QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Three Months Ended
	September 30
		2014		2013
Interest Income:
Loans, including fees	$	20,473	$	18,805
Securities:
Taxable		3,521		2,352
Exempt from Federal income taxes		585		696
Federal funds sold		7		8
Deposits in banks		241		548
Total interest income		24,827		22,409
Interest Expense:
Deposits		1,224		1,207
Securities sold under repurchase agreements and other short-term borrowings		11		6
Other borrowings		—		183
Total interest expense		1,235		1,396
Net Interest Income		23,592		21,013
Provision for loan losses		651		767
Net interest income after provision for loan losses		22,941		20,246
Non-Interest Income:
Service charges		1,439		1,434
Investment advisory fees		1,922		1,915
Realized gains on securities available for sale, net		1		—
Other income		657		840
Total non-interest income		4,019		4,189
Non-Interest Expense:
Salaries and employee benefits		12,603		11,213
Occupancy		2,131		2,093
Professional services		1,796		1,979
Equipment		1,065		1,032
Business development		756		547
FDIC assessment		559		1,007
Other operating expenses		3,273		3,675
Total non-interest expense		22,183		21,546
Income before income taxes		4,777		2,889
Income taxes		1,515		394
Net Income	$	3,262	$	2,495
Basic earnings per common share	$	0.16	$	0.13
Diluted earnings per common share	$	0.16	$	0.13

	Nine Months Ended
	September 30
		2014			2013
Interest Income:
Loans, including fees	$	59,516		$	56,890
Securities:
Taxable		8,594			6,937
Exempt from Federal income taxes		1,837			2,244
Federal funds sold		23			30
Deposits in banks		973			1,536
Total interest income		70,943			67,637
Interest Expense:
Deposits		3,486			3,746
Securities sold under repurchase agreements and other short-term borrowings		26			22
Other borrowings		10			542
Total interest expense		3,522			4,310
Net Interest Income		67,421			63,327
Provision for loan losses		1,189			1,828
Net interest income after provision for loan losses		66,232			61,499
Non-Interest Income:
Service charges		4,637			4,567
Investment advisory fees		5,720			5,807
Realized gains on securities available for sale, net		39			—
Gains on sales and revaluation of loans held for sale and other real estate owned, net		—			17
Prepayment penalty - FHLB Borrowings		(1,860	)		—
Other income		1,893			2,196
Total non-interest income		10,429			12,587
Non-Interest Expense:
Salaries and employee benefits		38,335			33,615
Occupancy		6,515			6,303
Professional services		5,417			5,215
Equipment		3,043			3,089
Business development		2,354			1,590
FDIC assessment		1,687			2,900
Other operating expenses		8,712			8,263
Total non-interest expense		66,063			60,975
Income Before Income Taxes		10,598			13,111
Income Taxes		3,294			3,478
Net Income	$	7,304		$	9,633
Basic Earnings Per Common Share	$	0.37		$	0.49
Diluted Earnings Per Common Share	$	0.36		$	0.49

	Three Months Ended						Nine Months Ended
	September 30						September 30
		2014			2013			2014			2013

Net income	$	3,262		$	2,495		$	7,304		$	9,633
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Other-than-temporarily impaired securities available for sale:
Total gains		—			276			—			826
Losses recognized in earnings		—			—			—			—
Gains recognized in comprehensive income		—			276			—			826
Income tax effect		—			(113	)		—			(339	)
Unrealized holding gains on other-than-temporarily impaired
securities available for sale, net of tax		—			163			—			487
Securities available for sale not other-than-temporarily impaired:
Gains (losses) arising during the period		(4,595	)		(1,081	)		3,769			(13,357	)
Income tax effect		1,810			434			(1,428	)		5,163
		(2,785	)		(647	)		2,341			(8,194	)
Gains recognized in earnings		(1	)		—			(39	)		—
Income tax effect		—			—			16			—
		(1	)		—			(23	)		—
Unrealized holding gains (losses) on securities available for sale not
other-than-temporarily-impaired, net of tax		(2,786	)		(647	)		2,318			(8,194	)
Unrealized holding gains (losses) on securities, net		(2,786	)		(484	)		2,318			(7,707	)
Accrued benefit liability adjustment:
Net gain during the period		(152	)		—			(152	)		—
Reclassification adjustment for amortization of prior service cost and
net gain/loss included in net period pension cost		52			155			428			465
Income tax effect		40			(61	)		(110	)		(185	)
Net of tax		(60	)		94			166			280
Other comprehensive income (loss)		(2,846	)		(390	)		2,484			(7,427	)
Comprehensive Income	$	416		$	2,105		$	9,788		$	2,206

	September 30			December 31
	2014			2013
ASSETS
Cash and non-interest earning due from banks	$	48,995		$	37,711
Interest earning deposits in banks		292,076			661,643
Total cash and cash equivalents		341,071			699,354
Federal funds sold		13,608			27,134
Securities available for sale, at estimated fair value (amortized cost of $847,607 in
2014 and $550,785 in 2013)		842,750			542,198
Securities held to maturity, at amortized cost (estimated fair value of $4,837 in
2014 and $6,556 in 2013)		4,575			6,238
Federal Home Loan Bank of New York (FHLB) stock		2,409			3,478
Loans (net of allowance for loan losses of $27,722 in 2014 and $25,990 in 2013)		1,800,653			1,606,179
Accrued interest and other receivables		15,341			14,663
Premises and equipment, net		15,451			15,103
Deferred income tax, net		28,514			31,433
Bank owned life insurance		42,735			41,224
Goodwill		5,142			5,142
Other intangible assets		570			713
Other assets		7,278			6,340
Total Assets	$	3,120,097		$	2,999,199

LIABILITIES
Deposits:
Non-interest bearing	$	1,077,422		$	1,069,631
Interest bearing		1,691,229			1,564,113
Total deposits		2,768,651			2,633,744
Securities sold under repurchase agreements and other short-term borrowings		29,890			34,379
Other borrowings		—			16,388
Accrued interest and other liabilities		30,212			30,379
Total Liabilities		2,828,753			2,714,890

STOCKHOLDERS’ EQUITY
Preferred Stock, $0.01 par value; authorized 15,000,000 shares; no shares
outstanding in 2014 and 2013, respectively		—			—
Common stock, $0.20 par value; authorized 25,000,000 shares: outstanding
19,984,957 and 19,935,559 shares in 2014 and 2013, respectively		4,257			4,247
Additional paid-in capital		352,322			351,108
Retained earnings (deficit)		(3,784	)		(7,111	)
Accumulated other comprehensive loss		(3,887	)		(6,371	)
Treasury stock, at cost; 1,299,414 shares in 2014 and 2013		(57,564	)		(57,564	)
Total Stockholders' Equity		291,344			284,309
Total Liabilities and Stockholders' Equity	$	3,120,097		$	2,999,199

													Accumulated
	Number of							Additional		Retained			Other
	Shares		Common		Treasury			Paid-in		Earnings			Comprehensive
	Outstanding		Stock		Stock			Capital		(Deficit)			Income (Loss)			Total

Balance at January 1, 2013		19,761,426	$	4,212	$	(57,564	)	$	348,643	$	(3,471	)	$	(849	)	$	290,971
Net income		—		—		—			—		9,633			—			9,633
Other comprehensive loss		—		—		—			—		—			(7,427	)		(7,427	)
Common stock issued for dividend reinvestment		1,656		—		—			29		—			—			29
Vesting and exercise of stock options, net of tax		14,002		4		—			240		—			—			244
Restricted stock awards and related expense		126,253		25		—			800		—			—			825
Cash dividends ($0.18 per share)		—		—		—			—		(3,573	)		—			(3,573	)
Balance at September 30, 2013		19,903,337	$	4,241	$	(57,564	)	$	349,712	$	2,589		$	(8,276	)	$	290,702

Balance at January 1, 2014		19,935,559	$	4,247	$	(57,564	)	$	351,108	$	(7,111	)	$	(6,371	)	$	284,309
Net income		—		—		—			—		7,304			—			7,304
Other comprehensive income		—		—		—			—		—			2,484			2,484
Common stock issued for dividend reinvestment		2,397		—		—			41		—			—			41
Vesting and exercise of stock options, net of tax		6,413		2		—			120		—			—			122
Restricted stock awards and related expense		40,588		8		—			1,053		—			—			1,061
Cash dividends ($0.20 per share)		—		—		—			—		(3,977	)		—			(3,977	)
Balance at September 30, 2014		19,984,957	$	4,257	$	(57,564	)	$	352,322	$	(3,784	)	$	(3,887	)	$	291,344

	Nine Months Ended
	September 30
		2014			2013
Operating Activities:
Net Income	$	7,304		$	9,633
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,189			1,828
Depreciation and amortization		2,069			3,616
Realized gain on security transactions net		(39	)		—
Amortization of premiums on securities, net		1,992			1,309
Realized gain on sale of loans and revaluation of OREO, net		—			(17	)
Increase in cash value of bank owned life insurance		(1,250	)		(1,334	)
Amortization of other intangible assets		143			143
Share-based payment expense		1,061			825
Deferred tax expense (benefit)		1,396			(752	)
Increase (decrease) in deferred loan fees, net		848			(3,619	)
(Increase) decrease in accrued interest and other receivables		(678	)		2,701
(Increase) decrease in other assets		(938	)		5,118
Excess tax benefit from share-based payment arrangements		(66	)		(34	)
Increase (decrease) in accrued interest and other liabilities		111			(2,673	)
Net Cash Provided by Operating Activities		13,142			16,744

Investing Activities:
Net decrease in short term investments		13,526			858
Decrease in FHLB stock		1,069			1,348
Proceeds from maturities of securities available for sale		95,251			154,328
Proceeds from maturities of securities held to maturity		1,667			3,298
Proceeds from sales of securities available for sale		10,469			789
Purchases of securities available for sale		(404,499	)		(253,298	)
Net increase in loans		(196,512	)		(107,257	)
Proceeds from sales of OREO		—			267
Premiums paid on bank owned life insurance		(261	)		(261	)
Net (purchases) sales of premises and equipment		(2,417	)		4,694
Net Cash Used in Investing Activities		(481,707	)		(195,234	)

Financing Activities:
Proceeds from issuance of common stock		163			273
Excess tax benefits from share-based payment arrangements		66			34
Net increase in deposits		134,907			144,979
Cash dividends paid		(3,977	)		(3,573	)
Repayment of other borrowings		(16,388	)		(30	)
Net decrease in securities sold under repurchase agreements and short-term borrowings		(4,489	)		(13,586	)
Net Cash Provided by Financing Activities		110,282			128,097

Decrease in Cash and Cash Equivalents		(358,283	)		(50,393	)
Cash and Cash Equivalents, Beginning of Period		699,354			827,523
Cash and Cash Equivalents, End of Period	$	341,071		$	777,130

Supplemental Disclosures:
Interest paid	$	3,614		$	4,230
Income tax payments		—			5,095
Change in unrealized loss on securities available for sale, net of tax		2,318			(7,707	)
Transfers from loans held for sale back to loan portfolio		—			2,317

Hudson Valley Holding Corp. (“Hudson Valley” or the “Company”) is a New York corporation founded in 1982. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956.

The Company provides financial services through its wholly-owned subsidiary, Hudson Valley Bank, N.A. (“HVB” or the “Bank”), a national banking association established in 1972, with operational headquarters in Westchester County, New York. HVB has 17 branch offices in Westchester County, New York, 4 in Manhattan, New York, 4 in Bronx County, New York, 2 in Rockland County, New York, and 1 in Kings County, New York. During 2013, the Company announced and completed the consolidation and/or closure of its 6 Connecticut branches, 1 branch in Westchester, and 1 branch in Manhattan, New York.

The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a money management firm, thereby generating fee income, which has offices at 500 Fifth Avenue in Manhattan, New York.

The Company provides asset based lending products through a wholly-owned subsidiary of HVB, HVB Capital Credit LLC, which has offices at 489 Fifth Avenue in Manhattan, New York.

The Company provides equipment loan and lease financing through a wholly-owned subsidiary of HVB, HVB Equipment Capital, LLC, which also has offices at 489 Fifth Avenue in Manhattan, New York.

We derive substantially all of our revenue and income from providing banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals within our market area.

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

Our principal customers are businesses, professionals, municipalities, not-for-profit organizations and individuals. Our strategy is to operate community-oriented banking institutions dedicated to providing personalized service to customers and focusing on products and services for selected segments of the market. We believe that our ability to attract and retain customers is due primarily to our focused approach to our markets, our personalized and professional services, our product offerings, our experienced staff, our knowledge of our markets and our ability to provide responsive solutions to customer needs. We provide these products and services to a diverse range of customers and do not rely on a single large depositor for a significant percentage of deposits.

The unaudited condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not contain all of the information and footnotes required by GAAP for annual financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The accounting and reporting policies followed in the presentation of the unaudited condensed consolidated financial statements are consistent with those described in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s 2013 Annual Report on Form 10-K. Management has evaluated all significant events and transactions that occurred after September 30, 2014, for potential recognition or disclosure in these consolidated financial statements. In the opinion of management, these consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and dates indicated. Such adjustments are normal and recurring in nature. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period’s presentation. Reclassifications had no effect on prior period net income or stockholders’ equity.

In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and statements of income for the periods reported. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of the fair value of securities available for sale, the determination of other-than-temporary impairment of investments and the carrying amounts of goodwill and deferred tax assets. In connection with the determination of the allowance for loan losses, management utilizes the work of professional appraisers for significant properties.

The following tables set forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities classified as available for sale and held to maturity at the dates indicated:

	September 30, 2014
	Amortized		Gross Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
	(In thousands)
Classified as Available for Sale
U.S. Treasury and government agencies	$	119,020	$	92	$	666	$	118,446
Mortgage-backed securities - residential		615,444		2,113		8,097		609,460
Obligations of states and political subdivisions		102,470		1,154		51		103,573
Other debt securities		971		3		1		973
Total debt securities		837,905		3,362		8,815		832,452
Mutual funds and other equity securities		9,702		870		274		10,298
Total	$	847,607	$	4,232	$	9,089	$	842,750


	Amortized		Gross Unrecognized				Estimated
	Cost		Gains		Losses		Fair Value
	(In thousands)
Classified as Held to Maturity
Mortgage-backed securities - residential	$	2,456	$	232		—	$	2,688
Obligations of states and political subdivisions		2,119		30		—		2,149
Total	$	4,575	$	262		—	$	4,837

	December 31, 2013
	Amortized		Gross Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
	(In thousands)
Classified as Available for Sale
U.S. Treasury and government agencies	$	94,427	$	35	$	770	$	93,692
Mortgage-backed securities - residential		349,216		2,211		11,732		339,695
Obligations of states and political subdivisions		87,884		1,520		100		89,304
Other debt securities		9,529		4		4		9,529
Total debt securities		541,056		3,770		12,606		532,220
Mutual funds and other equity securities		9,729		636		387		9,978
Total	$	550,785	$	4,406	$	12,993	$	542,198


	Amortized		Gross Unrecognized				Estimated
	Cost		Gains		Losses		Fair Value
	(In thousands)
Classified as Held to Maturity
Mortgage-backed securities - residential	$	3,133	$	249		—	$	3,382
Obligations of states and political subdivisions		3,105		69		—		3,174
Total	$	6,238	$	318		—	$	6,556

Included in other debt securities at December 31, 2013, were investments in pooled trust preferred securities with an original cost of $19,995 and a carrying value of $8,753. These investments had been severely negatively affected by the economic downturn of recent years and had accumulated other-than-temporary impairment (“OTTI”) losses of $11,242. The Company sold these investments in January 2014 using the specific identification method without further loss. There were no OTTI losses recognized in the nine month periods ended September 30, 2014 or 2013.

The following table summarizes the change in pretax OTTI credit related losses on securities available for sale for the periods indicated:

At September 30, 2014 and December 31, 2013, securities having a stated value of approximately $321,629 and $216,051, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

The following tables reflect the fair value and gross unrealized loss of the Company’s investments, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of the dates indicated:

	Less Than 12 Months				Greater Than 12 Months				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2014	Value		Loss		Value		Loss		Value		Loss
	(In thousands)
Available for sale:
U.S. Treasuries and government agencies	$	40,431	$	323	$	21,213	$	343	$	61,644	$	666
Mortgage-backed securities - residential		365,876		2,573		157,740		5,524		523,616		8,097
Obligations of states and political subdivisions		10,119		37		2,213		14		12,332		51
Other debt securities		510		1		—		—		510		1
Total debt securities		416,936		2,934		181,166		5,881		598,102		8,815
Mutual funds and other equity securities		16		1		8,887		273		8,903		274
Total temporarily impaired securities	$	416,952	$	2,935	$	190,053	$	6,154	$	607,005	$	9,089

	Less Than 12 Months				Greater Than 12 Months				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2013	Value		Loss		Value		Loss		Value		Loss
	(In thousands)
Available for sale:
U.S. Treasuries and government agencies	$	53,299	$	761	$	3,469	$	9	$	56,768	$	770
Mortgage-backed securities - residential		240,192		10,593		20,216		1,139		260,408		11,732
Obligations of states and political subdivisions		8,060		94		1,322		6		9,382		100
Other debt securities		203		2		98		2		301		4
Total debt securities		301,754		11,450		25,105		1,156		326,859		12,606
Mutual funds and other equity securities		—		—		8,785		387		8,785		387
Total temporarily impaired securities	$	301,754	$	11,450	$	33,890	$	1,543	$	335,644	$	12,993

There were no securities classified as held to maturity in an unrealized loss position at September 30, 2014 or December 31, 2013.

The total number of securities in the Company’s portfolio that were in an unrealized loss position was 242 and 215 at September 30, 2014 and December 31, 2013, respectively. The Company has determined that it does not intend to sell, nor is it more likely than not that it will be required to sell, its securities that are in an unrealized loss position prior to the recovery of its amortized cost basis. The Company believes that its securities continue to have satisfactory ratings, are readily marketable and that current unrealized losses are primarily a result of changes in interest rates and other market conditions. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

The contractual maturity of all debt securities held at September 30, 2014 is shown below. Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)
Contractual Maturity
Within 1 year	$	46,554	$	46,650		—		-
After 1 year but within 5 years		149,336		149,585	$	2,119	$	2,149
After 5 year but within 10 years		26,571		26,757		—		—
After 10 years		—		—		—		—
Mortgage-backed securities - residential		615,444		609,460		2,456		2,688
Total	$	837,905	$	832,452	$	4,575	$	4,837

Risk characteristics of the Company’s loan portfolio segments include the following:

Commercial Real Estate Loans — In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loan. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan, or a decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied. These types of loans may involve greater risks than other types of lending, because payments on such loans are often dependent upon the successful operation of the business involved, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions affecting the borrowers’ business.

Construction Loans — Construction loans are short-term loans (generally up to 18 months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of

construction are completed. Most non-residential construction loans require pre-approved permanent financing or pre-leasing by the company or another bank providing the permanent financing. The Company funds construction of single family homes and commercial real estate, when no contract of sale exists, based upon the experience of the builder, the financial strength of the owner, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by a decline in general economic conditions. The Bank’s primary regulator considers construction loans to be part of commercial real estate for concentration risk measurement purposes.

Residential Real Estate Loans — Various loans secured by residential real estate properties are offered by the Company, including 1-4 family residential mortgages, multi-family residential loans and a variety of home equity line of credit products. Repayment of such loans may be negatively impacted should the borrower default, should there be a significant decline in the value of the property securing the loan or should there be a decline in general economic conditions. These loans are available for 7 or 10 year terms with one 5 year extension option. A 7 year term with no extension option is also offered. Pricing is typically based on a spread over the corresponding Federal Home Loan Bank (“FHLB”) rate. Amortization of up to 30 years, a maximum loan to value ratio of 75% and a debt service coverage ratio of 1.2 to 1 are generally required. The Bank’s primary regulator considers multi-family residential loans to be part of commercial real estate for concentration risk measurement purposes.

Commercial and Industrial Loans — The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance the purchase of inventory, new or used equipment or other short or long-term working capital purposes. These loans are generally secured by corporate assets, often with real estate as secondary collateral, but are also offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source. In late 2013, the Company initiated an asset-based lending (“ABL”) program which offers credit facilities in the form of credit lines and/or term loans to manufacturers, wholesalers, distributors, service providers and retailers. ABL refers to loans secured by a variety of assets usually comprised of accounts receivable, inventory, machinery and equipment and, at times, real estate. The collateral is considered the primary source of repayment and the operation of the business is the secondary source. Commercial loans are often larger and may involve greater risks than other types of loans offered by the Company. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.

Lease Financing and Other Loans — The Company originates lease financing transactions which are primarily conducted with businesses, professionals and not-for-profit organizations. In late March 2014, the Company initiated an equipment leasing program with a focus on financing income producing equipment in the manufacturing, healthcare, technology and transportation segments. 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, and management’s inability to effectively manage the business or loss of market for the borrower’s products or services. The Company also offers installment loans and reserve lines of credit to individuals. Repayment of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an emphasis on originating these types of loans.

The following table presents the allowance for loan losses by portfolio segment for the periods indicated:

	For the three months ended September 30, 2014
	Commercial						Residential			Commercial &			Lease Financing
	Real Estate			Construction			Real Estate			Industrial			& Other			Total
	(In thousands)
Balance at beginning of period	$	11,831		$	4,460		$	6,431		$	4,177		$	376		$	27,275
Charge-offs		(202	)		—			(325	)		—			(26	)		(553	)
Recoveries		195			—			43			103			8			349
Net Recoveries (Charge-offs)		(7	)		—			(282	)		103			(18	)		(204	)
Provision for loan losses		148			(92	)		366			(135	)		364			651
Net change during the period		141			(92	)		84			(32	)		346			447
Balance at end of period	$	11,972		$	4,368		$	6,515		$	4,145		$	722		$	27,722

	For the nine months ended September 30, 2014
	Commercial						Residential			Commercial &			Lease Financing
	Real Estate			Construction			Real Estate			Industrial			& Other			Total
	(In thousands)
Balance at beginning of period	$	11,231		$	4,641		$	6,236		$	3,436		$	446		$	25,990
Charge-offs		(202	)		—			(1,011	)		(99	)		(36	)		(1,348	)
Recoveries		983			37			191			539			141			1,891
Net Recoveries (Charge-offs)		781			37			(820	)		440			105			543
Provision for loan losses		(40	)		(310	)		1,099			269			171			1,189
Net change during the period		741			(273	)		279			709			276			1,732
Balance at end of period	$	11,972		$	4,368		$	6,515		$	4,145		$	722		$	27,722

	For the three months ended September 30, 2013
	Commercial						Residential			Commercial &			Lease Financing
	Real Estate			Construction			Real Estate			Industrial			& Other			Total
	(In thousands)
Balance at beginning of period	$	11,344		$	4,112		$	6,446		$	3,638		$	386		$	25,926
Charge-offs		(281	)		(94	)		(595	)		(228	)		(150	)		(1,348	)
Recoveries		50			—			293			156			19			518
Net Charge-offs		(231	)		(94	)		(302	)		(72	)		(131	)		(830	)
Provision for loan losses		(303	)		424			572			(121	)		195			767
Net change during the period		(534	)		330			270			(193	)		64			(63	)
Balance at end of period	$	10,810		$	4,442		$	6,716		$	3,445		$	450		$	25,863

	For the three months ended September 30, 2013
	Commercial						Residential			Commercial &			Lease Financing
	Real Estate			Construction			Real Estate			Industrial			& Other			Total
	(In thousands)
Balance at beginning of period	$	10,090		$	3,949		$	8,119		$	4,077		$	377		$	26,612
Charge-offs		(649	)		(676	)		(2,165	)		(903	)		(397	)		(4,790	)
Recoveries		107			3			1,646			405			52			2,213
Net Charge-offs		(542	)		(673	)		(519	)		(498	)		(345	)		(2,577	)
Provision for loan losses		1,262			1,166			(884	)		(134	)		418			1,828
Net change during the period		720			493			(1,403	)		(632	)		73			(749	)
Balance at end of period	$	10,810		$	4,442		$	6,716		$	3,445		$	450		$	25,863

The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of the dates indicated:

	September 30, 2014
	Commercial				Residential		Commercial &		Lease Financing
	Real Estate		Construction		Real Estate		Industrial		& Other		Total
	(In thousands)
Allowance for loan losses:
Ending balance attributed to loans:
Collectively evaluated for impairment	$	11,972	$	4,368	$	6,515	$	4,145	$	722	$	27,722
Individually evaluated for impairment		—		—		—		—		—		—
Total allowance for loan losses	$	11,972	$	4,368	$	6,515	$	4,145	$	722	$	27,722

Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	613,965	$	83,844	$	719,499	$	309,850	$	53,282	$	1,780,440
Individually evaluated for impairment		25,084		879		13,034		8,407		—		47,404
Total loans	$	639,049	$	84,723	$	732,533	$	318,257	$	53,282	$	1,827,844

	December 31, 2013
	Commercial				Residential		Commercial &		Lease Financing
	Real Estate		Construction		Real Estate		Industrial		& Other		Total
	(In thousands)
Allowance for loan losses:
Ending balance attributed to loans:
Collectively evaluated for impairment	$	11,231	$	4,641	$	6,236	$	3,436	$	446	$	25,990
Individually evaluated for impairment		—		—		—		—		—		—
Total allowance for loan losses	$	11,231	$	4,641	$	6,236	$	3,436	$	446	$	25,990

Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	580,561	$	87,432	$	642,957	$	248,260	$	30,528	$	1,589,738
Individually evaluated for impairment		12,915		879		16,940		10,318		—		41,052
Total loans	$	593,476	$	88,311	$	659,897	$	258,578	$	30,528	$	1,630,790

The following table presents the recorded investment in non-accrual loans and loans past due 90 days and still accruing by class of loans as of the dates indicated:

	September 30, 2014				December 31, 2013
			Past Due				Past Due
			90 Days and				90 Days and
	Non-Accrual		Still Accruing		Non-Accrual		Still Accruing
	(In thousands)
Loans:
Commercial Real Estate:
Owner occupied	$	3,052		—	$	3,768		—
Non owner occupied		12,438		—		2,861		—
Construction:
Commercial		879		—		879		—
Residential		—		—		—		—
Residential:
Multifamily		—		—		1,282		—
1-4 family		9,678		—		12,164		—
Home equity		980		—		1,113		—
Commercial & Industrial		—		—		1,422		—
Other:
Lease financing & other		—		—		—		—
Overdrafts		—		—		—		—
Total	$	27,027		—	$	23,489		—

Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $391 and $819 for the three and nine month periods ended September 30, 2014, respectively, and $341 and $820 for the same periods in the prior year. There was no interest income recorded on non-accrual loans during the nine month periods ended September 30, 2014 and 2013.

The following table presents the aging of loans (including past due and non-accrual loans) by class of loans as of the dates indicated:

	September 30, 2014
	31-60 Days		61-89 Days		90 Days Or		Total
	Past Due		Past Due		More Past Due		Past Due		Current		Total
	(In thousands)
Loans:
Commercial Real Estate:
Owner occupied		—		—	$	205	$	205	$	169,462	$	169,667
Non owner occupied	$	10,050		—		3,188		13,238		456,144		469,382
Construction:
Commercial		—		—		879		879		49,982		50,861
Residential		—		—		—		—		33,862		33,862
Residential:
Multifamily		550		—		—		550		327,513		328,063
1-4 family		572	$	319		4,522		5,413		284,026		289,439
Home equity		2,846		—		980		3,826		111,205		115,031
Commercial & Industrial		1,339		575		—		1,914		316,343		318,257
Other:
Lease financing & other		2		—		—		2		51,939		51,941
Overdrafts		—		—		—		—		1,341		1,341
Total	$	15,359	$	894	$	9,774	$	26,027	$	1,801,817	$	1,827,844

	December 31, 2013
	31-60 Days		61-89 Days		90 Days Or		Total
	Past Due		Past Due		More Past Due		Past Due		Current		Total
	(In thousands)
Loans:
Commercial Real Estate:
Owner occupied		—	$	158	$	704	$	862	$	167,509	$	168,371
Non owner occupied	$	200		—		2,861		3,061		422,044		425,105
Construction:
Commercial		—		—		879		879		46,160		47,039
Residential		1		—		—		1		41,271		41,272
Residential:
Multifamily		—		—		—		—		226,898		226,898
1-4 family		1,012		190		11,841		13,043		307,598		320,641
Home equity		408		540		1,113		2,061		110,297		112,358
Commercial & Industrial		1,606		321		1,365		3,292		255,286		258,578
Other:
Lease financing & other		185		4		—		189		29,437		29,626
Overdrafts		—		—		—		—		902		902
Total	$	3,412	$	1,213	$	18,763	$	23,388	$	1,607,402	$	1,630,790

Impaired loans and the recorded investment in impaired loans as of the dates indicated were as follows:

	September 30, 2014						December 31, 2013
	Unpaid				Allowance for		Unpaid				Allowance for
	Principal		Recorded		Loan Losses		Principal		Recorded		Loan Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
	(In thousands)
With no related allowance recorded:
Commercial Real Estate:
Owner occupied	$	11,298	$	11,218		—	$	10,320	$	10,054		—
Non owner occupied		14,035		13,867		—		2,861		2,861		—
Construction:
Commercial		1,231		879		—		1,231		879		—
Residential		—		—		—		—		—		—
Residential:
Multifamily		1,603		1,603		—		2,921		2,921		—
1-4 family		12,627		10,375		—		14,782		12,831		—
Home equity		1,055		1,055		—		1,705		1,188		—
Commercial & Industrial		8,410		8,407		—		11,421		10,318		—
Total loans	$	50,259	$	47,404		—	$	45,241	$	41,052		—

The carrying value of impaired loans was determined using either the fair value of the underlying collateral of the loan or by an analysis of the expected cash flows related to the loan.

The following table presents the average recorded investment in impaired loans by portfolio segment and interest recognized on impaired loans for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	Average		Average		Average		Average
	Recorded	Interest	Recorded	Interest	Recorded	Interest	Recorded	Interest
	Investment	Income	Investment	Income	Investment	Income	Investment	Income
	(In thousands)
Commercial Real Estate:
Owner occupied	$ 11,161	$ 18	$ 19,554	$ 3	$ 10,993	$ 55	$ 20,742	$ 10
Non owner occupied	9,330	81	3,030	62	5,819	238	3,135	187
Construction:
Commercial	879	—	927	—	879	—	1,210	—
Residential	—	—	1,661	8	—	—	1,822	19
Residential:
Multifamily	1,609	17	3,275	39	1,835	52	3,238	118
1-4 family	11,369	12	13,088	—	12,223	36	12,445	—
Home equity	1,093	1	825	—	1,127	1	708	—
Commercial & Industrial	8,710	98	11,385	106	9,184	295	11,711	327
Lease Financing & Other	—	—	—	—	—	—	—	—
Total	$ 44,151	$ 227	$ 53,745	$ 218	$ 42,060	$ 677	$ 55,011	$ 661

During the nine months ended September 30, 2014, the terms of certain loans were modified as troubled debt restructurings (“TDRs”). The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 6 months to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 3 years.

The Company is not committed to extend any additional credit to borrowers whose loans are classified as TDRs. Impaired loans as of September 30, 2014 and December 31, 2013 included $31,256 and $30,864, respectively, of loans considered to be TDRs. The Company classifies all loans considered to be TDRs as impaired.

For the nine month period ended September 30, 2014, sixteen TDRs with carrying amounts of $20,377 were on accrual status and performing in accordance with their modified terms. All other TDRs for the nine month period ended September 30, 2014 were on non-accrual status. At September 30, 2014, there was one loan totaling $3,874 modified as a TDR that was in payment default within twelve months following the modification. There were no TDRs with payment defaults within twelve months following the modification during the nine month periods ended September 30, 2013. The Company’s policy states that a loan is considered to be in payment default once it is 45 days contractually past due under the modified terms.

The following tables present loans by class modified as TDRs that occurred during the periods indicated:

	Three Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2014
		Pre-Modification	Post-Modification		Pre-Modification	Post-Modification
		Outstanding	Outstanding		Outstanding	Outstanding
	Number	Recorded	Recorded	Number	Recorded	Recorded
	of Loans	Investment	Investment	of Loans	Investment	Investment
	(Dollars in thousands)
Commercial Real Estate:
Owner occupied	1	$ 602	$ 602	2	$ 1,901	$ 1,901
Non owner occupied	—	—	—	2	1,444	1,444
Construction:
Commercial	—	—	—	—	—	—
Residential	—	—	—	—	—	—
Residential:
Multifamily	—	—	—	—	—	—
1-4 family	2	157	157	4	365	365
Home equity	—	—	—	1	75	75
Commercial & Industrial	—	—	—	—	—	—
Other:
Lease financing and other	—	—	—	—	—	—
Overdrafts	—	—	—	ù	—	—
Total	3	$ 759	$ 759	9	$ 3,785	$ 3,785

The TDRs described above resulted in no charge-offs during the nine month period ended September 30, 2014.

	Three Months Ended			Nine Months Ended
	September 30, 2013			September 30, 2013
		Pre-Modification	Post-Modification		Pre-Modification	Post-Modification
		Outstanding	Outstanding		Outstanding	Outstanding
	Number	Recorded	Recorded	Number	Recorded	Recorded
	of Loans	Investment	Investment	of Loans	Investment	Investment
	(Dollars in thousands)
Commercial Real Estate:
Owner occupied	—	—	—	—	—	—
Non owner occupied	—	—	—	1	$ 5,546	$ 5,546
Construction:
Commercial	—	—	—	—	—	—
Residential	—	—	—	—	—	—
Residential:
Multifamily	—	—	—	—	—	—
1-4 family	3	$ 4,440	$ 4,393	7	9,643	9,419
Home equity	1	75	75	1	75	75
Commercial & Industrial	—	—	—	2	569	538
Other:
Lease financing and other	—	—	—	—	—	—
Overdrafts	—	—	—	—	—	—
Total	4	$ 4,515	$ 4,468	11	$ 15,833	$ 15,578

The TDRs described above resulted in charge-offs of $48 and $269 during the three and nine month periods ended September 30, 2013, respectively.

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as value of underlying collateral, current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans individually and classifies them as to credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention — Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful — Loans classified as doubtful have all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans not meeting the above criteria that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following table presents the risk category by class of loans as of the dates indicated of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed:

	September 30, 2014
	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial Real Estate:
Owner occupied	$	134,494	$	15,765	$	19,408		—	$	169,667
Non owner occupied		436,857		13,966		18,559		—		469,382
Construction:
Commercial		44,482		5,500		879		—		50,861
Residential		33,862		—		—		—		33,862
Residential:
Multifamily		325,462		2,601		—		—		328,063
1-4 family		26,937		2,384		14,084		—		43,405
Home equity		32		—		1,750		—		1,782
Commercial & Industrial		308,237		7,617		2,403		—		318,257
Lease Financing & Other		46,681		—		175		—		46,856
Total loans	$	1,357,044	$	47,833	$	57,258		—	$	1,462,135

	December 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial Real Estate:
Owner occupied	$	139,108	$	6,342	$	22,921		—	$	168,371
Non owner occupied		399,009		14,024		12,072		—		425,105
Construction:
Commercial		46,160		—		879		—		47,039
Residential		37,931		3,341		—		—		41,272
Residential:
Multifamily		222,147		2,550		2,201		—		226,898
1-4 family		42,158		2,008		17,274		—		61,440
Home equity		34		—		1,112		—		1,146
Commercial & Industrial		249,238		5,207		4,133		—		258,578
Lease Financing & Other		28,391		—		270		—		28,661
Total loans	$	1,164,176	$	33,472	$	60,862		—	$	1,258,510

Loans not individually rated, primarily consisting of certain 1-4 family residential mortgages and home equity lines of credit, are evaluated for risk in groups of homogeneous loans. The primary risk characteristic evaluated on these pools is delinquency.

The following table presents the delinquency categories by class of loans as of the dates indicated for loans evaluated for risk in groups of homogeneous loans:

	September 30, 2014
	31-59 Days		60-89 Days		90 Days Or		Total
	Past Due		Past Due		More Past Due		Past Due		Current		Total
	(In thousands)
Residential:
1-4 family	$	227	$	122		—	$	349	$	245,684	$	246,033
Home equity		2,747		—		—		2,747		110,503		113,250
Other:
Other loans		2		—		—		2		5,081		5,083
Overdrafts		—		—		—		—		1,343		1,343
Total loans	$	2,976	$	122		—	$	3,098	$	362,611	$	365,709

	December 31, 2013
	31-59 Days		60-89 Days		90 Days Or		Total
	Past Due		Past Due		More Past Due		Past Due		Current		Total
	(In thousands)
Residential:
1-4 family	$	705	$	115		—	$	820	$	258,381	$	259,201
Home equity		408		540		—		948		110,264		111,212
Other:
Other loans		23		4		—		27		938		965
Overdrafts		—		—		—		—		902		902
Total loans	$	1,136	$	659		—	$	1,795	$	370,485	$	372,280

FASB ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards and restricted stock units granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities. Restricted stock unit awards which contain forfeitable rights to dividends and are non-voting, are considered common stock equivalents and are considered only in diluted earnings per share.

The following table presents the calculation of earnings per share for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30				September 30
		2014		2013		2014		2013
	(Dollars in thousands)
Net income	$	3,262	$	2,495	$	7,304	$	9,633
Less: Dividends paid on and earnings allocated to participating securities		45	$	40		101		136
Income attributable to common stock	$	3,217	$	2,455	$	7,203	$	9,497
Weighted average common shares outstanding, including participating
securities		19,987,656		19,902,465		19,987,074		19,866,599
Less: Weighted average participating securities		271,048		304,970		279,636		285,361
Weighted average common shares outstanding		19,716,608		19,597,495		19,707,438		19,581,238
Basic earnings per common share	$	0.16	$	0.13	$	0.37	$	0.49

Income attributable to common stock	$	3,217	$	2,455	$	7,203	$	9,497
Weighted average common shares outstanding		19,716,608		19,597,495		19,707,438		19,581,238
Weighted average common equivalent shares outstanding		54,725		—		46,541		—
Weighted average common and equivalent shares outstanding		19,771,333		19,597,495		19,753,979		19,581,238
Diluted earnings per common share	$	0.16	$	0.13	$	0.36	$	0.49

Dividends per common share	$	0.08	$	0.06	$	0.20	$	0.18

There were 209,925 and 342,733 options outstanding at September 30, 2014, and 2013, respectively, that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common stock and were, therefore, antidilutive.

In addition to defined contribution pension and savings plans which cover substantially all employees, the Company provides additional retirement benefits to certain officers and directors pursuant to unfunded supplemental defined benefit plans. The following table summarizes the components of the net periodic pension cost of the defined benefit plans.

The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2013 Annual Report on Form 10-K that it expected to contribute $1,067 to the unfunded defined benefit plans during 2014. During the third quarter of 2014, a participant elected earlier than anticipated payments resulting in an increase of the expected contributions to $1,124 for fiscal year 2014. The Company contributed $339 and $790 to these plans for the three and nine month periods ended September 30, 2014, respectively.

In accordance with the provisions of the Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan, the Company may grant eligible employees, including directors, consultants and advisors, incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other types of awards. Prior to the 2010 Plan, the Company had stock option plans that provided for the granting of options to directors, officers, eligible employees, and certain advisors at an exercise price not less than the market value of the stock on the date of grant subject to various eligibility and vesting requirements. There will be no further grants under any plans adopted prior to the 2010 plan.

Compensation costs relating to stock-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Stock-based payments are expensed over their respective vesting periods.

The following table summarizes stock-based compensation activity for the nine month period ended September 30, 2014:

				Weighted		Aggregate		Weighted Average
				Average Grant or		Intrinsic Value (2)		Remaining
Prior Option Plans (1):	Shares			Exercise Price		(In thousands)		Contractual Term
Outstanding at December 31, 2013		295,627		$	21.62
Granted		—			—
Exercised		(6,413	)		18.78
Cancelled or Expired		(24,657	)		22.15
Outstanding at September 30, 2014		264,557			21.64	$	—		0.8

Exercisable at September 30, 2014		264,557			21.64		—		0.8

Non-vested at September 30, 2014		—			—

2010 Omnibus Incentive Plan:

Non-vested at December 31, 2013	251,274		$	16.30
Granted at fair value	175,052			18.19
Restriction released	(40,708	)		16.48
Cancelled	(62,861	)		16.57
Non-vested at September 30, 2014	322,757			17.25


Available for grant at December 31, 2013	968,762
Restricted stock awards	(175,052	)	$	18.14
Unissued or cancelled	123,823			16.41
Available for future grant	917,533

The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted in the nine month period ended September 30, 2014 or the year ended December 31, 2013.

There was no net compensation expense related to stock options included in net income for the nine month periods ended September 30, 2014 and 2013. There was no remaining unrecognized compensation expense related to stock options at September 30, 2014 and 2013.

During 2014, the Company granted 65,531 of restricted stock units. Each unit cliff vests three years from the date of grant with the amount of shares awarded dependent upon the Company’s performance relative to a defined peer group. No expense has been recognized in either the three or nine months ended September 30, 2014.

Compensation expense of $1,436 and $888 related to the Company’s restricted stock awards was included in net income for the nine month periods ended September 30, 2014 and 2013, respectively. The tax effect related thereto was $595 and $361, respectively. Unrecognized compensation expense related to restricted stock awards totaled $3,133 at September 30, 2014. This expense is expected to be recognized over a remaining weighted average period of 2.1 years.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Investment Securities — The fair values of investment securities are determined by obtaining quoted prices on nationally recognized securities exchanges, if available (Level 1), or matrix pricing, which is a mathematical technique widely used in the

industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, which is a Level 2 input.

Impaired Loans — At the time a loan is considered impaired, it is generally valued at lower of cost or fair value. Impaired loans carried at fair value generally are partially charged off or receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals adjusted for market conditions and costs to sell. Management may apply additional discounts based on changes in the market from the time of valuation. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned (“OREO”) — Real estate properties acquired through loan foreclosure are recorded at estimated fair value, net of estimated selling costs, at time of foreclosure establishing a new cost basis. Fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs used in determining fair value.

	September 30, 2014
	Quoted Prices in		Significant		Significant
	Active Markets		Other		Unobservable
	for Identical Assets		Observable Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Measured on a recurring basis:
Available for sale securities:
U.S. Treasury and government agencies		—	$	118,446		—	$	118,446
Mortgage-backed securities - residential		—		609,460		—		609,460
Obligations of states and political subdivisions		—		103,573		—		103,573
Other debt securities		—		973		—		973
Mutual funds and other equity securities	$	10,298		—		—		10,298
Total assets at fair value	$	10,298	$	832,452		—	$	842,750

Measured on a non-recurring basis:
Impaired loans: (1)
Commercial Real Estate		—		—	$	725	$	725
Construction		—		—		—		—
Residential		—		—		3,874		3,874
Commercial & Industrial		—		—		—		—
Total assets at fair value		—		—	$	4,599	$	4,599

	December 31, 2013
	Quoted Prices in		Significant		Significant
	Active Markets		Other		Unobservable
	for Identical Assets		Observable Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Measured on a recurring basis:
Available for sale securities:
U.S. Treasury and government agencies		—	$	93,692		—	$	93,692
Mortgage-backed securities - residential		—		339,695		—		339,695
Obligations of states and political subdivisions		—		89,304		—		89,304
Other debt securities		—		9,529		—		9,529
Mutual funds and other equity securities	$	9,978		—		—		9,978
Total assets at fair value	$	9,978	$	532,220		—	$	542,198

Measured on a non-recurring basis:
Impaired loans: (1)
Commercial Real Estate		—		—		—		—
Construction		—		—		—		—
Residential		—		—	$	380	$	380
Commercial & Industrial		—		—		895		895
Total assets at fair value		—		—	$	1,275	$	1,275

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of the dates indicated:

The table below presents a reconciliation and income statement classification of gains and losses for securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated:

The Company follows the “Financial Instruments” topic of the FASB Accounting Standards Codification which requires the disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of September 30, 2014 and December 31, 2013 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.

Carrying amount and estimated fair value of financial instruments, not previously presented, at the dates indicated were as follows:

					Fair Value Measurements
					Quoted Prices in		Significant		Significant
			Total		Active Markets for		Other Observable		Unobservable
	Carrying		Fair		Identical Assets		Inputs		Inputs
September 30, 2014	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(In millions)
Assets:
Held to maturity securities and accrued interest	$	4.6	$	4.8		—	$	4.8		—
FHLB Stock		2.4	N/A			—		—		—
Loans and accrued interest		1,830.0		1,833.5		—		—	$	1,833.5

Liabilities:
Deposits with no stated maturity and accrued interest		2,658.3		2,658.3	$	2,658.3		—		—
Time deposits and accrued interest		110.5		110.4		—		110.4		—
Securities sold under repurchase agreements and
other short-term borrowing and accrued interest		29.9		29.9		29.9		—		—

					Fair Value Measurements
					Quoted Prices in		Significant		Significant
			Total		Active Markets for		Other Observable		Unobservable
	Carrying		Fair		Identical Assets		Inputs		Inputs
December 31, 2013	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(In millions)
Assets:
Held to maturity securities and accrued interest	$	6.2	$	6.6		—	$	6.6		—
FHLB Stock		3.5	N/A			—		—		—
Loans and accrued interest		1,637.3		1,655.6		—		—	$	1,655.6

Liabilities:
Deposits with no stated maturity and accrued interest		2,517.8		2,517.8	$	2,517.8		—		—
Time deposits and accrued interest		116.1		116.1		—		116.1		—
Securities sold under repurchase agreements and
other short-term borrowing and accrued interest		34.4		34.4		34.4		—		—
Other borrowings and accrued interest		16.5		14.6		—		14.6		—

Financial assets for which carrying value approximates fair value are excluded from the table — 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.

Held to maturity securities and accrued interest — The fair value of securities held to maturity was estimated based on quoted market prices or dealer quotations. Accrued interest is stated at its carrying amounts which approximates fair value.

FHLB Stock — It is not practicable to determine its fair value due to restrictions placed on its transferability.

Loans and accrued interest — The fair value of loans was estimated by discounting projected cash flows at the reporting date using current rates for similar loans. Accrued interest is stated at its carrying amount which approximates fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits with no stated maturity and accrued interest — The estimated fair value of deposits with no stated maturity and accrued interest, as applicable, are considered to be equal to their carrying amounts.

Time deposits and accrued interest — The fair value of time deposits has been estimated by discounting projected cash flows at the reporting date using current rates for similar deposits. Accrued interest is stated at its carrying amount which approximates fair value.

Securities sold under repurchase agreements and other short-term borrowings and accrued interest — The estimated fair value of these instruments approximate carrying amount because of their short maturities and variable rates. Accrued interest is stated at its carrying amount which approximates fair value.

Other borrowings and accrued interest — The fair value of callable FHLB advances was estimated by discounting projected cash flows at the reporting date using the rate applicable to the projected call date option. Accrued interest is stated at its carrying amount which approximates fair value.

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and accrued benefit liability adjustments which are also recognized as separate components of equity. Activity in accumulated other comprehensive income (loss), net of tax, was as follows:

							Accumulated
	Securities			Defined			Other
	Available			Benefit			Comprehensive
	For Sale			Plans			Income (Loss)
	(In thousands)
Balance at January 1, 2014	$	(5,328	)	$	(1,043	)	$	(6,371	)
Other comprehensive income (loss) before reclassification		2,341			(91	)		2,250
Amounts reclassified from accumulated other comprehensive income		(23	)		257			234
Net other comprehensive income during period		2,318			166			2,484
Balance at September 30, 2014	$	(3,010	)	$	(877	)	$	(3,887	)


Balance at January 1, 2013	$	624		$	(1,473	)	$	(849	)
Other comprehensive (loss) income before reclassification		(7,707	)		—			(7,707	)
Amounts reclassified from accumulated other comprehensive income		—			280			280
Net other comprehensive (loss) income during period		(7,707	)		280			(7,427	)
Balance at September 30, 2013	$	(7,083	)	$	(1,193	)	$	(8,276	)

The following table represents the reclassification out of accumulated other comprehensive income for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30						September 30
		2014			2013			2014			2013
	(In thousands)
Unrealized gains (losses) on securities available for sale:
Realized gains (losses) on securities transactions	$	1			—		$	39			—
Income tax expense		—			—			(16	)		—
Net of tax		1			—			23			—
Amortization of pension and post-retirement benefit items:
Amortization of net actuarial loss		(52	)	$	(209	)		(428	)	$	(628	)
Amortization of prior service cost		—			54			—			163
Income tax expense		21			61			171			185
Net of tax		(31	)		(94	)		(257	)		(280	)
Total reclassifications, net of tax	$	(30	)	$	(94	)	$	(234	)	$	(280	)

The income statement line items impacted by the reclassification of unrealized gains (losses) on securities available for sale are net impairment loss recognized in earnings and income tax expense. The income statement line items impacted by the reclassification of amortization of pension and post-retirement benefit items are salaries and employee benefits and income tax expense.

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” The ASU clarifies that an in substance repossession or foreclosure has occurred and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure. Interim and annual disclosure is required of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The new standard is effective using either the modified retrospective transition method or a prospective transition method for fiscal years and interim periods within those years, beginning after December 15, 2014, and early adoption is permitted. We do not expect that this ASU will have a material impact on our results of operations or financial position.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies to all entities that dispose of components. It will significantly change current practices for assessing discontinued operations and affect an entity’s income and earnings per share from continuing operations. An entity is required to reclassify assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period for all comparative periods presented. The ASU requires that an entity present in the statement of cash flows or disclose in a note either total operating and investing cash flows for discontinued operations, or depreciation, amortization, capital expenditures and significant operating and investing noncash items related to discontinued operations. Additional disclosures are required when an entity retains significant continuing involvement with a discontinued operation after its disposal, including the amount of cash flows to and from a discontinued operation. The new standard applies prospectively after the effective date of December 15, 2014, and early adoption is permitted. We do not expect that his ASU will have a material impact on our results of operations or financial position.

On November 4, 2014, the Company signed a definitive Agreement and Plan of Merger with Sterling Bancorp (“Sterling”) whereby the Company will be merged with and into Sterling. The Company’s stockholders will receive 1.92 shares of Sterling common stock in the merger. The merger has been approved by the boards of directors of both the Company and Sterling and is subject to approval by the Company’s and Sterling’s shareholders as well as regulatory approval and other customary closing conditions. The merger is anticipated to close in the second quarter of 2015.

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

This section presents discussion and analysis of the Company’s consolidated financial condition at September 30, 2014 and December 31, 2013, and the consolidated results of operations for the nine month periods ended September 30, 2014 and September 30, 2013. The Company is consolidated with its wholly owned subsidiaries Hudson Valley Bank, N.A. and its subsidiaries (collectively “HVB” or the “Bank”) and HVHC Risk Management Corp. This discussion and analysis should be read in conjunction with the financial statements and supplementary financial information contained in the Company’s 2013 Annual Report on Form 10-K.

In this Form 10-Q, the Company has made various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to earnings, credit quality and other financial and business matters for periods subsequent to September 30, 2014. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about items such as new and existing programs and products, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “intends,” “estimates,” “predicts,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” and words of similar import. 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.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, in addition to those risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 include, but are not limited to, statements regarding:

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

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 2013 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, and portions of New York City. The Company’s assets consist primarily of cash and cash equivalents, 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 cash and cash equivalents, loans and investments, and interest expense on deposits and borrowed funds. The Company’s strategy includes investigation of opportunities for expansion within our market area, select lending opportunities outside our market area, as well as an ongoing review of our existing branch system to evaluate if our current locations have or have not met expectations for growth and profitability. Considering current economic conditions, the Company’s primary market risk exposures are interest rate risk, the risk of deterioration of market values of collateral supporting the Company’s loan portfolio, primarily commercial and residential real estate, and potential risks associated with the impact of regulatory changes that have occurred and may continue to take place in reaction to current conditions in the financial system. Interest rate risk is the exposure of net interest income to changes in interest rates. Commercial and residential real estate are the primary collateral for the majority of the Company’s loans.

The Company recorded net income for the three month period ended September 30, 2014 of $3.3 million or $0.16 per diluted share, an increase of $0.8 million compared to net income of $2.5 million or $0.13 per diluted share for the same period in the prior year. Net income for the nine month period ended September 30, 2014 was $7.3 million or $0.36 per diluted share, a decrease of $2.3 million compared to net income of $9.6 million or $0.49 per diluted share for the same period in the prior year. The increase in earnings for the three month period ended September 30, 2014, compared to the same period in the prior year, was primarily due to higher interest income on loans and investments, which was partially offset by an increase in non-interest expense. The decrease in earnings for the nine month period ended September 30, 2014, compared to the same period in the prior year, was primarily due to lower yields on loans and investment securities, executive severance payments and new hires in the ABL and equipment financing units coupled with lower non-interest income, which was primarily a result of a $1.9 million pre-tax charge for prepaying all $16.4 million of the Company’s outstanding Federal Home Loan Bank borrowings.

Total loans increased $197.0 million to $1,827.8 million during the nine month period ended September 30, 2014 compared to $1,630.8 million at the prior year end. The overall increase was primarily the result of new production and multi-family residential and commercial real estate loan purchases in excess of payoffs and net pay downs. The purchases were conducted as a part of the ongoing reinvestment of excess liquidity. The Company continues to provide lending availability to both new and existing customers.

Nonperforming assets increased to $27.0 million at September 30, 2014, compared to $23.5 million at December 31, 2013. The increase was primarily due to a commercial real estate loan relationship totaling $9.2 million which was transferred to non-accrual status. With the exception of this loan, overall reductions in classified and nonperforming loans have resulted from the Company’s aggressive strategies for resolving problem assets. However, levels of nonperforming and classified loans remain at elevated levels. As a result of these factors, the Company has continued to maintain the allowance for loan losses at a higher than historical level, while recognizing the measurable improvements in overall asset quality and the general economic outlook. The allowance for loan losses totaled $27.7 million or 1.52 percent of total loans at September 30, 2014, compared to $26.0 million or 1.59 percent of total loans at

December 31, 2013. The provision for loan losses totaled $0.7 million and $1.2 million for the three and nine month periods ended September 30, 2014, respectively, compared to $0.8 million and $1.8 million for the same periods in the prior year.

Total deposits increased by $135.0 million to $2,768.7 million during the nine month period ended September 30, 2014, compared to $2,633.7 million at the prior year end. The Company continued to emphasize its core deposit growth, while placing less emphasis on non-core deposits.

The net interest margin was 3.12 percent and 3.10 percent, respectively, for the three and nine month periods ended September 30, 2014, compared to 2.99 percent and 3.07 percent, respectively, for the same periods in the prior year. The Company has increased its efforts to redeploy excess liquidity, primarily in new loans and purchasing investment securities while reducing interest expense by repaying other borrowings. Net interest income increased by $2.6 million or 12.3 percent to $23.6 million for the three month period ended September 30, 2014 compared to $21.0 million for the same period in the prior year. Net interest income increased by $4.1 million or 6.5 percent to $67.4 million for the nine month period ended September 30, 2014 compared to $63.3 million for the same period in the prior year.

The tax equivalent net interest margin was 3.16 percent and 3.15 percent for the three and nine month periods ended September 30, 2014, respectively, compared to 3.03 percent and 3.13 percent for the same periods in the prior year. As a result of the aforementioned activity in the Company’s core businesses of loans and deposits and other asset/liability management activities, tax equivalent basis net interest income increased by $2.5 million or 11.8 percent to $23.9 million for the three month period ended September 30, 2014, compared to $21.4 million for the same period in the prior year. Tax equivalent basis net interest income increased by $3.9 million or 6.0 percent to $68.4 million for the nine month period ended September 30, 2014, compared to $64.5 million for the same period in the prior year. Tax equivalent basis net interest income is a non-GAAP financial measure.

The Company’s non-interest income was $4.0 million and $10.4 million for the three and nine month periods ended September 30, 2014, respectively, compared to $4.2 million and $12.6 million for the same periods in the prior year. The decrease for the nine month period ended September 30, 2014, compared to the same period in the prior year, was primarily due to a previously disclosed $1.9 million pre-tax charge for prepaying all $16.4 million of the Company’s outstanding Federal Home Loan Bank borrowings.

Non-interest expense was $22.2 million and $66.1 million, respectively, for the three and nine month periods ended September 30, 2014, compared to $21.5 million and $61.0 million, respectively, for the same periods in the prior year. The increase for the nine month period ended September 30, 2014, compared to the same period in the prior year, was primarily due to executive severance payments and new hires in the ABL and equipment financing units.

Hudson Valley’s capital ratios remain in excess of “well capitalized” levels generally applicable to banks under current regulations. At September 30, 2014, Hudson Valley Holding Corp. maintained a total risk-based capital ratio of 15.6 percent, a Tier 1 risk-based capital ratio of 14.3 percent, and a Tier 1 leverage ratio of 9.1 percent. At September 30, 2014, Hudson Valley Bank, N.A. maintained a total risk-based capital ratio of 15.3 percent, a Tier 1 risk-based capital ratio of 14.0 percent, and a Tier 1 leverage ratio of 8.8 percent.

Application of Critical Accounting Policies — The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). 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 critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, are those that most frequently require management to make estimates and judgments, and therefore, are critical to understanding the Company’s results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Company’s Board of Directors. There have been no changes to the Company’s critical accounting policies during the three months ended September 30, 2014.

Results of Operations for the Three and Nine Month Periods Ended September 30, 2014 and September 30, 2013

The Company recorded net income of $3.3 million or $0.16 per diluted share for the three month period ended September 30, 2014, compared to net income of $2.5 million or $0.13 per diluted share for the same period in the prior year. Net income for the nine month period ended September 30, 2014 was $7.3 million or $0.36 per diluted share, compared to net income of $9.6 million or $0.49 per diluted share for the same period in the prior year. The increase in net income for the three month period ended September 30, 2014, compared to the same period in the prior year, was primarily due to higher interest income on loans and investments. The decrease in net income for the nine month period ended September 30, 2014, compared to the same period in the prior year, was primarily due to lower yields on loans and investment securities, the $1.9 million pre-tax charge for prepaying all $16.4 million of the Company’s outstanding Federal Home Loan Bank borrowings and a $0.2 million tax charge related to the New York State Corporate Tax Reform enacted on March 31, 2014. The provision for loan losses totaled $0.7 million and $1.2 million for the three and nine month periods ended September 30, 2014, compared to $0.8 million and $1.8 million for the same periods in the prior year, respectively.

Annualized returns on average stockholders’ equity and average assets were 4.5 percent and 0.4 percent for the three month period ended September 30, 2014, compared to 3.4 percent and 0.3 percent for the same period in the prior year. Annualized returns on average stockholders’ equity and average assets were 3.4 percent and 0.3 percent for the nine month period ended September 30, 2014, compared to 4.4 percent and 0.4 percent for the same period in the prior year. Returns on adjusted average stockholders’ equity were 4.5 percent and 3.4 percent for the three month periods ended September 30, 2014 and 2013, respectively. Adjusted average stockholders’ equity excludes the effects of average net unrealized losses, net of tax, offset by the tax equivalent income adjustment, totaling $1.3 million and $7.8 million for the three month periods ended September 30, 2014 and 2013, respectively. Returns on adjusted average stockholders’ equity were 3.3 percent and 4.4 percent for the nine month periods ended September 30, 2014 and 2013, respectively. Adjusted average stockholders’ equity excludes the effects of average net unrealized losses, net of tax, offset by the tax equivalent income adjustment, totaling $1.9 million and $3.0 million for the nine month periods ended September 30, 2014 and 2013, respectively. The annualized return on adjusted average stockholders’ equity is, under SEC regulations, a non-GAAP financial measure. Management believes that this non-GAAP financial measure more closely reflects actual performance, as it is more consistent with the Company’s stated asset/liability management strategies, which do not contemplate significant realization of market gains or losses on securities available for sale which were primarily related to changes in interest rates or illiquidity in the marketplace.

The following tables set forth the average balances of interest earning assets and interest bearing liabilities for the periods indicated, as well as total interest and corresponding yields and rates.

	Three Months Ended September 30,
		2014			2013
	Average		Yield/	Average		Yield/
	Balance	Interest (3)	Rate	Balance	Interest (3)	Rate
(Unaudited)	(Dollars in thousands)
ASSETS
Interest earning assets:
Deposits in Banks	$ 400,657	$ 241	0.24%	$ 807,764	$ 548	0.27%
Federal funds sold	16,664	7	0.17%	19,360	8	0.17%
Securities: (1)
Taxable	748,917	3,521	1.88%	462,622	2,352	2.03%
Exempt from federal income taxes	101,465	900	3.55%	83,681	1,070	5.11%
Loans, net (2)	1,758,225	20,473	4.66%	1,450,338	18,805	5.19%
Total interest earning assets	3,025,928	25,142	3.32%	2,823,765	22,783	3.23%
Non-interest earning assets:
Cash & due from banks	61,361			59,577
Other assets	111,339			132,410
Total non-interest earning assets	172,700			191,987
Total assets	$ 3,198,628			$ 3,015,752
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Money market	$ 998,079	$ 825	0.33%	$ 886,735	$ 739	0.33%
Savings	119,233	34	0.11%	126,827	80	0.25%
Time	111,539	127	0.46%	120,797	148	0.49%
Checking with interest	548,495	238	0.17%	488,219	240	0.20%
Securities sold under repo & other s/t borrowings	34,831	11	0.13%	27,743	6	0.09%
Other borrowings	—	—	0.00%	16,402	183	4.46%
Total interest bearing liabilities	1,812,177	1,235	0.27%	1,666,723	1,396	0.34%
Non-interest bearing liabilities:
Demand deposits	1,062,638			1,015,931
Other liabilities	30,858			35,887
Total non-interest bearing liabilities	1,093,496			1,051,818
Stockholders' equity (1)	292,955			297,211
Total liabilities and stockholders' equity	$ 3,198,628			$ 3,015,752
Net interest earnings		$ 23,907			$ 21,387
Net yield on interest earning assets			3.16%			3.03%

	Nine Months Ended September 30,
		2014			2013
	Average		Yield/	Average		Yield/
	Balance	Interest (3)	Rate	Balance	Interest (3)	Rate
(Unaudited)	(Dollars in thousands)
ASSETS
Interest earning assets:
Deposits in Banks	$ 521,133	$ 973	0.25%	$ 794,649	$ 1,536	0.26%
Federal funds sold	18,969	23	0.16%	22,711	30	0.18%
Securities: (1)
Taxable	579,790	8,594	1.98%	423,549	6,937	2.18%
Exempt from federal income taxes	96,265	2,826	3.91%	83,268	3,452	5.53%
Loans, net (2)	1,682,525	59,516	4.72%	1,427,552	56,890	5.31%
Total interest earning assets	2,898,682	71,932	3.31%	2,751,729	68,845	3.34%
Non-interest earning assets:
Cash & due from banks	58,914			57,393
Other assets	110,513			133,755
Total non-interest earning assets	169,427			191,148
Total assets	$ 3,068,109			$ 2,942,877
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Money market	$ 948,784	$ 2,363	0.33%	$ 881,208	$ 2,364	0.36%
Savings	122,009	113	0.12%	127,014	267	0.28%
Time	113,481	392	0.46%	124,591	466	0.50%
Checking with interest	505,518	618	0.16%	433,088	649	0.20%
Securities sold under repo & other s/t borrowings	32,031	26	0.11%	27,926	22	0.11%
Other borrowings	300	10	4.44%	16,412	542	4.40%
Total interest bearing liabilities	1,722,123	3,522	0.27%	1,610,239	4,310	0.36%
Non-interest bearing liabilities:
Demand deposits	1,025,443			1,007,336
Other liabilities	29,213			30,960
Total non-interest bearing liabilities	1,054,656			1,038,296
Stockholders' equity (1)	291,330			294,342
Total liabilities and stockholders' equity	$ 3,068,109			$ 2,942,877
Net interest earnings		$ 68,410			$ 64,535
Net yield on interest earning assets			3.15%			3.13%

	Three Months Ended						Nine Months Ended
	September 30						September 30
		2014			2013			2014			2013
	(Dollars in thousands)
Total average interest earning assets:
As reported	$	3,023,976		$	2,810,870		$	2,895,665		$	2,746,618
Unrealized loss on securities available-for-sale (a)		1,952			12,895			3,017			5,111
Adjusted total average interest earning assets	$	3,025,928		$	2,823,765		$	2,898,682		$	2,751,729
Net interest income:
As reported	$	23,592		$	21,013		$	67,421		$	63,327
Adjustment to tax equivalency basis (b)		315			374			989			1,208
Adjusted net interest income	$	23,907		$	21,387		$	68,410		$	64,535
Net yield on average interest earning assets:
As reported		3.12	%		2.99	%		3.10	%		3.07	%
Effects of (a) and (b) above		0.04	%		0.04	%		0.05	%		0.06	%
Adjusted net yield on average interest earning assets		3.16	%		3.03	%		3.15	%		3.13	%
Average stockholders' equity:
As reported	$	291,702		$	289,395		$	289,419		$	291,315
Effects of (a) and (b) above		1,253			7,816			1,911			3,027
Adjusted average stockholders' equity	$	292,955		$	297,211		$	291,330		$	294,342
Interest income:
As reported	$	24,827		$	22,409		$	70,943		$	67,637
Adjustment to tax equivalency basis (b)		315			374			989			1,208
Adjusted interest income	$	25,142		$	22,783		$	71,932		$	68,845
Gross yield on average interest earning assets:
As reported		3.28	%		3.19	%		3.27	%		3.28	%
Effects of (a) and (b) above		0.04	%		0.04	%		0.04	%		0.06	%
Adjusted gross yield on average interest earning assets		3.32	%		3.23	%		3.31	%		3.34	%

The following table sets forth the changes in interest income, interest expense and net interest income for the periods indicated:

	Three Months Ended September 30,									Nine Months Ended September 30,
	2014 Compared to 2013									2014 Compared to 2013
	Volume			Rate			Total (1)			Volume			Rate			Total (1)
	(In thousands)
Interest income:
Deposits in Banks	$	(276	)	$	(31	)	$	(307	)	$	(529	)	$	(34	)	$	(563	)
Federal funds sold		(1	)		—			(1	)		(5	)		(2	)		(7	)
Securities:
Taxable		1,456			(287	)		1,169			2,559			(902	)		1,657
Exempt from federal income taxes (2)		227			(397	)		(170	)		539			(1,165	)		(626	)
Loans, net		3,992			(2,324	)		1,668			10,161			(7,535	)		2,626
Total interest income		5,398			(3,039	)		2,359			12,725			(9,638	)		3,087

Interest expense:
Deposits:
Money market		93			(7	)		86			181			(182	)		(1	)
Savings		(5	)		(41	)		(46	)		(11	)		(143	)		(154	)
Time		(11	)		(10	)		(21	)		(42	)		(32	)		(74	)
Checking with interest		30			(32	)		(2	)		109			(140	)		(31	)
Securities sold under repo & other s/t borrowings		2			3			5			3			1			4
Other borrowings		(183	)		—			(183	)		(532	)		—			(532	)
Total interest expense		(74	)		(87	)		(161	)		(292	)		(496	)		(788	)
Interest differential	$	5,472		$	(2,952	)	$	2,520		$	13,017		$	(9,142	)	$	3,875

For purposes of the financial information included in this section, the Company adjusts average interest earning assets to exclude the effects of unrealized gains and losses on securities available for sale and adjusts net interest income to a tax equivalent basis. Management believes that this alternate presentation more closely reflects actual performance, as it is consistent with the Company’s stated asset/liability management strategies. The effects of these non-GAAP adjustments to tax equivalent basis net interest income and adjusted average assets are included in the table presented above in the “Average Balances and Interest Rates” section herein.

Net interest income, the difference between interest income and interest expense, is the most significant component of the Company’s consolidated earnings. The Company, its customers and marketplace have experienced an extended period of negative, although recently improving, economic conditions and historically low interest rates. Management has commenced several initiatives to redeploy remaining excess liquidity from previous loan sales. These initiatives included asset purchases, expanded residential mortgage programs and the establishment of new commercial lending programs in asset-based lending and equipment lease financing. Management believes that the results of these efforts will enable the Company to maximize its net interest income, and effectively diversify its portfolio from both asset composition and interest rate risk management perspectives.

Net interest income, on a tax equivalent basis, increased by $2.5 million or 11.7 percent to $23.9 million and by $3.9 million or 6.0 percent to $68.4 million for the three and nine month periods ended September 30, 2014, respectively, compared to $21.4 million and $64.5 million for the same periods in the prior year. Net interest income was higher partially due to higher volumes of loans and securities. Adjusted average interest earning assets over average interest bearing liabilities increased $56.6 million or 4.9 percent to $1,213.7 million and $35.1 million or 3.1 percent to $1,176.6 million for the three and nine month periods ended September 30, 2014, compared to $1,157.1 million and $1,141.5 million for the same periods in the prior year. Net interest income in accordance with GAAP increased by $2.6 million or 12.4 percent to $23.6 million and by $4.1 million or 6.5 percent to $67.4 million for the three and nine month periods ended September 30, 2014, respectively, compared to $21.0 million and $63.3 million for the same periods in the prior year.

The Company’s overall asset quality has improved as a result of actions taken by management to reduce concentrations and classified assets and the gradually improving credit environment. However, the Company has continued to experience elevated levels of delinquent and nonperforming loans. Changes in the levels of nonperforming loans have a direct impact on net interest income.

Interest income is determined by the volume of, and related rates earned on, interest earning assets. Volume increases in average loans and investments, and a lower average cost of interest bearing liabilities, partially offset by a volume decrease in deposits in banks and federal funds sold resulted in slightly higher interest income for the three and nine month periods ended September 30, 2014, compared to the same periods in the prior year. Adjusted total average interest earning assets for the three month period ended September 30, 2014, increased $202.1 million or 7.2 percent to $3,025.9 million, compared to $2,823.8 million for the same period in the prior year. Adjusted total average interest earning assets for the nine month period ended September 30, 2014, increased $147.0 million or 5.3 percent to $2,898.7 million, compared to $2,751.7 million for the same period in the prior year.

Loans are the largest component of interest earning assets. Average net loans increased $307.9 million or 21.2 percent to $1,758.2 million for the three month period ended September 30, 2014, compared to $1,450.3 million for the same period in the prior year. Average net loans increased $254.9 million or 17.9 percent to $1,682.5 million for the nine month period ended September 30, 2014, compared to $1,427.6 million for the same period in the prior year. The increase in average loans resulted from new production in excess of payoffs and paydowns. The average yield on loans was 4.66 percent for the three month period ended September 30, 2014, compared to 5.19 percent for the same period in the prior year. The average yield on loans was 4.72 percent for the nine month period ended September 30, 2014, compared to 5.31 percent for the same period in the prior year. This reduction resulted primarily from continued historically low interest rates and their effect on the yield of new and renewing loans. Interest income on loans was higher for the three and nine month periods ended September 30, 2014, compared to the same period in the prior year, due to higher volume.

Average total securities, including FHLB stock and excluding net unrealized gains and losses, increased $304.1 million or 55.7 percent to $850.4 million for the three month period ended September 30, 2014, compared to $546.3 million for the same period in the prior year. Average total securities, including FHLB stock and excluding net unrealized gains and losses, increased $169.3 million or 33.4 percent to $676.1 million for the nine month period ended September 30, 2014, compared to $506.8 million for the same period in the prior year. The increase in average total securities resulted primarily from the $304 million securities purchase

in June 2014. The average tax equivalent basis yield on securities was 2.08 percent and 2.25 percent for the three and nine month periods ended September 30, 2014, respectively, compared to 2.51 percent and 2.73 percent for the same periods in the prior year. Tax equivalent basis interest income on securities increased for the three and nine month periods ended September 30, 2014, compared to the same periods in the prior year, due to higher volume, which was partially offset by lower interest rates. Average securities for the nine months ended September 30, 2014 include the effect of the $304 million of securities purchase in June 2014.

Interest expense is a function of the volume of, and rates paid for, interest bearing liabilities, comprised of deposits and borrowings. Interest expense decreased $0.2 million or 14.3 percent to $1.2 million for the three month period ended September 30, 2014, compared to $1.4 million for the same period in the prior year. Interest expense decreased $0.8 million or 18.6 percent to $3.5 million for the nine month period ended September 30, 2014, compared to $4.3 million for the same period in the prior year. Average interest bearing liabilities increased $145.5 million or 8.7 percent to $1,812.2 million for the three month period ended September 30, 2014, compared to $1,666.7 million for the same period in the prior year. Average interest bearing liabilities increased $111.9 million or 6.9 percent to $1,722.1 million for the nine month period ended September 30, 2014, compared to $1,610.2 million for the same period in the prior year. The increase in average interest bearing liabilities for the nine month period ended September 30, 2014, compared to the same period in the prior year, was due to volume increases in interest bearing deposits, securities sold under repurchase agreements, and other short-term borrowings, which was partially offset by volume decreases in other borrowings. The average interest rate paid on interest bearing liabilities was 0.27 percent for both the three and nine month periods ended September 30, 2014, compared to 0.34 percent and 0.36 percent, respectively, for the same periods in the prior year.

Average non-interest bearing demand deposits increased $46.7 million or 4.6 percent to $1,062.6 million for the three month period ended September 30, 2014 compared to $1,015.9 million for the same period in the prior year. Average non-interest bearing demand deposits increased $18.1 million or 1.8 percent to $1,025.4 million for the nine month period ended September 30, 2014 compared to $1,007.3 million for the same period in the prior year. Non-interest bearing demand deposits are an important component of the Company’s ongoing asset liability management, and also have a direct impact on the determination of net interest income.

The interest rate spread on a tax equivalent basis for the periods indicated was as follows:

Interest rate spreads increase or decrease as a result of the relative change in average interest rates on interest earning assets compared to the change in average interest rates on interest bearing liabilities. Management cannot predict what impact market conditions will have on its interest rate spread and future compression of net interest spread may occur.

The provision for loan losses was $0.7 million and $1.2 million for the three and nine month periods ended September 30, 2014, respectively, compared to $0.8 million and $1.8 million for the same periods in the prior year. Net charge-offs (recoveries) totaled $0.2 million and ($0.5) million for the three and nine month periods ended September 30, 2014, respectively, compared to $0.8 million and $2.6 million for the same periods in the prior year.

Non-interest income decreased $0.2 million or 4.8 percent to $4.0 million for the three month period ended September 30, 2014 compared to $4.2 million for the same period in the prior year. Non-interest income decreased $2.2 million or 17.5 percent to $10.4 million for the nine month period ended September 30, 2014, compared to $12.6 million for the same period in the prior year, which was primarily due to the $1.9 million prepayment penalty on FHLB borrowings.

Non-interest expense was $22.2 million and $66.1 million for the three and nine month periods ended September 30, 2014, respectively. This represented increases of $0.7 million or 3.3 percent and $5.1 million or 8.4 percent compared to $21.5 million and $61.0 million, respectively, for the same periods in the prior year. The increases for the three and nine month periods ended September 30, 2014, compared to the same periods in the prior year, were primarily due to increases in salaries and employee benefits.

Salaries and employee benefits expense, the largest component of non-interest expense, increased $1.4 million or 12.5 percent to $12.6 million and $4.7 million or 14.0 percent to $38.3 million for the three and nine month periods ended September 30, 2014, respectively, compared to $11.2 million and $33.6 million for the same periods in the prior year, primarily due to severance payments and new hires in the ABL and equipment financing units.

Occupancy expense remained unchanged at $2.1 million for the three month period ended September 30, 2014, and increased $0.2 million or 3.2 percent to $6.5 million for the nine month period ended September 30, 2014, compared to $6.3 million for the same period in the prior year, primarily due to the additional office space leased for the ABL and equipment leasing teams.

Professional service fees decreased $0.2 million or 10.0 percent to $1.8 million and increased $0.2 million or 3.8 percent to $5.4 million for the three and nine month periods ended September 30, 2014, respectively, compared to $2.0 million and $5.2 million for the same periods in the prior year. The decrease for the three month period ended September 30, 2014 was due to expenses recorded in the prior year period related to the expansion of the Company’s regulatory compliance capabilities. The increase for the nine month period ended September 30, 2014 was due to fees incurred to expand residential lending operations and to assist with new systems implementations.

Equipment expense increased $0.1 million or 10.0 percent to $1.1 million and decreased $0.1 million or 3.2 percent to $3.0 million for the three and nine month periods ended September 30, 2014, respectively, compared to $1.0 million and $3.1 million for the same periods in the prior year. The increase for the three month period ended September 30, 2014 was due to higher equipment and software maintenance costs related to new systems. The decrease for the nine month period ended September 30, 2014 was due to lower equipment costs.

Business development expense increased $0.3 million or 60.0 percent to $0.8 million and $0.8 million or 50.0 percent to $2.4 million for the three and nine month periods ended September 30, 2014, respectively, compared to $0.5 million and $1.6 million for the same periods in the prior year. The increases were due to higher participation in business development activities and increased promotion of the Bank’s products and services.

The FDIC assessment decreased $0.4 million or 40.0 percent to $0.6 million and $1.2 million or 41.4 percent to $1.7 million for the three and nine month periods ended September 30, 2014, respectively, compared to $1.0 million and $2.9 million for the same periods in the prior year. The decreases were reflective of changes in the Bank’s premium calculation base and assessment rate.

Significant changes in other components of non-interest expense for the three and nine month periods ended September 30, 2014 compared to September 30, 2013, were due to the following:

Income taxes of $1.5 million and $3.3 million were recorded in the three and nine month periods ended September 30, 2014, respectively, compared to $0.4 million and $3.5 million for the same periods in the prior year. The overall effective income tax rate was 31.7 percent and 31.1 percent for the three and nine month periods ended September 30, 2014, respectively, compared to 13.6 percent and 26.5 percent for the same periods in the prior year. The 2014 effective rate included a $0.2 million tax charge related to the New York State Corporate Tax Reform enacted on March 31, 2014. The 2014 effective tax rate was higher primarily due to tax-exempt income representing a lower percentage of income before taxes, compared to the same period in the prior year period. For the three and nine months ended September 30, 2014, tax exempt interest income represented 12.2 percent and 17.3 percent, respectively, of pre-tax income as compared to 24.1 percent and 17.1 percent, respectively, for the same periods in 2013. The effect of the higher portion of tax exempt interest in 2014 was to reduce the effective tax rate.

The Company is subject to a Federal statutory tax rate of 35.0 percent, a New York State tax rate of 7.1 percent plus a 17.0 percent surcharge, and a New York City tax rate of 9.0 percent. The Company is in process of evaluating the future effect on its effective tax rate that will result from the aforementioned New York State Tax Reform legislation.

In May 2013, the Internal Revenue Service (IRS) commenced a routine examination of the Company’s 2009, 2010 and 2011 income tax returns. In May 2014, the Company received results of the examinations and there were no significant adjustments noted.

In March 2014, the Company was informed that an examination of its New York State income tax returns for the years 2009 through 2012 will commence in the near future.

The Company had total assets of $3,120.1 million at September 30, 2014, an increase of $120.9 million or 4.0 percent from $2,999.2 million at December 31, 2013.

Cash and due from banks was $341.1 million at September 30, 2014, a decrease of $358.3 million or 51.2 percent from $699.4 million at December 31, 2013. Included in cash and due from banks is interest earning deposits of $292.1 million at September 30, 2014, compared to $661.6 million at December 31, 2013. The decrease was primarily the result of increasing the loan portfolio and securities purchases.

Federal funds sold totaled $13.6 million at September 30, 2014, a decrease of $13.5 million or 49.8 percent from $27.1 million at December 31, 2013. Federal funds sold were also used to fund loan originations and securities purchases.

Securities are selected to provide safety of principal, liquidity, pledging capabilities (to collateralize certain deposits and borrowings), income, and to leverage capital. The Company’s investment strategy focuses on maximizing income while providing for safety of principal, maintaining appropriate utilization of capital, providing adequate liquidity to meet loan demand or deposit outflows and to manage overall interest rate risk. The Company selects individual securities whose credit, cash flow, maturity and interest rate characteristics, in the aggregate, affect the stated strategies.

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

The available for sale portfolio totaled $842.8 million at September 30, 2014 which was an increase of $300.6 million or 55.4 percent from $542.2 million at December 31, 2013, primarily due to $304 million in securities purchased in June 2014. The Company purchased these securities in order to redeploy excess liquidity into higher yielding assets. The amortized cost of mortgage-backed securities increased $266.2 million, U.S. Treasury and agency securities increased $24.6 million, obligations of states and political subdivisions increased $14.6 million, while other debt securities decreased $8.5 million. The decrease in other debt securities was due to the sale of the trust preferred securities in the first quarter of 2014.

The held to maturity portfolio totaled $4.6 million at September 30, 2014, which was a decrease of $1.6 million or 25.8 percent from $6.2 million at December 31, 2013. The decrease was due to principal payments on mortgage-backed securities and maturities of obligations of states and political subdivisions.

The Bank, as a member of the FHLB, invests in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Bank must purchase additional shares of FHLB stock to obtain increases in such borrowings. Shares in excess of required amounts for outstanding borrowings are generally redeemed by the FHLB. The investment in FHLB stock totaled $2.4 million at September 30, 2014, a decrease of $1.1 million or 31.4 percent from $3.5 million at December 31, 2013.

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 and 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.

Net loans totaled $1,800.7 million at September 30, 2014, an increase of $194.5 million or 12.1 percent from $1,606.2 million at December 31, 2013. The overall increase in loans was primarily driven by loan originations and purchases totaling $306.5 million, which was partially offset by $112.0 million of pay-downs, payoffs, and other changes.

The loan portfolio, excluding loans held for sale, is comprised of the following:

The following table illustrates the trend in nonperforming assets from September 2013 to September 2014:

	Sep 30			Jun 30			Mar 31			Dec 31			Sep 30
		2014			2014			2014			2013			2013
	(Dollars in thousands)
Total Loans Past Due 90 Days or More and Still Accruing		—			—			—			—			—
Non-Accrual Loans:
Real Estate:
Commercial	$	15,490		$	6,916		$	6,525		$	6,629		$	15,884
Construction		879			879			879			879			2,540
Residential		10,658			12,751			13,093			14,559			13,617
Total Real Estate		27,027			20,546			20,497			22,067			32,041
Commercial & Industrial		—			—			508			1,422			1,923
Lease Financing & Other		—			—			—			—			—
Total Non-Accrual Loans		27,027			20,546			21,005			23,489			33,964
Other Real Estate Owned		—			—			—			—			—
Total Nonperforming Assets including loans held for sale	$	27,027		$	20,546		$	21,005		$	23,489		$	33,964

Net charge-offs (recoveries) during quarter	$	202		$	89		$	(836	)	$	520		$	830

Nonperforming assets to total assets		0.87	%		0.64	%		0.72	%		0.78	%		1.12	%

Non-accrual loans totaled $27.0 million at September 30, 2014, and $23.5 million at December 31, 2013. There was no interest income on non-accrual loans included in net income for the nine month period ended September 30, 2014 and the year ended December 31, 2013. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $0.5 million and $0.8 million for the three and nine month periods ended September 30, 2014, respectively.

Net income is adversely impacted by the level of nonperforming assets caused by the deterioration of the borrowers’ ability to meet scheduled interest and principal payments. In addition to forgone revenue, the Company must increase the level of provision for loan losses and incur higher collection costs and other costs associated with the management and disposition of foreclosed properties.

There were no loans past due 90 days or more and still accruing at September 30, 2014 and December 31, 2013. The Company had $7.0 million and $4.6 million of loans that were 31-89 days delinquent and still accruing at September 30, 2014 and December 31, 2013, respectively.

There were twenty-five loans totaling $31.3 million and twenty loans totaling $30.9 million at September 30, 2014 and December 31, 2013, respectively, that were considered troubled debt restructurings. There were sixteen loans totaling $20.4 million at September 30, 2014 and ten loans totaling $17.6 million at December 31, 2013 that were performing in accordance with their restructured terms. The remaining loans which totaled $10.9 million and $13.3 million at September 30, 2014 and December 31, 2013, respectively, were on non-accrual status. At September 30, 2014, the Company had no commitments to lend additional funds to non-accrual or restructured loans.

The Company maintains an allowance for loan losses to absorb probable losses incurred in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company’s methodology for assessing the appropriateness of the allowance consists of a specific component for identified problem loans and a formula component to consider historical loan loss experience and additional risk factors affecting the portfolio.

A summary of the components of the allowance for loan losses, changes in the components and the impact of charge-offs/recoveries on the resulting provision for loan losses for the dates indicated is as follows:

				Change									Change
	Sep 30			During			Dec 31			Sep 30			During			Dec 31
		2014			2014			2013			2013			2013			2012
	(Dollars in thousands)
Components
Specific:
Real Estate:
Commercial		—			—			—			—			—			—
Construction		—			—			—			—			—			—
Residential		—			—			—			—			—			—
Commercial & Industrial		—			—			—			—			—			—
Lease Financing & other		—			—			—			—			—			—
Total Specific Component		—			—			—			—			—			—
Formula:
Real Estate:
Commercial	$	11,972		$	741		$	11,231		$	10,810		$	720			10,090
Construction		4,368			(273	)		4,641			4,442			493			3,949
Residential		6,515			279			6,236			6,716			(1,403	)		8,119
Commercial & Industrial		4,145			709			3,436			3,445			(632	)		4,077
Lease Financing & other		722			276			446			450			73			377
Total Formula Component		27,722			1,732			25,990			25,863			(749	)		26,612
Total Allowance	$	27,722					$	25,990		$	25,863					$	26,612

Net Change					1,732									(749	)
Net (Recoveries) Charge-offs (1)					(543	)								2,577
Provision for loan losses				$	1,189								$	1,828

Coverage Ratio (2)		103	%					111	%		76	%					76	%
Coverage Ratio excluding partial charge-offs		103	%					110	%		77	%					81	%

The specific component of the allowance for loan losses is the result of our analysis of impaired loans and our determination of the amount required to reduce the carrying amount of such loans to estimated fair value. Accordingly, such allowance is dependent on the particular loans and their characteristics at each measurement date, not necessarily the total amount of such loans. The Company usually records partial charge-offs as opposed to specific reserves for impaired loans that are real estate collateral dependent and for which independent appraisals have determined the fair value of the collateral to be less than the carrying amount of the loan. During the three and nine months ended September 30, 2014, the Company recorded $0.5 million and $1.3 million, respectively, of charge-offs related to impaired loans. At September 30, 2014 and December 31, 2013, the Company had no specific reserves allocated, as partial charge-offs were recorded for all identified impairments. The Company’s analyses as of September 30, 2014 and December 31, 2013 indicated that impaired loans were principally real estate collateral dependent and that there was sufficient underlying value to indicate expected recovery of the carrying amount of the loans.

The changes in the formula component of the allowance for loan losses are the result of the application of historical loss experience to outstanding loans by type. Loss experience for each year is based upon average charge-off experience for the prior three year period by loan type. The formula component is then adjusted to reflect changes in other relevant factors affecting loan collectability. Management periodically adjusted the formula component to an amount that, when considered with the specific component, represented its best estimate of probable losses in the loan portfolio as of each balance sheet date.

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 collectability of the loan portfolio as of the evaluation date have changed. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, the Bank is able to adjust specific and inherent loss estimates based upon any more recent information that has become available. Additional information related to the Company’s allowance for loan losses is contained in Note 4 to the Company’s condensed consolidated financial statements presented in this Form 10-Q.

Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 30, 2014. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions or regulatory examinations.

Deposits totaled $2,768.7 million at September 30, 2014, an increase of $135.0 million or 5.1 percent from $2,633.7 million at December 31, 2013. The increase resulted primarily from higher checking and money market account balances. The Company continued to emphasize its core deposit growth, while placing less emphasis on non-core deposits including deposits which are obtained on a bid basis. The following table presents a summary of deposits at the dates indicated:

Total borrowings were $29.9 million at September 30, 2014, a decrease of $20.9 million or 41.1 percent from $50.8 million at December 31, 2013. The decrease resulted primarily from the Company prepaying all $16.4 million of its outstanding Federal Home Loan Bank borrowings. Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital and to manage interest rate risk.

Stockholders’ equity totaled $291.3 million at September 30, 2014, an increase of $7.0 million or 2.5 percent from $284.3 million at December 31, 2013. The increase in stockholders’ equity resulted from net income of $7.3 million, a decrease in accumulated other comprehensive loss of $2.5 million, net proceeds from stock options of $0.1 million and restricted stock issued of $1.1 million, which was partially offset by cash dividends paid on common stock of $4.0 million.

The Company’s and the Bank’s capital ratios at the dates indicated were as follows:

On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact to the Company.

The Asset/Liability Strategic Committee (“ALSC”) of the Board of Directors of HVB establishes specific policies and operating procedures governing the Company’s liquidity levels and develops plans to address future liquidity needs, including contingent sources of liquidity. The primary functions of asset liability management are to provide safety of depositor and investor funds, assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirement of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to manage fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

The Company’s liquid assets at September 30, 2014 include cash and due from banks of $49.0 million, $292.1 million of interest earning deposits and Federal funds sold of $13.6 million. Interest earning deposits and Federal funds sold represent the Company’s excess liquid funds which are invested with other financial institutions and are available daily.

Other sources of liquidity include maturities and principal and interest payments on loans and securities. The loan and securities portfolios are of high credit quality and of mixed maturity, providing a constant stream of maturing and re-investable assets, which can be converted into cash should the need arise. The ability to redeploy these funds is an important source of medium to long term liquidity. The amortized cost of securities having contractual maturities, expected call dates or average lives of one year or less amounted to $99.0 million at September 30, 2014. This represented 11.6 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $246.9 million, or 13.5 percent of loans at September 30, 2014, mature in one year or less. The Company may increase liquidity by selling certain residential mortgages, or exchanging them for mortgage-backed securities that may be sold in the secondary market.

Non-interest bearing demand deposits and interest bearing deposits from businesses, professionals, not-for-profit organizations and individuals are relatively stable, low-cost sources of funds. The deposits of the Bank generally have shown a steady growth trend as well as a generally consistent deposit mix. However, there can be no assurance that deposit growth will continue or that the deposit mix will not shift to higher rate products.

HVB is a member of the FHLB. As a member, HVB is able to participate in various FHLB borrowing programs which require certain investments in FHLB common stock as a prerequisite to obtaining funds. As of September 30, 2014, HVB had short-term borrowing lines with the FHLB of $198 million with no amounts outstanding. These and various other FHLB borrowing programs available to members are subject to availability of qualifying loan and/or investment securities collateral and other terms and conditions.

HVB also has unsecured overnight borrowing lines totaling $75 million with three major financial institutions which were all unused and available at September 30, 2014. In addition, HVB has approved lines under Retail Certificate of Deposit Agreements

with three major financial institutions approximating $1.1 billion of which no balances were outstanding as at September 30, 2014. Utilization of these lines is subject to product availability and other restrictions.

Additional liquidity is also provided by the Company’s ability to borrow from the Federal Reserve Bank’s discount window. In response to the current economic crisis, the Federal Reserve Bank has increased the ability of banks to borrow from this source through its Borrower-in-Custody (“BIC”) program, which expanded the types of collateral which qualify as security for such borrowings. HVB has been approved to participate in the BIC program. There were no balances outstanding with the Federal Reserve at September 30, 2014.

As of September 30, 2014, the Company had qualifying loan and investment securities totaling approximately $716 million which could be utilized under available borrowing programs thereby increasing liquidity.

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

The Company has outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to the Company’s obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. The Company is also obligated under leases or license agreements for certain of its branches and equipment. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end as reported in the Company’s Annual Report on Form 10-K.

The Condensed Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts or estimated fair value without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Quantitative and qualitative disclosures about market risk at December 31, 2013 were previously reported in the Company’s 2013 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at September 30, 2014 compared to December 31, 2013.

The Company’s primary market risk exposure is interest rate risk since substantially all transactions are denominated in U.S. dollars with no direct foreign exchange or changes in commodity price exposure.

All market risk sensitive instruments are classified either as available for sale or held to maturity with no financial instruments entered into for trading purposes. The Company from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the nine month period ended September 30, 2014. The Company had no derivative financial instruments in place at September 30, 2014 and December 31, 2013.

The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at September 30, 2014 shows the Company’s net interest income increasing slightly if interest rates rise and decreasing slightly if interest rates fall, considering a continuation of the current yield curve. A change in the shape or steepness of the yield curve will impact our market risk to change in interest rates.

The Company also prepares a static gap analysis which, at September 30, 2014, shows a positive cumulative static gap of $292.6 million in the one year time frame.

The following table illustrates the estimated exposure under a rising rate scenario and a declining rate scenario calculated as a percentage change in estimated net interest income assuming a gradual shift in interest rates for the next 12 month measurement period, beginning September 30, 2014.

Beginning on September 30, 2008, a 100 basis point downward change was substituted for the 200 basis point downward scenario previously used, as management believes that a 200 basis point downward change is not a meaningful analysis in light of current interest rate levels. The percentage change in estimated net income in the +200 and -100 basis points scenario is within the Company’s policy limits.

The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), with the assistance of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

The Company’s CEO and CFO have also concluded that there have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our business is subject to various risks. These risks are included in our 2013 Annual Report on Form 10-K under “Risk Factors”. There have been no material changes in such risk factors since the date of such report.

The following table sets forth information with respect to purchases made by the Company of its common stock during the three month period ended September 30, 2014:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
(Do not check if a smaller reporting company)

	Fair Value at
	December 31, 2013		Valuation	Unobservable	Discount Range
Asset	(In thousands)		Technique	Inputs	(Weighted Average)
Impaired loans - residential real estate	$	380	Sales comparison approach	Discounts to appraisals for market conditions	0% (0%)

Impaired loans - commercial and industrial		895	Sales comparison approach	Discounts to appraisals for market conditions	0% (0%)

	September 30		December 31		Increase
		2014		2013	(Decrease)
	(In thousands)
Demand deposits	$	1,077,422	$	1,069,631	$	7,791
Money market accounts		913,143		870,291		42,852
Savings accounts		118,904		120,000		(1,096	)
Time deposits of $100,000 or more		81,923		85,205		(3,282	)
Time deposits of less than $100,000		28,523		30,863		(2,340	)
Checking with interest		548,736		457,754		90,982
Total Deposits	$	2,768,651	$	2,633,744	$	134,907

					Minimum to be
	September 30		December 31		Considered
		2014		2013	Well Capitalized
Leverage ratio:
Company		9.1%		9.5%	N/A
HVB		8.8%		9.3%		5.0%
Tier 1 capital:
Company		14.3%		16.2%	N/A
HVB		14.0%		15.8%		6.0%
Total capital:
Company		15.6%		17.5%	N/A
HVB		15.3%		17.1%		10.0%

	Percent Change in Estimated
	Net Interest Income from
Gradual Change in Interest Rates	September 30, 2014		Policy Limit
+200 basis points		0.4%	(12.5)%
-100 basis points	(2.2)%		(7.5)%

	Issuer Purchases of Equity Securities
Period	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1, 2014 – July 31, 2014	274	$ 16.97	—	—
August 1, 2014 – August 31, 2014	—	—	—	—
September 1, 2014 – September 30, 2014	—	—	—	—
Total	274	$ 16.97	—	—

3.1		Restated Certificate of Incorporation of Hudson Valley Holding Corp. (1)
3.2		Amended and Restated By-Laws of Hudson Valley Holding Corp. (2)
10.1		Consulting Agreement, dated October 6, 2014, between Hudson Valley Bank, N.A. and James J. Landy (3)
10.2		Amendment to the Hudson Valley Bank Supplemental Retirement Plan of 1995, dated October 6, 2014, between Hudson Valley Bank, N.A. and James J. Landy (3)
10.3		Amendment to the Hudson Valley Bank Supplemental Retirement Plan of 1995, dated October 7, 2014, between Hudson Valley Bank, N.A. and Vincent T. Palaia (3)
10.4		Third Amendment to the Hudson Valley Bank Supplemental Retirement Plan of 1997, dated October 7, 2014, between Hudson Valley Bank, N.A. and Stephen R. Brown (3)
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4)
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4)
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 (4)
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 (4)

101.INS		XBRL Instance Document (4)

101.SCH		XBRL Taxonomy Extension Schema (4)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase (4)

101.LAB		XBRL Taxonomy Extension Label Linkbase (4)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase (4)

101.DEF		XBRL Taxonomy Extension Definition Linkbase 4)

HUDSON VALLEY HOLDING CORP.

By:		/s/ Michael J. Indiveri
		Michael J. Indiveri
		Executive Vice President,
		Chief Financial Officer