | 1,119  |       
|FDIC assessment                                                                 |                                  |      | 177    |        |  |      | 164    |        |  |   | 166    |       
|Other operating expenses                                                        |                                  |      | 4,837  |        |  |      | 4,373  |        |  |   | 4,083  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Total non interest expense                                                      |                                  |      | 33,334 |        |  |      | 30,516 |        |  |   | 27,036 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Income Before Income Taxes                                                      |                                  |      | 35,962 |        |  |      | 30,744 |        |  |   | 28,376 |       
|Income Taxes                                                                    |                                  |      | 11,755 |        |  |      | 9,160  |        |  |   | 9,495  |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Net Income                                                                      |                                  | $    | 24,207 |        |  | $    | 21,584 |        |  | $ | 18,881 |       
|                                                                                |                                  |      |        |        |  |      |        |        |  |   |        |       
|Basic Earnings Per Common Share                                                 |                                  | $    | 3.71   |        |  | $    | 3.36   |        |  | $ | 2.99   |       
|Diluted Earnings Per Common Share                                               |                                  | $    | 3.62   |        |  | $    | 3.27   |        |  | $ | 2.91   |       

See notes to consolidated financial statements.

53



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

For the years ended December 31, 2003,
2002 and 2001


Dollars in thousands


|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                              |  | 2003 |         | 2002 |  | 2001
|                                                                                              |  |      |         |      |  |     
|Net Income                                                                                    |  | $    | 24,207  |      |  | $    | 21,584 |   |  | $ | 18,881 |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|Other comprehensive (loss) income, net of
    tax:                                            |  |      |         |      |  |      |        |   |  |   |        |  
|Unrealized holding (loss) gain on securities
    available for sale arising during the year   |  |      | (11,784 | )    |  |      | 12,182 |   |  |   | 9,307  |  
|Income tax effect                                                                             |  |      | 4,417   |      |  |      | (4,340 | ) |  |   | (3,867 | )
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|                                                                                              |  |      | (7,367  | )    |  |      | 7,842  |   |  |   | 5,440  |  
|Reclassification adjustment for net
    (gain) loss realized on securities available for sale |  |      | (5,408  | )    |  |      | (54    | ) |  |   | 180    |  
|Income tax effect                                                                             |  |      | 1,992   |      |  |      | 22     |   |  |   | (75    | )
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|                                                                                              |  |      | (3,416  | )    |  |      | (32    | ) |  |   | 105    |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|Unrealized holding (loss) gain on securities, net                                             |  |      | (10,783 | )    |  |      | 7,810  |   |  |   | 5,545  |  
|Minimum pension liability adjustment                                                          |  |      | (174    | )    |  |      | (235   | ) |  |   | (17    | )
|Income tax effect                                                                             |  |      | 69      |      |  |      | 98     |   |  |   | 7      |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|                                                                                              |  |      | (105    | )    |  |      | (137   | ) |  |   | (10    | )
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|Other comprehensive (loss) income                                                             |  |      | (10,888 | )    |  |      | 7,673  |   |  |   | 5,535  |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  
|Comprehensive Income                                                                          |  | $    | 13,319  |      |  | $    | 29,257 |   |  | $ | 24,416 |  
|                                                                                              |  |      |         |      |  |      |        |   |  |   |        |  

See notes to consolidated financial statements.

54



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


Dollars in thousands, except per share and
share amounts


|                                                                                                                                               |                      |      |           |           |  |   |           |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                                                                                                                               |                      | 2003 |           | 2002     
|                                                                                                                                               |                      |      |           |          
|ASSETS                                                                                                                                         |                      |      |           |           |  |   |           |          
|Cash and due from banks                                                                                                                        |                      | $    | 42,558    |           |  | $ | 48,350    |          
|Federal funds sold                                                                                                                             |                      |      | 6,000     |           |  |   | 29,393    |          
|Securities available for sale, at estimated fair
    value (amortized cost of $856,651 in 2003 and $721,933 in 2002)                           |                      |      | 861,410   |           |  |   | 743,884   |          
|Federal Home Loan Bank of New York
    (FHLB) stock                                                                                            |                      |      | 11,157    |           |  |   | 10,459    |          
|Loans (net of allowance for loan losses of
    $11,441 in 2003 and $11,510 in 2002)                                                            |                      |      | 707,104   |           |  |   | 642,438   |          
|Accrued interest and other receivables                                                                                                         |                      |      | 10,778    |           |  |   | 9,043     |          
|Premises and equipment, net                                                                                                                    |                      |      | 14,436    |           |  |   | 12,629    |          
|Other real estate owned                                                                                                                        |                      |      |          |           |  |   | 1,831     |          
|Deferred income taxes, net                                                                                                                     |                      |      | 5,760     |           |  |   |          |          
|Other assets                                                                                                                                   |                      |      | 10,310    |           |  |   | 8,856     |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|TOTAL ASSETS                                                                                                                                   |                      | $    | 1,669,513 |           |  | $ | 1,506,883 |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|LIABILITIES                                                                                                                                    |                      |      |           |           |  |   |           |          
|Deposits:                                                                                                                                      |                      |      |           |           |  |   |           |          
|                                                                                                                                               | Non interest-bearing |      | $         | 484,956   |  |   | $         | 446,370   | 
|                                                                                                                                               | Interest-bearing     |      |           | 639,944   |  |   |           | 580,806   | 
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|                                                                                                                                               | Total deposits       |      |           | 1,124,900 |  |   |           | 1,027,176 | 
|Securities sold under repurchase agreements and
    other short-term borrowings                                                                |                      |      | 198,256   |           |  |   | 139,212   |          
|Other borrowings                                                                                                                               |                      |      | 188,144   |           |  |   | 188,171   |          
|Deferred income taxes, net                                                                                                                     |                      |      |          |           |  |   | 825       |          
|Accrued interest and other liabilities                                                                                                         |                      |      | 15,852    |           |  |   | 14,692    |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|TOTAL LIABILITIES                                                                                                                              |                      |      | 1,527,152 |           |  |   | 1,370,076 |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|Commitments and contingencies (Note
    10)                                                                                                    |                      |      |           |           |  |   |           |          
|                                                                                                                                              
|STOCKHOLDERS EQUITY                                                                                                                           |                      |      |           |           |  |   |           |          
|Common Stock, $0.20 par value; authorized
    10,000,000 shares; outstanding 6,586,816 and 5,887,600
    shares in 2003 and 2002, respectively |                      |      | 1,519     |           |  |   | 1,366     |          
|Additional paid-in capital                                                                                                                     |                      |      | 165,562   |           |  |   | 146,393   |          
|Retained earnings                                                                                                                              |                      |      | 1,304     |           |  |   | 894       |          
|Accumulated other comprehensive income                                                                                                         |                      |      | 1,800     |           |  |   | 12,688    |          
|Treasury stock, at cost; 1,009,374 and
    940,329 shares in 2003 and 2002, respectively                                                       |                      |      | (27,824   | )         |  |   | (24,534   | )        
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|Total stockholders equity                                                                                                                     |                      |      | 142,361   |           |  |   | 136,807   |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          
|TOTAL LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                 |                      | $    | 1,669,513 |           |  | $ | 1,506,883 |          
|                                                                                                                                               |                      |      |           |           |  |   |           |          

See notes to consolidated financial statements.

55



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the years ended December 31, 2003,
2002 and 2001


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, 2001                               |  |             | 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 |  
|Net income                                               |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | 24,207  |   |  |   |         |   |  |   | 24,207  |  
|Exercise of stock options, net of tax                    |  |             | 168,998   |        |  |          | 33    |            |  |          |         |               |  |       | 4,724   |  |  |   |         |   |  |   |         |   |  |   | 4,757   |  
|Purchase of treasury stock                               |  |             | (89,416   | )      |  |          |       |            |  |          | (3,833  | )             |  |       |         |  |  |   |         |   |  |   |         |   |  |   | (3,833  | )
|Sale of treasury stock                                   |  |             | 20,371    |        |  |          |       |            |  |          | 543     |               |  |       | 301     |  |  |   |         |   |  |   |         |   |  |   | 844     |  
|Stock dividend                                           |  |             | 599,263   |        |  |          | 120   |            |  |          |         |               |  |       | 14,144  |  |  |   | (14,264 | ) |  |   |         |   |  |   |        |  
|Cash dividends                                           |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   | (9,533  | ) |  |   |         |   |  |   | (9,533  | )
|Minimum pension liability adjustment                     |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (105    | ) |  |   | (105    | )
|Net unrealized gain on securities available for
    sale |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   | (10,783 | ) |  |   | (10,783 | )
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                             |  |             | 6,586,816 |        |  | $        | 1,519 |            |  | $        | (27,824 | )             |  | $     | 165,562 |  |  | $ | 1,304   |   |  | $ | 1,800   |   |  | $ | 142,361 |  
|                                                         |  |             |           |        |  |          |       |            |  |          |         |               |  |       |         |  |  |   |         |   |  |   |         |   |  |   |         |  

See notes to consolidated financial statements.

56



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the years ended December 31, 2003,
2002 and 2001


Dollars in thousands


|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |       | 
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---- | ---------- | ------ | - | ---- | -------- | ----- | - | - | -------- | ----- | 
|                                                                                                           |                                                    | 2003 |            | 2002   |   | 2001
|                                                                                                           |                                                    |      |            |        |   |     
|Operating Activities:                                                                                      |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Net income                                                                                                 |                                                    | $    | 24,207     |        |   | $    | 21,584   |       |   | $ | 18,881   |      
|Adjustments to reconcile net income to net cash
    provided by operating activities:                      |                                                    |      |            |        |   |      |          |       |   |   |          |      
|                                                                                                           | Provision for loan losses                          |      |            | 437    |   |      |          | 3,902 |   |   |          | 4,380 | 
|                                                                                                           | Depreciation and amortization                      |      |            | 1,703  |   |      |          | 1,703 |   |   |          | 1,841 | 
|                                                                                                           | Realized (gain) loss on security transactions, net |      |            | (5,408 | ) |      |          | (54   | ) |   |          | 180   | 
|                                                                                                           | Amortization of premiums on securities, net        |      |            | 4,284  |   |      |          | 1,340 |   |   |          | 1,217 | 
|                                                                                                           | Realized gain on sale of OREO                      |      |            | (850   | ) |      |          |      |   |   |          |      | 
|                                                                                                           | Stock option expense and related tax benefits      |      |            | 843    |   |      |          | 592   |   |   |          | 321   | 
|Deferred taxes (benefit)                                                                                   |                                                    |      | (107       | )      |   |      | (7,353   | )     |   |   | (1,629   | )    
|Increase (decrease) in deferred loan fees                                                                  |                                                    |      | 355        |        |   |      | (17      | )     |   |   | 141      |      
|(Increase) decrease in accrued interest and other
    receivables                                          |                                                    |      | (1,735     | )      |   |      | (67      | )     |   |   | 5,628    |      
|Increase in other assets                                                                                   |                                                    |      | (1,454     | )      |   |      | (695     | )     |   |   | (894     | )    
|Increase (decrease) in accrued interest and
    other liabilities                                          |                                                    |      | 1,160      |        |   |      | 636      |       |   |   | (598     | )    
|Other changes, net                                                                                         |                                                    |      | (173       | )      |   |      | (45      | )     |   |   | 79       |      
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Net cash provided by operating
    activities                                                              |                                                    |      | 23,262     |        |   |      | 21,526   |       |   |   | 29,547   |      
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Investing Activities:                                                                                      |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Net (increase) decrease in short-term
    investments                                                      |                                                    |      | 23,393     |        |   |      | 46,907   |       |   |   | (69,000  | )    
|Increase in FHLB stock                                                                                     |                                                    |      | (698       | )      |   |      |         |       |   |   | (998     | )    
|Proceeds from maturities of securities available
    for sale                                              |                                                    |      | 1,357,857  |        |   |      | 788,712  |       |   |   | 311,796  |      
|Proceeds from sales of securities available for
    sale                                                   |                                                    |      | 129,749    |        |   |      | 775      |       |   |   | 47,835   |      
|Purchases of securities available for sale                                                                 |                                                    |      | (1,621,201 | )      |   |      | (898,320 | )     |   |   | (320,721 | )    
|Decrease in receivable for securities sold                                                                 |                                                    |      |           |        |   |      |         |       |   |   | 44,326   |      
|Decrease in payable for securities purchased                                                               |                                                    |      |           |        |   |      |         |       |   |   | (14,913  | )    
|Net increase in loans                                                                                      |                                                    |      | (65,458    | )      |   |      | (45,946  | )     |   |   | (98,797  | )    
|Proceeds from sale of OREO                                                                                 |                                                    |      | 2,681      |        |   |      |         |       |   |   |         |      
|Net purchases of premises and equipment                                                                    |                                                    |      | (3,510     | )      |   |      | (2,203   | )     |   |   | (625     | )    
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Net cash used in investing
    activities                                                                  |                                                    |      | (177,187   | )      |   |      | (110,075 | )     |   |   | (101,097 | )    
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Financing Activities:                                                                                      |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Proceeds from issuance of common stock                                                                     |                                                    |      | 3,914      |        |   |      | 3,000    |       |   |   | 2,857    |      
|Proceeds from sale of treasury stock                                                                       |                                                    |      | 844        |        |   |      | 302      |       |   |   | 573      |      
|Net increase in deposits                                                                                   |                                                    |      | 97,724     |        |   |      | 138,799  |       |   |   | 8,802    |      
|Cash dividends paid                                                                                        |                                                    |      | (9,533     | )      |   |      | (7,737   | )     |   |   | (6,351   | )    
|Repayment of other borrowings                                                                              |                                                    |      | (27        | )      |   |      | (21,020  | )     |   |   | (18      | )    
|Proceeds from other borrowings                                                                             |                                                    |      |           |        |   |      |         |       |   |   | 121,250  |      
|Net increase (decrease) in securities sold under
    repurchase agreements and other short-term borrowings |                                                    |      | 59,044     |        |   |      | (4,317   | )     |   |   | (54,343  | )    
|Purchase of treasury stock                                                                                 |                                                    |      | (3,833     | )      |   |      | (1,949   | )     |   |   | (1,819   | )    
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Net cash provided by financing
    activities                                                              |                                                    |      | 148,133    |        |   |      | 107,078  |       |   |   | 70,951   |      
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Increase (decrease) in Cash and Due from
    Banks                                                         |                                                    |      | (5,792     | )      |   |      | 18,529   |       |   |   | (599     | )    
|Cash and due from banks, beginning of year                                                                 |                                                    |      | 48,350     |        |   |      | 29,821   |       |   |   | 30,420   |      
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Cash and due from banks, end of year                                                                       |                                                    | $    | 42,558     |        |   | $    | 48,350   |       |   | $ | 29,821   |      
|                                                                                                           |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Supplemental Disclosures:                                                                                  |                                                    |      |            |        |   |      |          |       |   |   |          |      
|Interest paid                                                                                              |                                                    | $    | 16,325     |        |   | $    | 23,452   |       |   | $ | 34,021   |      
|Income tax payments                                                                                        |                                                    |      | 11,491     |        |   |      | 17,332   |       |   |   | 10,031   |      
|Change in unrealized gain (loss) on securities
    available for sale  net of tax                         |                                                    |      | (10,783    | )      |   |      | 7,810    |       |   |   | 5,545    |      

See notes to consolidated financial statements.

57



---



##### 



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 14 branches and a business center in
Westchester County, New York, two branches in Bronx County, New
York one branch in Manhattan, New York, a loan production
office in Dutchess County, New York and a loan production office
in Queens County, 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 to maturity,
representing securities the Bank has the ability and positive
intent to hold until maturity. Securities available for sale are
reported at fair value with unrealized gains and losses (net of
tax) excluded from operations and reported in other
comprehensive income. Securities held to maturity are stated at
amortized cost. There were no securities held to maturity at
December 31, 2003 and 2002. The amortization of premiums
and accretion of discounts is determined by using the level
yield method to the earlier of the call or maturity date.
Securities are not acquired for purposes of engaging in trading
activities. Realized gains and losses from sales of securities
are determined using the specific identification method.

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

Interest Rate Contracts The Company, from time to time, uses
various interest rate contracts such as forward rate agreements,
interest rate swaps, caps and floors, primarily as hedges
against specific assets and liabilities. Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging
Activities  Deferral of the Effective Date of SFAS
Statement No. 133 and as amended by SFAS
No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities requires
that all derivative instruments, including interest rate
contracts, be recorded on the balance sheet at their fair value.
Changes in the fair value of derivative instruments are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
There were no interest rate contracts outstanding as of
December 31, 2003. The Company had two interest rate floor
contracts which expired on June 1, 2003, one with a
notional value of $25 million with a 4.5% strike rate and
one with a notional value of $25 million and a 4.0% strike
rate, which did not qualify for hedge accounting under SFAS
No. 133. Accordingly, the contracts were accounted for at
fair value with the resulting net gains of $25, $1,105 and $832
included in other income during 2003, 2002 and 2001,
respectively.

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

58



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 and 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,
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 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.

59



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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. The Company accounts for
stock-based compensation in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123 (SFAS No. 148).
SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting
for stock-based compensation. Prior to 2002, the Company
accounted for stock-based employee compensation plans under the
recognition and measurement provisions of Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, and related interpretations.
Accordingly, no stock-based employee compensation cost was
recorded 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. 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 2003 and 2002 net income is less than that which would have
been recognized if the fair value method had been applied to all
stock options granted since the original effective date of SFAS
No. 123. Non-employee stock options are expensed as of the
date of grant.

60



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                                                                                                                                                        |                       |                         
|                                                                                                                                                        |                       | 2003                     |        | 2002 |  | 2001
|                                                                                                                                                        |                       |                          |        |      |  |     
|Net income, as reported                                                                                                                                 |                       | $                        | 24,207 |      |  | $    | 21,584 |      |  | $ | 18,881 |     
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                          |                       |                          | 157    |      |  |      | 204    |      |  |   |       |     
|Deduct: Total stock-based employee compensation
    expense determined under the fair value based method for all
    awards, net of related tax effects |                       |                          | (183   | )    |  |      | (256   | )    |  |   | (222   | )   
|                                                                                                                                                        |                       |                          |        |      |  |      |        |      |  |   |        |     
|Pro forma net income                                                                                                                                    |                       | $                        | 24,181 |      |  | $    | 21,532 |      |  | $ | 18,659 |     
|                                                                                                                                                        |                       |                          |        |      |  |      |        |      |  |   |        |     
|                                                                                                                                                       
|Earnings per share:                                                                                                                                     |                       |                          |        |      |  |      |        |      |  |   |        |     
|                                                                                                                                                        | Basic  as reported   |                          | $      | 3.71 |  |      | $      | 3.36 |  |   | $      | 2.99 | 
|                                                                                                                                                        | Basic  pro forma     |                          |        | 3.70 |  |      |        | 3.35 |  |   |        | 2.95 | 
|                                                                                                                                                       
|                                                                                                                                                        | Diluted  as reported |                          | $      | 3.62 |  |      | $      | 3.27 |  |   | $      | 2.91 | 
|                                                                                                                                                        | Diluted  pro forma   |                          |        | 3.62 |  |      |        | 3.26 |  |   |        | 2.87 | 

The fair value (present value of the estimated
future benefit to the option holder) of each option grant in
2003, 2002 and 2001 is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2003, 2002 and 2001,
respectively: dividend yield of 4.1%, 3.8% and 3.5%; average
expected volatility of 8%, 9%, and 10% and average risk-free
interest rates of 2.69%, 4.11% and 4.36% and expected life of
5 years for 2003 and 2002, and 6 years for 2001. All
option grants expire within 10 years of the date of grant.
The weighted average fair value of options granted during 2003,
2002 and 2001, including the effects of 10% stock dividends
declared in 2003, 2002 and 2001, was $1.27, $2.18 and $2.55,
respectively.

Earnings per Common Share SFAS No. 128, Earnings per
Share, establishes standards for computing and presenting
earnings per share. The statement requires disclosure of basic
earnings per common share (i.e. common stock equivalents are not
considered) and diluted earnings per common share (i.e. common
stock equivalents are considered using the treasury stock
method) on the face of the statement of operations, along with a
reconciliation of the numerator and denominator of basic and
diluted earnings per share. Basic earnings per common share are
computed by dividing net income by the weighted average number
of common shares outstanding during the period. The computation
of diluted earnings per common share is similar to the
computation of basic earnings per share except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive
potential common shares, consisting solely of stock options, had
been issued.

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

|                                |  |      |           |      |  |      |           |  |  |  |           | 
|------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                |  | 2003 |           | 2002 |  | 2001
|                                |  |      |           |      |  |     
|Weighted average common shares: |  |      |           |      |  |      |           |  |  |  |           | 
|Basic                           |  |      | 6,532,625 |      |  |      | 6,432,667 |  |  |  | 6,320,437 | 
|Effect of stock options         |  |      | 149,611   |      |  |      | 176,603   |  |  |  | 170,276   | 
|Diluted                         |  |      | 6,682,236 |      |  |      | 6,609,270 |  |  |  | 6,490,713 | 

In December 2003, 2002 and 2001, 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.

61



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Recent Accounting Pronouncements

Accounting 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 did not have a significant effect on
the Companys financial position or results of operations.

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

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

Amendment of Statement 133 on Derivative
Instruments and Hedging
Activities In April
2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). The statement
clarifies and amends financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). In
general, SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for derivative
instruments designated as hedges after June 30, 2003. The
adoption of SFAS No. 149 by the Company on July 1,
2003 did not have any impact on its financial position or
results of operations.

62



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

Other Certain 2002 and 2001 amounts have
been reclassified to conform to the 2003 presentation.

2  Securities

|                                                 |  |             |         |                  |  |        |        |           |  |                  |       |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |     |  |  |   |         | 
|------------------------------------------------ |  | ----------- | ------- | ---------------- |  | ------ | ------ | --------- |  | ---------------- | ----- | ----- |  | ------ | ------- | ----- |  | - | ------- |  |  | - | ------ |  |  | - | --- |  |  | - | ------- | 
|                                                 |  |            
|                                                 |  | December 31
|                                                 |  |            
|                                                 |  |             |         |                 
|                                                 |  | 2003        |         | 2002            
|                                                 |  |             |         |                 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |       |      
|                                                 |  |             |         | 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            |  | $           | 187,388 |                  |  | $      | 420    |           |  | $                | 742   |       |  | $      | 187,066 |       |  | $ | 223,005 |  |  | $ | 1,671  |  |  | $ | 2   |  |  | $ | 224,674 | 
|Mortgage-backed securities                       |  |             | 437,200 |                  |  |        | 1,935  |           |  |                  | 4,983 |       |  |        | 434,152 |       |  |   | 323,898 |  |  |   | 10,309 |  |  |   | 208 |  |  |   | 333,999 | 
|Obligations of states and political subdivisions |  |             | 183,057 |                  |  |        | 8,188  |           |  |                  | 544   |       |  |        | 190,701 |       |  |   | 167,346 |  |  |   | 9,469  |  |  |   | 4   |  |  |   | 176,811 | 
|Other debt securities                            |  |             | 28,030  |                  |  |        | 365    |           |  |                  | 379   |       |  |        | 28,016  |       |  |   | 6,714   |  |  |   | 288    |  |  |   |    |  |  |   | 7,002   | 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |       |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |     |  |  |   |         | 
|Total debt securities                            |  |             | 835,675 |                  |  |        | 10,908 |           |  |                  | 6,648 |       |  |        | 839,935 |       |  |   | 720,963 |  |  |   | 21,737 |  |  |   | 214 |  |  |   | 742,486 | 
|Mutual funds and other equity securities         |  |             | 20,976  |                  |  |        | 581    |           |  |                  | 82    |       |  |        | 21,475  |       |  |   | 970     |  |  |   | 428    |  |  |   |    |  |  |   | 1,398   | 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |       |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |     |  |  |   |         | 
|Total                                            |  | $           | 856,651 |                  |  | $      | 11,489 |           |  | $                | 6,730 |       |  | $      | 861,410 |       |  | $ | 721,933 |  |  | $ | 22,165 |  |  | $ | 214 |  |  | $ | 743,884 | 
|                                                 |  |             |         |                  |  |        |        |           |  |                  |       |       |  |        |         |       |  |   |         |  |  |   |        |  |  |   |     |  |  |   |         | 

At December 31, 2003, securities having a
stated value of approximately $389,277 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 $5,408 and $54 and gross losses of
$180 were recorded as a result of securities available for sale
sold or redeemed in 2003, 2002 and 2001 respectively. Applicable
income taxes (benefit) relating to such transactions were
$1,992, $22 and $(75) in 2003, 2002 and 2001, respectively.

63



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reflects the Companys
investments fair value and gross unrealized loss,
aggregated by investment category and length of time the
individual securities have been in a continuous unrealized loss
position, as of December 31, 2003:

|                                                 |                                       |                             |         |                        |  |            |       |            |  |            |    |            |  |   |   |   |  |   |         |         |  |   |       |       | 
|------------------------------------------------ | ------------------------------------- | --------------------------- | ------- | ---------------------- |  | ---------- | ----- | ---------- |  | ---------- | -- | ---------- |  | - | - | - |  | - | ------- | ------- |  | - | ----- | ----- | 
|                                                 |                                       |                             |         |                        |  |           
|                                                 |                                       | Duration of Unrealized Loss |         |                        |  |           
|                                                 |                                       |                             |         |                        |  |           
|                                                 |                                       |                             |         |                        |  |           
|                                                 |                                       | Less than 12 months         |         | Greater than 12 months |  | Total     
|                                                 |                                       |                             |         |                        |  |           
|                                                 |                                       |                             |         | Gross                  |  |            |       | Gross      |  |            |    | Gross     
|                                                 |                                       |                             |         | Unrealized             |  |            |       | Unrealized |  |            |    | Unrealized
|                                                 |                                       | Fair Value                  |         | Losses                 |  | Fair Value |       | Losses     |  | Fair Value |    | Losses    
|                                                 |                                       |                             |         |                        |  |            |       |            |  |            |    |           
|Classified as Available for Sale                 |                                       |                             |         |                        |  |            |       |            |  |            |    |            |  |   |   |   |  |   |         |         |  |   |       |      
|U.S. Treasury and government agencies            |                                       | $                           | 102,811 |                        |  | $          | 742   |            |  |            |   |            |  |   |  |   |  | $ | 102,811 |         |  | $ | 742   |      
|Mortgage-backed securities                       |                                       |                             | 345,896 |                        |  |            | 4,983 |            |  |            |   |            |  |   |  |   |  |   | 345,896 |         |  |   | 4,983 |      
|Obligations of states and political subdivisions |                                       |                             | 21,393  |                        |  |            | 544   |            |  |            |   |            |  |   |  |   |  |   | 21,393  |         |  |   | 544   |      
|Other debt securities                            |                                       |                             | 21,219  |                        |  |            | 379   |            |  |            |   |            |  |   |  |   |  |   | 21,219  |         |  |   | 379   |      
|                                                 |                                       |                             |         |                        |  |            |       |            |  |            |    |            |  |   |   |   |  |   |         |         |  |   |       |      
|Total debt securities                            |                                       |                             | 491,319 |                        |  |            | 6,648 |            |  |            |   |            |  |   |  |   |  |   | 491,319 |         |  |   | 6,648 |      
|Mutual funds and other equity securities         |                                       |                             | 19,919  |                        |  |            | 80    |            |  | $          | 13 |            |  | $ | 2 |   |  |   | 19,932  |         |  |   | 82    |      
|                                                 |                                       |                             |         |                        |  |            |       |            |  |            |    |            |  |   |   |   |  |   |         |         |  |   |       |      
|                                                 | Total temporarily impaired securities |                             | $       | 511,238                |  |            | $     | 6,728      |  |            | $  | 13         |  |   | $ | 2 |  |   | $       | 511,251 |  |   | $     | 6,730 | 
|                                                 |                                       |                             |         |                        |  |            |       |            |  |            |    |            |  |   |   |   |  |   |         |         |  |   |       |      

The Company has the ability and intent to hold
its securities to maturity. There have been no downgrades in
credit ratings of securities in the Companys portfolio,
and all of the Companys securities continue to be readily
marketable. Based on these and other factors, the Company has
concluded that the impairment in the market value of the above
securities is primarily the result of changes in interest rates
since the securities were acquired and is considered to be
temporary in nature. The total number of securities in the
Companys portfolio that were in an unrealized loss
position at December 31, 2003 was 200.

The contractual maturity of all debt securities
held at December 31, 2003 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               |  | $                  | 23,911  |       |  | $ | 24,061  | 
|After 1 but within 5 years  |  |                    | 162,417 |       |  |   | 164,382 | 
|After 5 but within 10 years |  |                    | 57,199  |       |  |   | 60,243  | 
|After 10 years              |  |                    | 154,948 |       |  |   | 157,097 | 
|Mortgage-backed Securities  |  |                    | 437,200 |       |  |   | 434,152 | 
|                            |  |                    |         |       |  |   |         | 
|Total                       |  | $                  | 835,675 |       |  | $ | 839,935 | 
|                            |  |                    |         |       |  |   |         | 

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

64



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

|                   |  |          |         |          |  |   |         | 
|------------------ |  | -------- | ------- | -------- |  | - | ------- | 
|                   |  | 2003     |         | 2002    
|                   |  | Contract |         | Contract
|                   |  | Amount   |         | Amount  
|                   |  |          |         |         
|Credit commitments |  | $        | 197,640 |          |  | $ | 129,442 | 
|Guarantees written |  | $        | 2,494   |          |  | $ | 5,287   | 

The majority of loan commitments have terms up to
one year, with either a floating interest rate or contracted
fixed interest rates ranging from 3.50% to 7.75%. 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 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
|                   |  |             |         |            |  |      
|2003               |  |             |         |            |  |       |         |  |  |   |         | 
|Loans              |  | $           | 156,334 |            |  | $     | 431,504 |  |  | $ | 587,838 | 
|Credit commitments |  |             | 34,532  |            |  |       | 76,523  |  |  |   | 111,055 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 
|                   |  | $           | 190,866 |            |  | $     | 508,027 |  |  | $ | 698,893 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 
|2002               |  |             |         |            |  |       |         |  |  |   |         | 
|Loans              |  | $           | 181,564 |            |  | $     | 342,360 |  |  | $ | 523,924 | 
|Credit commitments |  |             | 27,269  |            |  |       | 76,223  |  |  |   | 103,492 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 
|                   |  | $           | 208,833 |            |  | $     | 418,583 |  |  | $ | 627,416 | 
|                   |  |             |         |            |  |       |         |  |  |   |         | 

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.

65



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4  Loans

The loan portfolio is comprised of the following:

|                          |              |             |         |         |  |   |         |         | 
|------------------------- | ------------ | ----------- | ------- | ------- |  | - | ------- | ------- | 
|                          |              |            
|                          |              | December 31
|                          |              |            
|                          |              | 2003        |         | 2002   
|                          |              |             |         |        
|Real Estate:              |              |             |         |         |  |   |         |        
|                          | Commercial   |             | $       | 241,566 |  |   | $       | 231,411 | 
|                          | Construction |             |         | 60,892  |  |   |         | 56,691  | 
|                          | Residential  |             |         | 178,518 |  |   |         | 164,287 | 
|Commercial and industrial |              |             | 218,130 |         |  |   | 179,288 |        
|Individuals               |              |             | 15,256  |         |  |   | 14,509  |        
|Lease financing           |              |             | 6,000   |         |  |   | 9,224   |        
|                          |              |             |         |         |  |   |         |        
|Total                     |              |             | 720,362 |         |  |   | 655,410 |        
|Deferred loan fees        |              |             | (1,817  | )       |  |   | (1,462  | )      
|Allowance for loan losses |              |             | (11,441 | )       |  |   | (11,510 | )      
|                          |              |             |         |         |  |   |         |        
|Loans, net                |              | $           | 707,104 |         |  | $ | 642,438 |        
|                          |              |             |         |         |  |   |         |        

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.

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

|                           |                                            |             |        |      |   |      |        |       |   |   |       |        |  
|-------------------------- | ------------------------------------------ | ----------- | ------ | ---- | - | ---- | ------ | ----- | - | - | ----- | ------ | -
|                           |                                            |            
|                           |                                            | December 31
|                           |                                            |            
|                           |                                            | 2003        |        | 2002 |   | 2001
|                           |                                            |             |        |      |   |     
|Balance, beginning of year |                                            | $           | 11,510 |      |   | $    | 8,018  |       |   | $ | 4,816 |       
|Add (deduct):              |                                            |             |        |      |   |      |        |       |   |   |       |       
|                           | Provision for loan losses                  |             |        | 437  |   |      |        | 3,902 |   |   |       | 4,380  |  
|                           | Recoveries on loans previously charged-off |             |        | 211  |   |      |        | 69    |   |   |       | 250    |  
|                           | Charge-offs                                |             |        | (717 | ) |      |        | (479  | ) |   |       | (1,428 | )
|                           |                                            |             |        |      |   |      |        |       |   |   |       |       
|Balance, end of year       |                                            | $           | 11,441 |      |   | $    | 11,510 |       |   | $ | 8,018 |       
|                           |                                            |             |        |      |   |      |        |       |   |   |       |       

The recorded investment in impaired loans at
December 31, 2003 was $2,913 for which an allowance of
$1,010 has been established. The recorded investment in impaired
loans at December 31, 2002 was $4,672, for which an
allowance of $1,282 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
2003, 2002 and 2001 was $5,077, $3,519 and $2,317, respectively.
During the years reported, no income was recorded on impaired
loans during the portion of the year that they were impaired.

66



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Non-accrual and restructured loans at
December 31, 2003, 2002 and 2001 and related interest
income are summarized as follows:

|                                                                                    |  |             |       |              |  |             |   |              |  |             |       |              |  |  |   |  |  |   |       |  |  |  |   | 
|----------------------------------------------------------------------------------- |  | ----------- | ----- | ------------ |  | ----------- | - | ------------ |  | ----------- | ----- | ------------ |  |  | - |  |  | - | ----- |  |  |  | - | 
|                                                                                    |  |             |       |              |  |            
|                                                                                    |  | 2003        |       | 2002         |  | 2001       
|                                                                                    |  |             |       |              |  |            
|                                                                                    |  | Non-Accrual |       | Restructured |  | Non-Accrual |   | Restructured |  | Non-Accrual |       | Restructured
|                                                                                    |  | Loans       |       | Loans        |  | Loans       |   | Loans        |  | Loans       |       | Loans       
|                                                                                    |  |             |       |              |  |             |   |              |  |             |       |             
|Amount                                                                              |  | $           | 2,913 |              |  |             |  |              |  | $           | 4,758 |              |  |  |  |  |  | $ | 3,523 |  |  |  |  | 
|Interest income recorded                                                            |  |             |      |              |  |             |  |              |  |             |      |              |  |  |  |  |  |   |      |  |  |  |  | 
|Interest income that would have been recorded
    under the original contract terms |  |             | 188   |              |  |             |   |              |  |             | 179   |              |  |  |  |  |  |   | 334   |  |  |  |  | 

Non-accrual loans at December 31, 2003 and
2002 include $2,913 and $4,172, respectively, of loans
considered to be impaired under SFAS No. 114.

Loans made directly or indirectly to employees,
directors or principal shareholders were approximately $18,476
and $17,192 at December 31, 2003 and 2002, respectively.
During 2003, new loans granted to these individuals and the
effects of changes in board member composition totaled $5,962
and payments totaled $4,678.

5  Premises and Equipment

A summary of premises and equipment follows:

|                                               |  |             |         |      |  |   |        | 
|---------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------ | 
|                                               |  |            
|                                               |  | December 31
|                                               |  |            
|                                               |  | 2003        |         | 2002
|                                               |  |             |         |     
|Land                                           |  | $           | 1,139   |      |  | $ | 1,139  | 
|Buildings                                      |  |             | 11,122  |      |  |   | 10,715 | 
|Leasehold improvements                         |  |             | 3,909   |      |  |   | 2,485  | 
|Furniture, fixtures and equipment              |  |             | 14,609  |      |  |   | 13,011 | 
|Automobiles                                    |  |             | 489     |      |  |   | 447    | 
|                                               |  |             |         |      |  |   |        | 
|Total                                          |  |             | 31,268  |      |  |   | 27,797 | 
|Less accumulated depreciation and amortization |  |             | (16,832 | )    |  |   | 15,168 | 
|                                               |  |             |         |      |  |   |        | 
|Premises and equipment, net                    |  | $           | 14,436  |      |  | $ | 12,629 | 
|                                               |  |             |         |      |  |   |        | 

6  Borrowings

Borrowings with original maturities of one year
or less totaled $198,256 and $139,212 at December 31, 2003
and 2002, respectively. Such short-term borrowings consisted of
securities sold under agreements to repurchase of $162,506 and
$138,204 and note options on Treasury, tax and loan of $750 and
$1,008 at December 31, 2003 and 2002, respectively, and
overnight borrowings of $35,000 at December 31, 2003. Other
borrowings totaled $188,144 and $188,171 at December 31,
2003 and 2002, respectively, consisting of borrowings from FHLB
with initial stated maturities of ten years and 1 to 4 year call
options.

Interest expense on all borrowings totaled
$10,773, $15,097 and $14,067 in 2003, 2002 and 2001,
respectively. In December 2002, the Company prepaid
$21 million of its FHLB borrowings resulting in a
pretax penalty of $2.6 million. This penalty is included in
interest expense on other borrowings in the 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,

67



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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:

|                                      |                  |      |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------- | ---------------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                      |                  | 2003 |   | 2002    |   | 2001
|                                      |                  |      |   |         |   |     
|Average balance:                      |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      | $ | 156,989 |   |      | $ | 148,555 |   |  | $ | 154,311 |  
|                                      | Other Borrowings |      |   | 188,159 |   |      |   | 208,886 |   |  |   | 160,255 |  
|Weighted average interest rate:       |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      |   | 1.1     | % |      |   | 1.6     | % |  |   | 3.8     | %
|                                      | Other Borrowings |      |   | 4.8     |   |      |   | 6.1     |   |  |   | 5.1     |  
|Maximum month-end outstanding amount: |                  |      |   |         |   |      |   |         |   |  |   |        
|                                      | Short-term       |      | $ | 198,436 |   |      | $ | 161,757 |   |  | $ | 164,222 |  
|                                      | Other Borrowings |      |   | 188,169 |   |      |   | 209,191 |   |  |   | 209,191 |  

As of December 31, 2003 and 2002, these
borrowings were collateralized by loans and securities with an
estimated fair value of $480,498 and $343,752, respectively.

In addition, at December 31, 2003, the Bank
had available unused lines of credit of $85 million from
FHLB, and $30 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.

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
|                                         |  |                        
|                                         |  |                         |        |      |  |     
|                                         |  | 2003                    |        | 2002 |  | 2001
|                                         |  |                         |        |      |  |     
|                                         |  |                         |        |      |  |      |      |   |  |  
|Income tax at statutory rate             |  | $                       | 12,587 |      |  |      | 35.0 | % |  | $ | 10,761 |   |  |  | 35.0 | % |  | $ | 9,932  |   |  |  | 35.0 | %
|State income tax, net of Federal benefit |  |                         | 1,923  |      |  |      | 5.4  |   |  |   | 1,038  |   |  |  | 3.4  |   |  |   | 1,036  |   |  |  | 3.7  |  
|Tax-exempt interest income               |  |                         | (2,730 | )    |  |      | (7.6 | ) |  |   | (2,592 | ) |  |  | (8.4 | ) |  |   | (2,334 | ) |  |  | (8.2 | )
|Non-deductible expenses and other        |  |                         | (25    | )    |  |      | (0.1 | ) |  |   | (47    | ) |  |  | (0.2 | ) |  |   | 861    |   |  |  | 3.0  |  
|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  
|Provision for income taxes               |  | $                       | 11,755 |      |  |      | 32.7 | % |  | $ | 9,160  |   |  |  | 29.8 | % |  | $ | 9,495  |   |  |  | 33.5 | %
|                                         |  |                         |        |      |  |      |      |   |  |   |        |   |  |  |      |   |  |   |        |   |  |  |      |  

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

|         |          |                         |        |       |   |      |       |        |   |   |       |        |  
|-------- | -------- | ----------------------- | ------ | ----- | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|         |          |                        
|         |          | Years Ended December 31
|         |          |                        
|         |          | 2003                    |        | 2002  |   | 2001
|         |          |                         |        |       |   |     
|Federal: |          |                         |        |       |   |      |       |        |   |   |       |       
|         | Current  |                         | $      | 9,622 |   |      | $     | 14,194 |   |   | $     | 9,113  |  
|         | Deferred |                         |        | (112  | ) |      |       | (6,398 | ) |   |       | (1,164 | )
|State:   |          |                         |        |       |   |      |       |        |   |   |       |       
|         | Current  |                         |        | 2,240 |   |      |       | 2,319  |   |   |       | 2,011  |  
|         | Deferred |                         |        | 5     |   |      |       | (955   | ) |   |       | (465   | )
|         |          |                         |        |       |   |      |       |        |   |   |       |       
|Total    |          | $                       | 11,755 |       |   | $    | 9,160 |        |   | $ | 9,495 |       
|         |          |                         |        |       |   |      |       |        |   |   |       |       

68



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                              |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   |       | 
|----------------------------- |  | ----------------- | ----- | ----------------- |  | ----- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|                              |  |                   |       |                  
|                              |  | December 31, 2003 |       | December 31, 2002
|                              |  |                   |       |                  
|                              |  | Asset             |       | Liability         |  | Asset |       | Liability
|                              |  |                   |       |                   |  |       |       |          
|Allowance for loan losses     |  | $                 | 4,625 |                   |  |       |       |           |  | $ | 4,652 |  |  |   |       | 
|Supplemental pension benefit  |  |                   | 1,725 |                   |  |       |       |           |  |   | 1,519 |  |  |   |       | 
|Minimum pension liability     |  |                   | 648   |                   |  |       |       |           |  |   | 579   |  |  |   |       | 
|Deferred compensation         |  |                   | 692   |                   |  |       |       |           |  |   | 702   |  |  |   |       | 
|Securities available for sale |  |                   |       |                   |  | $     | 1,997 |           |  |   |       |  |  | $ | 8,406 | 
|Interest on non-accrual loans |  |                   | 285   |                   |  |       |       |           |  |   | 200   |  |  |   |       | 
|SFAS 123 compensation cost    |  |                   | 110   |                   |  |       |       |           |  |   | 87    |  |  |   |       | 
|Depreciation                  |  |                   |       |                   |  |       | 72    |           |  |   |       |  |  |   | 158   | 
|Other                         |  |                   |       |                   |  |       | 256   |           |  |   |       |  |  |   |       | 
|                              |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   |       | 
|                              |  | $                 | 8,085 |                   |  | $     | 2,325 |           |  | $ | 7,739 |  |  | $ | 8,564 | 
|                              |  |                   |       |                   |  |       |       |           |  |   |       |  |  |   |       | 

In the normal course of business, the
Companys Federal, New York State and New York City
Corporation tax returns are subject to audit. The New York State
Department of Taxation and Finance has completed an audit of the
Companys New York State Corporation Tax returns for the
years 1996 through 1998, and has assessed additional tax,
interest and penalties of approximately $1.5 million. The
Company is contesting this assessment. The Company does not
believe the resolution of this matter will have a significant
impact on its financial position.

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 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,
2003, that both the Company and the Bank meet all capital
adequacy requirements to which they are subject.

69



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following summarizes the capital requirements
and capital position at December 31, 2003 and 2002:

|                                         |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------------- | ---- | ----------------- |  | ------- | ------ | ----- |  |  | --- | - |  | - | ------ |  |  |  | ---- | -
|                                         |  |        |         |                   |  |                   |      |                   |  |        
|                                         |  |        |         |                   |  |                   |      |                   |  | 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, 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  |  
|As of December 31, 2003:                 |  |        |         |                   |  |                   |      |                   |  |         |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 149,842 |                   |  |                   | 16.9 | %                 |  |         | 71,123 |       |  |  | 8.0 | % |  |   | 88,903 |  |  |  | 10.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 138,719 |                   |  |                   | 15.6 |                   |  |         | 35,561 |       |  |  | 4.0 |   |  |   | 53,342 |  |  |  | 6.0  |  
|Tier 1 Capital (To Average Assets)       |  |        | 138,719 |                   |  |                   | 8.4  |                   |  |         | 65,967 |       |  |  | 4.0 |   |  |   | 82,459 |  |  |  | 5.0  |  

|                                         |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------- | ---- | ----- |  | - | ------ |  |  |  | --- | -
|                                         |  |        |         |                   |  |            
|                                         |  |        |         |                   |  | Minimum For
|                                         |  |        |         | Capital          
|                                         |  | Actual |         | Adequacy Purposes
|                                         |  |        |         |                  
|Consolidated                             |  | Amount |         | Ratio             |  | Amount      |      | Ratio
|                                         |  |        |         |                   |  |             |      |      
|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, 2003:                 |  |        |         |                   |  |             |      |       |  |   |        |  |  |  |     |  
|Total Capital (To Risk Weighted Assets)  |  | $      | 150,136 |                   |  |             | 16.9 | %     |  |   | 71,168 |  |  |  | 8.0 | %
|Tier 1 Capital (To Risk Weighted Assets) |  |        | 139,006 |                   |  |             | 15.6 |       |  |   | 35,584 |  |  |  | 4.0 |  
|Tier 1 Capital (To Average Assets)       |  |        | 139,006 |                   |  |             | 8.4  |       |  |   | 65,981 |  |  |  | 4.0 |  

As of December 31, 2003, 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 2003 and 2002 the Board of
Directors of the Company declared 10 percent stock
dividends. Share and per share amounts have been retroactively
restated to reflect the issuance of the additional shares.

Stock Options

The Company has stock option plans that provide
for the granting of options to directors, certain officers, and
to all eligible employees. Options to purchase
495,839 shares of common stock were outstanding at
December 31, 2003 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.

70



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock option transactions under the Plans were as
follows:

|                                    |  |            |          |                  |  |   |       | 
|----------------------------------- |  | ---------- | -------- | ---------------- |  | - | ----- | 
|                                    |  | Shares     |          | Weighted        
|                                    |  | Underlying |          | Average Exercise
|Outstanding Options                 |  | Options    |          | Price Per Share 
|                                    |  |            |          |                 
|As of January 1, 2001               |  |            | 458,919  |                  |  | $ | 15.47 | 
|Granted                             |  |            | 191,761  |                  |  |   | 25.49 | 
|Cancelled or expired                |  |            | (4,727   | )                |  |   | 23.21 | 
|Exercised                           |  |            | (149,260 | )                |  |   | 19.13 | 
|                                    |  |            |          |                  |  |   |       | 
|As of December 31, 2001             |  |            | 496,693  |                  |  |   | 18.16 | 
|Granted                             |  |            | 180,629  |                  |  |   | 29.38 | 
|Cancelled or expired                |  |            | (5,335   | )                |  |   | 28.43 | 
|Exercised                           |  |            | (159,326 | )                |  |   | 18.83 | 
|                                    |  |            |          |                  |  |   |       | 
|As of December 31, 2002             |  |            | 512,661  |                  |  |   | 21.80 | 
|Granted                             |  |            | 174,953  |                  |  |   | 33.20 | 
|Cancelled or expired                |  |            | (5,987   | )                |  |   | 30.49 | 
|Exercised                           |  |            | (185,788 | )                |  |   | 21.07 | 
|                                    |  |            |          |                  |  |   |       | 
|As of December 31, 2003             |  |            | 495,839  |                  |  |   | 25.99 | 
|Exercisable as of December 31, 2003 |  |            | 428,393  |                  |  |   | 25.25 | 
|Available for future grant          |  |            | 604,760  |                  |  |   |       | 

The following table summarizes the range of
exercise prices of the Companys stock options outstanding
and exercisable at December 31, 2003:

|                          |  |                |       |           |  |            |       |                  |  |  |         |  |  |  |     |  |  |   |       | 
|------------------------- |  | -------------- | ----- | --------- |  | ---------- | ----- | ---------------- |  |  | ------- |  |  |  | --- |  |  | - | ----- | 
|                          |  |                |       |           |  |            |       |                 
|                          |  |                |       |           |  |            |       | Weighted Average
|                          |  |                |       |           |  |            |       |                 
|                          |  |                |       | Number of |  | Remaining  |       | Exercise        
|                          |  | Exercise Price |       | Options   |  | Life (yrs) |       | Price           
|                          |  |                |       |           |  |            |       |                 
|                          |  | $              | 8.76  |           |  | $          | 21.88 |                  |  |  | 144,241 |  |  |  | 4.4 |  |  | $ | 17.61 | 
|                          |  |                | 21.90 |           |  |            | 29.88 |                  |  |  | 220,565 |  |  |  | 7.5 |  |  |   | 27.18 | 
|                          |  |                | 29.89 |           |  |            | 34.16 |                  |  |  | 131,033 |  |  |  | 9.0 |  |  |   | 33.21 | 
|Total Options Outstanding |  | $              | 8.76  |           |  | $          | 34.16 |                  |  |  | 495,839 |  |  |  | 7.0 |  |  | $ | 25.99 | 
|Exercisable               |  | $              | 8.76  |           |  | $          | 34.16 |                  |  |  | 428,393 |  |  |  | 6.8 |  |  | $ | 25.25 | 
|Not Exercisable           |  | $              | 22.22 |           |  | $          | 34.16 |                  |  |  | 67,446  |  |  |  | 8.4 |  |  | $ | 30.71 | 

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
$1,012, $756 and $785 in 2003, 2002 and 2001, 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 $85, $74 and $67 in 2003, 2002 and
2001, respectively.

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

Additional retirement benefits are provided to
certain officers and directors pursuant to supplemental plans.
Costs for the supplemental pension plans totaled $1,067, $931
and $1,035 in 2003, 2002 and 2001, 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

71



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

additional minimum pension liability is offset by
an intangible asset, not to exceed prior service costs of the
pension plan. Amounts in excess of prior service costs are
reflected as a reduction in other comprehensive income net of
related tax benefits. The estimated contribution expected to be
paid to these plans in 2004 is $513.

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

|                                               |                         |      |        |      |   |   |        |      |  
|---------------------------------------------- | ----------------------- | ---- | ------ | ---- | - | - | ------ | ---- | -
|                                               |                         | 2003 |        | 2002
|                                               |                         |      |        |     
|Change in benefit obligation:                  |                         |      |        |      |   |   |        |     
|Benefit obligation at beginning of year        |                         | $    | 6,617  |      |   | $ | 5,709  |     
|                                               | Service cost            |      |        | 198  |   |   |        | 180  |  
|                                               | Interest cost           |      |        | 416  |   |   |        | 396  |  
|                                               | Amendments              |      |        | 456  |   |   |        |     |  
|                                               | Actuarial (gain) loss   |      |        | 413  |   |   |        | 813  |  
|                                               | Benefits paid           |      |        | (563 | ) |   |        | (482 | )
|                                               |                         |      |        |      |   |   |        |     
|Benefit obligation at end of year              |                         |      | 7,537  |      |   |   | 6,616  |     
|                                               |                         |      |        |      |   |   |        |     
|Change in plan assets:                         |                         |      |        |      |   |   |        |     
|Fair value of plan assets at beginning of year |                         |      |       |      |   |   |       |     
|                                               | Actual return on assets |      |        |     |   |   |        |     |  
|                                               | Employer contributions  |      |        | 563  |   |   |        | 482  |  
|                                               | Benefits paid           |      |        | (563 | ) |   |        | (482 | )
|                                               |                         |      |        |      |   |   |        |     
|Fair value of plan assets at end of year       |                         |      |       |      |   |   |       |     
|                                               |                         |      |        |      |   |   |        |     
|Funded status                                  |                         |      | (7,537 | )    |   |   | (6,616 | )   
|Unrecognized transition obligation             |                         |      | 137    |      |   |   | 227    |     
|Unrecognized prior service cost                |                         |      | 594    |      |   |   | 273    |     
|Unrecognized net loss                          |                         |      | 2,437  |      |   |   | 2,250  |     
|                                               |                         |      |        |      |   |   |        |     
|Accrued benefit cost                           |                         | $    | (4,369 | )    |   | $ | (3,866 | )   
|                                               |                         |      |        |      |   |   |        |     
|Weighted average assumptions:                  |                         |      |        |      |   |   |        |     
|Discount rate                                  |                         |      | 6.25   | %    |   |   | 6.25   | %   
|Expected return on plan assets                 |                         |      |       |      |   |   |       |     
|Rate of compensation increase                  |                         |      | 5.00   | %    |   |   | 5.00   | %   
|Components of net periodic benefit
    cost:   |                         |      |        |      |   |   |        |     
|Service cost                                   |                         | $    | 198    |      |   | $ | 180    |     
|Interest cost                                  |                         |      | 416    |      |   |   | 396    |     
|Expected return on plan assets                 |                         |      |       |      |   |   |       |     
|Amortization of transition obligation          |                         |      | 91     |      |   |   | 91     |     
|Amortization of prior service cost             |                         |      | 136    |      |   |   | 44     |     
|Amortization of net loss                       |                         |      | 226    |      |   |   | 220    |     
|                                               |                         |      |        |      |   |   |        |     
|Net periodic benefit cost                      |                         | $    | 1,067  |      |   | $ | 931    |     
|                                               |                         |      |        |      |   |   |        |     

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

|                                                                             |  |      |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                             |  | 2003 |        | 2002
|                                                                             |  |      |        |     
|Accrued benefit liability                                                    |  | $    | (6,703 | )    |  | $ | (5,795 | )
|Intangible asset                                                             |  |      | 730    |      |  |   | 500    |  
|Accumulated other comprehensive income (pre-tax
    net reduction in equity) |  |      | 1,604  |      |  |   | 1,429  |  
|                                                                             |  |      |        |      |  |   |        |  
|Accrued benefit cost                                                         |  | $    | (4,369 | )    |  | $ | (3,866 | )
|                                                                             |  |      |        |      |  |   |        |  

72



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,     |  |  
|                             |  |  
|2004                         |  | $ | 912   | 
|2005                         |  |   | 833   | 
|2006                         |  |   | 700   | 
|2007                         |  |   | 796   | 
|2008                         |  |   | 536   | 
|Thereafter                   |  |   | 4,043 | 
|                             |  |   |       | 
|Total minimum future rentals |  | $ | 7,820 | 
|                             |  |   |       | 

Rent expense for premises and equipment was
approximately $987, $993 and $833 in 2003, 2002 and 2001,
respectively. In the normal course of business, there are
various outstanding commitments and contingent liabilities which
are not reflected in the consolidated balance sheets. No losses
are anticipated as a result of these transactions.

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

Cash Reserve Requirements

The Bank is required to maintain average reserve
balances under the Federal Reserve Act and Regulation D
issued thereunder. Such reserves totaled approximately $2,209 at
December 31, 2003 and $1,559 at December 31, 2002.

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 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, 2003,
2002 and 2001, 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, 2003 and 2002 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

73



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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  
|                                                                                                     |  |              
|                                                                                                     |  |               |       |           
|                                                                                                     |  | 2003          |       | 2002      
|                                                                                                     |  |               |       |           
|                                                                                                     |  | Carrying      |       | Estimated  |  | Carrying |       | Estimated 
|                                                                                                     |  | Amount        |       | Fair Value |  | Amount   |       | Fair Value
|                                                                                                     |  |               |       |            |  |          |       |           
|                                                                                                     |  |              
|                                                                                                     |  | (In millions)
|Assets:                                                                                              |  |               |       |            |  |          |       |            |  |   |       |  |  |   |       | 
|Financial assets for which carrying value
    approximates fair value                                |  | $             | 48.6  |            |  | $        | 48.6  |            |  | $ | 79.6  |  |  | $ | 79.6  | 
|Securities, FHLB stock and accrued interest                                                          |  |               | 878.4 |            |  |          | 878.4 |            |  |   | 758.7 |  |  |   | 758.7 | 
|Loans and accrued interest                                                                           |  |               | 721.9 |            |  |          | 728.4 |            |  |   | 656.8 |  |  |   | 660.9 | 
|Interest Rate Floor Contracts                                                                        |  |               |      |            |  |          |      |            |  |   | 0.7   |  |  |   | 0.7   | 
|Liabilities:                                                                                         |  |               |       |            |  |          |       |            |  |   |       |  |  |   |       | 
|Deposits with no stated maturity and accrued
    interest                                            |  |               | 966.5 |            |  |          | 966.5 |            |  |   | 862.3 |  |  |   | 862.3 | 
|Time deposits and accrued interest                                                                   |  |               | 158.9 |            |  |          | 158.4 |            |  |   | 166.0 |  |  |   | 164.5 | 
|Securities sold under repurchase agreements and
    other short-term borrowings and accrued interest |  |               | 198.4 |            |  |          | 198.4 |            |  |   | 139.3 |  |  |   | 139.3 | 
|Other borrowings and accrued interest                                                                |  |               | 189.1 |            |  |          | 178.9 |            |  |   | 189.3 |  |  |   | 176.0 | 
|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.                                                                                                                                                                                                                                                 
|
| | 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.                                                                                                                                                                                                                                                                                                                                                       

74



---



##### 



HUDSON VALLEY HOLDING CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13  Condensed Financial Information
of Hudson Valley Holding Corp.

(Parent Company Only)


Condensed Balance Sheets

December 31, 2003 and 2002


Dollars in thousands


|                                               |  |      |         |      |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                               |  | 2003 |         | 2002
|                                               |  |      |         |     
|Assets                                         |  |      |         |      |  |   |         | 
|Cash                                           |  | $    | 2       |      |  | $ | 249     | 
|Investment in subsidiary                       |  |      | 141,731 |      |  |   | 136,224 | 
|Equity securities                              |  |      | 1,157   |      |  |   | 998     | 
|                                               |  |      |         |      |  |   |         | 
|Total Assets                                   |  | $    | 142,890 |      |  | $ | 137,471 | 
|                                               |  |      |         |      |  |   |         | 
|Liabilities and Stockholders
    Equity       |  |      |         |      |  |   |         | 
|Other liabilities                              |  | $    | 529     |      |  | $ | 664     | 
|Stockholders equity                           |  |      | 142,361 |      |  |   | 136,807 | 
|                                               |  |      |         |      |  |   |         | 
|Total Liabilities and Stockholders
    Equity |  | $    | 142,890 |      |  | $ | 137,471 | 
|                                               |  |      |         |      |  |   |         | 

Condensed Statements of Income

For the years ended December 31, 2003, 2002 and
2001


Dollars in thousands


|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                               |  | 2003 |        | 2002 |  | 2001
|                                                               |  |      |        |      |  |     
|Dividends from the Bank                                        |  | $    | 8,706  |      |  | $    | 6,406  |  |  | $ | 5,058  | 
|Dividends from equity securities                               |  |      | 40     |      |  |      | 38     |  |  |   | 56     | 
|Other income                                                   |  |      |       |      |  |      | 1      |  |  |   |       | 
|Operating expenses                                             |  |      | 181    |      |  |      | 200    |  |  |   | 291    | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Income before equity in undistributed earnings in
    the Bank |  |      | 8,565  |      |  |      | 6,245  |  |  |   | 4,823  | 
|Equity in undistributed earnings of the Bank                   |  |      | 15,642 |      |  |      | 15,339 |  |  |   | 14,058 | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Net Income                                                     |  | $    | 24,207 |      |  | $    | 21,584 |  |  | $ | 18,881 | 
|                                                               |  |      |        |      |  |      |        |  |  |   |        | 

Condensed Statements of Cash Flows

For the years ended December 31, 2003, 2002 and
2001


Dollars in thousands


|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |         |  
|------------------------------------------------------------------------------------- | -------------------------------------------- | ---- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------ | ------- | -
|                                                                                      |                                              | 2003 |        | 2002    |   | 2001
|                                                                                      |                                              |      |        |         |   |     
|Operating Activities:                                                                 |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net income                                                                            |                                              | $    | 24,207 |         |   | $    | 21,584 |         |   | $ | 18,881 |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |      |        |         |   |      |        |         |   |   |        |        
|                                                                                      | Equity in undistributed earnings of the Bank |      |        | (15,642 | ) |      |        | (15,339 | ) |   |        | (14,058 | )
|                                                                                      | (Decrease) increase in other liabilities     |      |        | (198    | ) |      |        | 41      |   |   |        | 174     |  
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net cash provided by operating
    activities                                         |                                              |      | 8,367  |         |   |      | 6,286  |         |   |   | 4,997  |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Investing Activities:                                                                 |                                              |      |        |         |   |      |        |         |   |   |        |        
|Proceeds from sales of equity securities                                              |                                              |      |       |         |   |      | 3      |         |   |   |       |        
|Purchase of equity securities                                                         |                                              |      | (6     | )       |   |      | (100   | )       |   |   | (21    | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net cash used in investing
    activities                                             |                                              |      | (6     | )       |   |      | (97    | )       |   |   | (21    | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Financing Activities:                                                                 |                                              |      |        |         |   |      |        |         |   |   |        |        
|Proceeds from issuance of common stock and sale
    of treasury stock                 |                                              |      | 4,758  |         |   |      | 3,302  |         |   |   | 3,430  |        
|Purchase of treasury stock                                                            |                                              |      | (3,833 | )       |   |      | (1,949 | )       |   |   | (1,819 | )      
|Cash dividends paid                                                                   |                                              |      | (9,533 | )       |   |      | (7,737 | )       |   |   | (6,351 | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Net cash used in financing
    activities                                             |                                              |      | (8,608 | )       |   |      | (6,384 | )       |   |   | (4,740 | )      
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Increase (decrease) in Cash and Due from
    Banks                                    |                                              |      | (247   | )       |   |      | (195   | )       |   |   | 236    |        
|Cash and due from banks, beginning of year                                            |                                              |      | 249    |         |   |      | 444    |         |   |   | 208    |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        
|Cash and due from banks, end of year                                                  |                                              | $    | 2      |         |   | $    | 249    |         |   | $ | 444    |        
|                                                                                      |                                              |      |        |         |   |      |        |         |   |   |        |        

75



---



##### 



MANAGEMENTS REPORT TO THE
STOCKHOLDERS

February 9, 2004

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, 2003. This
assessment was based on criteria for effective internal control
over financial reporting, including safeguarding of assets,
described in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that
the Company maintained effective internal control over financial
reporting, including safeguarding of assets, presented in
conformity with accounting principles generally accepted in the
United States of America and, for Hudson Valley Bank, in
conformity with the Call Report Instructions, as of
December 31, 2003.

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.

76



---



##### 



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, 2003.

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

77



---



##### 



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, 2003 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, 2003, is fairly stated, in all
material respects, based on the criteria established in the COSO
report.

Deloitte & Touche LLP

Stamford, Connecticut

February 9, 2004


78



---



##### 



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

None.

ITEM 9A.     CONTROLS
AND PROCEDURES

Our disclosure controls and procedures are
designed to ensure that information the Company must disclose in
its reports filed or submitted under the Securities Exchange Act
of 1934, as amended (the Exchange Act), is recorded,
processed, summarized, and reported on a timely basis. We
carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures as of December 31, 2003. Based on this
evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2003, the
Companys disclosure controls and procedures were effective
in bringing to their attention on a timely basis information
required to be disclosed by the Company in reports that the
Company files or submits under the Exchange Act. Also, during
the year ended December 31, 2003, there has not been any
change that has effected, or is reasonably likely to materially
effect, the Companys internal control over financial
reporting.

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, 2003, 2002 and 2001                             
|
| |  | Consolidated Statements of Comprehensive Income
    for the Years Ended December 31, 2003, 2002 and 2001               
|
| |  | Consolidated Balance Sheets at December 31,
    2003 and 2002                                                          
|
| |  | Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended December 31,
    2003, 2002 and 2001
|
| |  | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001                         
|
| |  | 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, 2003

The Registrant filed a current report on
Form 8-K on October 29, 2003 in connection with its
earnings release for the nine month period ended
September 30, 2003 and its declaration of a cash dividend
(Items 7 and 12).

The Registrant filed a current report on
Form 8-K on November 26, 2003 in connection with its
declaration of a stock dividend and a stock repurchase program
(Items 5 and 7).

79



---



##### 



(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)                                                                                                                          
|       | 31.1 |               |  | Certification of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of
    2002(3)                                               
|       | 31.2 |               |  | Certification of Chief Financial Office Pursuant
    to Section 302 of the Sarbanes-Oxley Act of
    2002(3)                                                
|       | 32.1 |               |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002(3)
|       | 32.2 |               |  | Certification of Chief Financial Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002(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                                                                                                                                                                         

80



---



##### 



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 12, 2004

| |     |                   
| | --- | ------------------
| | 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 12, 2004 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/ WILLIAM J. MULROW




William J. Mulrow


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


81