This section presents discussion and analysis of the Company's consolidated financial condition at September 30, 2008 and December 31, 2007, and consolidated results of operations for the three and nine month periods ended September 30, 2008 and September 30, 2007. The Company is consolidated with its wholly-owned subsidiaries, Hudson Valley Bank, NA and its subsidiaries, Grassy Sprain Real Estate Holdings, Inc., Sprain Brook Realty Corp., HVB Leasing Corp., HVB Employment Corp., HVB Realty Corp., and A.R. Schmeidler & Co., Inc. (collectively "HVB"), and New York National Bank and its subsidiaries 369 East 149th Street Corp. and 369 East Realty Corp. (collectively "NYNB"). This discussion and analysis should be read in conjunction with the financial statements and supplementary financial information contained in the Company's 2007 Annual Report on Form 10-K.

Overview of Management's Discussion and Analysis

This overview is intended to highlight selected information included in this Quarterly Report on Form 10-Q. It does not contain sufficient information for a complete understanding of the Company's financial condition and operating results and, therefore, should be read in conjunction with this entire Quarterly Report on Form 10-Q and the Company's 2007 Annual Report on Form 10-K.

The Company derives substantially all of its revenue from providing banking and related services to businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and Rockland County, New York, portions of New York City and Fairfield County, Connecticut. The Company's assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company's basic strategy is to grow net interest income and non interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. 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 the three month period ended September 30, 2008 was $9.0 million or $0.89 per diluted share, a decrease of $0.1 million or 1.1 percent compared to $9.1 million or $0.89 per diluted share for the three month period ended September 30, 2007. Net income for the nine month period ended September 30, 2008 was $25.4 million or $2.48 per diluted share, a decrease of $0.4 million or 1.6 percent compared to $25.8 million or $2.53 per diluted share for the nine month period ended September 30, 2007.

Total deposits, excluding the effects of a $97 million temporary deposit in a money market account from late December 2007 through early February 2008 and $75 million of brokered certificates of deposit added in September 2008, declined slightly during the nine month period ended September 30, 2008, reflective of the recent unprecedented downturn in the overall economy in general and, in particular, in activity related to the commercial real estate industry, a significant source of business for the Company. Although the Company did experience declines in certain deposit balances, it was able to partially mitigate this effect through the addition of new customers, additional deposits from existing customers and the continued growth provided by the addition of new branches. The Company was able to achieve significant loan growth during the nine month period ended September 30, 2008 in both existing and new markets. In addition, the Company continued to increase its fee based revenue through its subsidiary A.R. Schmeidler & Co., Inc., a registered investment advisory firm located in Manhattan, New York, which at September 30, 2008 had approximately $1.3 billion in assets under management. Fee income from this source, however, is expected to decline at least in the near term as a result of the effects of recent significant declines in both domestic and international markets.

Non-performing assets and charge-offs increased during 2008, however overall asset quality continued to be good as a result of the Company's conservative underwriting and investment standards. The Company does not generally engage in sub-prime lending, except in occasional circumstances where additional underwriting factors are present which justify extending the loan. The Company does not offer loans with low "teaser" rates or high loan-to-value ratios to sub-prime borrowers. At September 30, 2008, the Company had no sub-prime loans in its portfolio. In addition, the Company has not invested in mortgage-backed securities secured by sub-prime loans. The

recent severe downturn in the overall economy has had wide ranging negative effects on all financial sectors, including the real estate industry, which is a major source of the Company's business. Management cannot predict what effects the continuation of such conditions may have on asset quality in the future.

Short-term interest rates rose gradually in 2005 and into the second quarter of 2006 then remained virtually unchanged from September, 2006 through the first half of September 2007. The immediate effect of this rise in interest rates was positive to the Company, due to more assets than liabilities repricing in the near term. This rise in short-term rates, however, was not accompanied by similar increases in longer term interest rates. This resulted in a flattening and eventual inversion of the yield curve which persisted until the third quarter of 2007. The effects of this rate environment put downward pressure on the Company's net interest income as liabilities repriced at higher rates and maturing longer term assets repriced at similar or only slightly higher rates. The 375 basis point reduction of short-term interest rates from September 2007 through October 2008 has resulted in some steepening of the yield curve. A steep yield curve is generally favorable for the Company. However, recent volatility in interest rates and the varying relationship of interest rate indices, such as LIBOR, the prime rate and the U.S. Treasury curve could result in downward pressure on net interest income in the future.

As a result of the effects of changes in interest rates, activity in the Company's core businesses of loans and deposits, an increase in loans as a percentage of total interest earning assets and other asset/liability management activities, tax equivalent basis net interest income increased by $2.2 million or 8.0 percent to $29.8 million for the three month period ended September 30, 2008, compared to $27.6 million for the same period in the prior year, and increased by $3.4 million or 4.2 percent to $84.7 million for the nine month period ended September 30, 2008, compared to $81.3 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $1.0 million and $1.2 million for the three month periods ended September 30, 2008 and 2007 and $3.5 million and $3.7 million for the nine month periods ended September 30, 2008 and 2007.

Non interest income, excluding net gains and losses on securities transactions, was $5.5 million for the three month period ended September 30, 2008, an increase of $1.5 million or 37.5 percent compared to $4.0 million for the same period in the prior year. Non interest income, excluding net gains and losses on securities transactions, was $15.3 million for the nine month period ended September 30, 2008, an increase of $4.2 million or 37.8 percent compared to $11.1 million for the same period in the prior year. The increases were primarily due to growth in the investment advisory fee income of A.R. Schmeidler & Co., Inc. and also reflected increases in deposit activity and other service fees and other income. The net realized loss on securities available for sale for the nine month period ended September 30, 2008, included a $1.1 million pretax loss for other than temporary impairment taken in September 2008 related to the Company's investment in a pooled trust preferred security and a $0.5 million pretax loss for other than temporary impairment taken in March 2008 related to the Company's investment in a mutual fund. The mutual fund investment, which had a previous pretax other than temporary impairment loss of $0.6 million in December 2007, was sold in April 2008 due to its inability to meet the Company's performance expectations. Investment advisory fee income is expected to decline at least in the near term, due to the current difficulties in the global financial markets, and resulting general decline in values of equity securities.

Non interest expense was $18.2 million for the three month period ended September 30, 2008, an increase of $1.9 million or 11.7 percent compared to $16.3 million for the same period in the prior year. Non interest expense was $52.9 million for the nine month period ended September 30, 2008, an increase of $4.9 million or 10.2 percent compared to $48.0 million for the same period in the prior year. The increases reflect the Company's continued investment in its branch offices, technology and personnel to accommodate growth in loans and deposits, the expansion of services and products available to new and existing customers and the upgrading of certain internal processes.

The Company uses a simulation analysis to estimate the effect that specific movements in interest rates would have on net interest income. Excluding the effects of planned growth and anticipated new business, the simulation analysis at September 30, 2008 shows the Company's net interest income decreasing slightly if interest rates rise or fall.

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

The Company, HVB and NYNB 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. The Company, HVB and NYNB exceeded all current regulatory capital requirements to be considered in the "well-capitalized" category at September 30, 2008. Management plans to conduct the affairs of the Company and its subsidiary banks so as to maintain a strong capital position in the future.

Critical Accounting Policies

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

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

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

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

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 30, 2008. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company's service area, since the majority of the Company's loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examinations.

Income Recognition on Loans - Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are

placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management's judgment as to the 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 Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost. Interest income includes amortization of purchase premium and accretion of purchase discount. The amortization of premiums and accretion of discounts is determined by using the level yield method. Securities are not acquired for purposes of engaging in trading activities. Realized gains and losses from sales of securities are determined using the specific identification method. The Company regularly reviews declines in the fair value of securities below their costs for purposes of determining whether such declines are other-than-temporary in nature. In estimating other-than-temporary losses, management considers: adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If the Company determines that a decline in the fair value of a security below cost is other-than-temporary, the carrying amount of the security is reduced to its fair value and the related impairment is charged to earnings.

Goodwill and Other Intangible Assets - In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company's impairment evaluations as of December 31, 2007 did not indicate impairment of its goodwill or identified intangible assets. The Company is not aware of any events during the nine month period ended September 30, 2008 which would have required additional impairment evaluations.

Bank Owned Life Insurance - The Company has purchased life insurance policies on certain key executives. In accordance with Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance) ("EITF No. 06-5"), bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to adoption of EITF No. 06-5, the Company recorded bank owned life insurance at its cash surrender value.

Retirement Plans - Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Supplemental retirement plan expense allocates the benefits over years of service

Results of Operations for the Three and Nine Month Periods Ended September 30, 2008 and 2007

Summary of Results

The Company reported net income of $9.0 million for the three month period ended September 30, 2008, a decrease of $0.1 million or 1.1 percent compared to $9.1 million reported for the same period in the prior year. Net income for the nine month period ended September 30, 2008 was $25.4 million, a decrease of $0.4 million or 1.6 percent compared to $25.8 million reported for the same period in the prior year. The decreases in the current year periods compared to the prior year periods resulted from higher provisions for loan losses, higher non interest expenses and higher income taxes, partially offset by higher net interest income and higher non interest income. In

addition, the nine month period ended September 30, 2008 included pretax adjustments totaling $1.5 million for other than temporary impairment related to certain securities in the Company's investment portfolio.

Diluted earnings per share were $0.89 for both three month periods ended September 30, 2008 and 2007. Diluted earnings per share were $2.48 for the nine month period ended September 30, 2008, a decrease of $0.05 or 2.0 percent compared to $2.53 reported for the same period in the prior year. Annualized returns on average equity and average assets were 17.3 percent and 1.5 percent for the three month period ended September 30, 2008, compared to 19.2 percent and 1.6 percent for the same period in the prior year. Annualized returns on average equity and average assets were 16.1 percent and 1.5 percent for the nine month period ended September 30, 2008, compared to 18.2 percent and 1.5 percent for the same period in the prior year. Annualized returns on adjusted average equity and adjusted average assets were 16.8 percent and 1.5 percent for the three month period ended September 30, 2008, compared to 18.6 percent and 1.6 percent for the same period in the prior year. Annualized returns on adjusted average equity and adjusted average assets were 16.0 percent and 1.5 percent for the nine month period ended September 30, 2008, compared to 17.7 percent and 1.5 percent for the same period in the prior year. Adjusted average stockholders' equity and adjusted average assets exclude the effects of net unrealized gains and losses on securities available for sale and along with annualized returns on adjusted average equity and adjusted average assets is, under SEC regulations, a non-GAAP financial measure. Management believes that these non-GAAP financial measures more closely reflect actual performance, as they are more consistent with the Company's stated asset/liability management strategies, which have not resulted in significant realization of temporary market gains or losses on securities available for sale which were primarily related to changes in interest rates.

 Average Balances and Interest Rates

The following table sets forth the average balances of interest earning assets
and interest bearing liabilities for the three month periods ended September 30,
2008 and September 30, 2007, 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 Company's federal statutory rate of 35 percent in 2008 and
2007.


                                                                                Three Months Ended September 30,
                                                                       2008                                          2007
                                                       Average                         Yield/        Average                         Yield/
                                                       Balance        Interest(3)       Rate         Balance        Interest(3)       Rate
                                                                                   (000's except percentages)
ASSETS
Interest earning assets:
Deposits in banks                                    $     5,924     $          18        1.22 %   $    18,428     $         252        5.47 %
Federal funds sold                                        11,103                97        3.49          95,441             1,247        5.23
Securities:(1)
Taxable                                                  481,155             5,961        4.96         648,377             7,979        4.92
Exempt from federal income taxes                         194,135             3,078        6.34         214,147             3,469        6.48
Loans, net(2)                                          1,542,239            27,699        7.18       1,230,034            26,384        8.58

Total interest earning assets                          2,234,556            36,853        6.60       2,206,427            39,331        7.13

Non interest earning assets:
Cash and due from banks                                   50,479                                        58,367
Other assets                                             105,878                                        84,371

Total non interest earning assets                        156,357                                       142,738

Total assets                                         $ 2,390,913                                   $ 2,349,165

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Money market                                         $   638,833     $       2,346        1.47 %   $   588,030     $       4,044        2.75 %
Savings                                                   94,229               160        0.68          93,158               196        0.84
Time                                                     248,388             1,376        2.22         287,022             2,860        3.99
Checking with interest                                   150,049               233        0.62         159,949               384        0.96
Securities sold under repurchase agreements and
other short-term borrowings                              185,710               753        1.62         159,137             1,886        4.74
Other borrowings                                         196,825             2,155        4.38         214,593             2,405        4.48

Total interest bearing liabilities                     1,514,034             7,023        1.86       1,501,889            11,775        3.14

Non interest bearing liabilities:
Demand deposits                                          627,991                                       619,564
Other liabilities                                         33,724                                        32,014

Total non interest bearing liabilities                   661,715                                       651,578

Stockholders' equity(1)                                  215,164                                       195,698

Total liabilities and stockholders' equity(1)        $ 2,390,913                                   $ 2,349,165

Net interest earnings                                                $      29,830                                 $      27,556

Net yield on interest earning assets                                                      5.34 %                                        5.00 %

(1) Excludes unrealized gains (losses) on securities available for sale

(2) Includes loans classified as non-accrual

(3) Effects of adjustments to a tax equivalent basis were increases of $1,077 and $1,214 for the three month periods ended September 30, 2008 and September 30, 2007, respectively.

The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the nine month periods ended September 30, . . .