**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  
 **FORM
        10-K**
 
  **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  **For
                  the fiscal year ended December 31, 2005**
              **Commission
                  File number 1-12811**
  **U.S.B.
        HOLDING CO., INC.**
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
              
              **36-3197969**(State
                  or other jurisdiction ofincorporation
                  or organization)
              
              (I.R.S.
                  Employer Identification No.)**100
                  Dutch Hill Rd., Orangeburg, New York**
              
              **10962**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
  **Registrant’s
        telephone number, including area code: (845) 365-4600**
  **Securities
        registered pursuant to Section 12(b) of the Act:**
  Name
                  of each exchange onTitle
                  of each Class
              
              which
                  registered**Common
                  Stock ($0.01 par value)**
              
              **New
                  York Stock Exchange**
  **Securities
        registered pursuant to section 12(g) of the Act:**
  Title
                  of Class**None**
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.  Yes:    ̈ No: x
  Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange Act. Yes:    ̈ No: x
  Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months and (2) has been subject to such filing requirements
        for the
        past 90 days. Yes:   x No:  ̈
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of Registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K:   ̈
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
        accelerated filer  ̈    Accelerated
        filer  x     Non-accelerated
        filer  ̈
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes:    ̈ No: x
  Class
              
              Outstanding
                  at February 28, 2006**Common
                  Stock**
              
              **21,729,232
                  shares****($0.01
                  par value)**
  The
        aggregate market value of the voting stock held by nonaffiliates of the
        registrant on June 30, 2005 was approximately $260.2 million, computed by
        reference to the closing price on the New York Stock Exchange composite tape
        of
        $23.40 per share of Common Stock on June 30, 2005.
  **Documents
        incorporated by reference:**
  Portions
        of the registrant’s Annual Report to Stockholders for the year ended December
        31, 2005 are incorporated by reference in Part II of this report.
  Portions
        of the registrant’s definitive Proxy Statement for the 2006 Annual Meeting of
        Stockholders, which will be filed with the Securities and Exchange Commission
        within 120 days after December 31, 2005, are incorporated by reference in
        Part
        III of this report.
 
   **PART
        I**
  **ITEM
        1.**  **BUSINESS**
  U.S.B.
        Holding Co., Inc. (the “Company”), a Delaware corporation incorporated in 1982,
        is a bank holding company registered under the Bank Holding Company Act of
        1956,
        as amended, which provides financial services through its wholly-owned
        subsidiaries. The Company and its subsidiaries derive substantially all of
        their
        revenue and income from providing banking and related financial services,
        primarily to customers in Rockland and Westchester Counties, New York City
        and
        Long Island, New York, and Southern Connecticut, as well as Orange, Putnam,
        and
        Dutchess Counties, New York, and the surrounding area (the “Metropolitan area”).
        The Company is a separate and distinct legal entity from its
        subsidiaries.
  Union
        State Bank (the “Bank”), the Company’s commercial banking subsidiary, is a New
        York chartered commercial bank established in 1969. The Bank offers a wide
        range
        of banking services to individuals, municipalities, corporations, and small
        and
        medium-size businesses through its 26 retail branches in Rockland and
        Westchester Counties (as of January 23, 2006), and one branch each in Stamford,
        Connecticut, Manhattan, New York City, and Goshen (Orange County), New York.
        The
        Bank also has loan production offices located in Rockland County, Westchester
        County and Orange County, New York, and Stamford, Connecticut. The Bank’s
        corporate offices are located in Rockland County. The Bank’s products and
        services include checking accounts, NOW accounts, money market accounts,
        savings
        accounts (passbook and statement), certificates of deposit, retirement accounts,
        commercial, personal, residential, construction, home equity (second mortgage)
        and condominium mortgage loans, consumer loans, credit cards, safe deposit
        facilities, and other consumer oriented financial services. The Bank also
        makes
        available to its customers automated teller machines (ATMs), debit cards,
        lock-box services, and Internet banking. The deposits of the Bank are insured
        to
        the extent permitted by law pursuant to the Federal Deposit Insurance Act
        of
        1950, as amended.
  In
        1997,
        the Bank established two nonbank wholly-owned subsidiaries. Dutch Hill Realty
        Corp. owns and manages problem assets and real estate acquired in foreclosure
        from the Bank. U.S.B. Financial Services, Inc. offers sales of various financial
        products, such as mutual funds, stocks and bonds, annuities, and life insurance
        in conjunction with an arrangement with a third party brokerage and insurance
        firm specializing in bank financial product sales.
  USB
        Delaware Inc. is a Delaware passive investment company established by the
        Bank.
        USB Delaware Inc. was established for the purpose of managing the Bank’s
        investment in TPNZ Preferred Funding Corporation (“TPNZ”).
  TPNZ
        is a
        majority-owned subsidiary of USB Delaware Inc. TPNZ was formed in 1998 to
        manage
        certain mortgage-backed securities and mortgage loans, substantially all
        of
        which were previously owned by the Bank and TPNZ’s former parent company,
        Tarrytowns Bank, FSB (“Tarrytowns”). TPNZ qualifies as a Real Estate Investment
        Trust for income tax purposes.
  In
        February 1997, the Company established Union State Capital Trust I, which
        is a
        Delaware business trust, in July 2001 and June 2002, established Union State
        Statutory Trust II and USB Statutory Trust III, respectively, which are
        Connecticut business trusts, and in March 2004, established Union State
        Statutory Trust IV, a Delaware business trust, (collectively the “Trusts”). The
        Trusts were established solely for the purpose of issuing Capital Securities
        and
        purchasing subordinated debt from the Company with the proceeds. Refer to
        Note
        10 to the Consolidated Financial Statements for further detail.
  The
        Company also has a nonbank subsidiary, Ad Con, Inc., which is currently
        inactive.
  The
        Company fully utilizes its website, www.unionstate.com, to advertise the
        Bank’s
        products, list information about its locations, and make available, free
        of
        charge, its Securities Exchange Act filings, including Annual Reports on
        Form
        10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and
        amendments to those reports as soon as reasonably practicable after they
        have
        been electronically filed with or furnished to the Securities and Exchange
        Commission (“SEC”). Such filings are also available on the SEC’s website at
        www.sec.gov.
  **Employees**
  As
        of
        December 31, 2005, the Company employed a total of 377 full-time and 39
        part-time employees. The Company and its subsidiaries provide a variety of
        benefit plans, including incentive bonus, group life, health, and stock
        ownership plans. Management considers its employee relations to be
        satisfactory.
  **Competition**
  The
        Bank’s headquarters and fourteen of its branch offices are currently located in
        Rockland County, New York. Twelve of the Bank’s branch offices (as of January
        23, 2006) are located in Westchester County, New York. The Bank also has
        a
        branch location in Stamford, Connecticut, Manhattan, New York City, and Goshen
        (Orange County), New York, as well as offices that close loans and disburse
        funds in Tarrytown, New York, Goshen (Orange County), New York, and Stamford,
        Connecticut. The Company’s current deposits constitute a market share that is
        approximately 16.6 percent and 2.2 percent of Rockland and Westchester Counties’
deposits, respectively.
  -2-
  The
        Bank
        is the largest bank headquartered in the Hudson Valley and has been successful
        in its penetration of New York markets in Rockland and Westchester Counties
        and
        more recently, the Stamford, Connecticut, and Orange County, New York, markets.
        The Bank believes it is able to attract and retain customers because of its
        knowledge of local markets, competitive products, and the ability of
        professional staff to provide a high degree of service to customers. Within
        its
        market area, the Bank encounters competition from many other financial
        institutions offering comparable products. These competitors include other
        commercial banks (both locally based independent banks and major New York
        City
        commercial banks) and savings banks, as well as mortgage bankers, savings
        and
        loan associations, and credit unions. In addition, the Bank experiences
        competition in marketing some of its services from the local operations of
        insurance companies, brokerage firms, and other financial
        institutions.
  The
        Company expects to continue to expand by opening new retail branches, enhancing
        Internet and telephonic delivery channels, and expanding loan originations
        in
        its market area. Acquisitions of other smaller financial institutions and
        branches will be considered to supplement growth in the Company’s present and
        contiguous markets. Acquisitions of other nonbank financial institutions
        will
        also be considered to expand the Company’s product offerings.
  **Supervision
        and Regulation**
  The
        references under this heading to various aspects of supervision and regulation
        are brief summaries which do not purport to be complete and which are qualified
        in their entirety by reference to applicable laws, rules, and
        regulations.
  The
        Company, as a “bank holding company” under the Bank Holding Company Act of 1956
        (the “BHC Act”), is regulated and examined by the Board of Governors of the
        Federal Reserve System (the “FRB”) and is required to file with the FRB an
        annual report and other information. The BHC Act restricts the business
        activities and acquisitions that may be engaged in by the Company. The FRB
        may
        make examinations of the Company and has the authority (which it has not
        exercised) to regulate provisions of certain bank holding company debt. The
        BHC
        Act requires every bank holding company to obtain the prior approval of the
        FRB
        before acquiring substantially all the assets of, or direct or indirect
        ownership or control of more than five percent of the voting shares of, any
        bank
        that is not already majority-owned. Subject to certain limitations and
        restrictions, a bank holding company, with the prior approval of the FRB,
        may
        acquire an out-of-state bank. A national or state bank may also establish
        a de
        novo branch out of state if such branching is expressly permitted by the
        other
        state.
  The
        BHC
        Act also prohibits a bank holding company, with certain exceptions, from
        engaging in or acquiring direct or indirect control of more than five percent
        of
        the voting shares of any company engaged in non-banking activities. One of
        the
        principal exceptions to these prohibitions is engaging in, or acquiring shares
        of a company engaged in, activities found by the FRB, by order or regulations,
        to be so closely related to banking or the management of banks as to be a
        proper
        incident thereto. Activities determined by the FRB to be so closely related
        to
        banking within the meaning of the BHC Act include operating a mortgage company,
        finance company, credit card company, factoring company, trust company or
        savings association; performing certain data processing operations; providing
        limited securities brokerage services; acting as an investment or financial
        advisor; acting as an insurance agent for certain types of credit-related
        insurance; leasing personal property on a full-payout, non-operating basis;
        providing tax planning and preparation services; operating a collection agency;
        and providing certain courier services. The FRB also has determined that
        under
        the BHC Act certain other activities, including real estate brokerage and
        syndication, land development, property management, and underwriting of life
        insurance unrelated to credit transactions, are not closely related to banking
        and therefore are not a proper incident thereto.
  Historically,
        the BHC Act has restricted the business activities and acquisitions that
        may be
        engaged in or made by the Company. The enactment of the Gramm-Leach-Bliley
        Act
        of 1999 (the “GLB Act”), which became effective on March 11, 2000, permits bank
        holding companies to elect to be treated as “financial holding companies.” If
        the Company should elect to become a financial holding company, the business
        activities and acquisitions or investments that may be engaged in will be
        significantly expanded. A financial holding company is authorized to engage
        in
        any activity that is financial in nature or incidental to an activity that
        is
        financial in nature or is a complementary activity. These activities include
        insurance, securities transactions, and traditional banking related
        activities.
  The
        GLB
        Act also authorizes a state bank to have a financial subsidiary that engages,
        as
        a principal, in the same activities that are permitted for a financial
        subsidiary of a national bank if the state bank meets eligible criteria and
        special conditions for maintaining the financial subsidiary. The GLB Act
        designates the FRB as the umbrella supervisor of financial holding companies
        and
        adopts a system of functional regulation where the primary regulator is
        determined by the nature of the activity rather than the type of institution.
        If
        the Company should elect to become a financial holding company, the Company
        may
        be subject to supervision from different governmental agencies. As of the
        date
        hereof, the Company has made no determination to elect to be treated as a
        financial holding company and, accordingly, will still be subject to the
        BHC
        Act.
  -3-
  The
        Company is a legal entity separate and distinct from its subsidiaries. The
        ability of holders of debt and equity securities of the Company to benefit
        from
        the distribution of assets from any subsidiary upon the liquidation or
        reorganization of such subsidiary is subordinate to prior claims of creditors
        of
        the subsidiary (including depositors in the case of banking subsidiaries),
        except to the extent that a claim of the Company as a creditor may be
        recognized.
  There
        are
        various statutory and regulatory limitations regarding the extent to which
        present and future banking subsidiaries of the Company can finance or otherwise
        transfer funds to the Company or its nonbanking subsidiaries, whether in
        the
        form of loans, extensions of credit, investments or asset purchases, including
        regulatory limitations on the payment of dividends directly or indirectly
        to the
        Company from the Bank. Federal and state bank regulatory agencies also have
        the
        authority to limit further the Bank’s payment of dividends based on such factors
        as the maintenance of adequate capital for such subsidiary Bank, which could
        reduce the amount of dividends otherwise payable. Under applicable banking
        statutes, at December 31, 2005, the Bank could declare additional dividends
        of
        $66.9 million to the Company without prior regulatory approval.
  Under
        the
        policy of the FRB, the Company is expected to act as a source of financial
        strength to the Bank and to commit resources to support the Bank in
        circumstances where the Company might not do so absent such policy. In addition,
        any subordinated loans by the Company to the Bank would also be subordinate
        in
        right of payment to depositors and obligations to general creditors of such
        subsidiary bank.
  The
        Bank
        is organized under the Banking Law of the State of New York. Its operations
        are
        subject to Federal and state laws applicable to commercial banks and to
        extensive regulation, supervision and examination by the Superintendent of
        Banks
        and the Banking Board of the State of New York, as well as by the Federal
        Deposit Insurance Corporation (“FDIC”), as its primary Federal regulator and
        insurer of deposits. The New York Superintendent of Banks and the FDIC
        periodically examine the affairs of the Bank for the purpose of determining
        its
        financial condition and compliance with laws and regulations.
  The
        New
        York Superintendent of Banks and the FDIC have significant discretion in
        connection with their supervisory and enforcement activities and examination
        policies, including policies with respect to the classification of assets
        and
        the establishment of adequate loan loss reserves for regulatory purposes.
        Any
        change in such policies whether by the FDIC, Congress, the New York
        Superintendent of Banks or the New York Legislature could have a material
        adverse impact on the Bank and the Company.
  The
        Company is subject to risk-based capital and leverage guidelines issued by
        the
        FRB. The Bank, whose deposits are insured by the FDIC, is subject to similar
        guidelines. These guidelines are utilized to evaluate capital adequacy. The
        regulatory agencies are required by law to take specific prompt corrective
        actions with respect to banks that do not meet minimum capital standards.
        As of
        December 31, 2005, the Bank was classified as “well capitalized” for regulatory
        purposes. See “Capital Resources” under Management’s Discussion and Analysis of
        Financial Condition and Results of Operations, and Note 12 to the Consolidated
        Financial Statements.
  Federal
        laws and regulations also limit, with certain exceptions, the ability of
        banks
        to engage in activities or make equity investments that are not permissible
        for
        national banks. The Company does not expect such provisions to have a material
        adverse effect on the Bank or the Company.
  **Sarbanes-Oxley
        Act of 2002**
  On
        July
        29, 2002, Congress passed the Sarbanes-Oxley Act of 2002 (the “Act”), which
        provides for extensive new regulations regarding corporate governance, auditor
        independence and oversight, and other related matters. Among other things,
        the
        Act required: the establishment of a Public Company Accounting Oversight
        Board
        to monitor the audit profession with respect to audits of public companies;
        establishment of audit independence standards; establishment of corporate
        responsibility standards that include rules and regulations with respect
        to
        audit committees and corporate responsibility for financial reports; disclosures
        and assessment of internal controls; and increases in corporate and criminal
        fraud accountability that sets forth white collar crime penalty enhancements.
        The Act also requires the Company to name and disclose the Company’s Audit
        Committee financial expert or explain why no such Audit Committee financial
        expert has been named.
  In
        conjunction with the Act’s requirements, the SEC and New York Stock Exchange
        (“NYSE”) have issued numerous rules and regulations, which have various
        implementation dates. The Company has complied with all such rules and
        regulations to date and will continue to comply with all rules and regulations
        as they become effective.
  -4-
  **Government
        Monetary Policies and Economic Co** **ntrols**
  The
        earnings and growth of the banking industry, the Company, and the Bank are
        affected by general economic conditions, as well as by the policies of monetary
        authorities, including the FRB. An important function of the FRB is to regulate
        the national supply of bank credit in order to maintain economic growth and
        curb
        inflationary pressures. Its policies are used in varying combinations to
        influence overall growth of bank loans, investments and deposits and may
        also
        affect interest rates charged on loans or paid for deposits.
  In
        view
        of changing conditions in the national economy and the financial markets,
        as
        well as the effect of actions by monetary and fiscal authorities, including
        the
        FRB, no prediction can be made by the Company as to possible future changes
        in
        interest rates, deposit levels, loan demand, investments, or their effect
        on the
        business and earnings of the Company and the Bank.
  **ITEM
        1A.**  **RISK
        FACTORS**
  **Strong
        competition within the Company’s market areas may limit its growth and
        profitability.**
  Competition
        in the banking and financial services industry is intense. In the Company’s
        market area, the Company competes with commercial banks, savings institutions,
        mortgage firms, credit unions, and insurance companies operating locally
        and
        elsewhere. Many of these competitors (including money center, national and
        regional institutions) have substantially greater resources and higher lending
        limits than the Company does and may offer certain services that the Company
        does not or cannot provide. The Company’s profitability depends upon its
        continued ability to successfully compete in its market area.
  **Changes
        in interest rates may reduce the Company’s net income.**
  The
        Company’s net income depends largely on the relationship between the yield on
        interest earning assets, primarily commercial loans and securities, and the
        cost
        of deposits and borrowings. This relationship, known as the net interest
        rate
        spread, is subject to fluctuations and is affected by economic and competitive
        factors that influence market interest rates, the volume and mix of interest
        earning assets and interest bearing liabilities, and the level of non-performing
        assets. Fluctuations in market interest rates affect customer demand for
        the
        Company’s products and services. The Company is subject to interest rate risk to
        the degree that interest bearing liabilities reprice or mature more slowly
        or
        more rapidly or on a different basis than interest-earning assets.
  In
        addition, the actual amount of time before loans and securities are repaid
        can
        be significantly impacted by changes in prepayment rates and market interest
        rates. Prepayment rates will vary due to a number of factors, including the
        regional economy in the areas where the underlying loans were originated,
        seasonal factors, demographic variables and the assumability of the underlying
        mortgages. However, the major factors affecting prepayment rates are prevailing
        interest rates, related refinancing opportunities and competition. Securities
        are also subject to calls that are due to changes in market interest rates.
        If
        this were to occur and should the Company decide to reinvest the proceeds
        at a
        potentially lower rate, this may negatively impact the Company’s net interest
        income.
  Also,
        many of the Company’s borrowings contain features that would allow them to be
        called prior to contractual maturity in periods of rising interest rates.
        If
        this were to occur, the Company would either renew the borrowings at a
        potentially higher rate of interest, which may negatively impact the Company’s
        net interest income, or repay such borrowings. If the Company sells securities
        to fund the repayment of such borrowings, the securities sold could result
        in a
        loss. Changes in interest rates may also affect the value of the underlying
        collateral to the borrowing. This may result in additional collateral needed
        for
        the borrowings. The effects of interest rate changes on the Company’s net
        interest income is further described on page 55 of Management’s Discussion
        and Analysis of Financial Condition and Results of Operations.
  **The
        geographic concentration of the Company’s loan portfolio and lending activities
        may increase its credit risk.**
  The
        Company’s business depends significantly on general economic conditions in the
        New York Metropolitan area. Unlike larger banks that are more geographically
        diversified, the Company provides banking and financial services to customers
        primarily in the New York Metropolitan area. The local economic conditions
        in
        the New York Metropolitan area have a significant impact on its loans, the
        ability of the borrowers to repay these loans, and the value of the collateral
        securing these loans. A significant decline in general economic conditions
        caused by inflation, recession, unemployment, or other factors beyond the
        Company’s control would impact these local economic conditions and could
        negatively affect the financial results of its banking operations. Additionally,
        because the Company has a significant amount of commercial real estate loans,
        decreases in tenant occupancy may also have a negative effect on the ability
        of
        many of the Company’s borrowers to make timely repayments of their loans, which
        could have an adverse effect on the Company’s net income.
  -5-
  **The
        Company’s continued emphasis on real estate lending could adversely affect the
        Company’s net income.**
  Originating
        loans secured by residential real estate is the Company’s primary business. The
        Company’s financial results may be adversely affected by changes in prevailing
        economic conditions, primarily in the Metropolitan area. These economic
        conditions include decreases in real estate values, adverse employment
        conditions, the monetary and fiscal policies of the federal, state, and local
        governments, and other significant external events. As of December 31, 2005,
        approximately 88.9 percent of the Company’s loan portfolio was secured by real
        estate related properties located primarily in the New York Metropolitan
        market
        area. Decreases in real estate values could adversely affect the value of
        the
        properties pledged as collateral for the Company’s loans. Adverse changes in the
        economy may also have a negative effect on the ability of the Company’s
        borrowers to make timely repayments of their loans, which may have an adverse
        impact on net income.
  **If
        the Company’s allowance for loan losses is not sufficient to cover actual loan
        loss, net income may be adversely affected.**
  If
        the
        Company’s borrowers are not able to repay their loans according to the terms of
        their loans, and the collateral securing the payment of these loans is not
        sufficient to pay any remaining indebtedness, the Company may experience
        significant loan losses, which may have a material adverse effect on its
        net
        income. The Company makes various assumptions and judgments about the
        collectibility of its loan portfolio, including the creditworthiness of its
        borrowers and the value of the real estate and other assets serving as
        collateral for the repayment of its loans. In determining the amount of the
        allowance for loan losses, the Company relies on its loan quality reviews,
        experience, and evaluation of economic conditions, among other factors. If
        the
        Company’s assumptions and judgments prove to be incorrect, the allowance for
        loan losses may not be sufficient to cover losses to the loan portfolio,
        resulting in additional provisions for credit losses. Additional provisions
        for
        credit losses would decrease the Company’s net income.
  In
        addition, bank regulators periodically review the Company’s loan portfolio, loan
        underwriting procedures, and the allowance for loan losses, which may require
        the Company to increase its provision for credit losses or otherwise recognize
        further loan charge-offs. Any increase in its allowance for loan losses or
        loan
        charge-offs, as required by these regulatory authorities, may have an adverse
        effect on the Company’s net income.
  **The
        Company operates in a highly regulated industry, which limits the manner
        and
        scope of the Company’s business activities.**
  The
        Company is subject to extensive supervision, regulation, and examination
        by the
        New York State Banking Department, its chartering authority, and by the FDIC,
        as
        the primary Federal regulator and insurer of deposits. As a result, the Company
        is limited in the manner in which it conducts its business, undertakes new
        investments and activities, and obtains financing. This regulatory structure
        is
        designed primarily for the protection of the deposit insurance funds and
        the
        Company’s depositors and not to benefit the Company’s stockholders. This
        regulatory structure also gives the regulatory authorities extensive discretion
        in connection with their supervisory and enforcement activities and examination
        policies, including policies with respect to capital levels, the timing and
        amount of dividend payments, the classification of assets, and the establishment
        of adequate loan loss reserves. In addition, the Company must comply with
        significant anti-money laundering and anti-terrorism laws. Government agencies
        have substantial discretion to impose significant monetary penalties on
        institutions that fail to comply with these laws.
  **Changes
        in laws, government regulation, and monetary policy may have a material effect
        on the Company’s results of operations.**
  Financial
        institution regulation has been the subject of significant legislation and
        may
        be the subject of further significant legislation in the future, none of
        which
        is in the Company’s control. Significant new laws or changes in, or repeals of,
        existing laws, including with respect to Federal and state taxation, may
        cause
        the Company’s results of operations to differ materially. The cost of compliance
        may adversely affect the Company’s ability to operate profitability. Also,
        Federal monetary policy significantly affects credit conditions for the Company.
        These policies are implemented through the Federal Reserve System, primarily
        through open market operations in U.S. government securities, the discount
        rate
        for bank borrowings, and reserve requirements. A material change in any of
        these
        conditions may have a material impact on the Bank and, therefore, on the
        Company’s results of operations.
  **ITEM
        IB.**  **UNRESOLVED STAFF COMMENTS**
  None
  **ITEM
        2.**  **PROPERTIES**
  The
        main
        office of the Company and the Bank, including the Executive Offices, Finance,
        Commercial Loan, Residential Mortgage, Credit Administration, Legal, Compliance,
        Human Resources, Facilities/Security, Internal Audit, Operations Center,
        Customer Service Center, Transit and Data Processing Departments, and Marketing
        Departments, is located at its Corporate Headquarters building, which is
        owned
        by the Bank at 100 Dutch Hill Road, Orangeburg, New York. The Bank’s main branch
        and Consumer Loan, Pension, and Credit Card departments are located at 46
        College Avenue, Nanuet, New York in premises that are leased by the Bank.
        The
        Bank also has loan production offices that may originate loans and disburse
        funds located at 660 White Plains Road in Tarrytown, New York, and 999 Bedford
        Street, Stamford, Connecticut, which premises are leased, and 50 North Church
        Street, Goshen, New York, which premises is owned.
  -6-
  In
        addition to the main branch in Nanuet, the Bank operates 13 retail banking
        branches in Rockland County, New York: 270 South Little Tor Road, New City;
        87
        Route 59, Monsey; 115 South Main Street, New City; 45 Kennedy Drive, Spring
        Valley; 35 South Liberty Drive, Stony Point; One Broadway, Haverstraw; Route
        9W
        and Railroad Avenue, West Haverstraw; 338 Route 59, Central Nyack; 230 North
        Middletown Road, Pearl River; 747 Chestnut Ridge Road, Chestnut Ridge; 65
        Dutch
        Hill Road, Orangeburg; 59 Route 59, Suffern, and 4 North Main Street, Spring
        Valley. The premises of the Little Tor Road, 45 Kennedy Drive, Spring Valley,
        Central Nyack, Chestnut Ridge and Orangeburg branch offices are leased, while
        the other Rockland branch offices are owned by the Bank.
  The
        Bank
        also operates 12 retail banking branches in Westchester County, New York
        (as of
        January 23, 2006): 131 Central Avenue, Tarrytown; 75 North Broadway, Tarrytown;
        299 Bedford Road, Bedford Hills; 3000 East Main Street, Cortlandt Manor;
        28 Le
        Count Place, New Rochelle; 313 Main Street, Eastchester; 270 Martine Avenue,
        White Plains; 88 Croton Avenue, Ossining, which are owned, and leased locations
        at 76 Virginia Road, North White Plains; 1779 Central Park Avenue, Yonkers;
        2500
        Central Park Avenue, Yonkers; and 800 Westchester Avenue, Rye Brook, which
        opened on January 23, 2006. The Bank also operates retail banking branches
        at 11
        East 22 nd Street,
        New York, New York, and 999 Bedford Street, Stamford, Connecticut, both of
        which
        are leased, and 50 North Church Street, Goshen, New York, which is
        owned.
  In
        the
        opinion of management, the premises, fixtures, and equipment used by the
        Company
        and the Bank are adequate and suitable for the conduct of their businesses.
        All
        the facilities are well maintained and provide adequate parking.
  **ITEM
        3.**  **LEGAL
        PROCEEDINGS**
  Various
        actions and proceedings are presently pending to which the Company is a party
        in
        the ordinary course of the Company’s business. Management, based on the advice
        of legal counsel, is of the opinion that the aggregate liabilities, if any,
        arising from such actions would not have a material adverse effect on the
        consolidated financial position of the Company.
  **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  None.
  -7-
  **PART
        II**
 
 **ITEM
        5.**  **MARKET
        FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES**
 
 The
        following table sets forth information with respect to purchases made by
        the
        Company of its common stock during the year ended December 31,
        2005.
 **2005
                  Periods**
              
              **Total
                  Number Of**
                **Shares
                  Purchased****2**
              
              **Average
                  Price Paid**
                **Per
                  Share****2**
              
              **Total
                  Number of Shares Purchased**
                **As
                  Part Of Publicly**
                **Announced
                  Programs**
              
              **Maximum
                  Number of**
                **Shares
                  That May Yet**
                **Be
                  Purchased Under**
                **The
                  Program****1&2**January
                  1 to January 31
              
              
              —
              
              $
              —
              
              
              N/A
              
              
              315,000February
                  1 to February 28
              
              
              88,371
              
              
              22.31
              
              
              N/A
              
              
              315,000March
                  1 to March 31
              
              
              36,873
              
              
              21.19
              
              
              11,865
              
              
              303,135April
                  1 to April 30
              
              
              —
              
              
              —
              
              
              N/A
              
              
              303,135May
                  1 to May 31
              
              
              73,831
              
              
              19.79
              
              
              58,275
              
              
              244,860June
                  1 to June 30
              
              
              —
              
              
              —
              
              
              N/A
              
              
              244,860July
                  1 to July 31
              
              
              —
              
              
              —
              
              
              N/A
              
              
              244,860August
                  1 to August 31
              
              
              —
              
              
              —
              
              
              N/A
              
              
              244,860September
                  1 to September 30
              
              
              —
              
              
              —
              
              
              N/A
              
              
              244,860October
                  1 to October 31
              
              
              —
              
              
              —
              
              
              N/A
              
              
              244,860November
                  1 to November 30
              
              
              90,972
              
              
              21.13
              
              
              90,972
              
              
              153,888December
                  1 to December 31
              
              
              27,000
              
              
              21.97
              
              
              27,000
              
              
              126,888**Total**
              
              
              **317,047**
              
              **$**
              **21.23**
              
              
              **188,112**
              
              
              **126,888**
 
 1
              The
                  Company announced a common stock repurchase plan of up to 315,000
                  shares
                  (adjusted for the five percent common stock dividend distributed
                  in
                  September 2005) on March 23, 2005, which expired on December 31,
                  2005.
 2
              Share
                  amounts and price paid per share are adjusted for the five percent
                  common
                  stock dividend distributed in September
                  2005.
  **Market
        Information and Holders**
  The
        Company’s common stock was held of record as of February 28, 2006 by 1,307
        registered stockholders and is traded on the NYSE under the symbol
“UBH.”
  The
        high
        and low sales prices for the Company’s common stock, as reported by the NYSE, as
        adjusted for the 5 percent stock dividend distributed in September 2005,
        for
        each quarter of 2005 and 2004, are as follows:
  **2005**
              
              2004**High**
              
              **Low**
              
              High
              
              LowFirst
                  Quarter
              
              **$**
              **23.40**
              
              **$**
              **20.90**
              
              $
              22.26
              
              $
              17.52Second
                  Quarter
              
              
              **22.96**
              
              
              **19.20**
              
              
              22.19
              
              
              18.57Third
                  Quarter
              
              
              **23.81**
              
              
              **21.17**
              
              
              24.08
              
              
              17.78Fourth
                  Quarter
              
              
              **23.09**
              
              
              **20.58**
              
              
              27.48
              
              
              23.71**First
                  Quarter 2006 through February 28, 2006**
              
              **$**
              **23.10**
              
              **$**
              **21.09**
  A
        summary
        of the Company’s equity compe nsation
        plans as of December 31, 2005 is included in Item 12.
  **Dividends**
  A
        stock
        dividend of 5 percent was declared by the Company for stockholders of record
        on
        August 17, 2005 and distributed on September 23, 2005. The weighted average
        common shares outstanding and per common share amounts are adjusted to reflect
        all common stock dividends.
  The
        Board
        of Directors of the Company has adopted a policy of paying quarterly cash
        dividends to holders of its common stock. In 2005, quarterly cash dividends
        per
        share were paid as follows: $0.13 to stockholders of record on March 31 and
        June
        30, and $0.14 to stockholders of record on September 30 and December 31.
        In
        2004, quarterly cash dividends were paid as follows: $0.10 to stockholders
        of
        record on March 31 and June 30, and $0.12 to stockholders of record on September
        30 and December 31.
  The
        Company expects that regular quarterly dividends will continue in the future,
        depending upon the Company’s earnings, financial condition, and other factors.
        Any funds that the Company may require in the future to pay cash dividends,
        as
        well as various Company expenses, are expected to be obtained by the Company
        chiefly in the form of cash dividends from the Bank and secondarily from
        the
        issuance of stock under Director and Employee Stock Option Plans. The ability
        of
        the Company to declare and pay dividends in the future will depend not only
        upon
        its future earnings and financial condition, but also upon the future earnings
        and financial condition of the Bank and its nonbank subsidiaries and upon
        the
        ability of the Bank to transfer funds to the Company primarily in the form
        of
        cash dividends. The Company is a separate and distinct legal entity from
        its
        subsidiaries. The Company’s right to participate in any distribution of the
        assets or earnings of its subsidiaries is subject to prior claims of creditors
        of the subsidiaries.
  -8-
  Under
        New
        York Banking Law, a New York bank may declare and pay dividends not more
        often
        than quarterly, and no dividends may be declared, credited, or paid so long
        as
        there is any impairment of capital stock. In addition, except with the approval
        of the New York State Superintendent of Banks, the total of all dividends
        declared in any year may not exceed the sum of a bank’s net profits for that
        year and its undistributed net profits for the preceding two years, less
        any
        required transfers to surplus. A bank may be required to transfer to surplus
        up
        to 10 percent of its net profits in any accounting period if its combined
        capital stock, surplus, and undivided profit accounts do not equal 10 percent
        of
        its net deposit liabilities. At December 31, 2005, the Bank could pay dividends
        of $66.9 million to the Company without having to obtain prior regulatory
        approval.
  The
        Company may not pay dividends on its common stock or preferred stock if it
        is in
        default with respect to the subordinated debt or related Capital Securities
        issued in March 2004, June 2002, July 2001, and February 1997, or if the
        Company
        elects to defer payment for up to five years as permitted under the terms
        of
        each subordinated debenture and Capital Securities. See note 10 to the Notes
        to
        Consolidated Financial Statements.
  The
        payment of dividends by the Company may also be limited by the FRB’s capital
        adequacy and dividend payment guidelines applicable to bank holding companies
        (see Item 1 - Business - Supervision and Regulation). Under these guidelines,
        the Company may not pay any dividends on shares of the Company’s common stock
        until such time as its debt to equity ratio (as defined, including long-term
        debt qualifying as capital) is below 30 percent.
  On
        June
        15, 2005, the Company’s Chief Executive Officer submitted his annual
        certification to the NYSE indicating that he was not aware of any violation
        by
        the Company of NYSE corporate governance listing standards.
  **ITEM
        6.**  **SELECTED
        FINANCIAL DATA**
  The
        information required by this Item is incorporated by reference from the table
        entitled “Selected Financial Data” in the Company’s 2005 Annual Report to
        Stockholders, page 52.
 
 **ITEM
        7.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
  The
        information required by this Item is incorporated by reference from the
        Company’s 2005 Annual Report to Stockholders, beginning on page 52.
  **ITEM
        7A.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
  The
        information required by this item is incorporated by reference from the
        Company’s 2005 Annual Report to Stockholders, beginning on page 71.
  **ITEM
        8.**  **FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA**
  The
        information required by this Item is incorporated by reference from the
        Company’s 2005 Annual Report to Stockholders, beginning on page 14.
  **ITEM
        9.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  None.
  **ITEM
        9A.**  **CONTROLS
        AND PROCEDURES**
  The
        Company has evaluated the design and operation of its disclosure controls
        and
        procedures to determine whether they are effective in ensuring that the
        disclosure of required information is timely made in accordance with the
        Securities Exchange Act of 1934 (“Exchange Act”) and the rules and forms of the
        SEC. This evaluation was made under the supervision and with the participation
        of management, including the Company’s principal executive officer and principal
        financial officer as of December 31, 2005. The principal executive officer
        and
        principal financial officer have each concluded, based on their review, that,
        as
        of December 31, 2005, the Company’s disclosure controls and procedures, as
        defined by Exchange Act Rules 13a- 15(e) and 15d-15(e), are effective to
        ensure
        that information required to be disclosed by the Company in reports that
        it
        files under the Exchange Act is recorded, processed, summarized, and reported
        within the time period specified in SEC rules and forms and that such
        information is accumulated and communicated to management as appropriate
        to
        allow timely decisions regarding required disclosure. There has been no change
        in the Company’s internal control over financial reporting during the Company’s
        fourth fiscal quarter of 2005 that has materially affected, or is reasonably
        likely to materially affect, the Company’s internal control over financial
        reporting.
  -9-
  The
        Company’s Management Report on Internal Control over Financial Reporting and the
        related report of the Company’s independent registered public accounting firm
        appear on pages 48 and 50, respectively, of the Company’s 2005 Annual
        Report to Stockholders and are incorporated herein by reference.
  **ITEM
        9B.**  **OTHER
        INFORMATION**
  None.
  **PART
        III**
  **ITEM
        10.**  **DIRECTORS
        AND EXECUTIVE OFFICERS OF THE REGISTRANT**
  The
        Company has named the Chairman of the Audit Committee, Mr. Edward T. Lutz,
        as
        the Audit Committee financial expert. The Board of Directors of the Company
        carefully evaluated the experience of Mr. Lutz in relation to specific criteria
        established by the SEC for determination of Audit Committee financial experts.
        Mr. Lutz, as well as the two other Audit Committee members, Mr. Howard V.
        Ruderman and Mr. Kenneth J. Torsoe, meet the qualifications for independent
        Audit Committee members as defined by the SEC.
  Included
        as exhibits to this Annual Report on Form 10-K are the Code of Conduct and
        Code
        of Ethics applicable to Financial Officers and the Chief Executive Officer.
        Copies of the Code of Conduct, Code of Ethics applicable to Financial Officers
        and the Chief Executive Officer, Corporate Governance Practices and Principles
        and charters of Board committees can be obtained upon request, free of charge,
        from the Company’s Corporate Headquarters and are also available on the
        Company’s website at www.unionstate.com.
  Additional
        information required by Item 10 is incorporated by reference to the information
        in the Company’s definitive Proxy Statement for its 2006 Annual Stockholders’
Meeting that will be filed with the SEC not later than 120 days after December
        31, 2005 (“2006 Proxy Statement”), under the headings “Item 1: Election of
        Directors,” “Audit Committee Independence,” and “Audit Committee Financial
        Expert.”
  **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
  The
        information required by this item is incorporated by reference to the
        information in the Company’s 2006 Proxy Statement under the headings “Executive
        Compensation,” “Report of the Company’s Compensation Committee on Executive
        Compensation,” and “Item 1: Election of Directors.”
  **ITEM
        12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
        MATTERS**
  Information
        with respect to equity compensation plans as of December 31, 2005 is as
        follows:
  **Equity
        Compensation Plan Information**
  **Plan
                  Cat****egory**
              
              **Number
                  of securities**
                **to
                  be issued upon exercise of outstanding options**
              
              **Weighted-average**
                **exercise
                  price of**
                **outstanding
                  options**
              
              **Number
                  of securities remaining available for future
                  issuance**
                **under
                  equity compensation plans****Equity
                  co****mpensation
                  plans****approved
                  by security holders:**Director
                  plans
              
              
              652,893
              
              $
              14.11
              
              
              443,536Employee
                  plans
              
              
              2,652,735
              
              
              14.16
              
              
              1,823,270**Equity
                  compensation plans not approved by security
                  holders**
              
              
              —
              
              
              —
              
              
              —**Total**
              
              
              **3,305,628**
              
              **$**
              **14.15**
              
              
              **2,266,806**
  Additional
        information required by Item 12 is incorporated by reference to the information
        in the Company’s 2006 Proxy Statement under the headings “Ownership of Shares by
        Management” and “Principal Stockholders of the Company.”
  **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS**
  The
        information required by this item is incorporated by reference to the
        information in the Company’s 2006 Proxy Statement under the heading, “Certain
        Relationships and Transactions with Management.”
  **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
  The
        information required by this item is incorporated by reference to the
        information in the Company’s 2006 Proxy Statement under the heading “Principal
        Accounting Firm: Fees and Policies.”
  -10-
  **PART
        IV**
  **ITEM
        15.**  **EXHIBITS
        AND FINANCIAL STATEMENT** **SCHEDULES**
 
 (a)
        Documents Filed as a Part of this Report:
   **1.
        and 2. FINANCIAL STATEMENTS AND SCHEDULES**
  The
        following financial statements of the Company and its subsidiaries are
        incorporated in Item 8 by reference to the Company’s 2005 Annual Report to
        Stockholders:
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  **CONSOLIDATED
        STATEMENTS OF CONDITION, DECEMBER 31, 2005 AND 2004**
  **CONSOLIDATED
        STATEMENTS OF INCOME,**
 **YEARS
        ENDED DECEMBER 31, 2005, 2004, AND 2003**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS, YEARS ENDED DECEMBER 31, 2005, 2004, AND
        2003**
  **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY, YEARS ENDED DECEMBER 31, 2005,
        2004, AND 2003**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 Financial
        Statement Schedules are omitted because of the absence of the conditions
        under
        which they are required or because the required information is included in
        the
        Consolidated Financial Statements and the Notes thereto.
  **3.**
              **EXHIBITS**
  **Exhibit
                  No.**
              
              **Exhibi**t(3)
                  (a)
              
              Restated
                  Certificate of Incorporation of Registrant (incorporated herein
                  by
                  reference to Registrant’s Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 2002 (“2002 Second Quarter 10-Q”), Exhibit
                  (3)(a)).(3)
                  (b)
              
              Bylaws
                  of Registrant (incorporated herein by reference to Registrant’s
                  Registration Statement on Form S-14 (File No. 2-79734), Exhibit
                  (3)(b)).(4)
                  (a)
              
              Junior
                  Subordinated Indenture, dated February 5, 1997, between Registrant
                  and The
                  Chase Manhattan Bank, as trustee (incorporated herein by reference
                  to
                  Registrant’s Annual Report on Form 10-K for the year ended December 31,
                  1996 (File No. 001-12811) (“1996 10-K”), Exhibit
                  (4)(a)).(4)
                  (b)
              
              Guarantee
                  Agreement, dated February 5, 1997, by and between Registrant and
                  The Chase
                  Manhattan Bank, as trustee for the holders of 9.58% Capital Securities
                  of
                  Union State Capital Trust I (incorporated herein by reference to
                  Registrant’s 1996 10-K, Exhibit (4)(b)).(4)
                  (c)
              
              Amended
                  and Restated Declaration of Trust of Union State Capital Trust
                  I
                  (incorporated herein by reference to Registrant’s 1996 10-K, Exhibit
                  (4)(c)).(4)
                  (d)
              
              Junior
                  Subordinated Indenture, dated July 31, 2001, between Registrant
                  and State
                  Street Bank and Trust Company of Connecticut, National Association,
                  as
                  trustee (incorporated herein by reference to Registrant’s Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 2001 (“2001 Third Quarter
                  10-Q”), Exhibit (4)(d)).(4)
                  (e)
              
              Guarantee
                  Agreement, dated July 31, 2001, by and between Registrant and State
                  Street
                  Bank and Trust Company of Connecticut, National Association, as
                  trustee
                  for the holders of Capital Securities of Union State Statutory
                  Trust II
                  (incorporated herein by reference to Registrant’s 2001 Third Quarter 10-Q,
                  Exhibit (4)(e)).(4)
                  (f)
              
              Amended
                  and Restated Declaration of Trust of Union State Statutory Trust
                  II
                  (incorporated herein by reference to Registrant’s 2001 Third Quarter 10-Q,
                  Exhibit (4)(f)).(4)
                  (g)
              
              Indenture,
                  dated June 26, 2002, between Registrant and State Street Bank and
                  Trust
                  Company of Connecticut, National Association, as trustee, (incorporated
                  herein by reference to Registrant’s 2002 Second Quarter 10-Q, Exhibit
                  (4)(g)).(4)
                  (h)
              
              Guarantee
                  Agreement dated June 26, 2002, by and between Registrant and State
                  Street
                  Bank and Trust Company of Connecticut, National Association, as
                  trustee
                  for the holders of Capital Securities of USB Statutory Trust III,
                  (incorporated herein by reference to Registrant’s 2002 Second Quarter
                  10-Q, Exhibit (4)(h)).(4)
                  (i)
              
              Amended
                  and Restated Declaration of Trust of USB Statutory Trust III,
                  (incorporated herein by reference to Registrant’s 2002 Second Quarter
                  10-Q, Exhibit (4)(i)).(4)
                  (j)
              
              Registrant’s
                  Dividend Reinvestment and Stock Purchase Plan (incorporated herein
                  by
                  reference to Registrant’s Form S-3 Registration Statement filed December
                  14, 1993 (File No. 33-72788)).
   -11-
  **Exhibit
                    No.**
                
                **Exhibi**t
 (4)
                  (k)
              
              Amended
                  and Restated Declaration of Trust of Union State Statutory Trust
                  IV dated
                  March 25, 2004 (incorporated herein by reference to the Registrant’s
                  Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
                  (“2004
                  First Quarter 10-Q”), Exhibit (10)(ad)).(4)
                  (l)
              
              Indenture
                  dated March 25, 2004 between Registrant and Wilmington Trust Company,
                  as
                  Trustee (incorporated herein by reference to the Registrant’s 2004 First
                  Quarter 10-Q, Exhibit (10)(ae)).(4)
                  (m)
              
              Guarantee
                  Agreement dated March 24, 2004 by and between registrant and Wilmington
                  Trust Company, as Trustee for the holders of Capital Securities
                  of Union
                  State Bank Statutory Trust IV (incorporated herein by reference
                  to the
                  Registrant’s 2004 First Quarter 10-Q, Exhibit
                  (10)(af)).(10)
                  (a)
              
              Agreement
                  of Employment dated as of November 16, 2003 between the Company
                  and the
                  Bank and Thomas E. Hales (incorporated herein by reference to Registrant’s
                  Annual Report on Form 10-K for the year ended December 31, 2003,
                  Exhibit
                  (10)(a)).(10)
                  (b)
              
              Agreement
                  of Employment dated as of July 28, 2004 between the Company and
                  the Bank
                  and Raymond J. Crotty (incorporated herein by reference to Registrant’s
                  Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
                  (“2004
                  Second Quarter 10-Q”), Exhibit (10)(b)).(10)
                  (c)
              
              Registrant’s
                  1993 Incentive Stock Option Plan (incorporated herein by reference
                  to
                  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1999 (File No. 002-79734), Exhibit (10)(e)).(10)
                  (d)
              
              Registrant’s
                  Employee Stock Ownership Plan (With 401(k) Provisions) (incorporated
                  herein by reference to Registrant’s Annual Report on Form 10-K for the
                  year ended December 31, 2001 (“2001 10-K”), Exhibit
                  (10)(g)).(10)
                  (e)
              
              Registrant’s
                  Director Stock Option Plan (incorporated herein by reference to
                  Registrant’s 1996 10-K, Exhibit (10)(f)).(10)
                  (f)
              
              Registrant’s
                  1998 Director Stock Option Plan (incorporated herein by reference
                  to
                  Registrant’s Form S-8 Registration Statement, filed June 5, 1998 (File No.
                  333-56169), Exhibit (99.1)).(10)
                  (g)
              
              Registrant’s
                  Key Employees’ Supplemental Investment Plan, as amended July 1, 1997 and
                  September 1, 1998 (incorporated herein by reference to the Plan’s Annual
                  Report on Form 11-K for the year ended December 31, 1998, (File
                  No.
                  001-12811), Exhibit (10)(j)).(10)
                  (h)
              
              Registrant’s
                  Key Employees’ Supplemental Diversified Investment Plan dated September 1,
                  1998 (incorporated herein by reference to the Plan’s Annual Report on Form
                  11-K for the year ended December 31, 1998 (File No. 001-12811),
                  Exhibit
                  (10)(k)).(10)
                  (i)
              
              Registrant’s
                  1997 Employee Stock Option Plan (incorporated herein by reference
                  to
                  Exhibit A to Registrant’s Proxy Statement filed April 16, 1997 (File No.
                  001-12811)).(10)
                  (j)
              
              Tappan
                  Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees
                  (“Employees Stock Option Plan”) (incorporated herein by reference to
                  Exhibit A to Tappan Zee Financial, Inc.’s Proxy Statement for use in
                  connection with its 1996 Annual Meeting of Shareholders (File No.
                  000-26466) (“Tappan Zee 1996 Proxy Statement”)).(10)
                  (k)
              
              Amendment
                  No. 1 to the Employees Stock Option Plan (incorporated herein by
                  reference
                  to Tappan Zee Financial, Inc.’s Annual Report on Form 10-K for the fiscal
                  year ended March 31, 1997 (File No. 000-26466) (“Tappan Zee 1997 10-K”),
                  Exhibit 10.1.1).(10)
                  (l)
              
              Amendment
                  No. 2 to the Employees Stock Option Plan (incorporated herein by
                  reference
                  to Appendix A to Tappan Zee Financial, Inc.’s Proxy Statement for use in
                  connection with its 1997 Annual Meeting of Shareholders (File No.
                  000-26466) (“Tappan Zee 1997 Proxy Statement”)).(10)
                  (m)
              
              Tappan
                  Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors
                  (“Outside
                  Director Option Plan”) (incorporated herein by reference to Exhibit B to
                  the Tappan Zee 1996 Proxy Statement).(10)
                  (n)
              
              Amendment
                  No. 1 to the Outside Director Option Plan (incorporated herein
                  by
                  reference to the Tappan Zee 1997 10-K, Exhibit 10.2.1).(10)
                  (o)
              
              Amendment
                  No. 2 to the Outside Director Option Plan (incorporated herein
                  by
                  reference to Appendix B to the Tappan Zee 1997 Proxy
                  Statement).(10)
                  (p)
              
              Deferred
                  Compensation Plan for Directors of Tarrytowns Bank, FSB (incorporated
                  herein by reference to the Registration Statement on Form S-1 (File
                  No.
                  33-94128) filed on June 30, 1995, as amended, Exhibit
                  10.7).(10)
                  (q)
              
              Registrant’s
                  2005 Employee Stock Option Plan (incorporated herein by reference
                  to
                  Appendix A to the Registrant’s Proxy Statement filed April 28,
                  2005).(10)
                  (r)
              
              Form
                  of Employee Stock Option Agreement by and between the Registrant
                  and
                  recipients of stock options granted pursuant to the Employee Stock
                  Option
                  Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s
                  Form 8-K filed on June 16, 2005).(10)
                  (s)
              
              Registrant’s
                  2005 Director Stock Option Plan (incorporated herein by reference
                  to
                  Appendix B to the Registrant’s Proxy Statement filed April 28,
                  2005).(10)
                  (t)
              
              Form
                  of Director Stock Option Agreement by and between the Registrant
                  and
                  recipients of stock options granted pursuant to the Director Stock
                  Option
                  Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s
                  Form 8-K filed on June 16, 2005).(10)
                  (u)
              
              Forms
                  of Stock Option Agreement by and between Tappan Zee Financial,
                  Inc., and
                  recipients of stock options granted pursuant to the Employees Stock
                  Option
                  Plan and the Outside Director Option Plan (incorporated herein
                  by
                  reference to the Tappan Zee 1997 10-K, Exhibit 10.16).(10)
                  (v)
              
              Registrant’s
                  Retirement Plan for Non-Employee Directors of U.S.B. Holding Co.,
                  Inc. and
                  Certain Affiliates dated effective as of May 19, 1999, and as amended
                  March 20, 2002 (incorporated herein by reference to the Registrant’s 2001
                  10-K, Exhibit (10)(w)).(10)
                  (w)
              
              Asset
                  Purchase and Account Assumption Agreement by and between Union
                  State Bank
                  and La Jolla Bank dated May 25, 2000 (incorporated herein by reference
                  to
                  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June
                  30, 2000, Exhibit (10)(oo)).(10)
                  (x)
              
              U.S.B.
                  Holding Co., Inc. Severance Plan dated January 30, 2002 (incorporated
                  herein by reference to Registrant’s 2001 10-K, Exhibit
                  (10)(y)).(10)
                  (y)
              
              Asset
                  Purchase and Liability Assumption Agreement dated as of June 14,
                  2002, by
                  and between Union State Bank and Fourth Federal Savings Bank (incorporated
                  herein by reference to Registrant’s 2002 Second Quarter 10-Q, Exhibit
                  (10)(z)).
 (10)
                  (z)
              
              U.S.B.
                  Holding Co., Inc. Executive IncentiveBonus
                  Plan as amended February 24, 1999 (incorporated herein by reference
                  to
                  Exhibit A to Registrant’s Proxy Statement filed April 27, 1999 (File No.
                  002-79734)).(10)
                  (aa)
              
              Amendment
                  No. 2 to the Key Employees’ Supplemental Investment Plan dated September
                  1, 2003 (incorporated herein by reference to the Registrant’s Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 2003 (“2003 Third
                  Quarter 10-Q”), Exhibit (10)(ab)).(10)
                  (bb)
              
              Amendment
                  No. 1 to the Key Employees’ Diversified Investment Plan dated September 1,
                  2003 (incorporated herein by reference to the Registrant’s 2003 Third
                  Quarter 10-Q, Exhibit (10)(ac)).(10)
                  (cc)
              
              Amended
                  and restated Key Employees’ Supplemental Investment Plan and Key
                  Employees’ Supplemental Diversified Investment Plan dated November 30,
                  2005, effective January 1, 2005.*(10)
                  (dd)
              
              Amended
                  and restated Retirement Plan for Non-Employee Directors of U.S.B.
                  Holding
                  Co., Inc. and Certain Affiliates dated December 13, 2005, effective
                  January 1, 2005.*(13)
              
              Registrant’s
                  Annual Report to Stockholders for the year ended December 31, 2005*
                  (portions incorporated herein by reference).(14)
                  (a)
              
              Business
                  Code of Conduct.*(14)
                  (b)
              
              Code
                  of Ethics applicable to Financial Officers and the Chief Executive
                  Officer.*(21)
              
              Subsidiaries
                  of the Registrant.*(23)
              
              Consent
                  of Deloitte & Touche LLP.*(31.1)
              
              Certification
                  of Chief Executive Officer Pursuant to Exchange Act Rule
                  13a-14(a).*(31.2)
              
              Certification
                  of Chief Financial Officer Pursuant to Exchange Act Rule
                  13a-14(a).*(32)
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to 18
                  U.S.C. Section 1350.*
 
 *
              Filed
                  Herewith
   -12-
  **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized, on March 13, 2006.
  **U.S.B.
                HOLDING CO., INC.**By:
              /s/ THOMAS
                E.
                HALESName:  
                  Thomas E. Hales
                Title:     Chairman of the Board and
                  Chief Executive Officer
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Company and in the
        capacities indicated on March 13, 2006.
  /s/
                  THOMAS E. HALES
              
              /s/
                  THOMAS M. BUONAIUTOThomas
                  E. Hales, Chairman of the Board,
              
              Thomas
                  M. Buonaiuto, Executive Vice President andChief
                  Executive Officer, and Director
              
              Chief
                  Financial Officer/s/
                  RAYMOND J. CROTTY
              
              /s/
                  MICHAEL H. FURYRaymond
                  J. Crotty, President, Chief Operating Officer,
              
              Michael
                  H. Fury, Esq., DirectorSecretary,
                  and Director/s/
                  EDWARD T. LUTZ
              
              /s/
                  KEVIN J. PLUNKETTEdward
                  T. Lutz, Director
              
              Kevin
                  J. Plunkett, Director/s/
                  HOWARD V. RUDERMAN
              
              /s/
                  KENNETH J. TORSOEHoward
                  V. Ruderman, Director
              
              Kenneth
                  J. Torsoe, Director
   -13-


*Consolidated
      Statements of Condition*


*December
      31, 2005 and 2004*


**U.S.B.
      Holding Co., Inc.**


(000’s,
                except share data)**ASSETS**
            
            **2005**
            
            2004Cash
                and due from banks
            
            **$**
            **58,635**
            
            $
            48,295Federal
                funds sold
            
            
            **22,300**
            
            
            17,000Cash
                and cash equivalents
            
            
            **80,935**
            
            
            65,295Interest
                bearing deposits in other banks
            
            
            **132**
            
            
            334Securities:Available
                for sale (at estimated fair value)
            
            
            **375,990**
            
            
            589,572Held
                to maturity (estimated fair value of $740,269 as of 2005and
                $507,428 in 2004)
            
            
            **746,851**
            
            
            502,201Loans,
                net of allowance for loan losses of $15,164 as of 2005and
                $15,226 as of 2004
            
            
            **1,459,820**
            
            
            1,492,872Premises
                and equipment, net
            
            
            **13,762**
            
            
            15,616Accrued
                interest receivable
            
            
            **18,184**
            
            
            17,312Federal
                Home Loan Bank of New York stock
            
            
            **30,776**
            
            
            31,135Intangible
                assets, net
            
            
            **3,826**
            
            
            5,087Goodwill
            
            
            **1,380**
            
            
            1,380Other
                assets
            
            
            **26,570**
            
            
            25,466**TOTAL
                ASSETS**
            
            **$**
            **2,758,226**
            
            $
            2,746,270**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities:**Non-interest
                bearing deposits
            
            **$**
            **315,156**
            
            $
            317,874Interest
                bearing deposits
            
            
            **1,532,046**
            
            
            1,540,344Total
                deposits
            
            
            **1,847,202**
            
            
            1,858,218Accrued
                interest payable
            
            
            **8,546**
            
            
            6,782Dividend
                payable
            
            
            **3,040**
            
            
            2,644Accrued
                expenses and other liabilities
            
            
            **11,140**
            
            
            9,562Securities
                sold under agreements to repurchase
            
            
            **550,332**
            
            
            542,323Federal
                Home Loan Bank of New York advances
            
            
            **71,827**
            
            
            82,709Subordinated
                debt issued in connection with corporation-obligatedmandatory
                redeemable capital securities of subsidiary trusts
            
            
            **61,858**
            
            
            61,858**Total
                liabilities**
            
            
            **2,553,945**
            
            
            2,564,096Minority-interest
                junior preferred stock of consolidated subsidiary
            
            
            **128**
            
            
            128Commitments
                and contingencies (Notes 6 and 16)**Stockholders’
                equity:**Preferred
                stock, no par valueAuthorized
                shares: 10,000,000; no shares outstanding as of 2005 and
                2004
            
            
            **—**
            
            
            —Common
                stock, $0.01 par valueAuthorized
                shares: 50,000,000Issued
                shares: 23,120,733 as of 2005 and 22,004,701 as of 2004
            
            
            **231**
            
            
            220Additional
                paid-in capital
            
            
            **211,686**
            
            
            184,166Retained
                earnings
            
            
            **21,654**
            
            
            26,336Treasury
                stock at cost, 1,406,928 shares as of 2005 and 1,657,887 shares as
                of
                2004
            
            
            **(21,670**
            **)**
            
            (22,855
            )Common
                stock held for benefit plans
            
            
            **(2,927**
            **)**
            
            (2,780
            )Deferred
                compensation obligation
            
            
            **2,927**
            
            
            2,746Accumulated
                other comprehensive loss
            
            
            **(7,748**
            **)**
            
            (5,787
            )**Total
                stockholders’ equity**
            
            
            **204,153**
            
            
            182,046**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            **$**
            **2,758,226**
            
            $
            2,746,270




*See
      notes to Consolidated Financial Statements.*




-14-





*Consolidated
        Statements of Income*
 *Years
        Ended December 31, 2005, 2004, and 2003*
 **U.S.B.
        Holding Co., Inc.**


(000’s,
                except share data)**2005**
            
            2004
            
            2003**INTEREST
                INCOME:**Interest
                and fees on loans
            
            **$**
            **98,856**
            
            $
            89,128
            
            $
            86,056Interest
                on federal funds sold
            
            
            **2,193**
            
            
            347
            
            
            638Interest
                and dividends on securities:U.S.
                government agencies
            
            
            **35,466**
            
            
            38,414
            
            
            24,520Mortgage-backed
                securities
            
            
            **16,339**
            
            
            13,469
            
            
            15,583Obligations
                of states and political subdivisions
            
            
            **4,072**
            
            
            3,532
            
            
            3,303Corporate
                and other
            
            
            **147**
            
            
            120
            
            
            8Interest
                bearing deposits in other banks
            
            
            **5**
            
            
            6
            
            
            1Dividends
                on Federal Home Loan Bank of New York stock
            
            
            **1,455**
            
            
            680
            
            
            1,106Total
                interest income
            
            
            **158,533**
            
            
            145,696
            
            
            131,215**INTEREST
                EXPENSE:**Interest
                on deposits
            
            
            **32,609**
            
            
            24,225
            
            
            23,793Interest
                on borrowings
            
            
            **26,527**
            
            
            29,368
            
            
            26,957Interest
                on subordinated debt issued in connection with
              corporation
                - obligated mandatory redeemable
              capital
                securities of subsidiary trusts
            
            
            **4,834**
            
            
            3,968
            
            
            3,441Total
                interest expense
            
            
            **63,970**
            
            
            57,561
            
            
            54,191**NET
                INTEREST INCOME**
            
            
            **94,563**
            
            
            88,135
            
            
            77,024Provision
                for credit losses
            
            
            **611**
            
            
            3,687
            
            
            2,513Net
                interest income after provision for credit losses
            
            
            **93,952**
            
            
            84,448
            
            
            74,511**NON-INTEREST
                INCOME:**Service
                charges and fees
            
            
            **3,598**
            
            
            4,256
            
            
            3,940Other
                income
            
            
            **3,995**
            
            
            3,542
            
            
            3,725Gains
                on securities transactions
            
            
            **―**
            
            
            1,199
            
            
            8,383Gains
                on sales of loans
            
            
            **314**
            
            
            ―
            
            
            ―Total
                non-interest income
            
            
            **7,907**
            
            
            8,997
            
            
            16,048**NON-INTEREST
                EXPENSES:**Salaries
                and employee benefits
            
            
            **33,232**
            
            
            30,858
            
            
            27,081Occupancy
                and equipment
            
            
            **7,759**
            
            
            7,849
            
            
            6,877Advertising
                and business development
            
            
            **2,704**
            
            
            2,622
            
            
            2,697Professional
                fees
            
            
            **1,926**
            
            
            2,796
            
            
            1,414Communications
            
            
            **1,218**
            
            
            1,506
            
            
            1,306Stationery
                and printing
            
            
            **572**
            
            
            646
            
            
            774FDIC
                insurance
            
            
            **276**
            
            
            291
            
            
            274Amortization
                of intangibles
            
            
            **1,146**
            
            
            1,126
            
            
            1,015Other
                expense
            
            
            **3,870**
            
            
            3,826
            
            
            3,802Total
                non-interest expenses
            
            
            **52,703**
            
            
            51,520
            
            
            45,240Income
                before income taxes
            
            
            **49,156**
            
            
            41,925
            
            
            45,319Provision
                for income taxes
            
            
            **15,964**
            
            
            13,860
            
            
            16,031**NET
                INCOME**
            
            **$**
            **33,192**
            
            $
            28,065
            
            $
            29,288**BASIC
                EARNINGS PER COMMON SHARE**
            
            **$**
            **1.54**
            
            $
            1.31
            
            $
            1.36**DILUTED
                EARNINGS PER COMMON SHARE**
            
            **$**
            **1.48**
            
            $
            1.25
            
            $
            1.33**WEIGHTED
                AVERAGE COMMON SHARES**
            
            
            **21,606,228**
            
            
            21,407,889
            
            
            21,458,322**ADJUSTED
                WEIGHTED AVERAGE COMMON SHARES**
            
            
            **22,478,083**
            
            
            22,444,471
            
            
            22,070,626**DIVIDENDS
                PER COMMON SHARE**
            
            **$**
            **0.54**
            
            $
            0.45
            
            $
            0.35




*See
      notes to Consolidated Financial Statements.*




-15-


*Consolidated
        Statements of Cash Flows*
 *Years
        Ended December 31, 2005, 2004, and 2003*
 **U.S.B.
        Holding Co., Inc.**


(000’s)**2005**
            
            2004
            
            2003**OPERATING
                ACTIVITIES:**Net
                income
            
            **$**
            **33,192**
            
            $
            28,065
            
            $
            29,288Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for credit losses
            
            
            **611**
            
            
            3,687
            
            
            2,513Depreciation
                and amortization
            
            
            **3,433**
            
            
            3,471
            
            
            3,104Amortization
                of (discounts) premiums on securities - net
            
            
            **(388**
            **)**
            
            (562
            )
            
            850Deferred
                income tax benefit, net
            
            
            **(3,284**
            **)**
            
            (3,263
            )
            
            (4,882
            )Gains
                on securities transactions
            
            
            **—**
            
            
            (1,199
            )
            
            (8,383
            )Gains
                on sales of loans
            
            
            **(314**
            **)**
            
            —
            
            
            —Non-cash
                benefit plan expense
            
            
            **128**
            
            
            523
            
            
            424Increase
                in accrued interest receivable
            
            
            **(872**
            **)**
            
            (1,548
            )
            
            (3,726
            )Increase
                in accrued interest payable
            
            
            **1764**
            
            
            163
            
            
            861Other
                - net
            
            
            **6,380**
            
            
            (1,209
            )
            
            247Net
                cash provided by operating activities
            
            
            **40,650**
            
            
            28,128
            
            
            20,296**INVESTING
                ACTIVITIES:**Proceeds
                from sales of securities available for sale
            
            
            **—**
            
            
            105,418
            
            
            423,073Proceeds
                from principal paydowns, redemptions and maturities of:Securities
                available for
                sale
            
            
            **250,984**
            
            
            892,419
            
            
            495,551Securities
                held to
                maturity
            
            
            **135,568**
            
            
            90,956
            
            
            181,125Purchases
                of securities available for sale
            
            
            **(40,871**
            **)**
            
            (803,699
            )
            
            (1,540,370
            )Purchases
                of securities held to maturity
            
            
            **(379,379**
            **)**
            
            (57,421
            )
            
            (96,115
            )Net
                redemptions (purchases) of Federal Home Loan Bank of New York
                stock
            
            
            **359**
            
            
            (541
            )
            
            (5,450
            )Net
                liabilities assumed in Reliance Bank acquisition
            
            
            **—**
            
            
            10,697
            
            
            —Net
                decrease (increase) in interest bearing deposits in other
                banks
            
            
            **202**
            
            
            (284
            )
            
            (5
            )Proceeds
                from sales of loans
            
            
            **7,505**
            
            
            —
            
            
            —Net
                decrease (increase) in loans outstanding, excluding sales of
                loans
            
            
            **25,814**
            
            
            (51,749
            )
            
            (100,163
            )Purchases
                of premises and equipment - net
            
            
            **(433**
            **)**
            
            (2,533
            )
            
            (3,760
            )Net
                cash (used for) provided by investing activities
            
            
            **(251**
            **)**
            
            183,263
            
            
            (646,114
            )**FINANCING
                ACTIVITIES:**Net
                (decrease) increase in non-interest bearing deposits, NOW, money
                market
                and savings accounts
            
            
            **(25,378**
            **)**
            
            32,261
            
            
            153,325Net
                increase in time deposits, net of withdrawals and
                maturities
            
            
            **14,362**
            
            
            26,995
            
            
            69,937Net
                increase (decrease) in securities sold under agreements to repurchase
                -
                short-term
            
            
            **35,009**
            
            
            (254,309
            )
            
            280,427(Repayment
                of) proceeds from Federal Home Loan Bank of New York advances -
                short-term
            
            
            **—**
            
            
            (10,500
            )
            
            10,500Proceeds
                from securities sold under agreements to repurchase -
                long-term
            
            
            **—**
            
            
            75,000
            
            
            115,000Repayment
                of securities sold under agreements to repurchase -
                long-term
            
            
            **(27,000**
            **)**
            
            (67,000
            )
            
            —Repayment
                of Federal Home Loan Bank of New York advances - long-term
            
            
            **(10,882**
            **)**
            
            (11,664
            )
            
            (16,516
            )Net
                proceeds from issuance of corporation-obligated mandatory redeemable
                capital securities of subsidiary trusts
            
            
            **—**
            
            
            9,975
            
            
            ―Redemption
                from sale of junior preferred stock of consolidated
                subsidiary
            
            
            **—**
            
            
            ―
            
            
            (1
            )Cash
                dividends paid
            
            
            **(11,659**
            **)**
            
            (9,579
            )
            
            (7,633
            )Proceeds
                from exercise of common stock options
            
            
            **4,713**
            
            
            740
            
            
            1,652Purchases
                of treasury stock
            
            
            **(3,924**
            **)**
            
            (5,466
            )
            
            (4,223
            )Net
                cash (used for) provided by financing activities
            
            
            **(24,759**
            **)**
            
            (213,547
            )
            
            602,468**INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            **15,640**
            
            
            (2,156
            )
            
            (23,350
            )**CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR**
            
            
            **65,295**
            
            
            67,451
            
            
            90,801**CASH
                AND CASH EQUIVALENTS, END OF YEAR**
            
            **$**
            **80,935**
            
            $
            65,295
            
            $
            67,451**Supplemental
                Disclosures:**Interest
                paid
            
            **$**
            **(62,206**
            **)**
            $
            (57,398
            )
            $
            (53,330
            )Income
                tax payments
            
            
            **(17,324**
            **)**
            
            (17,100
            )
            
            (19,396
            )Change
                in shares held in trust for deferred compensation
            
            
            **(181**
            **)**
            
            (419
            )
            
            (636
            )Change
                in deferred compensation obligation
            
            
            **181**
            
            
            419
            
            
            636Change
                in accumulated other comprehensive loss
            
            
            **(1,961**
            **)**
            
            (977
            )
            
            (7,991
            )Non
                cash purchases of treasury stock related to exercise of stock
                options
            
            
            **(5,609**
            **)**
            
            (1,600
            )
            
            (1,940
            )Non-cash
                exercise of stock options and related tax benefit
            
            
            **7,541**
            
            
            2,181
            
            
            2,834Issuance
                of treasury stock related to the exercise of stock options
            
            
            **10,718**
            
            
            2,436
            
            
            3,715Purchase
                of held to maturity securities not yet settled, including interest
                receivable
            
            
            **—**
            
            
            ―
            
            
            924Payment
                for held to maturity securities not yet settled at beginning of
                period,
              including
                interest receivable
            
            
            **—**
            
            
            (924
            )
            
            —Payment
                for available for sale securities not yet settled at beginning of
                period,
                including interest Receivable
            
            
            **—**
            
            
            —
            
            
            (263,090
            )Transfer
                of available for sale securities to held to maturity
                securities
            
            
            **—**
            
            
            298,171
            
            
            46,941Amortization
                of loss on transfer of available for sale securities to held to maturity
                securities
            
            
            **(677**
            **)**
            
            (310
            )
            
            —Transfer
                of fixed assets under construction (other assets) at beginning of
                the
                period to premises and equipment - net
            
            
            **—**
            
            
            ―
            
            
            2,383Loans
                acquired in acquisition of Reliance Bank, including interest
                receivable
            
            
            **—**
            
            
            (10,869
            )
            
            —Deposits
                assumed in acquisition of Reliance Bank, including interest
                payable
            
            
            **—**
            
            
            23,932
            
            
            —Other
                assets (including intangibles) acquired in acquisition of Reliance
                Bank,
                net of other liabilities
              assumed
            
            
            **—**
            
            
            (2,367
            )
            
            —




*See
      notes to Consolidated Financial Statements* *.*




-16-


*Consolidated
      Statements of Changes in Stockholders’ Equity*


*Years
      Ended December 31, 2005, 2004, and 2003*


**U.S.B.
      Holding Co., Inc.**


(000’s,
                except share data)Common
              Stock
              Shares
              Outstanding
            
            Common
              Stock
              Par
              Value
            
            Additional
              Paid-in
              Capital
            
            Retained
              Earnings
            
            Treasury
              Stock
            
            Common
              Stock
              Held
                for
              Benefit
              Plans
            
            Deferred
              Compensation
              Obligation
            
            Accumulated
              Other
              Comprehensive
              Income
                (Loss)
            
            Total
              Stockholders’
              Equity**Balance
                at January 1, 2003**
            
            
            18,501,580
            
            $
            198
            
            $
            140,054
            
            $
            28,648
            
            $
            (15,777
            )
            $
            (1,984
            )
            $
            1,691
            
            $
            3,181
            
            $
            156,011Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            29,288
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            29,288Other
                comprehensive loss
              Net
                unrealized securities loss arising during the year, net of tax benefit
                of
                $3,688
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,336
            )
            
            (5,336
            )Reclassification
                adjustment of net gain for securities sold, net of
                tax of $1,835
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,655
            )
            
            (2,655
            )Other
                comprehensive loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,991
            )
            
            (7,991
            )Total
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            21,297Five
                percent
                common stock dividend
            
            
            994,545
            
            
            10
            
            
            18,638
            
            
            (18,663
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15
            )Five
                percent
                common sock dividend on treasury stock
            
            
            (70,401
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cash
                dividends:
              Common
                ($0.35
                per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,608
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,608
            )Junior
                preferred stock
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )Common
                stock
                options exercised and related tax benefit
            
            
            429,751
            
            
            1
            
            
            770
            
            
            —
            
            
            3,715
            
            
            —
            
            
            —
            
            
            —
            
            
            4,486Purchases
                of
                treasury stock
            
            
            (367,685
            )
            
            —
            
            
            —
            
            
            —
            
            
            (6,163
            )
            
            —
            
            
            —
            
            
            —
            
            
            (6,163
            )ESOP
                shares
                committed to be released
            
            
            —
            
            
            —
            
            
            166
            
            
            —
            
            
            —
            
            
            129
            
            
            —
            
            
            —
            
            
            295Deferred
                compensation obligation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (636
            )
            
            636
            
            
            —
            
            
            —**Balance
                at December 31, 2003**
            
            
            19,487,790
            
            
            209
            
            
            159,628
            
            
            31,655
            
            
            (18,225
            )
            
            (2,491
            )
            
            2,327
            
            
            (4,810
            )
            
            168,293Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            28,065
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            28,065Other
                comprehensive loss
              Net
                unrealized securities loss arising during the year, net of tax benefit
                and
                adjustment of effective tax rate of $627
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,164
            )
            
            (1,164
            )Reclassification
                adjustment of net loss for securities sold, net of
                tax benefit of $130
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            187
            
            
            187Other
                comprehensive loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (977
            )
            
            (977
            )Total
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            27,088Five
                percent
                common stock dividend
            
            
            1,055,984
            
            
            10
            
            
            23,795
            
            
            (23,805
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Five
                percent
                common stock dividend on treasury stock
            
            
            (88,324
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cash
                dividends:
              Common
                ($0.45
                per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,569
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,569
            )Junior
                preferred stock
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )Common
                stock
                options exercised and related tax benefit
            
            
            221,135
            
            
            1
            
            
            484
            
            
            —
            
            
            2,436
            
            
            —
            
            
            —
            
            
            —
            
            
            2,921Purchases
                of
                treasury stock
            
            
            (329,771
            )
            
            —
            
            
            —
            
            
            —
            
            
            (7,066
            )
            
            —
            
            
            —
            
            
            —
            
            
            (7,066
            )ESOP
                shares
                committed to be released
            
            
            —
            
            
            —
            
            
            259
            
            
            —
            
            
            —
            
            
            130
            
            
            —
            
            
            —
            
            
            389Deferred
                compensation obligation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (419
            )
            
            419
            
            
            —
            
            
            —**Balance
                at December 31, 2004**
            
            
            20,346,814
            
            
            220
            
            
            184,166
            
            
            26,336
            
            
            (22,855
            )
            
            (2,780
            )
            
            2,746
            
            
            (5,787
            )
            
            182,046Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            33,192
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            33,192Other
                comprehensive loss:
              Net
                unrealized securities loss arising during the year, net of tax benefit
                of
                $1,056
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,961
            )
            
            (1,961
            )Other
                comprehensive loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,961
            )
            
            (1,961
            )Total
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            31,231Five
                percent
                common stock dividend
            
            
            1,131,266
            
            
            11
            
            
            26,204
            
            
            (26,235
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (20
            )Five
                percent
                common stock dividend on treasury stock
            
            
            (97,966
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cash
                dividends:
              Common
                ($0.54
                per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            (11,629
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (11,629
            )Junior
                preferred stock
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (10
            )Common
                stock
                options exercised and related tax benefit
            
            
            756,225
            
            
            ―
            
            
            1,534
            
            
            —
            
            
            10,718
            
            
            —
            
            
            —
            
            
            —
            
            
            12,252Purchases
                of
                treasury stock
            
            
            (422,534
            )
            
            —
            
            
            (285
            )
            
            —
            
            
            (9,533
            )
            
            —
            
            
            —
            
            
            —
            
            
            (9,818
            )ESOP
                shares
                committed to be released
            
            
            —
            
            
            —
            
            
            67
            
            
            —
            
            
            —
            
            
            34
            
            
            —
            
            
            —
            
            
            101Deferred
                compensation obligation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (181
            )
            
            181
            
            
            —
            
            
            —**Balance
                at December 31, 2005**
            
            
            21,713,805
            
            $
            231
            
            $
            211,686
            
            $
            21,654
            
            $
            (21,670
            )
            $
            (2,927
            )
            $
            2,927
            
            $
            (7,748
            )
            $
            204,153




*See
      notes to Consolidated Financial Statements.*




-17-


Balance
      sheet information as of December 31, 2003, 2002, and 2001, and income statement
      information for the years ended December 31, 2002 and 2001 are not covered
      by
      the Report of Independent Registered Public Accounting Firm included on page
      47.
      The weighted average common shares outstanding and per common share amounts
      have
      been adjusted to reflect all stock dividends and splits.




**1.**
            **NATURE
                OF OPERATIONS**




U.S.B.
      Holding Co., Inc. (the “Company”), a Delaware corporation incorporated on July
      6, 1982, is a bank holding company that provides financial services through
      its
      wholly-owned subsidiaries. The Company and its subsidiaries derive substantially
      all of their revenue and income from providing banking and related services
      primarily to customers in Rockland and Westchester Counties, New York City
      and
      Long Island, New York, and Southern Connecticut, as well as Orange, Putnam
      and
      Dutchess Counties, New York, and the surrounding area (the “Metropolitan area”).
      The Company is a separate and distinct legal entity from its
      subsidiaries.




Union
      State Bank (the “Bank”), the Company’s wholly-owned banking subsidiary, is a New
      York State chartered full-service commercial bank that was established in 1969.
      The Bank offers a complete range of community banking services to individuals,
      municipalities, corporations, and small and medium-size businesses through
      its
      26 retail branches in Rockland and Westchester Counties (as of January 23,
      2006), and one branch each in Stanford, Connecticut, Manhattan, New York City,
      and Goshen (Orange County), New York. The Bank also has loan production offices
      located in Rockland County, Westchester County, and Orange County, New York,
      and
      Stamford, Connecticut. The Bank’s corporate offices are located in Rockland
      County. The Bank’s products and services include checking accounts, NOW
      accounts, money market accounts, savings accounts (passbook and statement),
      certificates of deposit, retirement accounts, commercial loans, personal loans,
      residential, construction, home equity (second mortgage) and condominium
      mortgage loans, consumer loans, credit cards, safe deposit facilities, and
      other
      consumer oriented financial services. The Bank also makes available to its
      customers automated teller machines (ATMs), debit cards, lock-box services,
      and
      Internet banking.




USB
      Delaware Inc. is a Delaware passive investment company and wholly-owned
      subsidiary of the Bank. USB Delaware Inc. was established by the Bank for the
      purpose of managing TPNZ Preferred Funding Corporation (“TPNZ”).




TPNZ
      is a
      majority-owned subsidiary of USB Delaware Inc. TPNZ manages certain
      mortgage-backed securities and mortgage loans, substantially all of which were
      previously owned by the Bank and TPNZ’s former parent company, Tarrytowns Bank,
      FSB (“Tarrytowns”). TPNZ qualifies as a Real Estate Investment Trust for income
      tax purposes.




Dutch
      Hill Realty Corp. and U.S.B. Financial Services, Inc. are wholly-owned
      subsidiaries of the Bank. Dutch Hill Realty Corp. manages problem assets and
      real estate acquired in foreclosure by the Bank. U.S.B. Financial Services,
      Inc.
      sells mutual funds, annuities and life insurance products in conjunction with
      an
      agreement with a third party brokerage and insurance firm specializing in bank
      financial products.




Union
      State Capital Trust I (“Trust I”), a Delaware business trust, Union State
      Statutory Trust II (“Trust II”) and USB Statutory Trust III (“Trust III”), both
      Connecticut business trusts, and Union State Statutory Trust IV (“Trust IV”), a
      Delaware business trust, were established by the Company in 1997, 2001, 2002,
      and 2004, respectively. Trust I, Trust II, Trust III, and Trust IV
      (collectively, the “Trusts”) were established for the purpose of issuing
      corporation-obligated mandatory redeemable capital securities of subsidiary
      trusts (“Capital Securities”) and acquiring junior subordinated debt from the
      Company (see Note 10).




Ad
      Con,
      Inc., currently inactive, is a wholly-owned non-bank subsidiary of the
      Company.




**2.**
            **ACQUISITIONS**





As
      of the
      close of business on March 19, 2004, the Bank assumed approximately $23.9
      million of deposits and acquired approximately $10.5 million of single-family
      residential mortgage loans, $10.7 million of cash and cash equivalents, $2.1
      million of other assets, and $0.3 million in other loans in connection with
      the
      acquisition of Reliance Bank. The premium paid for the deposits assumed was
      $2.2
      million, or 9.4 percent, and $0.2 million, or 1.6 percent, for the single-family
      residential loans acquired. Reliance Bank was closed by the New York
      Superintendent of Banks, which appointed the Federal Deposit Insurance
      Corporation (“FDIC”) as Receiver. Reliance Bank, which operated as a one branch
      bank at 1200 Mamaroneck Avenue, White Plains, New York, became a Bank branch
      effective immediately after its closing. During February 2005, the Bank closed
      the Mamaroneck Avenue branch, and the deposits were transferred to the Bank’s
      Martine Avenue, White Plains branch.




The
      assumption of deposits and acquisition of certain assets of Reliance Bank has
      been accounted for as a business combination in accordance with Statement of
      Financial Accounting Standards (“SFAS”) No. 141, “Accounting for Business
      Combinations.” Assets, time deposits, and other liabilities acquired have been
      recorded at their estimated fair values as of March 19, 2004, and a core deposit
      intangible of $0.7 million was recorded based on a core deposit valuation study.
      Goodwill of $1.4 million was also recorded. In accordance with SFAS No. 142,
      “Goodwill and Other Intangible Assets,” the core deposit intangible is being
      amortized over its estimated life of fifteen years, and the goodwill component
      is tested for impairment annually at year-end. As of December 31, 2005, there
      was no impairment of goodwill.




-18-




The
      results of Reliance Bank operations related to the assets acquired and deposits
      assumed are included in the Company’s consolidated statements of income from the
      date of its acquisition. Pro forma information as if the transaction occurred
      at
      the beginning of the period is not material.




**3.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




**Principles
      of Consolidation:** The
      Consolidated Financial Statements include the accounts of the Company and its
      wholly-owned subsidiaries, the Bank (including the Bank’s wholly-owned
      subsidiaries: Dutch Hill Realty Corp.; U.S.B. Financial Services, Inc.; USB
      Delaware Inc.; and TPNZ, which is a majority-owned subsidiary of USB Delaware
      Inc.), and Ad Con, Inc. The Consolidated Financial Statements do not include
      the
      Trusts as a result of the deconsolidation of the Trusts under Financial
      Accounting Standards Board (“FASB”) Interpretation No. 46 and 46R,
“Consolidation of Variable Interest Entities.” All intercompany accounts and
      transactions are eliminated in consolidation.




**Basis
      of Financial Statement Presentation:** The
      Consolidated Financial Statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America
      (“generally accepted accounting principles”) and predominant practices used
      within the banking industry. In preparing such financial statements, management
      is required to make estimates and assumptions that affect the reported amounts
      of actual and contingent assets and liabilities as of the dates of the
      Consolidated Statements of Condition and the revenues and expenses for the
      periods reported. Actual results could differ significantly from those
      estimates.




Estimates
      that are particularly susceptible to significant change relate to the
      determination of the allowance for loan losses and provision for credit losses.
      In connection with the determination of the allowance for loan losses and
      provision for credit losses, management obtains independent appraisals for
      significant properties for loans that are collateralized by real
      estate.




**Securities:** In
      accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and
      Equity Securities,” the Company’s investment policies include a determination of
      the appropriate classification of securities at the time of purchase. Securities
      that may be sold as part of the Company’s asset/liability or liquidity
      management, or in response to or in anticipation of changes in interest rates
      and resulting prepayment risk, or for similar factors, are classified as
      available for sale. Securities that the Company has the ability and positive
      intent to hold to maturity are classified as held to maturity and carried at
      amortized cost. Realized gains and losses on the sales of all securities,
      determined by using the specific identification method, are reported in
      earnings. Securities available for sale are shown in the Consolidated Statements
      of Condition at estimated fair value and the resulting net unrealized gains
      and
      losses, net of tax, are included in accumulated other comprehensive income
      (loss).




The
      decision to sell securities available for sale is based on management’s
      assessment of changes in economic or financial market conditions, interest
      rate
      risk, and the Company’s financial position and liquidity. Estimated fair values
      for securities are based on quoted market prices, where available. If quoted
      market prices are not available, estimated fair values are based on quoted
      market prices of comparable instruments. Securities in an unrealized loss
      position are periodically evaluated for other than temporary impairment.
      Management considers the effect of interest rates, credit ratings, and other
      factors on the valuation of such securities, as well as the Company’s intent and
      ability to hold such securities until a forecasted recovery or maturity occurs.
      The Company does not acquire any significant amount of securities for the
      purpose of engaging in trading activities.




**Derivative
      Instruments and Hedging Activities:** In
      accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments
      and Hedging Activities — Deferral of the Effective date of FASB Statement No.
      133” and SFAS No. 138, “Accounting for Derivative Instruments and Hedging
      Activities, an Amendment of SFAS 133, and as further amended by SFAS No. 149,
      “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”
(collectively, “SFAS No. 133”), the Company established accounting and reporting
      standards for derivative instruments and hedging activities. SFAS No. 133
      requires that all derivatives be recognized in the statement of condition,
      either as assets or as liabilities, and be measured at fair value. This
      statement requires that changes in a derivative’s fair value be recognized in
      current earnings unless specific hedge accounting criteria are met. Hedge
      accounting for qualifying hedges permits changes in the fair value of
      derivatives to be either offset against the changes in the fair value of the
      hedged item through earnings or recognized in accumulated other comprehensive
      income (loss) until the hedged item is recognized in earnings.




The
      Company has not entered into any derivative instruments or hedging activities
      during the periods reported in the Company’s Consolidated Financial Statements
      included in this Annual Report.




**Transfers
      and Servicing of Financial Assets and Extinguishments of
      Liabilities:** The
      Company follows the provisions of SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No.
      140”), which establishes a consistent application of a financial components
      approach that requires recognition of the financial and servicing assets the
      Company controls and the liabilities it has incurred, derecognition of financial
      assets when control has been surrendered and derecognition of liabilities when
      extinguished. SFAS No. 140 provides consistent guidelines for distinguishing
      transfers of financial assets that are sales from transfers that are secured
      borrowings.




-19-




**Loans:** Loans
      are reported at the principal amount outstanding, net of unearned income and
      the
      allowance for loan losses. Interest income on loans is recorded on an accrual
      basis unless an interest or principal payment is more than 90 days past due
      (with the exception of credit card loans for which the criteria is 180 days
      past
      due) or sooner if, in the opinion of management, there is a question as to
      the
      ability of the debtor to continue to make payments. At the time a loan is placed
      on nonaccrual status, interest accrued but not collected is reversed. Interest
      payments received while a loan is on nonaccrual status are either applied to
      reduce principal or, based on management’s estimate of collectibility,
      recognized as income. Loans are returned to accrual status when factors
      indicating doubtful collectibility no longer exist.




Loan
      origination and commitment fees and certain direct loan origination costs are
      deferred, and the net amount is accreted as an adjustment of the loan portfolio
      yield over the estimated expected average life of the related loan
      type.




**Allowance
      for Loan Losses:** The
      allowance for loan losses is increased by charges to income through the
      provision for credit losses and decreased by charge-offs, net of recoveries
      of
      loans previously charged-off. Management also provides a reserve, which is
      included in other liabilities, related to contractually committed loans that
      have not yet been funded and standby letters of credit.




A
      comprehensive evaluation of the quality of the loan portfolio is performed
      by
      management on a quarterly basis as an integral part of the credit administration
      function. Several aspects of the evaluation include: the identification and
      evaluation of past due loans, non-performing loans, impaired loans, and
      potential problem loans; assessment of the current economic environment,
      applicable industries represented in the loan portfolio, and geographic and
      customer concentrations of the loan portfolio; and review of historical credit
      loss experience.




Management
      believes that the allowance for loan losses (the “allowance”) and reserve
      related to unfunded loans and standby letters of credit (the “reserve”)
      appropriately reflect the risk elements inherent in the credit portfolio as
      of
      the balance sheet date. In management’s judgment, the allowance and reserve are
      considered appropriate to absorb losses inherent in the credit portfolio. While
      management uses available information to recognize probable credit losses,
      future adjustments to the allowance and reserve may be necessary based on
      changes in economic conditions, particularly in the Company’s primary service
      areas. Regulatory agencies, as an integral part of their examination process,
      periodically review the allowance and reserve. Such agencies may require
      adjustments to the allowance and reserve based on their judgment of information
      available to them at the time of their examination.




A
      loan is
      recognized as impaired when it is probable that either principal and/or interest
      are not collectible in accordance with the terms of the loan agreement.
      Measurement of the impairment is based on the present value of expected cash
      flows discounted at the loan’s effective interest rate, the loan’s observable
      market price, or the estimated fair value of the collateral if the loan is
      collateral dependent. If the estimated fair value of the impaired loan is less
      than the related recorded amount, a specific valuation allowance is established
      or a write-down is charged against the allowance for loan losses if the
      impairment is considered to be permanent. Homogenous loans such as residential
      mortgage, home equity, and installment loans are collectively evaluated for
      impairment.




**Premises
      and Equipment:** Premises
      and equipment are stated at cost less accumulated depreciation and amortization.
      Depreciation is computed on a straight-line basis over the estimated useful
      lives (20 to 31 years for buildings and 3 to 10 years for furniture, fixtures
      and equipment) of the related assets. Amortization of leasehold improvements
      is
      computed on a straight-line basis over the estimated useful lives of the assets
      or, if shorter, the term of the applicable lease.




**Other
      Real Estate Owned (“OREO”):** OREO
      includes properties acquired in full or partial satisfaction of loans. OREO
      properties are recorded at the lower of cost or estimated fair value, less
      estimated costs to sell. Losses arising at the time of acquisition of such
      properties are charged against the allowance for loan losses. Net costs of
      maintaining and operating foreclosed properties and any subsequent provisions
      for changes in valuation are charged or credited to results of operations when
      incurred. Gains and losses realized from the sale of OREO are included as part
      of other income or other non-interest expenses. Sales of OREO financed by the
      Bank are required to meet the Bank’s underwriting standards.




**Income
      Taxes:** The
      Company accounts for income taxes using an asset and liability approach for
      financial accounting and reporting. Deferred income taxes are based on
      prevailing statutory regulations. Valuation allowances for deferred tax assets
      are established when, in management’s judgment, it is more likely than not that
      such deferred tax asset will not be realized. The Company and its subsidiaries,
      with the exception of TPNZ, file a consolidated Federal income tax return.
      The
      Company and its subsidiaries, with the exception of TPNZ and USB Delaware Inc.,
      file a combined New York State income tax return. The Bank files separate
      Connecticut State and New York City income tax returns. TPNZ files separate
      Federal and New York State income tax returns. USB Delaware Inc. is not subject
      to State of Delaware income tax under current Delaware law.




-20-




**Earnings
      per Common Share (“EPS”):** The
      Company computes EPS based upon the provisions of SFAS No. 128, “Earnings per
      Share” (“SFAS No. 128”). SFAS No. 128 establishes standards for computing and
      presenting “Basic” and “Diluted” EPS. Basic EPS excludes dilution and is
      computed by dividing net income available to common stockholders (net income
      after preferred stock dividend requirements) by the weighted average number
      of
      common shares outstanding for the period.




Diluted
      EPS reflects the potential dilution that could occur if securities or other
      contracts to issue common stock were exercised or converted into common stock
      or
      resulted in the issuance of common stock that would then share in the earnings
      of the Company, reduced by common stock that could be repurchased by the Company
      with the assumed proceeds of such exercise or conversion and related tax
      benefit. Diluted EPS is based on net income available to common stockholders
      divided by the weighted average number of common shares outstanding and common
      equivalent shares (“adjusted weighted average common shares”). Stock options
      granted but not yet exercised under the Company’s stock option plans are
      considered common stock equivalents for Diluted EPS calculations.




**Accounting
      for Stock-Based Compensation:** SFAS No.
      123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), establishes a
      fair value based method of accounting for stock-based compensation plans and
      encouraged, but did not require, entities to adopt that method in place of
      the
      intrinsic value method under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”).




SFAS
      No.
      148, “Accounting for Stock-Based Compensation - Transition and Procedure,”
amended SFAS 123 to provide alternate methods of transition for an entity that
      voluntarily changes to the fair value based method of accounting for stock-based
      compensation. It also amended the disclosure provisions of that statement to
      require prominent disclosure about the effects on reported net income of an
      entity’s accounting policy decisions with respect to stock-based employee
      compensation. Finally, SFAS No. 148 amended APB Opinion No. 28, “Interim
      Financial Reporting,” to require disclosure about those effects in interim
      financial information.




The
      Company provides stock option plans to the Company’s Board of Directors, Tappan
      Zee Financial, Inc.’s (“Tappan Zee”) (parent company of Tarrytowns) former Board
      of Directors, and certain employees (see Note 17) for the purchase of Company
      common stock at prices at least equal to the fair value of the Company’s common
      stock on the date of grant. All stock option plans have been approved by the
      stockholders of the Company. The Company has elected to continue to measure
      compensation expense for its stock-based compensation plans under the
      recognition and measurement principles of APB No. 25 through the year ended
      2005
      reporting period, and to provide pro forma disclosures of compensation expense
      measured by the fair value based method as defined by SFAS No. 123. No
      stock-based employee compensation is reflected in net income, as all options
      granted under the Company’s plans have an exercise price at least equal to the
      market value of the underlying common stock on the date of grant.




Pro
      forma
      information of the Company’s net income and basic and diluted earnings per
      common share, as required by SFAS No. 123, has been determined as if the Company
      had accounted for its stock options under the fair value method of that
      standard. The fair value for these options was estimated at the date of grant
      using a Black-Scholes option-pricing model and is recognized over the options’
vesting period.




The
      following table compares the Company’s net income and basic and diluted earnings
      per common share, as reported, to the pro forma results as if the fair value
      method of accounting for options prescribed by SFAS No. 123 had been applied
      for
      the years ended December 31, 2005, 2004, and 2003.




(000’s,
                except share data)Years
                Ended
              December
                31,**2005**
            
            2004
            
            2003Net
                income, as reported
            
            **$**
            **33,192**
            
            $
            28,065
            
            $
            29,288Less
                preferred stockdividends
            
            
            **10**
            
            
            10
            
            
            10Less
                total stock-basedcompensation
                expensedetermined
                under the fairvalue
                based method for allawards,
                net of tax
            
            
            **2,219**
            
            
            2,910
            
            
            1,668Pro
                forma net incomeavailable
                to commonstockholders
            
            **$**
            **30,963**
            
            $
            25,145
            
            $
            27,610Earnings
                per common share:Basic
                - as reported
            
            **$**
            **1.54**
            
            $
            1.31
            
            $
            1.36Basic
                - pro forma
            
            
            **1.43**
            
            
            1.17
            
            
            1.29Diluted
                - as reported
            
            **$**
            **1.48**
            
            $
            1.25
            
            $
            1.33Diluted
                - pro forma
            
            
            **1.38**
            
            
            1.12
            
            
            1.25




The
      following weighted average assumptions were used for Director Plan grants in
      2005, 2004, and 2003, respectively: dividend yields of 2.42, 2.16, and 2.52
      percent; volatility factors of the expected market price of the Company’s common
      stock of 34.89, 40.25, and 41.33 percent; risk free interest rates of 3.99,
      3.34, and 2.47 percent; and expected lives of 7.67, 7.63, and 7.62
      years.




-21-




The
      following weighted average assumptions were used for Employee Plan grants in
      2005, 2004, and 2003, respectively: dividend yields of 2.60, 2.00, and 2.52
      percent; volatility factors of the expected market price of the Company’s common
      stock of 34.00, 39.77, and 41.62 percent; risk-free interest rates of 4.07,
      3.60, and 3.10 percent; and expected lives of 7.32, 8.50, and 8.96
      years.




SFAS
      No.
      123 was revised (SFAS No. 123R) in December 2004 to require accounting for
      stock-based compensation using a fair value based method in the financial
      statements for the first interim or reporting period beginning after June 15,
      2005. On April 14, 2005, the Securities and Exchange Commission (the “SEC”)
      deferred the required effective date of SFAS 123R to the fiscal year beginning
      after June 15, 2005. Under the SFAS No. 123R transition method, compensation
      cost is recognized on or after the required effective date for the portion
      of
      outstanding awards for which the requisite service has not yet been rendered,
      based on the grant-date fair value of those awards calculated under SFAS No.
      123
      for either recognition or pro forma disclosures. For periods before the required
      effective date, entities may elect to apply a modified version of retrospective
      application under which financial statements for prior periods are adjusted
      on a
      basis consistent with the pro forma disclosures required for those periods
      by
      SFAS No. 123. Management has decided SFAS No. 123R will be applied prospectively
      beginning on the effective date for the Company (January 1, 2006). The effect
      of
      complying with SFAS No. 123R will have a significant effect on the Company’s net
      income as disclosed in the table on page 21.




**Reporting
      Comprehensive Income:** Comprehensive income is defined as the change in equity (net assets) of a
      business enterprise during a period from transactions and other events and
      circumstances from non-owner sources. It includes all changes in equity during
      a
      period, except those resulting from investments by and distributions to
      owners.




The
      Company’s Consolidated Statements of Comprehensive Income for the years ended
      December 31, 2005, 2004, and 2003 are presented as part of the Consolidated
      Statements of Changes in Stockholders’ Equity.




**Goodwill
      and Other Intangible Assets:** SFAS No.
      142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), requires, among
      other things, amortization of intangibles over the estimated useful lives and
      the identification of reporting units for purposes of assessing potential future
      impairments of goodwill. SFAS No. 142 also requires an annual impairment test
      of
      goodwill.




At
      December 31, 2005, core deposit intangible assets, net of accumulated
      amortization, acquired in connection with bank and branch acquisitions were
      $3.2
      million and $0.4 million, and are being amortized over eight year and fifteen
      year periods, respectively, the estimated life of the deposits assumed. In
      addition, there is $0.1 million of intangible assets related to a favorable
      lease acquired. The annual amortization expense for the remaining life of all
      intangibles will vary throughout the amortization periods. The maximum amount
      of
      amortization will be $1.1 million during such periods. Gross intangible assets
      related to bank and branch acquisitions and a favorable lease, and accumulated
      amortization on such intangible assets, at December 31, 2005 and 2004 was $9.0
      million and $5.3 million, and $9.0 million and $4.2 million, respectively.
      At
      December 31, 2005, goodwill recorded totaled $1.4 million.




**Accounting
      for Conditional Asset Retirement Obligations:** FASB
      Interpretation No. 47 (“FIN No. 47”) pertains to SFAS No. 143, “Accounting for
      Asset Retirement Obligations (“SFAS No. 143”), which applies to legal
      obligations associated with the retirement of a tangible long-lived asset that
      results from the acquisition, construction, or development and/or the normal
      operation of a long-lived asset. An entity shall recognize the fair value of
      a
      liability for an asset retirement obligation in the period in which it is
      incurred if a reasonable estimate of fair value can be made. FIN No. 47 is
      effective no later than the end of fiscal years ending after December 15, 2005.
      The Company’s adoption of FIN No. 47 did not have any impact on its Consolidated
      Financial Statements.




**Pending
      Accounting Pronouncement — Accounting for Exchanges of Nonmonetary
      Assets:** In
      December 2004, the FASB issued SFAS No. 153, “Accounting for Exchanges of
      Nonmonetary Assets” (“SFAS No. 153”). SFAS No. 153 amends APB Opinion No. 29,
“Accounting for Nonmonetary Transactions.” SFAS No. 153 eliminates the exception
      for nonmonetary exchanges of similar productive assets and replaces it with
      a
      general exception for exchanges of nonmonetary assets that do not have
      commercial substance. A nonmonetary exchange has commercial substance if the
      future cash flows of the entity are expected to change significantly as a result
      of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges
      occurring in fiscal periods beginning after June 15, 2005. The Company’s
      adoption of SFAS No. 153 on January 1, 2006 will not have any impact on its
      Consolidated Financial Statements.




**Pending
      Accounting Pronouncement - Accounting Changes and Error
      Corrections:** In May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”), which is a replacement of APB Opinion No. 20, “Accounting
      Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
      Statements.” SFAS No. 154 provides guidance on the accounting for and reporting
      of accounting changes and error corrections. SFAS No. 154 also establishes,
      unless impracticable, retrospective application as the required method for
      reporting a change in accounting principle. SFAS No. 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.




-22-




**Pending
      Accounting Pronouncements - Other-Than-Temporary
      Impairment:** On
      November 3, 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and
      FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application
      to Certain Investments.” This FSP addresses the determination as to when an
      investment is considered impaired, whether that impairment is other than
      temporary, and the measurement of an impairment loss. This FSP also includes
      accounting considerations subsequent to the recognition of an
      other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. This FSP nullifies certain requirements of Emerging Issues Task
      Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and
      Its Application to Certain Investments,” and supersedes EITF Topic No. D-44,
“Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
      Security Whose Cost Exceeds Fair Value.” The guidance in this FSP amends FASB
      Statement No. 115, “Accounting for Certain Investments in Debt and Equity
      Securities.” The FSP is effective for reporting periods beginning after December
      15, 2005. The Company’s adoption of FSP Nos. 115-1 and FAS 124-1 on January 1,
      2006 is not expected to have a material impact on its Consolidated Financial
      Statements.




**Consolidated
      Statements of Cash Flows:** For
      purposes of presenting the Consolidated Statements of Cash Flows, cash and
      cash
      equivalents include cash and due from banks, as well as federal funds sold.




**4.**
            **SECURITIES**




A
      summary
      of the amortized cost, related gross unrealized gains and losses, and estimated
      fair value of securities at December 31, 2005 and 2004 is as
      follows:


(000's)**Gross**
            
            **Gross**
            
            **Estimated****Amortized**
            
            **Unrealized**
            
            **Unrealized**
            
            **Fair****December
                31, 2005**
            
            **Cost**
            
            **Gains**
            
            **Losses**
            
            **Value****Available
                for Sale:**U.S.
                government agencies
            
            $
            72,921
            
            $
            —
            
            $
            1,616
            
            $
            71,305Mortgage-backed
                securities
            
            
            306,166
            
            
            2,053
            
            
            3,930
            
            
            304,289Obligations
                of states and political subdivisions
            
            
            230
            
            
            17
            
            
            —
            
            
            247Corporate
                securities
            
            
            115
            
            
            34
            
            
            —
            
            
            149Total
                securities available for sale
            
            $
            379,432
            
            $
            2,104
            
            $
            5,546
            
            $
            375,990**Held
                to Maturity:**U.S.
                government agencies
            
            $
            639,111
            
            $
            31
            
            $
            8,702
            
            $
            630,440Obligations
                of states and political subdivisions
            
            
            107,740
            
            
            2,470
            
            
            381
            
            
            109,829Total
                securities held to maturity
            
            $
            746,851
            
            $
            2,501
            
            $
            9,083
            
            $
            740,269




(000’s**)****Gross**
            
            **Gross**
            
            **Estimated****Amortized**
            
            **Unrealized**
            
            **Unrealized**
            
            **Fair****December
                31, 2004**
            
            **Cost**
            
            **Gains**
            
            **Losses**
            
            **Valuev****Available
                for Sale:**U.S.
                government agencies
            
            $
            165,142
            
            $
            99
            
            $
            461
            
            $
            164,780Mortgage-backed
                securities
            
            
            423,143
            
            
            2,103
            
            
            1,575
            
            
            423,671Obligations
                of states and political subdivisions
            
            
            920
            
            
            51
            
            
            —
            
            
            971Corporate
                securities
            
            
            114
            
            
            36
            
            
            ―
            
            
            150Total
                securities available for sale
            
            $
            589,319
            
            $
            2,289
            
            $
            2,036
            
            $
            589,572**Held
                to Maturity:**U.S.
                government agencies
            
            $
            418,371
            
            $
            3,596
            
            $
            1,521
            
            $
            420,446Obligations
                of states and political subdivisions
            
            
            83,830
            
            
            3,503
            
            
            351
            
            
            86,982Total
                securities held to maturity
            
            $
            502,201
            
            $
            7,099
            
            $
            1,872
            
            $
            507,428




There
      were no gross realized gains or losses during the year ended December 31, 2005.
      During the years ended December 31, 2004 and 2003, gross realized gains from
      sales of securities available for sale were $1,199,000, and $8,383,000,
      respectively. There were no gross realized losses during 2004 and
      2003.




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




-23-




**Maturities
      of Securities Available for Sale**


(000’s,
      except percentages)


**Within
                1 Year**
            
            
            
            **After
                1 But Within 5 Years**
            
            
            
            **After
                5 But Within 10 Years**
            
            
            
            **After
                10 Years**
            
            
            
            **Total**Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average YieldU.S.
                government agencies - Fixed rate:
            
            $
            —
            
            
            —
            %
            $
            —
            
            
            —
            %
            $
            72,921
            
            
            5.75
            %
            $
            —
            
            
            —
            %
            $
            72,921
            
            
            5.75
            %Mortgage-backed
                securities:Fixed
                rate
            
            
            —
            
            
            —
            
            
            84,954
            
            
            4.56
            
            
            88,295
            
            
            4.85
            
            
            230
            
            
            5.50
            
            
            173,479
            
            
            4.71Adjustable
                rate
            
            
            399
            
            
            5.53
            
            
            1,118
            
            
            5.50
            
            
            51,728
            
            
            5.45
            
            
            79,442
            
            
            5.68
            
            
            132,687
            
            
            5.59Obligations
                of states and political subdivisions - Fixed rate
            
            
            —
            
            
            —
            
            
            230
            
            
            8.48
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            230
            
            
            8.48Other
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            115
            
            
            3.76
            
            
            115
            
            
            3.76Total
                securities available for sale
            
            $
            399
            
            
            5.53
            %
            $
            86,302
            
            
            4.58
            %
            $
            212,944
            
            
            5.30
            %
            $
            79,787
            
            
            5.68
            %
            $
            379,432
            
            
            5.22
            %Estimated
                fair value
            
            $
            399
            
            
            
            
            $
            84,496
            
            
            
            
            $
            210,001
            
            
            
            
            $
            81,094
            
            
            
            
            $
            375,990




**Maturities
      of Securities Held to Maturity**


(000’s,
      except percentages)


**Within
                1 Year**
            
            
            
            **After
                1 But Within 5 Years**
            
            
            
            **After
                5 But Within 10 Years**
            
            
            
            **After
                10 Years**
            
            
            
            **Total**Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average Yield
            
            Amt.
            
            Weighted
                Average YieldU.S.
                government agencies - Fixed rate:
            
            $
            —
            
            
            —
            %
            $
            44,980
            
            
            4.66
            %
            $
            382,678
            
            
            5.60
            %
            $
            211,453
            
            
            5.48
            %
            $
            639,111
            
            
            5.49
            %Obligations
                of states and political subdivisions - Fixed rate
            
            
            22,708
            
            
            4.35
            
            
            5,185
            
            
            6.93
            
            
            23,588
            
            
            7.00
            
            
            56,259
            
            
            5.88
            
            
            107,740
            
            
            5.85Total
                securities held to maturity
            
            $
            22,708
            
            
            4.35
            %
            $
            50,165
            
            
            4.89
            %
            $
            406,266
            
            
            5.68
            %
            $
            267,712
            
            
            5.56
            %
            $
            746,851
            
            
            5.54
            %Estimated
                fair value
            
            $
            22,706
            
            
            
            
            $
            50,067
            
            
            
            
            $
            401,805
            
            
            
            
            $
            265,691
            
            
            
            
            $
            740,269




Available
      for sale and held to maturity obligations of states and political subdivisions
      are not subject to Federal income tax. The yields in the above table are
      presented on a tax equivalent basis.




Securities
      having a total carrying amount of approximately $844.1 million at December
      31,
      2005 were pledged to secure public deposits, as required or permitted by law,
      letters of credit, and securities sold under agreements to repurchase
      transactions.




As
      of
      July 16, 2004, the Company transferred at fair value available for sale U.S.
      government agency securities with an amortized cost basis and fair value of
      approximately $307.6 million and $298.2 million, respectively, to held to
      maturity. The unrealized loss of $9.4 million, $6.2 million net of tax, was
      included as a component of other comprehensive income (loss) and is being
      accreted over the remaining life of the securities transferred. Management
      does
      not intend to sell these securities.




The
      net
      unrealized loss on the transferred securities at December 31, 2005 was $5.5
      million, net of taxes.




As
      of
      December 31, 2005, the security portfolio had gross unrealized losses of $14.6
      million, of which $5.5 million and $9.1 million were related to available for
      sale securities and held to maturity securities, respectively.




-24-




A
      summary
      of gross unrealized losses on securities that are not other-than-temporarily
      impaired, which have been in a continuous unrealizable loss position for less
      than 12 months and for 12 months or longer, as of December 31, 2005 and 2004,
      is
      as follows:


**Securities
      in an Unrealized Loss Position that are not Other-Than-Temporarily Impaired**


**December
                31, 2005**
            
            **Less
                Than 12 Months**
            
            **12
                Months or More**
            
            **Total****Fair
                Value**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair
                Value**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair
                Value**
            
            **Gross**
              **Unrealized**
              **Losses**U.S.
                government agencies
            
            $
            594,442
            
            $
            7,381
            
            $
            91,977
            
            $
            2,937
            
            $
            686,419
            
            $
            10,318Mortgage-backed
                securities
            
            
            116,585
            
            
            2,349
            
            
            49,274
            
            
            1,581
            
            
            165,859
            
            
            3,930Obligations
                of states andpolitical
                subdivisions
            
            
            36,850
            
            
            164
            
            
            6,190
            
            
            217
            
            
            43,040
            
            
            381Total
                temporarily impairedsecurities
            
            $
            747,877
            
            $
            9,894
            
            $
            147,441
            
            $
            4,735
            
            $
            895,318
            
            $
            14,629


**December
                31, 2004**
            
            **Less
                Than 12 Months**
            
            **12
                Months or More**
            
            **Total****Fair
                Value**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair
                Value**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair
                Value**
            
            **Gross**
              **Unrealized**
              **Losses**U.S.
                government agencies
            
            $
            119,700
            
            $
            515
            
            $
            93,440
            
            $
            1,467
            
            $
            213,140
            
            $
            1,982Mortgage-backed
                securities
            
            
            116,324
            
            
            1,360
            
            
            32,123
            
            
            215
            
            
            148,447
            
            
            1,575Obligations
                of states andpolitical
                subdivisions
            
            
            21,995
            
            
            217
            
            
            2,790
            
            
            134
            
            
            24,785
            
            
            351Total
                temporarily impairedsecurities
            
            $
            258,019
            
            $
            2,092
            
            $
            128,353
            
            $
            1,816
            
            $
            386,372
            
            $
            3,908




The
      Company’s U.S. government agency and mortgage-backed securities that are in an
      unrealized loss p osition
      at December 31, 2005 and 2004 are credit rated AAA or Aaa by nationally
      recognized statistical rating organizations. Substantially all obligations
      of
      states and political subdivisions are credit rated AAA or Aaa due to insurance,
      which guarantees the obligations against default, by private insurance
      companies. At December 31, 2005 and 2004, approximately $5.3 million and $7.3
      million, respectively, of issuances are not rated, substantially all of which
      are bond or tax anticipation notes from local municipalities.




At
      December 31, 2005 the number of securities in an unrealized loss position
      included 23 U.S. government agencies, 23 mortgage-backed securities, and 102
      obligations of states and political subdivisions. At December 31, 2004, the
      number of securities in an unrealized loss position included 8 U.S. government
      agencies, 17 mortgage-backed securities, 85 obligations of states and political
      subdivisions, and one corporate security. The temporary impairment on securities
      of less than 12 months and 12 months or more at December 31, 2005 and 2004
      is
      due to the higher interest rate environment as compared to the periods in which
      the securities were initially purchased. The higher interest rates at December
      31, 2005 and 2004 resulted in a decline in the market value of the securities.
      The temporary impairment will fluctuate as the interest rate environment
      changes. In a rising interest rate environment, the temporary impairment will
      increase, while a decrease in the temporary impairment will occur in a declining
      interest rate environment. Management does not consider the temporary impairment
      of the securities to be severe due to the high credit quality or insurance
      provided by private insurance companies, and the intent and ability of the
      Company to hold such securities until a forecasted recovery or maturity
      occurs.




-25-




**5.**
            **LOANS**




Major
      classifications of loans at December 31 are as follows:


(000’s)**2005**
            
            2004
            
            2003
            
            2002
            
            2001Time
                and demand loans
            
            **$**
            **147,734**
            
            $
            165,884
            
            $
            139,018
            
            $
            132,199
            
            $
            125,508Installment
                loans
            
            
            **7,248**
            
            
            7,802
            
            
            8,570
            
            
            10,174
            
            
            12,311Credit
                card
            
            
            **6,769**
            
            
            6,400
            
            
            5,631
            
            
            5,760
            
            
            6,577Real
                estate loans-
                Commercial
            
            
            **586,073**
            
            
            594,167
            
            
            615,061
            
            
            568,894
            
            
            501,943-
                Residential
            
            
            **277,211**
            
            
            248,667
            
            
            238,707
            
            
            230,267
            
            
            211,942-
                Construction and land development
            
            
            **366,457**
            
            
            401,802
            
            
            381,107
            
            
            348,151
            
            
            266,041-
                Home equity
            
            
            **83,782**
            
            
            80,199
            
            
            60,539
            
            
            55,190
            
            
            46,607Other
            
            
            **2,538**
            
            
            6,869
            
            
            4,934
            
            
            4,017
            
            
            3,885Gross
                loans
            
            
            **1,477,812**
            
            
            1,511,790
            
            
            1,453,567
            
            
            1,354,652
            
            
            1,174,814Deferred
                net loan commitment fees
            
            
            **(2,828**
            **)**
            
            (3,692
            )
            
            (4,887
            )
            
            (4,211
            )
            
            (3,868
            )Total
                loans
            
            
            **1,474,984**
            
            
            1,508,098
            
            
            1,448,680
            
            
            1,350,441
            
            
            1,170,946Allowance
                for loan losses
            
            
            **(15,164**
            **)**
            
            (15,226
            )
            
            (14,757
            )
            
            (14,168
            )
            
            (12,412
            )Total
                loans, net
            
            **$**
            **1,459,820**
            
            $
            1,492,872
            
            $
            1,433,923
            
            $
            1,336,273
            
            $
            1,158,534




At
      December 31, 2005 and 2004, there were no loans or commitments to close loans
      that were held for sale. The Bank sold $7.2 million of residential mortgages
      to
      Freddie Mac during 2005. The transaction resulted in gains on sales of loans
      of
      $0.3 million. No loans were sold during 2004 and 2003.




A
      substantial amount of the Company’s commercial and residential lending
      activities are with customers located in the Company’s primary service areas of
      Rockland and Westchester Counties, New York, as well as the remainder of the
      Metropolitan area. A substantial portion of the Company’s customers’ net worth
      is dependent on real estate values in the primary service areas.




Credit
      policies, applicable to each type of lending activity, have been established
      to
      evaluate the creditworthiness of each customer and, in most cases, require
      collateral to be pledged and personal guarantees. Generally, credit extension
      does not exceed 80 percent of the estimated fair value of the collateral at
      the
      date of extension (with occasional exceptions at the discretion of management),
      depending on the evaluation of the borrower’s creditworthiness. The fair value
      of collateral, primarily real estate, is monitored on an ongoing basis. While
      collateral provides a secondary source of repayment, the primary source of
      repayment is ordinarily based on the borrower’s ability to generate continuing
      cash flow, which is a principal underwriting criteria for approving a
      loan.




-26-




An
      analysis of the allowance for loan losses and reserve for unfunded loan
      commitments and standby letters of credit for the years ended December 31 is
      as
      follows:


(000’s,
                except percentages)**2005**
            
            2004
            
            2003
            
            2002
            
            2001Total
                loans
            
            **$**
            **1,474,984**
            
            $
            1,508,098
            
            $
            1,448,680
            
            $
            1,350,441
            
            $
            1,170,946Net
                loans outstanding at year end
            
            
            **1,459,820**
            
            
            1,492,872
            
            
            1,433,923
            
            
            1,336,273
            
            
            1,158,534Average
                net loans outstanding during the year
            
            
            **1,483,093**
            
            
            1,475,462
            
            
            1,391,689
            
            
            1,245,697
            
            
            1,101,091Allowance
                for loan losses:Balance
                at beginning of the year
            
            **$**
            **15,226**
            
            $
            14,757
            
            $
            14,168
            
            $
            12,412
            
            $
            11,338Provision
                for credit losses charged to expense
            
            
            **611**
            
            
            3,687
            
            
            2,513
            
            
            4,109
            
            
            1,684Reclassification
                of provision for credit losses related to unfunded loan commitments
                and
                standby letters of credit, and classified as other
                liabilities
            
            
            **(564**
            **)**
            
            (6
            )
            
            (39
            )
            
            (161
            )
            
            (336
            )**15,273**
            
            
            18,438
            
            
            16,642
            
            
            16,360
            
            
            12,686Charge-offs
                and recoveries during the year:Charge-offs:Real
                estate
            
            
            **—**
            
            
            (3,179
            )
            
            (1,783
            )
            
            (1,352
            )
            
            (65
            )Time
                and demand
            
            
            **—**
            
            
            —
            
            
            —
            
            
            (43
            )
            
            (56
            )Installment
            
            
            **(243**
            **)**
            
            (130
            )
            
            (249
            )
            
            (839
            )
            
            (237
            )Recoveries:Real
                estate
            
            
            **59**
            
            
            —
            
            
            72
            
            
            —
            
            
            —Time
                and demand
            
            
            **—**
            
            
            —
            
            
            —
            
            
            —
            
            
            16Installment
            
            
            **75**
            
            
            97
            
            
            75
            
            
            42
            
            
            68Net
                charge-offs during the year
            
            
            **(109**
            **)**
            
            (3,212
            )
            
            (1,885
            )
            
            (2,192
            )
            
            (274
            )Balance
                at year end
            
            **$**
            **15,164**
            
            $
            15,226
            
            $
            14,757
            
            $
            14,168
            
            $
            12,412Reserve
                for unfunded loan commitments and standby letters of
                credit
            
            **$**
            **1,106**
            
            $
            542
            
            $
            536
            
            $
            497
            
            $
            336Ratio
                of net charge-offs to average net loans outstanding during the
                year
            
            
            **0.01**
            **%**
            
            0.22
            %
            
            0.14
            %
            
            0.18
            %
            
            0.02
            %Ratio
                of allowance for loan losses to total loans outstanding at year
                end
            
            
            **1.03**
            **%**
            
            1.01
            %
            
            1.02
            %
            
            1.05
            %
            
            1.06
            %Ratio
                of provision for credit losses to net charge-offs (times)
            
            
            **5.61**
            
            
            1.15
            
            
            1.33
            
            
            1.87
            
            
            6.15




A
      summary
      of the Company’s nonaccrual and restructured loans, OREO, and related interest
      income not recorded on nonaccrual loans as of and for the years ended December
      31 is as follows:


(000’s,
                except percentages)**2005**
            
            2004
            
            2003
            
            2002
            
            2001Nonaccrual
                loans at year end
            
            **$**
            **8,977**
            
            $
            1,648
            
            $
            6,130
            
            $
            12,484
            
            $
            20,703OREO
                at year end
            
            
            **—**
            
            
            —
            
            
            —
            
            
            34
            
            
            34Restructured
                loans at year end
            
            
            **132**
            
            
            137
            
            
            142
            
            
            147
            
            
            152Additional
                interest income that would have been recorded if these borrowers
                had
                complied with contractual loan terms
            
            
            **331**
            
            
            157
            
            
            404
            
            
            895
            
            
            1,316Non-performing
                assets to total assets at year end
            
            
            **0.33**
            **%**
            
            0.06
            %
            
            0.21
            %
            
            0.49
            %
            
            1.02
            %




Substantially
      all of the nonaccruing loans are collateralized by real estate. At December
      31,
      2005, loans, which are not on nonaccrual status, that management believes were
      potential problem loans that may result in their being placed on nonaccrual
      status in the near future totaled $49,000. Accruing loans that are contractually
      past due 90 days or more at December 31, 2005 are immaterial. Total interest
      income on nonaccrual loans that would have been recorded if borrowers had
      complied with contractual loan terms for the years ended December 31, 2005
      and
      2004 was $336,000 and $161,000, compared to actual interest income reported
      with
      respect to such loans of $5,000 and $4,000, respectively.




-27-




At
      December 31, 2005 and 2004, the recorded investment in loans that are considered
      to be impaired approximated $16.0 million and $1.3 million, of which $8.7
      million and $1.3 million were in nonaccrual status, respectively. The average
      recorded investment in impaired loans for the years ended December 31, 2005,
      2004, and 2003 was approximately $11.4 million, $4.3 million, and $9.1 million,
      respectively. For the years ended December 31, 2005, 2004, and 2003 interest
      income recognized by the Company on impaired loans was not
      material.




As
      applicable, each impaired loan has a related allowance for loan losses. During
      2005, loans related to two customer relationships were classified as impaired
      and nonaccrual. As of December 31, 2005, the loans related to one customer
      relationship aggregating $4.7 million have been placed on nonaccrual status
      as a
      result of fraudulent activity by the borrower related to the real estate
      collateral of the loans. The Bank is pursuing collection of the principal
      balance of the loan from a title insurance company, which insured the Bank’s
      first mortgage positions. A specific allowance for loan loss allocated to these
      impaired loans was $0.3 million at December 31, 2005. The loans related to
      another customer relationship aggregating $3.9 million as of December 31, 2005
      involve a real estate construction project that has experienced unexpected
      delays in completing the construction. A specific allowance for loan loss
      allocated to these impaired loans was $0.7 million at December 31, 2005. The
      loans in both customers’ relationships are also supported by personal
      guarantees.




In
      November 2000, the Company reclassified a real estate construction loan held
      by
      the Bank’s wholly owned subsidiary, Dutch Hill Realty Corp. (the “Dutch Hill
      Loan”) in the amount of $19.7 million as a non-performing asset and placed the
      loan on nonaccrual status.




Construction
      of the condominium units, which collateralized the loan, was completed in 2004.
      At December 31, 2004, the recorded loan balance was $1.0 million, which was
      reduced by charge-offs of $3.2 million, of which $2.9 million occurred during
      the 2004 fourth quarter, and principal payments. At December 31, 2004, the
      Dutch
      Hill Loan had a specific allowance for loan losses of $0.2 million for unfunded
      letters of credit.




The
      $2.9
      million charge-off was recorded as a result of the Superior Court of New Jersey
      ruling on November 30, 2004 against Dutch Hill Realty Corp. and in favor of
      the
      defendants in connection with the foreclosure action of two collateral security
      mortgages on New Jersey properties that partially collateralized the Dutch
      Hill
      Loan. As a result, management determined that a portion of the balance of the
      loans of $2.9 million, not previously charged-off or paid, and secured by the
      collateral security mortgages, should be charged-off. The court also voided
      the
      personal guarantee of one of the principals. The guarantees have not been
      considered in determining the amount of charge-offs or allowance for loan losses
      applicable to this loan.




As
      of
      February 3, 2005, all 83 condominium units in the project have been sold and
      the
      remaining loan balance has been paid in full. Dutch Hill Realty Corp. is in
      the
      process of appealing the unfavorable ruling by the Superior Court of New Jersey.
      Any recovery as a result of the appeal will be recorded when and if
      realized.




A
      summary
      of impaired loans by loan amount, loan type and measurement method at December
      31 are as follows:




(000’s)**2005**
            
            2004**Present
                Value**
            
            **Fair
                Value**
            
            Present
                Value
            
            Fair
                Value**of
                Expected**
            
            **of**
            
            of
                Expected
            
            of**Cash
                Flows**
            
            **Collateral**
            
            Cash
                Flows
            
            CollateralReal
                estate - commercial
            
            **$**
            **4,730**
            
            **$**
            **11,280**
            
            $
            952
            
            $
            137Business
                Loans - commercial
            
            
            **—**
            
            
            **—**
            
            
            203
            
            
            —Totals
            
            **$**
            **4,730**
            
            **$**
            **11,280**
            
            $
            1,155
            
            $
            137







-28-


**6.**
            **PREMISES
                AND EQUIPMENT**




A
      summary
      of premises and equipment at December 31 is as follows:


**2005**
            
            (000’s)
                2004Land
            
            **$**
            **4,190**
            
            $
            4,190Buildings
            
            
            **10,603**
            
            
            10,563Leasehold
                improvements
            
            
            **141**
            
            
            136Furniture,
                fixtures and equipment
            
            
            **6,956**
            
            
            7,967Subtotal
            
            
            **21,890**
            
            
            22,856Accumulated
                depreciation and amortization
            
            
            **(8,128**
            **)**
            
            (7,240
            )Premises
                and equipment, net
            
            **$**
            **13,762**
            
            $
            15,616




The
      Bank
      leases certain premises and equipment under noncancellable operating leases.
      Certain of these lease agreements provide for periodic increases in annual
      rental payments based on current price indices, renewal options for varying
      periods and purchase options at amounts that are expected to approximate the
      fair values of the related assets at the dates the options are
      exercisable.




Rent
      expense for premises and equipment was $1,141,000 in 2005, $1,181,000 in 2004,
      and $999,000 in 2003.




The
      Bank
      leases a portion of its owned properties to tenants under operating leases
      and
      recorded rental income of $259,000 in 2005, $263,000 in 2004, and $264,000
      in
      2003.




As
      of
      December 31, 2005 future minimum lease payments are as follows:




**Years
                Ending December 31,**
            
            (000’s)2006
            
            $
            8942007
            
            
            8112008
            
            
            7542009
            
            
            5652010
            
            
            340After
                2010
            
            
            420Total
                minimum lease payments
            
            $
            3,784




As
      of
      December 31, 2005 future minimum lease receipts are as follows:




**Years
                Ending December 31,**
            
            (000’s)2006
            
            $
            1452007
            
            
            192008
            
            
            —2009
            
            
            —2010
            
            
            —Total
                minimum lease receipts
            
            $
            164







-29-




**7.**
            **DEPOSITS**




A
      summary
      of deposits at December 31 is as follows:


(000’s)**2005**
            
            2004**Non-interest
                bearing deposits:**Individuals,
                partnerships, and corporations
            
            **$**
            **294,350**
            
            $
            295,022Certified
                and official checks
            
            
            **10,499**
            
            
            13,305States
                and political subdivisions
            
            
            **10,307**
            
            
            9,547Total
                non-interest bearing deposits
            
            
            **315,156**
            
            
            317,874**Interest
                bearing deposits:**NOW
                accounts
            
            
            **117,512**
            
            
            131,879Money
                market accounts
            
            
            **134,711**
            
            
            175,435Savings
                deposits
            
            
            **440,299**
            
            
            418,536States
                and political subdivisions - NOW, money market, and savings
                deposits
            
            
            **71,445**
            
            
            60,777Time
                deposits of individuals, partnerships, corporations
            
            
            **510,533**
            
            
            502,479Brokered
                time deposits
            
            
            **49,499**
            
            
            49,860States
                and political subdivisions - time deposits
            
            
            **119,170**
            
            
            112,880IRAs
                and Keoghs
            
            
            **88,877**
            
            
            88,498Total
                interest bearing deposits
            
            
            **1,532,046**
            
            
            1,540,344Total
                deposits
            
            **$**
            **1,847,202**
            
            $
            1,858,218




Time
      deposits, including IRAs and Keoghs, time deposits of states and political
      subdivisions, and brokered time deposits, classified by time remaining to
      maturity for each of the five years following December 31, 2005 are as
      follows:


(000’s)Less
                than 12 months
            
            $
            595,005Over
                12 months through 24 months
            
            
            92,344Over
                24 months through 36 months
            
            
            32,857Over
                36 months through 48 months
            
            
            26,681Over
                48 months through 60 months
            
            
            21,192Total
            
            $
            768,079




At
      December 31, 2005 and 2004, time deposits of $100,000 or more totaled
      $307,283,000 and $284,900,000, respectively. At December 31, 2005, such deposits
      of $100,000 or more classified by time remaining to maturity were as
      follows:


(000’s)3
                months or less
            
            $
            134,526Over
                3 months through 6 months
            
            
            49,803Over
                6 months through 12 months
            
            
            54,880Over
                12 months
            
            
            68,074Total
            
            $
            307,283




**8.**
            **INCOME
                TAXES**




The
      components of the provision for income taxes for the years ended December 31
      are
      as follows:


(000’s)**2005**
            
            2004
            
            2003**Federal:**Current
            
            **$**
            **18,791**
            
            $
            16,861
            
            $
            19,789Deferred
            
            
            **(3,356**
            **)**
            
            (3,658
            )
            
            (5,841
            )**15,435**
            
            
            13,203
            
            
            13,948**State:**Current
            
            
            **529**
            
            
            262
            
            
            1,124Deferred
            
            
            **(373**
            **)**
            
            (687
            )
            
            (589
            )Valuation
                allowance
            
            
            **373**
            
            
            1,082
            
            
            1,548**529**
            
            
            657
            
            
            2,083Total
            
            **$**
            **15,964**
            
            $
            13,860
            
            $
            16,031







-30-




The
      income tax provision includes income taxes related to both gains on securities
      transactions and sales of loans of approximately $110,000, $420,000, and
      $3,426,000 for the years ended December 31, 2005, 2004, and 2003,
      respectively.




The
      income tax effects of temporary differences that give rise to the significant
      portions of the cumulative deferred tax asset (liability), net at December
      31,
      2005 and 2004 are as follows:


(000’s)**2005**
            
            2004Allowance
                for loan losses and reservefor
                unfunded loan commitments and standby letters of credit
            
            **$**
            **6,650**
            
            $
            6,445Deferred
                compensation and benefit plan expenses
            
            
            **2,990**
            
            
            2,648Deferred
                net loan commitment fees
            
            
            **1,156**
            
            
            1,584Sale
                of loans to subsidiary
            
            
            **873**
            
            
            1,033Accrued
                dividend
            
            
            **—**
            
            
            (3,458
            )Depreciation
                and other, net
            
            
            **1,486**
            
            
            1,376Fair
                value adjustment, securities
            
            
            **4,172**
            
            
            3,116State
                deferred tax asset valuation allowance, net of Federal taxbenefit
            
            
            **(1,951**
            **)**
            
            (1,710
            )Total
                deferred tax asset, net
            
            **$**
            **15,376**
            
            $
            11,034





The
      deferred tax asset, net is recorded as a component of other assets in the
      Consolidated Statements of Condition.




The
      Company has a net operating loss carry forward (“NOL”) for New York State tax
      purposes of $2.3 million expiring in 2025. The income tax effect of such NOL
      is
      included in Depreciation and other, net.




The
      income tax effect on the fair value adjustment of available for sale securities
      and the income tax effect on securities transferred at fair value from available
      for sale to held to maturity are components of accumulated other comprehensive
      income (loss).




As
      a
      result of a reduction in taxable income for New York State tax purposes, the
      Company has established a valuation allowance in the amount of $3.0 million
      and
      $2.6 million as of December 31, 2005 and 2004, respectively, to reduce the
      State
      deferred tax asset to the amount that management believes will more likely
      than
      not be realized. As of December 31, 2005 and December 31, 2004, the State
      deferred tax asset, net of state deferred tax liabilities, is fully reserved
      by
      the valuation allowance.




The
      following is a reconciliation of the statutory Federal income tax rate to the
      effective income tax rate as a percentage of income before taxes for the years
      ended December 31:


**2005**
            
            2004
            
            2003Statutory
                Federal income tax rate
            
            
            **35.0**
            **%**
            
            35.0
            %
            
            35.0
            %Interest
                on tax exempt obligations of states and political
                subdivisions
            
            
            **(2.6**
            **)**
            
            (2.6
            )
            
            (2.3
            )State
                income taxes (benefit), net ofFederal
                tax benefit
            
            
            **0.2**
            
            
            (0.7
            )
            
            0.8Valuation
                allowance
            
            
            **0.5**
            
            
            1.7
            
            
            2.2Other
            
            
            **(0.6**
            **)**
            
            (0.3
            )
            
            (
                0.3
            )Effective
                tax rate
            
            
            **32.5**
            **%**
            
            33.1
            %
            
            35.4
            %




The
      Company recently completed a tax examination by the Internal Revenue Service
      for
      the tax year ended December 31, 2002. The examination resulted in a $0.6 million
      adjustment to taxable income that was subsequently taken as a deduction of
      taxable income on the 2004 Federal income tax return.




The
      Company is under continuous examination by various tax authorities in
      jurisdictions in which the Company has significant business operations. The
      Company regularly evaluates the likelihood of additional assessments in each
      of
      the tax jurisdictions resulting from these examinations. Tax reserves have
      been
      established, which the Company believes to be adequate in relation to the
      potential for additional assessments. Once established, reserves are adjusted
      as
      information becomes available or when an event requiring a change to the reserve
      occurs. The resolution of tax matters could have an impact on the Company’s
      effective income tax rate.




**9.**
            **BORROWINGS
                AND LONG-TERM DEBT**




The
      Company utilizes short-term and long-term borrowings primarily to meet funding
      requirements for its asset growth, balance sheet leverage, and to manage its
      interest rate risk.




Short-term
      borrowings include securities sold under agreements to repurchase, federal
      funds
      purchased, and short-term Federal Home Loan Bank of New York (“FHLB”) advances.
      Short-term securities sold under agreements to repurchase have original
      maturities of between one and 365 days. The Bank has borrowing availability
      under master security sale and repurchase agreements through four primary
      investment firms, the FHLB, and, to a lesser extent, its customers. At December
      31, 2005, the Bank had short-term repurchase agreements with the FHLB of $61.0
      million at a weighted average interest rate of 4.17 percent. These short-term
      borrowings were collateralized by securities with an aggregate carrying value
      and estimated fair value of $71.7 million and $70.9 million, respectively.
      At
      December 31, 2005, the Bank also had short-term repurchase agreements with
      customers of $1.3 million at a weighted average interest rate of 3.31 percent,
      which were collateralized by securities with an aggregate carrying value and
      estimated fair value of $1.4 million. At December 31, 2004, the Bank had
      short-term repurchase agreements with the FHLB of $25.0 million at a weighted
      average interest rate of 2.10 percent. These short-term borrowings were
      collateralized by securities with an aggregate carrying value and estimated
      fair
      value of $29.4 million and $29.7 million, respectively. At December 31, 2004,
      the Bank also had short-term repurchase agreements with customers of $2.3
      million at a weighted average interest rate of 1.93 percent, which were
      collateralized by securities with an aggregate carrying value and estimated
      fair
      value of $2.4 million. The Bank did not have any short-term repurchase
      agreements outstanding with primary investment firms at December 31, 2005 and
      December 31, 2004.




-31-




Federal
      funds purchased represent overnight funds. The Bank has federal funds purchase
      lines available with six financial institutions for a total of $75.0 million.
      At
      December 31, 2005 and 2004, the Bank had no federal funds purchased balances
      outstanding.




Short-term
      FHLB advances are borrowings with original maturities of between one and 365
      days. There were no short-term advances outstanding with the FHLB at December
      31, 2005 and December 31, 2004.




Additional
      information with respect to short-term borrowings for the three years ended
      December 31, 2005, 2004, and 2003 is presented in the following
      table.


(000’s,
                except percentages)**Short-Term
                Borrowings**
            
            **2005**
            
            2004
            
            2003Balance
                at December 31
            
            **$**
            **62,331**
            
            $
            27,323
            
            $
            292,131Average
                balance outstanding
            
            **$**
            **13,044**
            
            $
            165,140
            
            $
            63,119Weighted
                average interest rateAs
                of December 31
            
            
            **4.15**
            **%**
            
            2.09
            %
            
            1.16
            %Paid
                during the year
            
            
            **3.06**
            **%**
            
            1.47
            %
            
            1.17
            %




The
      Bank
      has long-term borrowings, which have original maturities of over one year,
      of
      $488.0 million and $515.0 million of securities sold under agreements to
      repurchase as of December 31, 2005 and 2004, respectively. At both December
      31,
      2005 and 2004, these borrowings have original terms of between five and ten
      years at interest rates between 1.99 percent to 6.08 percent that are callable
      on certain dates after an initial noncall period at the option of the
      counterparty to the repurchase agreements. As of December 31, 2005 and 2004,
      these borrowings were collateralized by securities with an aggregate carrying
      value of $497.8 million and $518.8 million, and an estimated fair value of
      $495.1 million and $520.3 million, respectively.




At
      December 31, 2005, long-term FHLB advances totaled $71.8 million at interest
      rates of between 4.55 percent to 5.99 percent, compared with $82.7 million
      at
      December 31, 2004, at interest rates of between 4.55 percent to 6.05 percent.
      Advances at December 31, 2005 include $1.8 million of amortizing advances having
      scheduled periodic payments and $70.0 million that are callable on certain
      dates
      after an initial noncall period at the option of the issuer. Advances at
      December 31, 2004 include $2.7 million of amortizing advances having scheduled
      periodic payments, $10.0 million that are payable at maturity, and $70.0 million
      that are callable on certain dates after an initial noncall period at the option
      of the issuer. At December 31, 2005 and 2004, these borrowings were
      collateralized by a pledge to the FHLB of a security interest in certain
      mortgage-related assets having an aggregate book value of $88.3 million and
      $96.5 million, respectively.




The
      borrowings/advances may not be repaid by the Bank prior to the
      scheduled/repurchase payment dates without penalty. The maximum amount of total
      borrowings outstanding at any month end period during the years ended December
      31, 2005, 2004, and 2003 were $697.8 million, $926.2 million, and $893.5
      million, respectively. At December 31, 2005, the Bank had sufficient collateral
      available to borrow approximately $510.7 million under additional collateralized
      transactions through securities sold under agreements to repurchase and FHLB
      advances.




At
      December 31, 2005 and 2004, the Bank held 307,764 shares and 311,354 shares
      of
      capital stock of the FHLB with a carrying value of $30.8 million and $31.1
      million, respectively, which is required in order to borrow under the short-
      and
      long-term advances and securities sold under agreements to repurchase programs
      from the FHLB. The FHLB generally limits a bank’s borrowings to an aggregate of
      50 percent of total assets, or for collateral pledged by TPNZ, 75 percent of
      TPNZ net equity, upon the prerequisite purchase of additional shares of FHLB
      stock. Any advances made from the FHLB are required to be collateralized by
      the
      FHLB stock and certain other assets of the Bank.




-32-




A
      summary
      of long-term, fixed-rate borrowings distributed based upon remaining contractual
      payment date and expected option call date at December 31, 2005, with
      comparative totals for December 31, 2004 and 2003 is as follows:


(000’s,
                except percentages)**Long-Term
                Borrowings**
            
            **Within**
              **1
                Year**
            
            **After
                1**
              **But
                Within**
              **5
                Years**
            
            **After**
              **5
                Years**
            
            **2005**
              **Total**
            
            2004
              Total
            
            2003
              TotalContractual
              Payment Date:Total
                long-term borrowings
            
            **$**
            **10,019**
            
            **$**
            **215,087**
            
            **$**
            **334,722**
            
            **$**
            **559,828**
            
            $
            597,709
            
            $
            601,374Weighted
                average interest rate
            
            
            **4.79**
            **%**
            
            **5.50**
            **%**
            
            **3.64**
            **%**
            
            **4.37**
            **%**
            
            4.33
            %
            
            4.21
            %


Expected
              Call Date:Total
                long-term borrowings
            
            **$**
            **35,019**
            
            **$**
            **386,087**
            
            **$**
            **138,722**
            
            **$**
            **559,828**
            
            $
            597,709
            
            $
            601,374Weighted
                average interest rate
            
            
            **2.79**
            **%**
            
            **4.45**
            **%**
            
            **4.56**
            **%**
            
            **4.37**
            **%**
            
            4.33
            %
            
            4.21
            %





**10.**
            **SUBORDINATED
                DEBT ISSUED IN CONNECTION WITH CORPORATION-OBLIGATED MANDATORY REDEEMABLE
                CAPITAL SECURITIES OF SUBSIDIARY
                TRUSTS**




The
      Company has issued $61.9 million of junior subordinated debt in connection
      with
      the issuance of $60.0 million of Capital Securities. In accordance with FIN
      No.
      46R, the Company has deconsolidated its investment in the subsidiary trusts,
      which have issued the Capital Securities. The Consolidated Financial Statements
      reflect junior subordinated debt issued in connection with the Capital
      Securities (“subordinated debt”), along with the Company’s investment in common
      equity of the Trusts. A description of the terms of each issuance of Capital
      Securities and related subordinated debt (which terms are substantially
      identical to the related Capital Securities) is discussed below.




On
      February 5, 1997, the Company completed its first issuance of Capital Securities
      that raised $20 million of regulatory capital ($18.8 million net proceeds after
      issuance costs). The 9.58 percent Capital Securities, due February 1, 2027,
      were
      issued by Trust I, a Delaware business trust that was formed by the Company
      solely to issue the Capital Securities and related common stock. Trust I
      advanced the proceeds to the Company by purchasing 9.58 percent subordinated
      debt of the Company. The Capital Securities and related subordinated debt may
      not be redeemed, except under limited circumstances, until February 1, 2007,
      and
      thereafter at a premium which reduces over a ten year period. Dividends and
      interest are paid semi-annually in February and August.




On
      July
      31, 2001, the Company completed its second issuance of Capital Securities that
      raised an additional $20 million of regulatory capital ($19.4 million net
      proceeds after issuance costs). These Capital Securities and related
      subordinated debt pay dividends and interest on a floating rate basis, based
      on
      three month LIBOR plus 358 basis points (current rate as of December 31, 2005
      of
      7.82 percent), which resets in October, January, April, and July of each
      calendar year. These Capital Securities, due July 31, 2031, were issued by
      Trust
      II, a Connecticut business trust that was formed by the Company solely to issue
      the Capital Securities and related common stock. Trust II advanced the proceeds
      to the Company by purchasing subordinated debt of the Company. These Capital
      Securities and related subordinated debt may not be redeemed, except under
      limited circumstances, until July 31, 2006, and thereafter at a premium which
      reduces over a five year period. Dividends and interest are paid quarterly
      in
      October, January, April, and July.




On
      June
      26, 2002, the Company completed its third issuance of Capital Securities that
      raised $10.0 million of regulatory capital (approximately $9.7 million net
      proceeds after issuance costs). These Capital Securities and related
      subordinated debt pay dividends and interest on a floating rate basis, based
      on
      three month LIBOR plus 345 basis points (current rate as of December 31, 2005
      of
      7.97 percent), which resets in September, December, March, and June of each
      calendar year. These Capital Securities, which are due June 26, 2032, were
      issued by Trust III, a Connecticut business trust that was formed by the Company
      solely to issue these Capital Securities and related common stock. Trust III
      advanced the proceeds to the Company by purchasing subordinated debt of the
      Company. These Capital Securities and related subordinated debt may not be
      redeemed, except under limited circumstances, until June 26, 2007 at par.
      Dividends and interest are paid quarterly in September, December, March, and
      June.




On
      March
      25, 2004, the Company completed its fourth issuance of subordinated debt in
      connection with the issuance of Capital Securities totaling $10.3 million that
      raised $10.0 million of regulatory capital ($9,975,000 net proceeds after
      issuance costs). The Capital Securities and related subordinated debt issued
      pay
      dividends and interest on a floating rate basis at a rate equal to three month
      LIBOR plus 280 basis points (current rate as of December 31, 2005 of 6.95
      percent). These Capital Securities due March 25, 2034 were issued by Trust
      IV, a
      Delaware business trust that was formed by the Company solely to issue the
      Capital Securities and related common stock. Trust IV advanced the proceeds
      to
      the Company by purchasing subordinated debt of the Company. These Capital
      Securities and related subordinated debt may not be redeemed, except under
      limited circumstances, until March 25, 2009, at par. Dividend and interest
      payments, as well as the reset of the interest rate, occur in April, July,
      October, and January of each calendar year.




-33-




The
      Company owns 100 percent of the voting securities of each of the Trusts. The
      Company has fully and unconditionally guaranteed the Capital Securities along
      with all obligations of the Trusts under the trust agreements relating to the
      Capital Securities. The Company’s ability to make interest payments on the
      subordinated debt is primarily dependent upon the receipt of dividends from
      the
      Bank. See Note 11 for a discussion of the limits on the Bank’s ability to pay
      dividends to the Company.




Capital
      Securities qualify as Tier I or core capital for the Company under the
      risk-based capital guidelines of the Board of Governors of the Federal Reserve
      System (“FRB”) to the extent such Capital Securities equal 25 percent or less of
      Tier I Capital. Amounts in excess of the foregoing amount will qualify as Tier
      II or Total Capital. The aggregate amount of Capital Securities total $60.0
      million at December 31, 2005, all of which is included in Tier I regulatory
      capital.




Payments
      on the subordinated debt, which are in turn passed through the Trusts to the
      Capital Securities holders, will be serviced through existing liquidity and
      cash
      flow sources of the Company. The Company may also reduce outstanding Capital
      Securities through open market purchases. The Company is permitted to deduct
      dividend/interest payments on the Capital Securities under current Federal
      and
      New York State tax law.




As
      long
      as no default has occurred and is continuing, the Company has the right under
      the subordinated debt indentures to defer the payment of interest at any time
      or
      from time to time for a period not exceeding five years for any one extension
      (each such period an “Extension Period”); provided, however, that no Extension
      Period may extend beyond the stated maturity of the subordinated debt
      securities. During any Extension Period, the Company may not (i) declare or
      pay
      any dividends or distributions on, or redeem, purchase, acquire or make a
      liquidation payment with respect to, any of the Company’s capital stock (which
      includes common and preferred stock), (ii) make any payment of principal,
      interest or premium, if any, on, or repay, repurchase or redeem any debt
      securities of the Company that rank pari passu with or junior in interest to
      the
      subordinated debt securities, or (iii) make any guarantee payments with respect
      to any guarantee by the Company of the debt securities of any subsidiary of
      the
      Company if such guarantee ranks pari passu with or junior in interest to the
      subordinated debt securities, in each case subject to certain
      exceptions.




Pursuant
      to the terms of the documents governing the Company’s subordinated debt and the
      Capital Securities, if the Company is in default under such securities, the
      Company is prohibited from repurchasing or making distributions, including
      dividends, on or with respect to its common or preferred stock, and from making
      payments on any debt or guarantees which rank pari passu with or junior in
      interest to such securities.




In
      addition, under the terms of the indentures governing its subordinated debt,
      the
      Company may not merge or consolidate with, or sell substantially all of its
      assets to, any other corporation, person or entity unless: (a) the surviving
      corporation is a domestic corporation which expressly assumes the Company’s
      obligations with respect to the subordinated debt and the Capital Securities
      and
      related documents; (b) there is no, and the merger or other transaction would
      not cause a, default under any of the subordinated debt; and (c) certain other
      conditions are met.




**11.**
            **STOCKHOLDERS’
                EQUITY**




The
      Company distributed 5 percent common stock dividends on September 23, 2005,
      September 24, 2004, and September 26, 2003 to stockholders of record on
      September 9, 2005, September 10, 2004, and September 12, 2003,
      respectively.




The
      ability of the Company and the Bank to pay cash dividends in the future is
      restricted by various regulatory requirements. The Company’s ability to pay cash
      dividends to its stockholders is primarily dependent upon the receipt of
      dividends from the Bank. The Bank’s dividends to the Company in any year may not
      exceed the sum of the Bank’s undistributed net income for that year and its
      undistributed net income for the preceding two years, less any required
      transfers to additional paid-in capital. In addition, the Bank may not declare
      and pay dividends more often than quarterly, and no dividends may be declared
      or
      paid if there is any impairment of the Bank’s capital stock. At December 31,
      2005, the Bank could pay dividends of $66.9 million to the Company without
      having to obtain prior regulatory approval.




-34-




The
      Company may not pay dividends on its common stock or preferred stock if it
      is in
      default with respect to the Capital Securities or related subordinated debt,
      or
      if the Company elects to defer payment for up to five years as permitted under
      the terms of the Capital Securities and related subordinated debt (see Note
      10).




As
      of
      December 31, 2005, 200,000 shares of common stock are authorized for issuance
      in
      connection with a Dividend Reinvestment Plan (currently suspended), of which
      98,020 shares have been issued.




During
      2005, 2004, and 2003, TPNZ declared and paid dividends totaling approximately
      $10,000 in each of those years to its non-affiliate minority-interest junior
      preferred stockholders. Upon the voluntary or involuntary liquidation or
      dissolution of TPNZ, TPNZ junior preferred stockholders are entitled to receive
      $1,000 per share, plus a sum equal to all dividends accrued and unpaid to date,
      out of TPNZ’s assets available under applicable law, before any payment or
      distribution of assets shall be made on TPNZ’s common stock.




The
      Company issued 740,258, 188,676, and 302,088 shares of treasury stock in 2005,
      2004, and 2003, respectively, in connection with the exercise of stock options.
      In addition, the Company acquired 422,534, 329,771, and 367,685 common shares
      at
      fair value for the treasury in 2005, 2004, and 2003, respectively. Certain
      treasury stock purchases were made in connection with previously announced
      stock
      repurchase programs discussed below. The remaining treasury stock purchases
      were
      made in connection with common stock tendered for exercise of stock options.
      Treasury shares also increased 97,966, 88,324, and 70,401 in 2005, 2004, and
      2003, respectively, as a result of common stock dividends.




On
      December 13, 2005 and December 18, 2003, the Company’s Board of Directors
      authorized the repurchase of up to 300,000 and 330,750 (adjusted for common
      stock dividends) common shares, or approximately 1.4 percent and 1.5 percent
      (as
      determined at the time of the authorizations), respectively, of the Company’s
      outstanding common stock. Repurchases of common stock had been authorized to
      be
      made from time to time in open-market and private transactions as, in the
      opinion of management, market conditions may warrant. The repurchased common
      shares are held as treasury stock and are available for general corporate
      purposes. For the years ended December 31, 2005 and 2004, the Company purchased
      184,772 and 253,200 shares of common stock under the repurchase plans at an
      aggregate cost of approximately $3.9 million and $5.5 million,
      respectively.




In
      connection with the Bank’s Key Employee Supplemental Investment Plan (“KESIP”),
      amounts deferred by participating employees and contributed by the Bank are
      invested in Company stock. This investment in Company stock of $2,927,000 at
      December 31, 2005 and $2,746,000 at December 31, 2004 is included in common
      stock held for benefit plans, at cost, which is shown as a reduction of
      stockholders’ equity. The related deferred compensation obligation is also shown
      as a component of stockholders’ equity (see Note 17).




**12.**
            **REGULATORY
                MATTERS**




The
      Company and the Bank are subject to various regulatory capital requirements
      administered by the Federal banking agencies. Failure to meet minimum capital
      requirements can initiate certain mandatory — and possibly additional
      discretionary — actions by regulators that, if undertaken, could have a direct
      material effect on the Company’s Consolidated Financial Statements. Under
      capital adequacy guidelines and the regulatory framework for prompt corrective
      action, the Company and the Bank must meet or exceed specific capital guidelines
      that involve quantitative measures of their assets, liabilities and certain
      off-balance sheet items, as calculated under regulatory accounting practices
      and
      as presented in the following table. The Company’s and the Bank’s capital
      amounts and classification are also subject to qualitative judgments by the
      regulators about components, risk weightings, and other factors.




-35-




(000’s,
                except percentages)**Actual**
            
            **Minimum**
              **For
                Capital**
              **Adequacy
                Purposes**
            
            **Minimum**
              **To
                Be Well Capitalized**
              **Under
                Prompt Corrective**
              **Action
                Provisions****Company**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio****As
                of December 31, 2005**Total
                Capital (to Risk Weighted Assets)
            
            $
            283,093
            
            
            16.98
            %
            $
            133,403
            
            
            8.0
            %
            
            N/A
            
            
            N/ATier
                I Capital (to Risk Weighted Assets)
            
            
            266,823
            
            
            16.00
            
            
            66,702
            
            
            4.0
            
            
            N/A
            
            
            N/ATier
                I Capital (to Average Quarterly Assets)
            
            
            266,823
            
            
            9.47
            
            
            112,664
            
            
            4.0
            
            
            N/A
            
            
            N/A**As
                of December 31, 2004**Total
                Capital (to Risk Weighted Assets)
            
            $
            257,262
            
            
            15.07
            %
            $
            136,543
            
            
            8.0
            %
            
            N/A
            
            
            N/ATier
                I Capital (to Risk Weighted Assets)
            
            
            241,494
            
            
            14.15
            
            
            68,272
            
            
            4.0
            
            
            N/A
            
            
            N/ATier
                I Capital (to Average Quarterly Assets)
            
            
            241,494
            
            
            8.15
            
            
            118,522
            
            
            4.0
            
            
            N/A
            
            
            N/A**Bank****As
                of December 31, 2005**Total
                Capital (to Risk Weighted Assets)
            
            $
            276,560
            
            
            16.65
            %
            $
            132,852
            
            
            8.0
            %
            $
            166,066
            
            
            10.0
            %Tier
                I Capital (to Risk Weighted Assets)
            
            
            260,290
            
            
            15.67
            
            
            66,426
            
            
            4.0
            
            
            99,639
            
            
            6.0Tier
                I Capital (to Average Quarterly Assets)
            
            
            260,290
            
            
            9.32
            
            
            111,674
            
            
            4.0
            
            
            139,593
            
            
            5.0**As
                of December 31, 2004**Total
                Capital (to Risk Weighted Assets)
            
            $
            253,036
            
            
            14.85
            %
            $
            136,290
            
            
            8.0
            %
            $
            170,362
            
            
            10.0
            %Tier
                I Capital (to Risk Weighted Assets)
            
            
            237,268
            
            
            13.93
            
            
            68,145
            
            
            4.0
            
            
            102,217
            
            
            6.0Tier
                I Capital (to Average Quarterly Assets)
            
            
            237,268
            
            
            8.00
            
            
            118,666
            
            
            4.0
            
            
            148,333
            
            
            5.0


N/A
      - Not
      Applicable


Capital
      ratios are computed excluding net unrealized gains or losses on available for
      sale securities, net of tax, which is included in the other comprehensive income
      (loss) component of stockholders’ equity for financial reporting
      purposes.




Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and Bank to maintain or exceed minimum capital amounts and ratios as
      defined in the regulations and set forth in the above tables. Management
      believes, as of December 31, 2005, that the Company and the Bank meet all
      capital adequacy requirements to which they are subject and are considered
“well
      capitalized” under regulatory guidelines. Total Capital and Tier I Capital for
      the Company includes $60 million of Capital Securities.




As
      of
      December 31, 2005, the most recent notification from the FDIC categorized the
      Bank as “well capitalized” under the regulatory framework for prompt corrective
      action. There are no conditions or events since that notification that
      management believes have changed that assessment.




-36-




**13.**
            **EARNINGS
                PER COMMON SHARE**




The
      computation of basic and diluted earnings per common share for the years ended
      December 31 is as follows:




(000’s,
                except share amounts)**2005**
            
            2004
            
            2003**Numerator:**Net
                income
            
            **$**
            **33,192**
            
            $
            28,065
            
            $
            29,288Less
                preferred stock dividends
            
            
            **10**
            
            
            10
            
            
            10Numerator
                for basic and diluted earnings percommon
                share - net income available tocommon
                stockholders
            
            **$**
            **33,182**
            
            $
            28,055
            
            $
            29,278**Denominator:**Denominator
                for basic earnings per commonshare
                - weighted average shares
            
            
            **21,606,228**
            
            
            21,407,889
            
            
            21,458,322Effect
                of dilutive securities - director andemployee
                stock options
            
            
            **871,855**
            
            
            1,036,582
            
            
            612,304Denominator
                for diluted earnings per commonshare
                - adjusted weighted average shares
            
            
            **22,478,083**
            
            
            22,444,471
            
            
            22,070,626Basic
                earnings per common share
            
            **$**
            **1.54**
            
            $
            1.31
            
            $
            1.36Diluted
                earnings per common share
            
            **$**
            **1.48**
            
            $
            1.25
            
            $
            1.33




Note
      17
      describes the Company’s director and employee stock option plans.




**14.**
            **ESTIMATED
                FAIR VALUE OF FINANCIAL
                INSTRUMENTS**




SFAS
      No.
      107, “Disclosures about Fair Value of Financial Instruments,” as amended by SFAS
      No. 119, “Disclosure about Derivative Financial Instruments and Fair Value of
      Financial Instruments,” requires disclosure of the estimated fair values for
      certain financial instruments. The estimated fair values disclosed below are
      as
      of December 31, 2005 and 2004, and have been determined by using available
      market information and various valuation estimation methodologies. Considerable
      judgment is required to interpret the effects on fair value of such items due
      to
      changes in expected loss experience, current economic conditions, risk
      characteristics of various financial instruments and other factors. The
      estimates presented herein are not necessarily indicative of the amounts that
      the Company would realize in a current market exchange. Also, the use of
      different market assumptions and/or estimation methodologies may have a material
      effect on the determination of the estimated fair values.




The
      fair
      value estimates presented in the following table are based on pertinent
      information available to the Company as of December 31, 2005 and 2004. Although
      the Company is not aware of any factors that would significantly affect the
      estimated fair value amounts, such amounts have not been comprehensively
      revalued since December 31, 2005 and 2004, and therefore, current estimates
      of
      fair value may differ significantly from the amounts that follow.




-37-




As
                of December 31,**2005**
            
            2004**Carrying**
              **Amount**
            
            **Estimated**
              **Fair**
              **Value**
            
            Carrying
              Amount
            
            Estimated
              Fair
              Value**Assets:**
            
            
            
            (in
                millions)Cash
                and cash equivalents, and interest bearing deposits in other
                banks
            
            **$**
            **81.1**
            
            **$**
            **81.1**
            
            $
            65.6
            
            $
            65.6Securities,
                FHLB stock, and accrued interest and dividends receivable
            
            
            **1,164.9**
            
            
            **1,158.3**
            
            
            1,134.2
            
            
            1,139.5Loans,
                net, and accrued interest receivable
            
            
            **1,466.7**
            
            
            **1,463.8**
            
            
            1,498.9
            
            
            1,499.5**Liabilities:**Deposits
                without stated maturities and accrued interest payable
            
            
            **1,079.2**
            
            
            **1,079.2**
            
            
            1,104.6
            
            
            1,104.6Time
                deposits and accrued interest payable
            
            
            **772.5**
            
            
            **773.2**
            
            
            756.5
            
            
            754.0Securities
                sold under agreements to repurchase and accrued interest
                payable
            
            
            **552.5**
            
            
            **554.1**
            
            
            544.5
            
            
            563.5FHLB
                advances and accrued interest payable
            
            
            **72.3**
            
            
            **73.5**
            
            
            83.2
            
            
            87.6Subordinated
                debt issued in connection with corporation - obligated mandatory
                redeemable capital securities of subsidiary trusts and accrued interest
                payable
            
            
            **63.1**
            
            
            **66.3**
            
            
            63.0
            
            
            66.3





Fair
      value methods and assumptions are as follows:




**Cash
      and Cash Equivalents and Interest Bearing Deposits in Other Banks -** The
      carrying amount is a reasonable estimate of fair value.




**Securities,
      FHLB Stock, and Accrued Interest and Dividends Receivable -** The fair
      value of securities is estimated based on quoted market prices or dealer quotes,
      if available. If a quote is not available, fair value is estimated using quoted
      market prices for similar securities. The fair value of FHLB stock is stated
      at
      redemption value, which equals its carrying value. Accrued interest and
      dividends are stated at their carrying amount, which approximates fair
      value.




**Loans
      and Accrued Interest Receivable -** For
      certain homogeneous fixed rate categories of loans, such as residential
      mortgages, fair value is estimated by using quoted market prices for securities
      backed by similar loans. The fair value of other fixed rate loans has been
      estimated by discounting projected cash flows using current rates for similar
      loans with equivalent credit risk. For loans for which there has been no
      impairment in credit risk and which reprice frequently to market rates, the
      carrying amount is a reasonable estimate of fair value. The fair value of
      impaired and nonaccrual loans is estimated by reducing such amounts by specific
      and general loan loss allowances. Accrued interest is stated at its carrying
      amount, which approximates fair value.




**Deposits
      Without Stated Maturities and Accrued Interest Payable -** The
      estimated fair value of deposits with no stated maturity, such as non-interest
      bearing demand deposits, NOW accounts, money market accounts, and savings
      accounts, is equal to the amount payable on demand. Accrued interest payable,
      as
      applicable, is stated at its carrying amount, which approximates fair
      value.




**Time
      Deposits and Accrued Interest Payable -** The fair
      value of time deposits is based on the discounted value of contractual cash
      flows. The discount rate is estimated using the rates currently offered at
      the
      reporting date for deposits of similar remaining maturities. Accrued interest
      payable is stated at its carrying amount, which approximates fair
      value.




**Securities
      Sold Under Agreements to Repurchase, FHLB Advances, Subordinated Debt Issued
      in
      Connection with Corporation-Obligated Mandatory Redeemable Capital Securities
      of
      Subsidiary Trusts and Accrued Interest Payable -** The
      carrying amount is a reasonable estimate of fair value for borrowings which
      are
      either short-term or for which applicable interest rates reprice based upon
      changes in market rates. For medium and long-term fixed rate borrowings, fair
      value is based on discounted cash flow through contractual maturity, or earlier
      call date if expected to be called, at rates currently offered at the balance
      sheet date for similar terms. Accrued interest payable is stated at its carrying
      amount, which approximates fair value.




-38-




**Financial
      Instruments with Off-Balance Sheet Risk -** As
      described in Note 16, the Company is a party to financial instruments with
      off-balance sheet risk at December 31, 2005 and 2004. Such financial instruments
      include commitments to extend permanent financing and standby letters of credit.
      If the commitments are exercised by the prospective borrowers, these financial
      instruments will become interest earning assets of the Company. If the
      commitments expire, the Company retains any fees paid by the counterparty to
      obtain the commitment or guarantee.




The
      fair
      value of commitments is estimated based upon fees currently charged to enter
      into similar agreements, taking into account the remaining terms of the
      agreements and the present creditworthiness of the counterparties. For fixed
      rate commitments, the fair value estimation takes into consideration an interest
      rate risk factor. The fair value of guarantees and standby letters of credit
      is
      based on fees currently charged for similar agreements. The fair value of these
      off-balance sheet items at December 31, 2005 and 2004 approximates the recorded
      amounts of the related fees, which are not material to the consolidated
      financial position of the Company.




**15.**
            **RELATED
                PARTY TRANSACTIONS**




A
      summary
      of the transactions for the years ended December 31, 2005 and 2004, with respect
      to loans (in excess of $60,000 with respect to each party) to directors, senior
      executive officers, stockholders whose ownership equals or exceeds 10 percent,
      and companies in which such related party has a 10 percent or more beneficial
      interest (“insiders”) is as follows:


(000’s)**2005**
            
            2004Balance,
                January 1,
            
            **$**
            **772**
            
            $
            611New
                loans
            
            
            **281**
            
            
            217Repayments,
                other reductions
            
            
            **(59**
            **)**
            
            (56
            )Balance,
                December 31,
            
            **$**
            **994**
            
            $
            772




As
      of
      December 31, 2005 and 2004, deposits from insiders were $8.3 million and $6.5
      million, respectively.




The
      Company has made payments to organizations in which certain directors have
      a
      beneficial interest for services rendered by such organizations. Except as
      discussed below, such payments are not considered to be material in the
      aggregate. Fees of approximately $57,000, $420,000 and $50,000 in 2005, 2004,
      and 2003, respectively, were incurred with respect to a law firm in which a
      director is a partner. This law firm also represented the Bank for loan closings
      for which additional fees of approximately $527,000, $301,000, and $585,000
      in
      2005, 2004, and 2003, respectively, were paid by customers of the Bank. An
      additional law firm in which a director is the senior partner represented the
      Bank for loan closings, which resulted in fees paid by customers of the Bank
      of
      approximately $19,000, $17,000 and $30,000 in 2005, 2004, and 2003,
      respectively.




**16.**
            **COMMITMENTS
                AND CONTINGENCIES**




At
      December 31, 2005, the Company and Bank are committed under employment
      agreements with the Chairman and Chief Executive Officer (“CEO”) and President
      and Chief Operating Officer (“COO”) requiring an annual salary of $825,000 and
      $225,000, respectively; annual bonus payments equal to six percent and one
      percent of net income (as defined) of the Company under the Executive Incentive
      Bonus Plan, respectively (see Note 17); and annual stock option grants of
      142,370 shares and 53,389 shares, respectively, issued at fair value at the
      date
      of grant (110 percent of fair value for incentive stock options if the key
      officer’s ownership of the Company equals or exceeds 10 percent at the date of
      grant); and other benefits for the term of the agreements.




The
      CEO’s
      employment agreement, dated as of November 16, 2003, is for a five-year term,
      expiring November 16, 2008, while the President’s agreement dated as of July 28,
      2004, is for a three-year term, expiring July 28, 2007. The CEO’s contract also
      requires minimum annual salary increases of $30,000. Both of the agreements
      include change in control provisions, requiring certain payments, including
      an
      amount equal to three times annual salary and bonus payments (as defined),
      in
      the event of a voluntary or involuntary termination of employment with the
      Company or the Bank following a change in control.




The
      Company and the Bank were also committed under a letter agreement at December
      31, 2005 with the former Senior Executive Vice President and Chief Financial
      Officer (the “CFO”), pursuant to which the CFO provided notice of his decision
      to retire from his positions with the Company and the Bank, and from all other
      positions held with any subsidiaries or affiliates of the Company or the Bank,
      effective as of the close of business on January 6, 2006. The letter agreement
      further provided, among other things, that from the date of the letter agreement
      through January 6, 2006, the CFO continued to receive the salary and bonus
      currently provided for under his terminated Employment Agreement, continued
      to
      be treated as an employee of the Company and the Bank for the purposes of
      participation in employee benefit plans and programs of the Company and the
      Bank
      (other than stock option plans), and continued to be provided with certain
      insurance coverage and indemnification. As of the close of business on January
      6, 2006, the letter agreement had expired commencing with the CFO’s
      retirement.




In
      the
      normal course of business, various commitments to extend credit are made which
      are not reflected in the accompanying Consolidated Financial Statements. At
      December 31, 2005 and 2004, formal credit lines and loan commitments, which
      are
      primarily loans collateralized by real estate and credit card lines,
      approximated $535.6 million and $492.9 million, and outstanding standby letters
      of credit totaled $41.9 million and $41.3 million, respectively. Such amounts
      represent the maximum risk of loss on these commitments.




-39-




Standby
      letters of credit are issued to guarantee financial performance or obligations
      of the Bank’s customers. Generally, standby letters of credit are either
      partially or fully collateralized by cash, real estate, or other assets, and,
      in
      some cases, are not collateralized. In most cases, personal guarantees are
      obtained. At December 31, 2005 and 2004, there has been no specific liability
      recorded for standby letters of credit. However, standby letters of credit
      are
      considered in the Bank’s evaluation of its reserve for unfunded loan commitments
      and standby letters of credit.




The
      Bank
      is an approved Freddie Mac seller/servicer. At December 31, 2005, the principal
      balance of the loans sold or exchanged with Freddie Mac that remain uncollected
      totaled $11.4 million. The Bank is committed to service these
      loans.




The
      Bank
      is required to report deposits directly to the Federal Reserve Bank of New
      York
      (“FRBNY”) and to maintain reserves on a portion of these deposits. At December
      31, 2005, the reserve requirement for the Bank totaled $23.7
      million.




The
      Company is party to various legal proceedings arising in the ordinary course
      of
      business, none of which, in the opinion of management based on advice from
      legal
      counsel, will have a material adverse effect on the Company’s consolidated
      financial position.




Because
      litigation is inherently unpredictable, particularly in cases where claimants
      seek substantial or indeterminate damages or where investigations and
      proceedings are in the early states, the Company cannot predict with certainty
      the loss or range of loss related to such matters, how such matters will be
      resolved, when they will ultimately be resolved, or what the eventual
      settlement, fine, penalty, or other relief might be. Consequently, the Company
      cannot estimate losses or ranges of losses for matters where there is only
      a
      reasonable possibility that a loss may be incurred. Although the ultimate
      outcome of these matters cannot be ascertained at this time, it is the opinion
      of management, after consultation with counsel, that the resolution of the
      foregoing matters will not have a material adverse effect on the financial
      condition of the Company, taken as a whole; such resolution may, however, have
      a
      material effect on the operating results in any future period, depending on
      the
      level of income for such period.




The
      Company provides reserves for such matters in accordance with SFAS No. 5,
“Accounting for Contingencies,” as required. The ultimate resolution may differ
      from the amounts reserved, if any.




**17.**
            **EMPLOYEE
                BENEFIT PLANS**




**Executive
      Incentive Bonus Plan**




The
      Company provides an Executive Incentive Bonus Plan whereby certain key officers
      of the Company and/or the Bank (two of whom are directors of the Company and
      the
      Bank and are stockholders, and one of whom is a stockholder) are entitled to
      compensation in addition to their salaries at varying percentages of the
      Company’s or Bank’s net income (as defined). The total amount of such additional
      compensation cannot exceed 15 percent of the Company’s net income (as defined)
      in any year. Incentive compensation under the Executive Incentive Bonus Plan
      aggregated $3.9 million during 2005, $3.3 million during 2004, and $3.5 million
      during 2003.




**Employee
      Stock Ownership Plan (With 401(k)** **Provisions)**




The
      Company maintains for the benefit of its employees an Employee Stock Ownership
      Plan (With 401(k) Provisions) (“KSOP”).




The
      401(k) feature of the KSOP allows eligible employees of the Company and its
      affiliates to elect investment of their voluntary contributions in a fund that
      purchases common stock of the Company or in twelve other investment funds.
      Employees may elect to defer, through voluntary contributions, up to fifteen
      percent of compensation ($14,000 maximum in 2005), except for participants
      that
      are 50 years of age or older who may contribute an additional amount ($4,000
      in
      2005). The Company may elect to match fifty percent of the employee’s voluntary
      contributions up to an amount equal to four percent of the employee’s eligible
      compensation. Employer matching contributions for the years ended December
      31,
      2005, 2004, and 2003 aggregated approximately $654,000, $618,000, and $545,000,
      respectively.




Under
      the
      Employee Stock Ownership feature, covering substantially all of the Company’s
      full-time employees, the optional cash contribution determined by the Board
      of
      Directors, intended to be invested in the Company’s common stock, was $250,000
      for the year ended December 31, 2005. The Company did not make an optional
      cash
      contribution for the years ended December 31, 2004 and 2003. The Company and
      Bank paid directly expenses attributable to the KSOP of approximately $76,000,
      $70,000, and $82,000 in 2005, 2004, and 2003, respectively. Shares purchased
      with the Company’s contribution are allocated to participants on the basis of
      their relative compensation (as defined). The cumulative amount of shares
      allocated vest over the first seven years of a participant’s service. After
      completion of seven years of credited service, all shares allocated (and to
      be
      allocated) are fully vested. Any forfeited shares are allocated to other
      participants based on compensation (as defined).




-40-




Tappan
      Zee also had an Employee Stock Ownership Plan (the “ESOP”) for the benefit of
      eligible Tarrytowns employees, which was assumed by the Company upon its
      acquisition of and merger with Tappan Zee in 1998, and merged with the KSOP
      on
      September 30, 1999. In 1995, the ESOP borrowed approximately $1.3 million from
      Tappan Zee (assumed by the Company) and used the funds to purchase 213,484
      shares (as adjusted for common stock splits and dividends) of Company common
      stock. The Bank made monthly contributions to the KSOP sufficient to fund the
      debt service requirements over the ten-year term of the loan, which matured
      in
      September 2005. The unallocated shares were held in a suspense account by the
      KSOP trustee, and a portion of such shares were allocated to all KSOP
      participants at each year end. Shares released from the suspense account were
      allocated to participants on the basis of their eligible relative compensation
      (as defined). Participants become vested in the shares allocated to their
      respective accounts in the same manner as described in the preceding paragraph
      for optional contributions. Any forfeited shares are allocated to other
      participants based on compensation (as defined).




Shares
      allocated to participants and committed for release to participants totaled
      4,170, 16,638, and 17,882 (as adjusted for common stock splits and dividends)
      for the years ended December 31, 2005, 2004, and 2003, respectively. Expense
      recognized with respect to such shares allocated and released amounted to
      approximately $99,000, $380,000, and $282,000 for the years ended December
      31,
      2005, 2004, and 2003, respectively, based on the average fair value of Company
      common stock for each period. As of December 31, 2005, all shares have been
      allocated to KSOP participants and the Bank’s loan has been reduced to
      zero.




**Key
      Employees’ Supplemental Investment Plans**




The
      Bank
      maintains the KESIP, established solely for the purpose of providing, to certain
      key management personnel who participate in the KSOP, benefits attributable
      to
      contribution allocations that would otherwise be made under the KSOP except
      for
      Internal Revenue Service (“IRS”) limitations. Under the KESIP, salary reduction
      contributions may be made in excess of the limitations on annual contributions
      imposed by Internal Revenue Code Section 415, and the Bank shall elect to match
      up to fifty percent of the employee’s voluntary KESIP contribution (to the
      extent such election is made under the KSOP), not to exceed four percent of
      the
      employee’s compensation (less the amount of the employer matching contribution
      under the KSOP). The Bank must also contribute an amount equivalent to the
      KSOP
      optional contribution that would otherwise have been made to participating
      employees in the KSOP had it not been for IRS limitations. The Bank’s matching
      and optional contributions under the KESIP for the years ended December 31,
      2005, 2004, and 2003 were $75,000, $86,000, and $68,000,
      respectively.




All
      compensation deferred into the KESIP is immediately invested in shares of
      Company stock. In addition, distributions from the KESIP will be made in Company
      stock. The deferred compensation obligation and the shares held in trust for
      deferred compensation are recorded at historical cost and are included as
      separate components of stockholders’ equity, which is included in common stock
      held for benefit plans.




The
      Bank
      also maintains a Key Employees Supplemental Diversified Investment Plan
      (“KESDIP”). The KESDIP is similar in terms to the KESIP, except that investments
      made by the KESDIP trust may be in diversified assets, excluding common stock
      of
      the Company. All investments in the KESDIP are reflected in the Consolidated
      Financial Statements in other assets at fair market value. The Bank’s matching
      and optional contributions (which are reduced to the extent of contributions
      made to the KSOP and KESIP) under the KESDIP for the years ended December 31,
      2005, 2004, and 2003 were $91,000, $98,000, and $91,000,
      respectively.




**STOCK
      OPTION PLANS**




**Director
      Stock Option Plans**




In
      2005,
      1998, and 1989, the stockholders of the Company approved Director Stock Option
      Plans (the “Director Plans”) for an aggregate of 525,000, 588,306, and 928,052
      shares (after adjustment for stock splits and dividends), respectively, of
      the
      Company’s common stock to be issued to all non-employee members of the Company’s
      Board of Directors.




The
      2005
      Director Plan has a term of ten years. Final awards under the 1989 Director
      Plan
      were made, effective with approval of the 1998 Director Plan. Final awards
      under
      the 1998 Director Plan were made, effective with approval of the 2005 Director
      Plan. Options may not be exercised prior to the first anniversary of the date
      of
      grant and expire ten years after the date of grant. There were 430,189 shares
      (as adjusted for common stock splits and dividends) remaining to be granted
      at
      December 31, 2005 under the 2005 Director Plan.




Under
      the
      terms of the 2005 Director Plan, as approved by the stockholders of the Company
      on May 25, 2005, each eligible director will receive, effective as of the close
      of each annual meeting of stockholders of the Company, a non-qualified option
      (after adjustment for stock splits and stock dividends) to purchase a fixed
      number of shares of common stock at an exercise price equal to the fair market
      value of such shares on the date of the grant. The number of shares subject
      to
      the option is based on the number of years of service completed by the eligible
      director. After two years of service, the eligible director is entitled to
      an
      option covering 1,338 shares (as adjusted for common stock splits and
      dividends). Each additional year of service entitles the eligible director
      to an
      option covering an additional 1,338 shares, until the director has completed
      15
      years of the eligible service, after which the director is entitled to an option
      covering 24,915 shares (as adjusted for common stock splits and
      dividends).




-41-




Under
      the
      Tappan Zee Directors’ Stock Option Plan (the “Tappan Zee Directors’ Plan”),
      which was assumed by the Company, 80,057 shares (after adjustment for stock
      splits and stock dividends) were authorized for issuance to outside Directors
      for option exercises. Option terms and conditions are similar to those under
      the
      Tappan Zee Stock Option Plan (see Employee Stock Option Plans below), except
      that all director options are non-qualified options. There have been 66,710
      options (after adjustment for stock splits and dividends) issued under this
      plan. Upon the change in control that resulted when Tappan Zee was acquired
      by
      the Company, all options under this plan became vested. There are 13,347 shares
      (as adjusted for common stock splits and dividends) available for future grant
      under this plan, which will expire in 2006.




A
      summary
      of the Director Plans and the Tappan Zee Directors’ Plan activity and related
      information for the years ended December 31, 2005, 2004, and 2003
      follows:


**2005**
            
            2004
            
            2003**Options**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            Options
            
            Weighted-
              Average
              Exercise
              Price
            
            Options
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                at January 1,
            
            
            **630,216**
            
            **$**
            **12.54**
            
            
            576,902
            
            $
            10.84
            
            
            631,338
            
            $
            9.99Granted
            
            
            **94,811**
            
            
            **20.14**
            
            
            92,129
            
            
            20.20
            
            
            89,450
            
            $
            14.33Exercised
            
            
            **(72,134**
            **)**
            
            **8.29**
            
            
            (38,815
            )
            
            5.44
            
            
            (143,886
            )
            $
            9.28Outstanding
                at December 31,
            
            
            **652,893**
            
            **$**
            **14.11**
            
            
            630,216
            
            $
            12.54
            
            
            576,902
            
            $
            10.84Exercisable
                at December 31,
            
            
            **558,082**
            
            **$**
            **13.09**
            
            
            538,086
            
            $
            11.23
            
            
            487,447
            
            $
            10.19Weighted
                average fair value of options granted during the year
            
            
            **$****6.44**
            
            
            $8.00
            
            
            $5.09




The
      following table summarizes the range of exercise prices on stock options
      outstanding and exercisable for the Director Plans and the Tappan Zee Directors’
Plan at December 31, 2005:


Options
                Outstanding
            
            Options
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
            
            Weighted-
              Average
              Remaining
              Contractual
              Life
            
            Weighted-
              Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-
              Average
              Exercise
              Price$
                4.80 to $ 9.74
            
            
            100,609
            
            
            2.9
                years
            
            $
            7.83
            
            
            100,609
            
            $
            7.839.75
                to 12.17
            
            
            139,285
            
            
            3.9
            
            
            10.73
            
            
            139,285
            
            
            10.7312.18
                to 14.60
            
            
            226,060
            
            
            5.9
            
            
            13.98
            
            
            226,060
            
            
            13.9814.61
                to 20.20
            
            
            186,939
            
            
            8.9
            
            
            20.17
            
            
            92,128
            
            
            20.20$
                4.80 to $20.20
            
            
            652,893
            
            
            5.9
                years
            
            $
            14.11
            
            
            558,082
            
            $
            13.09




**Employee
      Stock Option Plans**




Under
      the
      1993 and 1984 Incentive Stock Option Plans, and the 2005, 2001, and 1997
      Employee Stock Option Plans for key employees of the Company and its
      subsidiaries, and the Tappan Zee Stock Option Plan, which were assumed by the
      Company (collectively, the “Employee Stock Option Plans”), the issuance of both
      incentive and nonqualified stock options up to an aggregate of 8,475,515 shares
      (after adjustment for stocks splits and stock dividends) were authorized for
      grant at prices at least equal to the fair value of the Company’s common stock
      at the time the options are granted (for incentive stock options, 110 percent
      of
      fair value for grants to an employee who, at the time of the grant, owns stock
      aggregating 10 percent or more of the combined voting power of all classes
      of
      stock of the Company).




-42-




For
      the
      1993 and 1984 Incentive Stock Option Plans, and the 2005, 2001 and 1997 Employee
      Stock Option Plans, each option holder may exercise up to 50 percent of his
      or
      her options after a three month period subsequent to the grant date and may
      exercise the remaining 50 percent six months after the grant date. The options
      granted have a maximum exercisable term of ten years from the date of grant
      (not
      more than five years in the case of incentive stock options granted to an
      employee who, at the time of grant, owns stock aggregating 10 percent or more
      of
      the total combined voting power of all classes of stock of the Company). The
      option shares and related prices are adjusted for stock splits and stock
      dividends. There were 1,769,902 shares (as adjusted for common stock splits
      and
      dividends) remaining to be granted at December 31, 2005 under the 2005 Employee
      Stock Option Plan. The 2005 Employee Stock Option Plan has a term of ten years.
      No additional shares will be granted under the 1993 and 1984 Incentive Stock
      Option Plans or the 2001 and 1997 Employee Stock Option Plan.




Options
      under the Tappan Zee Stock Option Plan have a ten-year term and vest ratably
      over five years from the date of grant. Each option, however, became fully
      exercisable upon the change in control of Tappan Zee. At December 31, 2005,
      shares available for future grants totaled 53,368 (as adjusted for common stock
      splits and dividends) for the Tappan Zee Stock Option Plan, which will expire
      in
      2006.




A
      summary
      of the Employee Stock Option Plans’ activity and related information for the
      years ended December 31, 2005, 2004, and 2003 follows:


**2005**
            
            2004
            
            2003**Options**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            Options
            
            Weighted-
              Average
              Exercise
              Price
            
            Options
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                at January 1,
            
            
            **2,963,830**
            
            **$**
            **13.16**
            
            
            2,710,412
            
            $
            11.85
            
            
            2,568,863
            
            $
            10.61Granted
            
            
            **430,077**
            
            
            **20.13**
            
            
            457,370
            
            
            19.72
            
            
            496,121
            
            
            14.57Exercised
            
            
            **(716,110**
            **)**
            
            **13.58**
            
            
            (203,623
            )
            
            10.45
            
            
            (346,731
            )
            
            6.51Expired
                or forfeited
            
            
            **(25,062**
            **)**
            
            **14.65**
            
            
            (329
            )
            
            17.96
            
            
            (7,841
            )
            
            15.39Outstanding
                at December 31,
            
            
            **2,652,735**
            
            **$**
            **14.16**
            
            
            2,963,830
            
            $
            13.16
            
            
            2,710,412
            
            $
            11.85Exercisable
                at December 31,
            
            
            **2,651,175**
            
            **$**
            **14.16**
            
            
            2,963,830
            
            $
            13.16
            
            
            2,648,889
            
            $
            11.72Weighted
                average fair value of options granted during the year
            
            
            **$****6.43**
            
            
            **$****7.95**
            
            
            $5.58




The
        following table summarizes the range of exercise prices on stock options
        outstanding and exercisable under the Employee Stock Option Plans at December
        31, 2005:


Options
                Outstanding
            
            Options
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
            
            Weighted-
              Average
              Remaining
              Contractual
              Life
            
            Weighted-Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-
              Average
              Exercise
              Price$
                4.63 to $ 9.74
            
            
            152,933
            
            
            3.1
                years
            
            $
            7.91
            
            
            152,933
            
            $
            7.919.75
                to 14.60
            
            
            1,777,414
            
            
            4.7
            
            
            12.31
            
            
            1,777,414
            
            
            12.3114.61
                to 21.91
            
            
            636,940
            
            
            8.8
            
            
            19.69
            
            
            636,940
            
            
            19.6921.92
                to 24.34
            
            
            85,448
            
            
            8.6
            
            
            22.58
            
            
            83,888
            
            
            22.59$
                4.63 to $24.34
            
            
            2,652,735
            
            
            5.7
                years
            
            $
            14.16
            
            
            2,651,175
            
            $
            14.16





**Director
      Retirement Plans**




Effective
      May 19, 1999, the Company adopted the Retirement Plan for non-employee Directors
      of U.S.B. Holding Co., Inc. and Certain Affiliates (the “Director Retirement
      Plan”). A non-employee Director who has served for a period of fifteen years is
      eligible to receive benefits. Vesting of benefits under the Director Retirement
      Plan accelerate in the event of change in control. Upon retirement, the
      non-employee Director shall be paid $2,000 per month for a period not to exceed
      ten years. In the event of death of the non-employee Director, after
      commencement of retirement payments but prior to the conclusion of the ten
      year
      payment period, the payments shall be paid to his or her spouse at a rate of
      50
      percent of the retirement payment over the remaining term of the retirement
      payment period, or through the date of the spouse’s death if it occurs prior to
      completion of the payment period. Alternatively, the retiree may choose a lump
      sum payment equivalent to the present value of $200,000 paid in equal monthly
      installments over the ten year period, discounted based on an interest rate
      equal to the average ten-year advance rate from the FHLB, for the thirty days
      prior to the election. The Director Retirement Plan is unfunded.




-43-




At
      December 31, 2005 and 2004, the Company has recorded a liability of $549,000
      and
      $522,000 to provide for the actuarial present value of payments expected to
      be
      made under the Director Retirement Plan. The discount rate used to compute
      the
      present value obligation is 5.25 percent for both 2005 and 2004. At December
      31,
      2005 and 2004, a net intangible asset of $140,000 and $255,000, respectively,
      is
      recorded, reflecting the unamortized prior service cost, which is being
      amortized over the average remaining service period of the current non-employee
      Directors. Benefit cost for the Director Retirement Plan for the years ended
      December 31, 2005, 2004, and 2003 was approximately $143,000, $134,000, and
      $129,000, of which $15,000, $11,000, and $10,000 represents current service
      cost, $100,000, $95,000, and $92,000, represents amortization of prior service
      cost, and $28,000, $28,000, and $27,000 represents interest, respectively.
      Payments made under the Director Retirement Plan to retired non-employee
      Directors were approximately $107,000 during the year ended December 31,
      2003.




**Deferred
      Compensation Plan**




The
      Bank
      has a nonqualified Deferred Compensation Plan for former Tarrytowns Directors.
      Under the Deferred Compensation Plan, eligible Directors deferred all or part
      of
      their compensation (including compensation paid to officer-directors for service
      as an officer). Deferred amounts were applied to either the purchase of (i)
      a
      life insurance policy, in which case the amount of deferred benefits payable
      is
      based on the value of expected death benefit proceeds, or (ii) Company common
      stock and other investments, in which case the amount of deferred benefits
      payable is based on the investment performance of the investments made. Deferred
      benefits are paid in installments over a ten year period beginning upon
      termination of service. Due to a change of control, which occurred upon the
      acquisition of Tappan Zee by the Company, the Deferred Compensation Plan
      required full funding of any previously purchased life insurance contracts.
      However, the Board of Directors of Tarrytowns waived this requirement. The
      Bank
      has established a trust fund with an independent fiduciary for the purpose
      of
      accumulating funds to be used to satisfy its obligations under this plan, in
      addition to the proceeds from life insurance contracts.




The
      accumulated projected benefit obligation of the Deferred Compensation Plan
      aggregated $0.5 million at December 31, 2005 and $0.7 million at December 31,
      2004. The present value of the accumulated projected benefit obligation is
      based
      on a discount rate of 4.40 percent and 5.00 percent as of December 31, 2005
      and
      2004, respectively. Expenses for this plan for the years ended December 31,
      2005, 2004, and 2003 were $57,000, $12,000, and $96,000,
      respectively.




For
      financial reporting purposes, the cash surrender values of the life insurance
      contracts are not considered plan assets but instead are included in the
      Company’s consolidated statements of condition. At December 31, 2005 and 2004,
      the cash surrender values of purchased life insurance policies were
      approximately $690,000 and $645,000, respectively. The total death benefits
      payable under the insurance policies amounted to approximately $1.2 million
      at
      December 31, 2005.




**Postretirement
      Health Care Benefits**




Substantially
      all Tarrytown’s employees were eligible for postretirement health care (medical
      and dental) benefits if they met certain age and length of service requirements.
      This plan was terminated on September 1, 1998, and only employees vested on
      that
      date will continue to receive benefits under this plan. A liability of $0.1
      million has been recorded to reflect an amount approximately equal to the
      Medicare Supplemental premiums for the three remaining
      participants.




The
      Bank
      also has established a Postretirement Health Care Plan. Under this plan,
      eligible retirees are entitled to participate in the Bank’s group health care
      plan but are responsible for premium payments.




**Severance
      Plan**




On
      January 30, 2002, the Company’s Board of Directors approved the U.S.B. Holding
      Co., Inc. Severance Plan (“Severance Plan”), which provides for severance
      benefits in the event of an involuntary termination in connection with a change
      in control of the Company (as defined). The Severance Plan covers all employees
      not otherwise covered by an employment contract. The purpose of the Severance
      Plan is to attract and retain capable personnel, address concerns of the
      Company’s employees regarding job security and help ensure that employees secure
      benefits, which they legitimately expect in the normal course of their
      employment. Benefits, which range from two weeks to forty weeks of compensation
      (as defined), are based on years of service.




-44-




**18.**
            **SEGMENT
                INFORMATION**




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




The
      Company operates only in the U.S. domestic market, specifically the lower Hudson
      Valley, which includes the counties of Rockland, Westchester, Orange, Putnam
      and
      Dutchess, New York, as well as New York City and Long Island, New York, Southern
      Connecticut, and the surrounding area. For the years ended December 31, 2005,
      2004, and 2003, there is no customer that accounted for more than 10 percent
      of
      the Company’s revenue.




**19.**
            **CONDENSED
                FINANCIAL INFORMATION OF U.S.B. HOLDING CO., INC. (PARENT COMPANY
                ONLY)**




Condensed
      statements of condition are as follows:


(000’s)
              December
                31,**2005**
            
            2004**ASSETS**Cash
                and cash equivalents
            
            **$**
            **3,789**
            
            $
            4,961Securities
                available for sale (at estimated fair value)
            
            
            **114**
            
            
            116Investment
                in common stock of bank subsidiary
            
            
            **257,464**
            
            
            237,441Other
                assets
            
            
            **9,874**
            
            
            6,094**TOTAL
                ASSETS**
            
            **$**
            **271,241**
            
            $
            248,612**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Other
                liabilities
            
            **$**
            **5,230**
            
            $
            4,708Subordinated
                debt issued in connection with corporation - obligatedmandatory
                redeemable capital securities of subsidiary trusts
            
            
            **61,858**
            
            
            61,858Stockholders’
                equity
            
            
            **204,153**
            
            
            182,046**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            **$**
            **271,241**
            
            $
            248,612





Condensed
      statements of income are as follows:


(000’s)
              Years
                Ended December 31,**2005**
            
            2004
            
            2003**Income:**Dividends
                from bank subsidiary
            
            **$**
            **15,500**
            
            $
            5,200
            
            $
            13,300Gains
                on securities transactions
            
            
            **—**
            
            
            66
            
            
            —Other
                income
            
            
            **150**
            
            
            129
            
            
            24Total
                income
            
            
            **15,650**
            
            
            5,395
            
            
            13,324**Expenses:**Interest
                on subordinated debt issued in connection with corporation - obligatedmandatory
                redeemable capital securities of subsidiary trusts
            
            
            **4,834**
            
            
            3,968
            
            
            3,441Other
                expenses
            
            
            **1,427**
            
            
            1,529
            
            
            944Total
                expenses
            
            
            **6,261**
            
            
            5,497
            
            
            4,385Income
                (loss) before equity in undistributed income of subsidiaryand
                benefit for income taxes
            
            
            **9,389**
            
            
            (102
            )
            
            8,939Equity
                in undistributed income of subsidiary
            
            
            **21,886**
            
            
            26,398
            
            
            18,518Income
                tax benefit
            
            
            **1,917**
            
            
            1,769
            
            
            1,831**NET
                INCOME**
            
            **$**
            **33,192**
            
            $
            28,065
            
            $
            29,288







-45-




Condensed
      statements of cash flow are as follows:




(000’s)
              Years
                Ended December 31,**2005**
            
            2004
            
            2003**Operating
                activities:**Net
                income
            
            **$**
            **33,192**
            
            $
            28,065
            
            $
            29,288Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Gains
                on securities transactions
            
            
            —
            
            
            (66
            )
            
            —Equity
                in undistributed income of subsidiary
            
            
            **(21,886**
            **)**
            
            (26,398
            )
            
            (18,518
            )Other
                - net
            
            
            **(1,608**
            **)**
            
            3,472
            
            
            (1,977
            )Net
                cash provided by operating activities
            
            
            **9,698**
            
            
            5,073
            
            
            8,793**Investing
                activities:**Proceeds
                from sale of available for sale securities
            
            
            **—**
            
            
            100
            
            
            —Purchases
                of available for sale securities
            
            
            **—**
            
            
            —
            
            
            (16
            )Net
                cash provided by (used for) investing activities
            
            
            **—**
            
            
            100
            
            
            (16
            )**Financing
                activities:**Dividends
                paid -common
            
            
            **(11,659**
            **)**
            
            (9,569
            )
            
            (7,623
            )Net
                proceeds from exercise of common stock options
            
            
            **4,713**
            
            
            740
            
            
            1,652Net
                proceeds from issuance of subordinated debt issued in connection
                withcorporation-obligated
                mandatory redeemable capital securities of subsidiary
                trusts
            
            
            **—**
            
            
            9,975
            
            
            —Purchases
                of treasury stock
            
            
            **(3,924**
            **)**
            
            (5,466
            )
            
            (4,223
            )Net
                cash used for financing activities
            
            
            **(10,870**
            **)**
            
            (4,320
            )
            
            (10,194
            )(Decrease)
                increase in cash and cash equivalents
            
            
            **(1,172**
            **)**
            
            853
            
            
            (1,417
            )**Cash
                and cash equivalents at beginning of year**
            
            
            **4,961**
            
            
            4,108
            
            
            5,525**Cash
                and cash equivalents at end of year**
            
            **$**
            **3,789**
            
            $
            4,961
            
            $
            4,108







-46-


*Report
      of Independent Registered Public Accounting Firm*





Deloitte.







To
      the
      Board of Directors and Stockholders of


U.S.B.
      Holding Co., Inc.


Orangeburg,
      New York





We
      have
      audited the accompanying consolidated statements of condition of U.S.B. Holding
      Co., Inc. and its subsidiaries (the “Company”) as of December 31, 2005 and 2004,
      and the related consolidated statements of income, cash flows and changes in
      stockholders’ equity for each of the three years in the period ended December
      31, 2005. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.




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




In
      our
      opinion, such consolidated financial statements present fairly, in all material
      respects, the financial position of U.S.B. Holding Co., Inc. and its
      subsidiaries as of December 31, 2005 and 2004, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2005, in conformity with accounting principles generally accepted
      in the United States of America.




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







/s/
      Deloitte & Touche LLP


New
      York,
      New York


March
      13,
      2006




-47-





*Management
      Report on Internal Control Over Financial Reporting*


March
      13,
      2006





**To
      the Stockholders**


**U.S.B.
      Holding Co., Inc.**




The
      management of U.S.B. Holding Co., Inc. (the “Company”) is responsible for the
      preparation, integrity, and fair presentation of its published financial
      statements and all other information presented in this annual report. The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America and,
      as
      such, include amounts based on informed judgments and estimates made by
      management.




The
      financial statements have been audited by an independent registered public
      accounting firm, Deloitte & Touche LLP, which was given unrestricted access
      to all financial records and related data, including minutes of all meetings
      of
      stockholders, the Board of Directors and committees of the Board. Management
      believes that all representations made to the independent registered public
      accounting firm during their audit were valid and appropriate. The independent
      registered public accounting firm’s report is presented on page 47.




**Internal
      Control**




Management
      is responsible for establishing and maintaining effective internal control
      over
      financial reporting, including safeguarding of assets, for financial
      presentations in conformity with accounting principles generally accepted in
      the
      United States of America as such term is defined in Exchange Act Rule 13a-15(f)
      or 15d-15(f), and for the Company’s bank subsidiary, Union State Bank, in
      conformity with the Federal Financial Institutions Examination Council
      instructions for Consolidated Reports of Condition and Income (“Call Report
      Instructions”). The Company’s internal control system is a process designed to
      provide reasonable assurance to the Company’s Management and Board of Directors
      regarding the preparation and fair presentation of published financial
      statements.




The
      Company’s internal control over financial reporting includes policies and
      procedures that pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect transactions and dispositions of assets;
      provide reasonable assurances that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that receipts
      and expenditures are being made only in accordance with authorizations of
      Management and the Directors of the Company, and provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the Company’s assets that could have a material effect on the
      Company’s financial statements. The internal control contains monitoring
      mechanisms and actions that are taken to correct deficiencies
      identified.




There
      are
      inherent limitations in the effectiveness of any internal control, including
      the
      possibility of human error and the circumvention or overriding of controls.
      Accordingly, even effective internal control can provide only reasonable
      assurance with respect to financial statement preparation and may not prevent
      or
      detect misstatements. Also, projections of any evaluation of effectiveness
      to
      future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate. Further, because of changes in
      conditions, the effectiveness of internal control may vary over
      time.




-48-




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




Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP,
      an independent registered public accounting firm, as stated in their report,
      which is presented on page 50.




**Compliance
      with Laws and Regulations**




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




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




/s/
              Thomas E. Hales
            
            /s/
              Thomas M. BuonaiutoThomas E. Hales
            
            Thomas M. BuonaiutoChairman
              and Chief Executive Officer
            
            Executive
              Vice President and Chief
              Financial Officer




-49-





*Report
      of Independent Registered Public Accounting Firm*


Deloitte.




To
      the
      Board of Directors and Stockholders of


U.S.B.
      Holding Co., Inc.


Orangeburg,
      New York





We
      have
      audited management’s assessment, included in the accompanying Management Report
      on Internal Control over Financial Reporting, that U.S.B. Holding Co., Inc.
      (the
“Company”) maintained effective internal control over financial reporting as of
      December 31, 2005, based on criteria established in *Internal
      Control—Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. Because
      management’s assessment and our audit were conducted to meet the reporting
      requirements of Section 112 of the Federal Deposit Insurance Corporation
      Improvement Act (FDICIA), management’s assessment and our audit of the Company’s
      internal control over financial reporting included controls over the preparation
      by Union State Bank (the Company’s wholly-owned bank subsidiary) of the
      schedules equivalent to the basic financial statements in accordance with the
      instructions for the Federal Financial Institutions Examination Council
      Instructions for consolidated reports of condition and income. The Company’s
      management is responsible for maintaining effective internal control over
      financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting. Our responsibility is to express an opinion
      on
      management’s assessment and an opinion on the effectiveness of the Company’s
      internal control over financial reporting based on our audit.




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




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




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




-50-




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




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




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







/s/
      Deloitte & Touche LLP


New
      York,
      New York


March
      13,
      2006


-51-


*Management's
      Discussion and Analysis of Financial
      Condition and Results of Operations*







This
      section presents discussion and analysis of the financial condition and results
      of operations of U.S.B. Holding Co., Inc. (the “Company”) and its subsidiaries,
      including Union State Bank (the “Bank”) and its wholly-owned subsidiaries, Dutch
      Hill Realty Corp., U.S.B. Financial Services, Inc., USB Delaware Inc. (from
      the
      date of its incorporation, September 12, 2003), and TPNZ Preferred Funding
      Corp.
      (“TPNZ”), a majority-owned subsidiary of USB Delaware Inc., and Ad Con, Inc.
      Union State Capital Trust I, Union State Statutory Trust II, and USB Statutory
      Trust III were consolidated through the year ended December 31, 2003 (with
      Union
      State Statutory Trust IV established in March 2004 (the “Trusts”)). As required
      by FIN 46R, on December 31, 2003, the Company deconsolidated all of the Trusts
      in existence as of that date and recorded subordinated debt issued to the Trusts
      and the Company’s investments in the common equity of the Trusts as of December
      31, 2003. This discussion and analysis should be read in conjunction with the
      Consolidated Financial Statements and supplemental financial data contained
      elsewhere in this report.


**Selected
                Financial Data**
            
            (000’s,
                except share data)Years
                Ended December 31,**2005**
            
            2004
            
            2003
            
            2002
            
            2001**Operating
                Results:**Total
                interest income
            
            **$**
            **158,533**
            
            $
            145,696
            
            $
            131,215
            
            $
            125,419
            
            $
            132,040Total
                interest expense
            
            
            **63,970**
            
            
            57,561
            
            
            54,191
            
            
            52,904
            
            
            70,716Net
                interest income
            
            
            **94,563**
            
            
            88,135
            
            
            77,024
            
            
            72,515
            
            
            61,324Provision
                for credit losses
            
            
            **611**
            
            
            3,687
            
            
            2,513
            
            
            4,109
            
            
            1,684Gains
                on securities transactions
            
            
            **—**
            
            
            1,199
            
            
            8,383
            
            
            6,405
            
            
            2,064Income
                before income taxes
            
            
            **49,156**
            
            
            41,925
            
            
            45,319
            
            
            40,912
            
            
            31,627Net
                income
            
            
            **33,192**
            
            
            28,065
            
            
            29,288
            
            
            27,034
            
            
            20,761Basic
                earnings per common share*
            
            
            **1.54**
            
            
            1.31
            
            
            1.36
            
            
            1.27
            
            
            0.98Diluted
                earnings per common share*
            
            
            **1.48**
            
            
            1.25
            
            
            1.33
            
            
            1.23
            
            
            0.96Cash
                dividends per common share*
            
            
            **0.54**
            
            
            0.45
            
            
            0.35
            
            
            0.31
            
            
            0.28Weighted
                average common shares*
            
            
            **21,606,228**
            
            
            21,407,889
            
            
            21,458,322
            
            
            21,312,705
            
            
            21,194,200Adjusted
                weighted average common shares*
            
            
            **22,478,083**
            
            
            22,444,471
            
            
            22,070,626
            
            
            21,994,776
            
            
            21,700,394




December
                31,**2005**
            
            2004
            
            2003
            
            2002
            
            2001**Financial
                Position:**Total
                loans, net
            
            **$**
            **1,459,820**
            
            $
            1,492,872
            
            $
            1,433,923
            
            $
            1,336,273
            
            $
            1,158,534Total
                assets
            
            
            **2,758,226**
            
            
            2,746,270
            
            
            2,906,462
            
            
            2,542,866
            
            
            2,040,126Total
                deposits
            
            
            **1,847,202**
            
            
            1,858,218
            
            
            1,775,049
            
            
            1,551,787
            
            
            1,425,958Borrowings
            
            
            **622,159**
            
            
            625,032
            
            
            893,505
            
            
            504,094
            
            
            417,570Subordinated
                debt issued in connection with/and corporation-obligated mandatory
                redeemable capital securities of subsidiary trusts
            
            
            **61,858**
            
            
            61,858
            
            
            51,548
            
            
            50,000
            
            
            40,000Stockholders’
                equity
            
            
            **204,153**
            
            
            182,046
            
            
            168,293
            
            
            156,011
            
            
            135,200




**2005
                Quarters**
            
            2004
                Quarters**Fourth**
            
            **Third**
            
            **Second**
            
            **First**
            
            Fourth
            
            Third
            
            Second
            
            First**Quarterly
                Results of Operations**
              **(Unaudited):**Interest
                income
            
            **$**
            **41,274**
            
            **$**
            **40,546**
            
            **$**
            **39,492**
            
            **$**
            **37,221**
            
            $
            38,670
            
            $
            36,750
            
            $
            36,020
            
            $
            34,256Net
                interest income
            
            
            **23,875**
            
            
            **23,785**
            
            
            **23,915**
            
            
            **22,988**
            
            
            23,509
            
            
            22,492
            
            
            21,817
            
            
            20,317Provision
                for credit losses**
            
            
            **40**
            
            
            **95**
            
            
            **85**
            
            
            **391**
            
            
            3,023
            
            
            110
            
            
            343
            
            
            211Gains
                on securities transactions
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            2
            
            
            —
            
            
            85
            
            
            1,112Gains
                on sales of loans
            
            
            **—**
            
            
            **314**
            
            
            **—**
            
            
            **—**
            
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                before income taxes
            
            
            **12,892**
            
            
            **12,463**
            
            
            **12,721**
            
            
            **11,080**
            
            
            8,778
            
            
            11,355
            
            
            10,761
            
            
            11,031Net
                income
            
            
            **8,561**
            
            
            **8,431**
            
            
            **8,809**
            
            
            **7,391**
            
            
            6,152
            
            
            7,519
            
            
            7,037
            
            
            7,357Basic
                earnings per common share*
            
            
            **0.39**
            
            
            **0.39**
            
            
            **0.41**
            
            
            **0.34**
            
            
            0.29
            
            
            0.35
            
            
            0.33
            
            
            0.34Diluted
                earnings per common share*
            
            
            **0.38**
            
            
            **0.37**
            
            
            **0.39**
            
            
            **0.33**
            
            
            0.27
            
            
            0.34
            
            
            0.31
            
            
            0.33





*
            Share
                amounts are adjusted for the five percent common stock dividend
                distributed in September 2005.


**
            The
                higher level of the provision for credit losses during the fourth
                quarter
                of 2004 reflects an increase in charge-offs. See Note 5 to the
                Consolidated Financial Statements.






-52-







**Average
                Balances and Interest Rates**
            
            (000’s,
                except percentages)
              Years
                Ended December 31,**2005**
            
            2004
            
            2003**Average
                Balance**
            
            **Interest**
            
            **Average
                Yield/Rate**
            
            Average
                Balance
            
            Interest
            
            Average
                Yield/Rate
            
            Average
                Balance
            
            Interest
            
            Average
                Yield/Rate**ASSETS**Interest
                earning assets:Interest
                bearing deposits
            
            **$**
            **243**
            
            **$**
            **5**
            
            
            **2.06**
            **%**
            $
            474
            
            $
            6
            
            
            1.27
            %
            $
            169
            
            $
            1
            
            
            0.59
            %Federal
                funds sold
            
            
            **65,826**
            
            
            **2,193**
            
            
            **3.33**
            
            
            27,458
            
            
            347
            
            
            1.26
            
            
            61,406
            
            
            638
            
            
            1.04Securities:U.S.
                government agencies
            
            
            **636,477**
            
            
            **35,466**
            
            
            **5.57**
            
            
            784,112
            
            
            38,414
            
            
            4.90
            
            
            537,395
            
            
            24,520
            
            
            4.56Mortgage-backed
                securities
            
            
            **363,784**
            
            
            **16,339**
            
            
            **4.49**
            
            
            397,373
            
            
            13,469
            
            
            3.39
            
            
            464,335
            
            
            15,587
            
            
            3.36Obligations
                of states and political subdivisions
            
            
            **96,962**
            
            
            **6,263**
            
            
            **6.46**
            
            
            81,644
            
            
            5,439
            
            
            6.66
            
            
            68,560
            
            
            5,127
            
            
            7.48Corporate
                securities, FHLB stock and other securities
            
            
            **32,093**
            
            
            **1,602**
            
            
            **4.99**
            
            
            41,117
            
            
            800
            
            
            1.95
            
            
            31,552
            
            
            1,114
            
            
            3.53Loans,
                net
            
            
            **1,483,093**
            
            
            **99,050**
            
            
            **6.68**
            
            
            1,475,462
            
            
            89,335
            
            
            6.05
            
            
            1,391,689
            
            
            86,274
            
            
            6.20Total
                interest earning assets
            
            
            **2,678,478**
            
            
            **160,918**
            
            
            **6.01**
            **%**
            
            2,807,640
            
            
            147,810
            
            
            5.26
            %
            
            2,555,106
            
            
            133,261
            
            
            5.22
            %Non-interest
                earning assets
            
            
            **114,862**
            
            
            
            
            
            
            
            
            112,191
            
            
            
            
            
            
            
            
            105,321**TOTAL**
            
            **$**
            **2,793,340**
            
            
            
            
            
            
            
            $
            2,919,831
            
            
            
            
            
            
            
            $
            2,660,427




**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**


Interest
                bearing liabilities:Deposits:NOW
            
            **$**
            **187,537**
            
            **$**
            **1,499**
            
            
            **0.80**
            **%**
            $
            167,787
            
            $
            739
            
            
            0.44
            %
            $
            137,270
            
            $
            581
            
            
            0.42
            %Money
                market
            
            
            **173,734**
            
            
            **2,680**
            
            
            **1.54**
            
            
            222,829
            
            
            2,702
            
            
            1.21
            
            
            158,303
            
            
            2,002
            
            
            1.26Savings
            
            
            **436,963**
            
            
            **5,806**
            
            
            **1.33**
            
            
            426,031
            
            
            2,372
            
            
            0.56
            
            
            434,945
            
            
            2,775
            
            
            0.64Time
            
            
            **755,886**
            
            
            **22,624**
            
            
            **2.99**
            
            
            739,379
            
            
            18,412
            
            
            2.49
            
            
            698,372
            
            
            18,435
            
            
            2.64Total
                interest bearing deposits
            
            
            **1,554,120**
            
            
            **32,609**
            
            
            **2.10**
            
            
            1,556,026
            
            
            24,225
            
            
            1.56
            
            
            1,428,890
            
            
            23,793
            
            
            1.67Federal
                funds purchased, securities sold under agreements to repurchase and
                FHLB
                advances
            
            
            **606,410**
            
            
            **26,527**
            
            
            **4.37**
            
            
            788,661
            
            
            29,368
            
            
            3.72
            
            
            681,920
            
            
            26,957
            
            
            3.95Subordinated
                debt issued in connection with corporation - obligated mandatory
                redeemable capital securities of subsidiary trusts
            
            
            **61,858**
            
            
            **4,834**
            
            
            **7.81**
            
            
            59,447
            
            
            3,968
            
            
            6.67
            
            
            50,000
            
            
            3,441
            
            
            6.88Total
                interest bearing liabilities
            
            
            **2,222,388**
            
            
            **63,970**
            
            
            **2.88**
            **%**
            
            2,404,134
            
            
            57,561
            
            
            2.39
            %
            
            2,160,810
            
            
            54,191
            
            
            2.51
            %Non-interest
                bearing liabilities and stockholders’ equity:Demand
                deposits
            
            
            **344,807**
            
            
            
            
            
            
            
            
            322,753
            
            
            
            
            
            
            
            
            282,469Other
                liabilities
            
            
            **32,708**
            
            
            
            
            
            
            
            
            19,011
            
            
            
            
            
            
            
            
            54,906Stockholders’
                equity
            
            
            **193,437**
            
            
            
            
            
            
            
            
            173,933
            
            
            
            
            
            
            
            
            162,242**TOTAL**
            
            **$**
            **2,793,340**
            
            
            
            
            
            
            
            $
            2,919,831
            
            
            
            
            
            
            
            $
            2,660,427**NET
                INTEREST INCOME**
            
            
            
            
            **$**
            **96,948**
            
            
            
            
            
            
            
            $
            90,249
            
            
            
            
            
            
            
            $
            79,070**NET
                YIELD ON INTEREST EARNING ASSETS (NET INTEREST
                MARGIN)**
            
            
            
            
            
            
            
            
            **3.62**
            **%**
            
            
            
            
            
            
            
            3.21
            %
            
            
            
            
            
            
            
            3.09
            %




The
      data
      contained herein has been adjusted to a tax equivalent basis, based on the
      Federal statutory tax rate of 35 percent and the applicable state and local
      income tax rates. The effect of the tax equivalent adjustment to interest income
      on total interest earning assets was $2.4 million, $2.1 million, and $2.0
      million for the years ended December 31, 2005, 2004, and 2003, respectively.
      Non
      accruing loans are included in average balances of loans, net. The net amount
      of
      loan origination and commitment fees, net of certain direct loan origination
      costs for the years ended December 31, 2005, 2004, and 2003 of $2.3 million,
      $3.1 million, and $2.8 million respectively, are included in interest income
      on
      loans, net.




-53-




***Forward-Looking
      Statements:***  *Statements
      contained herein, which are not historical facts, are “forward-looking
      statements” within the meaning of Section 27A of the Securities Act of 1933, as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      In
      addition, senior management may make forward-looking statements orally to
      analysts, investors, the media and others. These forward-looking statements
      may
      be identified by the use of such words as “believe,” “expect,” “anticipate,”
“intend,” “should,” “will,” “would,” “could,” “may,” “planned,” “estimated,”
“potential,” “outlook,” “predict,” “project” and similar terms and phrases,
      including references to assumptions.*




*Forward-looking
      statements are based on various assumptions and analyses made by the Company
      in
      light of management's experience and its perception of historical trends,
      current conditions and expected future developments, as well as other factors
      the Company believes are appropriate under the circumstances. These statements
      are not guarantees of future performance and are subject to risks, uncertainties
      and other factors (many of which are beyond the Company’s control) that could
      cause actual results to differ materially from future results expressed or
      implied by such forward-looking statements. These factors include, without
      limitation, the following: the timing and occurrence or non-occurrence of events
      may be subject to circumstances beyond the Company’s control; there may be
      increases in competitive pressure among financial institutions or from
      non-financial institutions; changes in the interest rate environment may reduce
      interest margins; changes in deposit flows, loan demand or real estate values
      may adversely affect the Company’s business; changes in accounting principles,
      policies or guidelines may cause the Company’s financial condition to be
      perceived differently; general economic conditions, either nationally or locally
      in some or all of the areas in which the Company does business, or conditions
      in
      the securities markets or the banking industry may be less favorable than the
      Company currently anticipates; legislative or regulatory changes may adversely
      affect the Company’s business; applicable technological changes may be more
      difficult or expensive than the Company anticipates; success or consummation
      of
      new business initiatives may be more difficult or expensive than the Company
      anticipates; or litigation or matters before regulatory agencies, whether
      currently existing or commencing in the future, may delay the occurrence or
      non-occurrence of events longer than the Company anticipates.*




*The
      Company's forward-looking statements are only as of the date on which such
      statements are made. By making any forward-looking statements, the Company
      assumes no duty to update them to reflect new, changing or unanticipated events
      or circumstances. These risks and uncertainties should be considered in
      evaluating forward-looking statements and undue reliance should not be placed
      on
      these statements.*




**Critical
      Accounting Policies**




The
      Company’s financial statements are prepared in accordance with accounting
      principles generally accepted in the United States. The Company’s significant
      accounting policies are more fully described in Note 3 to the Consolidated
      Financial Statements, Summary of Significant Accounting Policies. Certain
      accounting policies require management to make estimates and assumptions that
      affect the reported amounts of assets and liabilities at the date of the
      financial statements and the reported amounts of revenue and expense during
      the
      reporting period. On an on-going basis, management evaluates its estimates
      and
      assumptions, and the effects of revisions are reflected in the financial
      statements in the period in which they are determined to be
      necessary.




The
      accounting policies described below are those that most frequently require
      management to make estimates and judgments and, therefore, are critical to
      understanding the Company’s results of operations. The more critical policies
      given the Company’s current business strategy and asset/liability structure are
      accounting for non-performing loans, the allowance for loan losses, reserve
      for
      unfunded loan commitments and standby letters of credit and provision for credit
      losses, the classification of securities as either held to maturity or available
      for sale and evaluation of other than temporary impairment of securities, and
      the evaluation of valuation reserves for deferred tax assets. In addition to
      the
      discussion below and Notes to the Consolidated Financial Statements, the
      Company’s practice on each of these accounting policies is further described in
      the applicable sections of Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.




**Loans:** The
      Company’s decision to classify loans as non-performing is judgmental in nature,
      but generally loans are placed on non-performing status when they are past
      due
      90 days or more (180 days for credit cards) or earlier if management determines
      that the loan will become non-performing in the near future. At the time a
      loan
      is placed on non-performing status, interest accrued but not collected is
      reversed. Interest payments received while a loan is on non-performing status
      are either applied to reduce principal or, based on management’s estimate of
      collectibility, recognized as income. As reported in the Notes to the
      Consolidated Financial Statements, as of December 31, 2005, non-accrual assets
      were $9.0 million and potential problem loans that may result in being placed
      on
      nonaccrual status in the near future were $49,000.




**Allowance
      for Loan Losses:** The
      determination of the allowance for loan losses (the “allowance”), reserve for
      unfunded loan commitments and standby letters of credit (the “reserve”) and
      provision for credit losses (the “provision”) is judgmental in nature. The
      process of evaluating the loan portfolio, classifying loans and determining
      the
      allowance, reserve, and provision is described beginning on page 80. As a
      substantial amount of the Company’s loan portfolio is collateralized by real
      estate, appraisals of the underlying value of property securing loans and
      discounted cash flow valuation of properties are critical in determining the
      amount of the allowance or reserve required for specific loans. Assumptions
      for
      appraisals and discounted cash flow valuations are instrumental in determining
      the value of properties. Overly optimistic assumptions or negative changes
      to
      assumptions could significantly impact the valuation of a property securing
      a
      loan and the related allowance determined. The assumptions supporting such
      appraisals and discounted cash flow valuations are carefully reviewed by
      management to determine that the resulting values reasonably reflect amounts
      realizable on the related loans.




-54-




Additional
      changes in economic conditions, geographic and customer concentrations and
      other
      conditions could significantly impact the allowance, reserve, and provision.
      These evaluations are inherently subjective as they require estimates that
      are
      susceptible to significant revision as more information becomes available.
      As a
      result, future adjustments to the allowance and reserve may be
      necessary.




**Securities:** The
      classification of securities is determined by management at the time of
      purchase, and the reasoning and analysis of the classification is described
      beginning on page 63. Securities classified as held to maturity are carried
      at
      amortized cost, while those identified as available for sale are carried at
      estimated fair value with the resulting gain or loss, net of income tax,
      included in other comprehensive income (loss), which is a component of
      stockholders’ equity. Accordingly, a misclassification would have a direct
      effect on stockholders’ equity. Securities in an unrealized loss position are
      periodically evaluated for other than temporary impairment. Management considers
      the effect of interest rates, credit ratings and other factors on the valuation
      of such securities, as well as the Company’s ability to hold such securities
      until a forecasted recovery or maturity occurs. A substantial amount of the
      investment portfolio consists of triple-A rated credits, and, therefore,
      substantially all unrealized losses are due to interest rate factors. Sales
      or
      reclassification as available for sale (except for certain permitted reasons)
      of
      held to maturity securities may result in the reclassification of all held
      to
      maturity securities to available for sale. The Company has never sold or
      reclassified held to maturity securities to available for sale other than in
      specifically permitted circumstances.




**Valuation
      Reserve for Deferred Tax Assets:** The
      determination of the valuation reserve for deferred tax assets (“tax valuation
      reserve”) is based on an evaluation of projected taxable income in which the net
      deductible timing differences are expected to reverse, and the ability to carry
      forward or back losses to years in which taxable income will be or was
      generated. For Federal tax purposes, losses may be carried back two years and
      forward 20 years. As the Company has recorded substantial taxable income in
      the
      past two years, significantly in excess of net Federal deferred tax assets,
      it
      is more likely than not that any net Federal deferred tax asset will be
      realized. New York State allows losses to be carried forward for 20 years but
      does not allow losses to be carried back for banking institutions. Therefore,
      the determination of any tax valuation reserve for New York State deferred
      tax
      assets is based on projected taxable income. In making this determination,
      management considers it more likely than not that the current year’s taxable
      income is indicative of the highest level of income that will be generated
      in
      future periods when the net timing differences reverse. If the projected amount
      of future taxable income decreases or increases (based on an analysis of the
      current year’s taxable income), the tax valuation reserve will increase or
      decrease, respectively.




**Overview**




The
      Company’s primary business is obtaining deposits through its retail branch
      system, and commercial and municipal relationships, and lending to both a retail
      and commercial customer base. A substantial amount of loans are secured by
      real
      estate, including construction projects. The Company also generally acquires
      triple-A credit rated securities to invest deposits in excess of loan
      production, and borrows on a wholesale basis to leverage capital and manage
      interest rate risk. The Company operates through its 29 full service branches
      (as of January 23, 2006) and its four loan centers in Rockland, Westchester
      and
      Orange Counties, and Stamford, Connecticut.




The
      Company’s primary source of revenue is net interest income, which is the
      difference between interest income on interest earning assets and interest
      expense on interest bearing liabilities. The Company also derives income from
      non-interest income sources such as service charges on deposit accounts, gains
      on sales of securities, and other forms of income. Net interest income and
      non-interest income support the Company’s operating expenses and provision for
      credit losses.




As
      the
      Company’s primary source of income is net interest income, the interest rate
      environment has a significant effect on revenue, which is discussed in greater
      detail under “Net Interest Income” and “Market Risk.” The market for and credit
      quality of loans is also impacted by interest rates, as well as the local
      economy. Deposits are also sensitive to interest rates, local economic
      conditions, and the attractiveness of alternative investments, such as stocks,
      bonds, mutual funds, and annuities.




-55-




As
      discussed in “Net Interest Income” and “Market Risk,” a declining interest rate
      environment and flattening yield curve will have the effect of reducing the
      net
      interest margin. The Company’s balance sheet has shifted from an asset sensitive
      position to a liability sensitive position during 2005, primarily as a result
      of
      the acceleration of principal payments from floating rate securities and
      proceeds being reinvested in fixed rate securities, as well as the Company’s
      deposit base moving to shorter term maturities. Continued low interest rates,
      a
      further reduction in interest rates, and a flattening or inverted yield curve
      may further reduce the net interest margin as deposits reprice at higher rates
      from historical lows, while interest earning assets will not reprice at higher
      yields. However, a steepening of the yield curve will most likely increase
      the
      net interest margin due to an increase in yields on interest earning assets
      and
      management’s ability to reprice the deposit base at a slower rate. As such,
      beginning during the second half of 2004 through the end of 2005, net interest
      income was positively impacted as interest rates increased. Higher interest
      rates may also impact credit quality and loan production, as borrowers must
      pay
      more for debt service. Credit quality, however, has been well managed by the
      Company in varying economic cycles due to strong underwriting standards and
      loan
      monitoring processes.




Also
      significant to the Company’s net income and earnings per common share is the
      ability to generate quality interest earning assets in the form of loans and
      securities at reasonable interest spreads to maintain and increase net interest
      income. Due to the flattening and at times inverted yield curve, intense
      competition for loans, and difficulty in obtaining acceptable yields and
      structures on security investments, increasing the Company’s interest earning
      assets, while managing interest rate risk, is proving to be challenging. In
      addition, significant loan prepayments, and calls and accelerated principal
      payments on securities are also impacting the Company’s ability to increase
      interest earning assets.




**Comparison
      of Results of Operations**




The
      Company’s net income was $33.2 million for the year ended December 31, 2005, an
      18.3 percent increase compared to 2004. Net income was $28.1 million for the
      year ended December 31, 2004, a 4.2 percent decrease from 2003 net income of
      $29.3 million.




The
      increased net income for 2005, compared to 2004, reflects an increase in net
      interest income, a significant decrease in the provision for credit losses,
      gains on sales of loans, and a decrease in the effective rate for the provision
      for income taxes. These increases were partially offset by a decrease in
      non-interest income and an increase in non-interest expenses, as well as gains
      on securities transactions in 2004. There were no gains on securities
      transactions for the 2005 period. The decrease in net income for 2004, compared
      to 2003, primarily reflects a significant decrease in gains on securities
      transactions, as well as an increase in the provision for credit losses and
      non-interest expenses. The decrease in net income was partially offset by an
      increase in net interest income and non-interest income, and a decrease in
      the
      effective rate for the provision for income taxes.




Diluted
      earnings per common share increased 18.4 percent to $1.48 in 2005, compared
      to
      the $1.25 recorded in 2004, while diluted earnings per common share decreased
      5.8 percent in 2004 compared to the $1.33 recorded in 2003, reflecting higher
      net income in 2005 and lower net income in 2004, respectively, as compared
      to
      the prior year periods. Return on average common stockholders’ equity was 17.15
      percent in 2005, compared to 16.13 percent in 2004, and 18.05 percent in 2003.
      Return on average total assets in 2005 was 1.19 percent, compared to 0.96
      percent in 2004, and 1.10 percent in 2003.




Net
      interest income for 2005 rose to $94.6 million, a 7.3 percent increase over
      the
      $88.1 million recorded in 2004, while 2004 net interest income increased 14.4
      percent compared to the $77.0 million recorded in 2003. The increase in net
      interest income in 2005 resulted primarily from an increase in the net interest
      margin on a tax equivalent basis to 3.62 percent, compared to 3.21 percent
      in
      2004, partially offset by a decrease in average interest earning assets,
      primarily securities. The increase in net interest income in 2004 primarily
      resulted from a continuing growth of average interest earning assets, primarily
      loans and securities. The increase in net interest income in 2004 was also
      due
      to an increase in the net interest margin on a tax equivalent basis to 3.21
      percent compared to 3.09 percent in 2003. Net interest income during the three
      years was also negatively impacted by interest foregone on non-performing assets
      of $0.3 million in 2005, $0.2 million in 2004, and $0.4 million in
      2003.




Non-interest
      income for 2005 and 2004 decreased $1.1 million and $7.1 million, compared
      to
      2004 and 2003, respectively. The 2005 decrease was primarily due to lower gains
      on securities transactions and fees from service charges on deposit accounts,
      partially offset by higher other income and gains on sales of loans. The 2004
      decrease was primarily due to lower gains on securities transactions and other
      income, partially offset by higher fees from service charges on deposit
      accounts.




The
      provision for credit losses decreased $3.1 million and increased $1.2 million
      in
      2005 and 2004, respectively, as compared to the prior year periods. The 2005
      decrease was attributable to a lower level of net loan production as a result
      of
      a significant amount of loan prepayments and a lower level of net charge-offs
      compared to 2004. The significant charge-offs in 2004 are related to one
      non-performing real estate construction loan recorded by the Bank’s wholly owned
      subsidiary, Dutch Hill Realty Corp. (the “Dutch Hill Loan”). The Dutch Hill Loan
      balance was reduced to zero as of February 2005.




-56-




The
      overall increases in revenues were partially offset by a 2.3 percent and 13.9
      percent increase in non-interest expenses in 2005 and 2004, respectively. The
      increase in 2005 reflects higher salaries and employee benefits and advertising
      and business development expense. The increases in 2004 primarily reflect higher
      costs of salaries and employee benefits, occupancy and equipment costs,
      professional fees, communication costs, intangible amortization associated
      with
      bank and branch acquisitions, and other costs. The increase in non-interest
      expenses in 2004 includes approximately $1.7 million of professional fees
      related to litigation involving the Dutch Hill Loan, compliance with the
      Sarbanes-Oxley Act of 2002, and the Company’s evaluation of strategic
      opportunities. The increases in non-interest expenses in both years reflect
      the
      Company’s investment in people, new products, branches, and
      technology.




Under
      the
      revised SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS No.
      123R”), the Company will account for stock based compensation using a fair value
      based method in the financial statements for the first interim or reporting
      period beginning after December 15, 2005. The effect of complying with SFAS
      No.
      123R will have a significant impact on operating expenses, as well as the
      Company’s net income and earnings per common share, as disclosed in Note 3 to
      the Consolidated Financial Statements.




The
      effective rate for the provision for income taxes was 32.5 percent, 33.1
      percent, and 35.4 percent for the years ended December 31, 2005, 2004, and
      2003,
      respectively. The decrease in 2005 was primarily due to the satisfactory
      completion of Federal tax examinations for prior income tax years. The 2004
      decrease was primarily due to lower state income taxes and a decrease in income
      tax reserves as a result of the satisfactory completion of state tax
      examinations for prior income tax years.




Each
      of
      the components of net income is discussed in further detail throughout
      Management’s Discussion and Analysis.




The
      Company’s total capital ratio under the risk-based capital guidelines exceeds
      regulatory guidelines of eight percent, as the total capital ratio equaled
      16.98
      percent and 15.07 percent at December 31, 2005 and 2004, respectively. The
      Company’s leverage capital ratio was 9.47 percent at December 31, 2005 and 8.15
      percent at December 31, 2004, which also exceeds regulatory
      guidelines.




The
      Company is not aware of any factors, not otherwise disclosed, that would
      significantly affect its business operations. The Company has the liquidity
      to
      meet its obligations from stable sources of deposits and borrowings from
      reliable sources of lending institutions, the assets to generate income from
      stable loan production with strong credit quality, and investments in triple-A
      credit rated securities, and sufficient capital to support its business and
      future growth prospects.




-57-




**Interest
      Differential**




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


(000’s)**2005
                Compared to 2004**
              **Increase
                (Decrease)**
              **Due
                to Change in**
            
            2004
                Compared to 2003
              Increase
                (Decrease)
              Due
                to Change in**Average**
              **Volume**
            
            **Average**
              **Rate**
            
            **Total**
              **Increase**
              **(Decrease)**
            
            Average
              Volume
            
            Average
              Rate
            
            Total
              Increase
              (Decrease)Interest
                Income:Interest
                bearing deposits
            
            **$**
            **(3.7**
            **)**
            **$**
            **2.7**
            
            **$**
            **(1.0**
            **)**
            $
            3.1
            
            $
            1.9
            
            $
            5.0Federal
                funds sold
            
            
            **848.5**
            
            
            **997.5**
            
            
            **1,846.0**
            
            
            (405.9
            )
            
            114.9
            
            
            (291.0
            )Securities:U.S.
                government agencies
            
            
            **(7,794.6**
            **)**
            
            **4,846.6**
            
            
            **(2,948.0**
            **)**
            
            11,952.8
            
            
            1,941.2
            
            
            13,894.0Mortgage-backed
                securities
            
            
            **(1,213.6**
            **)**
            
            **4,083.6**
            
            
            **2,870.0**
            
            
            (2,256.9
            )
            
            138.9
            
            
            (2,118.0
            )Obligations
                of states and political subdivisions
            
            
            **991.8**
            
            
            **(167.8**
            **)**
            
            **824.0**
            
            
            912.3
            
            
            (600.3
            )
            
            312.0Corporate
                securities, FHLB stock andother
                securities
            
            
            **(209.5**
            **)**
            
            **1,011.5**
            
            
            **802.0**
            
            
            275.8
            
            
            (589.8
            )
            
            (314.0
            )Loans,
                net
            
            
            **459.7**
            
            
            **9,255.3**
            
            
            **9,715.0**
            
            
            5,161.5
            
            
            (2,100.5
            )
            
            3,061.0**Total
                interest earning assets**
            
            
            **(6,921.4**
            **)**
            
            **20,029.4**
            
            
            **13,108.0**
            
            
            15,642.7
            
            
            (1,093.7
            )
            
            14,549.0Interest
                Expense:Deposits:NOW
            
            
            **95.6**
            
            
            **664.4**
            
            
            **760.0**
            
            
            130.1
            
            
            27.9
            
            
            158.0Money
                market
            
            
            **(667.0**
            **)**
            
            **645.0**
            
            
            **(22.0**
            **)**
            
            782.2
            
            
            (82.2
            )
            
            700.0Savings
            
            
            **62.9**
            
            
            **3,371.1**
            
            
            **3,434.0**
            
            
            (56.8
            )
            
            (346.2
            )
            
            (403.0
            )Time
            
            
            **421.4**
            
            
            **3,790.6**
            
            
            **4,212.0**
            
            
            1,053.1
            
            
            (1,076.1
            )
            
            (23.0
            )Federal
                funds purchased, securities sold underagreements
                to repurchase and FHLB advances
            
            
            **(7,456.0**
            **)**
            
            **4,615.0**
            
            
            **(2,841.0**
            **)**
            
            4,043.6
            
            
            (1,632.6
            )
            
            2,411.0Subordinated
                debt issued in connection withcorporation-obligated
                mandatory redeemablecapital
                securities of subsidiary trusts
            
            
            **166.1**
            
            
            **699.9**
            
            
            **866.0**
            
            
            630.7
            
            
            (103.7
            )
            
            527.0**Total
                interest bearing liabilities**
            
            
            **(7,377.0**
            **)**
            
            **13,786.0**
            
            
            **6,409.0**
            
            
            6,582.9
            
            
            (3,212.9
            )
            
            3,370.0**Increase
                in interest differential**
            
            **$**
            **455.6**
            
            **$**
            **6,243.4**
            
            **$**
            **6,699.0**
            
            $
            9,059.8
            
            $
            2,119.2
            
            $
            11,179.0




The
      variance, not solely due to rate or volume, is allocated between the rate and
      volume variances based upon their absolute relative weights to the total change.
      Nonaccruing loans are included in average balances for purposes of computing
      changes in average volume and rate. The net amount of loan origination and
      loan
      commitment fees, net of certain direct loan origination costs for the years
      ended December 31, 2005 and 2004 of $2.3 million and $3.1 million, respectively,
      are included in interest income on loans, net.




-58-




**Net
      Interest Income**




Net
      interest income, the difference between interest income and interest expense,
      is
      the most significant component of the Company’s consolidated earnings. Net
      interest income is positively impacted by a combination of increases in interest
      earning assets over interest bearing liabilities, and an increase in the net
      interest spread between interest earning assets and interest bearing
      liabilities. Net interest income is adversely impacted by a combination of
      a
      decrease in interest earning assets over interest bearing liabilities, and
      a
      decrease in the net interest spread between interest earning assets and interest
      bearing liabilities. Net interest income of $96.9 million on a tax equivalent
      basis for 2005 reflects a 7.4 percent increase over the $90.2 million in 2004.
      Net interest income on a tax equivalent basis for 2004 rose 14.1 percent over
      the $79.1 million for 2003. Net interest income benefited from the increase
      in
      the excess of average interest earning assets over average interest bearing
      liabilities to $456.1 million in 2005, from $403.5 million and $394.3 million
      in
      2004 and 2003, respectively.




Interest
      income is determined by the volume of, and related interest rates earned on,
      interest earning assets. Interest income on a tax equivalent basis for 2005
      increased to $160.9 million or by 8.9 percent as compared to 2004, which
      increased to $147.8 million or by 10.9 percent as compared to 2003. An increase
      in the average rate in all categories, except obligations of states and
      political subdivisions, contributed to a higher level of interest income in
      2005
      compared to 2004, partially offset by an overall decrease in all categories
      except federal funds sold, obligations of states and political subdivisions,
      and
      loans. An overall increase in volume in all categories of interest earning
      assets, except federal funds sold and mortgage-backed securities, and an
      increase in the average rate on U.S. government agencies, mortgage-backed
      securities, federal funds sold, and interest bearing deposits, partially offset
      by a decrease in the average rate on loans, obligation of states and political
      subdivisions, and corporate securities, FHLB stock and other securities
      contributed to a higher level of interest income in 2004, as compared to
      2003.




The
      increase in net interest income due to changes in average rate in 2005 compared
      to 2004, primarily resulted from higher yields on floating rate securities
      and
      loans as a result of the FRB raising short-term interest rates a total of 200
      basis points during 2005. The decrease in net interest income due to changes
      in
      average rate in 2004 compared to 2003 primarily resulted from lower loan yields
      despite an increasing interest rate environment as a result of the FRB raising
      short-term interest rates a total of 125 basis points during 2004.




Average
      interest earning assets decreased in 2005 to $2,678.5 million compared to
      $2,807.6 million in 2004 and $2,555.1 million in 2003, reflecting a 4.6 percent
      decrease and 9.9 percent increase in 2005 and 2004, respectively. The Company’s
      ability to make changes in the asset mix enables management to capitalize on
      more desirable yields, as available, related to various interest earning
      assets.




Interest
      income on federal funds sold increased in 2005 due to higher volume and average
      rate, while such income decreased in 2004 due to a lower volume, partially
      offset by a higher average rate as compared to the prior year. The level of
      federal funds sold is dependent upon the amount of loan and deposit growth,
      cash
      flow requirements, and yields on alternative security investments. To a lesser
      extent, investments in interest bearing deposits are also an alternative to
      federal funds sold.




The
      average balances of total securities decreased in 2005 and increased in 2004.
      The decrease in 2005 was due to calls, maturities, and principal payments from
      amortizing securities, as well as management’s decision to not implement a
      significant amount of leveraging strategies during the year. The increase in
      2004 was due primarily to efforts to effectively leverage capital, as well
      as
      management’s efforts to balance the risk and liquidity of the entire portfolio.




Interest
      income on total securities increased in both 2005 and 2004 compared to the
      prior
      years. The increase in 2005 was primarily due to higher average interest rates
      on all categories except obligations of states and political subdivisions,
      partially offset by lower volume for all categories except obligations of states
      and political subdivisions. The increase in 2004 was primarily due to higher
      volume for all categories, except mortgage-backed securities, and higher average
      rates on U.S. government agencies securities and mortgage-backed securities,
      partially offset by a decrease in average interest rates on obligations of
      states and political subdivisions and corporate securities, FHLB stock and
      other
      securities.




Loans
      are
      the largest component of interest earning assets and, due to their significance,
      are carefully reviewed with respect to the Company’s overall interest rate
      sensitivity position. Interest income on loans in 2005 increased due to higher
      volume and average rates. Interest income on loans in 2004 increased due to
      higher volume, partially offset by lower average rates. In 2005, average net
      loan balances increased $7.6 million to $1,483.1 million compared to 2004,
      while
      average net loans increased $83.8 million in 2004 to $1,475.5 million compared
      to 2003. Net loans outstanding decreased $36.0 million to $1,459.8 million
      at
      December 31, 2005 from $1,492.9 million at December 31, 2004, or a 2.5 percent
      decrease, compared to an increase of $58.9 million, or 4.1 percent, in 2004
      compared to 2003. Loan interest income was also negatively impacted by interest
      income foregone on nonaccrual loans of $331,000 in 2005, $157,000 in 2004,
      and
      $404,000 in 2003.




-59-




Interest
      expense is a function of both the volume and rates paid for interest bearing
      liabilities. Interest expense in 2005 increased $6.4 million, or 11.1 percent
      to
      $64.0 million, and in 2004 increased $3.4 million to $57.6 million, or 6.2
      percent, compared to $54.2 million in 2003. Average balances in all categories
      increased in both 2005 and 2004, except for money market deposits in 2005 and
      savings deposits in 2004. Average retail, commercial, and municipal deposits
      increased in 2005 and 2004 primarily due to continuing growth of deposits in
      existing branches from ongoing business development efforts, and in 2004, the
      acquisition of Reliance Bank and brokered deposits of $25.0 million. The
      increase in interest expense on interest bearing deposits in 2005 was due to
      increases in volume in all categories except money market deposits and higher
      average rates in all categories. The increase in 2004 was due to increases
      in
      volume in all categories, except savings deposits, partially offset by a
      decrease in average rate in all categories, except NOW accounts.




Non-interest
      earning deposits are an integral aspect of liability management and have a
      positive impact on the determination of net interest income. The level of
      non-interest bearing average demand deposits increased 6.8 percent in 2005
      to
      $344.8 million from $322.8 million in 2004, which was a 14.3 percent increase
      compared to $282.5 million in 2003.




The
      Company utilizes federal funds purchased, securities sold under agreements
      to
      repurchase and FHLB advances (“borrowings”) to fund loan growth in excess of
      deposit growth and to leverage the Company’s capital by funding security
      investments. Interest expense on borrowings decreased in 2005 due to a decrease
      in volume, partially offset by an increase in rate. Interest expense increased
      on borrowings in 2004 due to increases in volume, partially offset by a decrease
      in rate.




Subordinated
      debt issued in connection with corporation-obligated mandatory redeemable
      securities of subsidiary trusts are issued to provide Tier I regulatory capital
      with interest that is deductible for federal and state income tax purposes.
      Such
      securities are issued on both a fixed and floating rate basis. Interest expense
      increased on these securities in 2005 due to an increase in the average rate
      in
      2005 and in 2004 as a result of an increase in securities issued in
      2004.




The
      net
      interest spread on a tax equivalent basis for the years ended December 31,
      2005,
      2004, and 2003 is as follows:




**Net
      Interest Spread Analysis**




**2005**
            
            2004
            
            2003Average
                interest rate on:Total
                average interest earning assets
            
            
            **6.01**
            **%**
            
            5.26
            %
            
            5.22
            %Total
                average interest bearing liabilities
            
            
            **2.88**
            
            
            2.39
            
            
            2.51Total
                average interest bearing liabilities and  demand
                deposits
            
            
            **2.49**
            
            
            2.11
            
            
            2.22Net
                interest spread excluding demand deposits
            
            
            **3.13**
            **%**
            
            2.87
            %
            
            2.71
            %Net
                interest spread including demand  deposits
            
            
            **3.52**
            **%**
            
            3.15
            %
            
            3.00
            %




In
      2005,
      the net interest spread increased due to yields on assets increasing at a faster
      rate than yields on interest bearing liabilities from 200 basis points of
      short-term rate increases by the FRB and an asset sensitive balance sheet during
      a significant part of 2005. In 2004, the net interest spread increased due
      to a
      modest increase of the overall yield on interest earning assets, while yields
      on
      interest bearing liabilities declined, partially offset by increased leveraging
      of the balance sheet at narrower spreads with shorter-term low interest rate
      borrowings to maximize net interest spreads.




Management
      has used its strong capital position to prudently leverage the balance sheet
      resulting in increased levels of net interest income without adding significant
      interest rate risk or operating expenses. Management believes leveraging the
      balance sheet with the addition of floating rate securities will protect
      interest income in a rising interest rate environment, while the inclusion
      of
      fixed rate securities with reasonable periods of call protection will mitigate
      the adverse effects on interest income if interest rates remain low. Although
      the effects of balance sheet leveraging tend to decrease the net interest
      spread, it adds net interest income without adding significant operating
      costs.




The
      Company’s balance sheet at December 31, 2005 is liability sensitive during the
      short-term period (one year and less). If the yield curve maintains a slightly
      inverted position whereby short-term interest rates are at levels higher than
      medium to long-term interest rates or a relatively flat position, compression
      of
      the net interest margins may occur and the Company’s net interest income would
      be negatively affected. This is due to the liability sensitivity of the
      Company’s balance sheet from the acceleration of principal payments on loans and
      securities and reinvestment in fixed rate securities, which is primarily the
      result of a decrease in investments in floating rate securities that reprice
      based on spreads over the London Interbank Borrowing Rate (“LIBOR”), or the
      prime rate, and prepayments of loans.




-60-




**Non-Interest
      Income**




Non-interest
      income consists of gains on securities transactions, gains on sales of loans,
      service charges and fees on deposit accounts, and other income. The Company
      generates increases in non-interest income primarily from new and larger
      existing retail and commercial deposits and loan relationships, increased bank
      services offered to retail and commercial customers, and prudently managing
      the
      security portfolio in order to recognize gains on securities when appropriate.




Non-interest
      income for 2005 was $7.9 million compared to $9.0 million for 2004, and $16.0
      million in 2003. The decrease in 2005, as compared to 2004, is primarily due
      to
      gains on securities transactions during 2004 of $1,199,000, and lower service
      charges and fees of $658,000, partially offset by higher other income of
      $453,000 and gains on sales of loans of $314,000. Non-interest income in 2004
      reflects lower gains on securities transactions of $7,184,000, lower other
      income of $183,000, partially offset by increases in service charges and fees
      of
      $316,000, as compared to 2003.




Gains
      on
      securities transactions in 2004 were the result of gains realized on sales
      of
      available for sale securities. There were no gains on securities transactions
      realized in 2005. During 2005, the Company sold $7.2 million of residential
      mortgages to Freddie Mac and realized a gain of $314,000.




Service
      charges and fees on deposit accounts decreased 15.5 percent in 2005 and
      increased 8.0 percent in 2004 compared to the prior years. The decrease in
      2005
      reflects higher deposit balances maintained by commercial loan customers and
      the
      loss of several chronically overdrawn accounts. The increases in 2004 and 2003
      reflect higher NSF (non sufficient funds) income, primarily from higher fees
      generated from commercial accounts.




The
      2005
      increase in other income primarily reflects higher letter of credit and credit
      card fees, income from merchant credit card transactions, and other non-interest
      income. The 2005 increase was partially offset by lower fee income from
      investment product sales and lower loan prepayment fees compared to the prior
      year. The decrease in other income in 2004 reflects decreases in loan prepayment
      and brokered loan fees, as well as decreases in other non-interest income.
      The
      2004 decrease was partially offset by increases in merchant credit card income
      and fee income on investment product sales. Loan prepayment fees decreased
      in
      2005 and 2004, as compared to the prior periods, due to a lower amount of loan
      refinancing in the lower interest rate environment during the prior year
      periods. Letter of credit fees fluctuate depending on the needs of the Bank’s
      customer base, particularly those involved in real estate development. Increases
      in other fee categories reflect increased marketing efforts.




**Non-Interest
      Expenses**




Non-interest
      expenses are primarily incurred to support the existing operations and growth
      of
      the Company, to increase its market share and customer base, support the
      Company’s investment in people and technology, and handle administrative
      functions. Non-interest expenses rose to $52.7 million for 2005, or 2.3 percent
      over the $51.5 million for 2004, compared to a 13.9 percent increase in 2004
      over the $45.2 million for 2003. These increases reflect increased business
      volume and investments in people and technology consistent with the Company’s
      business strategy, and in 2004, approximately $1.7 million for professional
      fees
      incurred in connection with litigation costs related to the Dutch Hill Loan,
      compliance with the Sarbanes-Oxley Act of 2002, and the Company’s evaluation of
      strategic opportunities.




The
      Company’s efficiency ratio (a lower ratio indicates greater efficiency) that
      compares non-interest expense to total adjusted revenue (taxable equivalent
      net
      interest income, plus non-interest income, excluding gains on securities
      transactions and gains on sales of loans) was 50.41 percent in 2005 compared
      to
      52.5 percent in 2004, and 52.2 percent in 2003. The decrease in efficiency
      ratio
      in 2005 as compared to 2004 is partially due to an increase in the net interest
      margin combined with a relatively smaller increase in non-interest expenses.
      The
      increase in the efficiency ratio in 2004, as compared to 2003, is partially
      due
      to a lower net interest margin and higher non-interest expenses.




Salaries
      and employee benefits, the largest component of non-interest expenses, rose
      7.7
      percent in 2005 to $33.2 million, compared to a 13.9 percent increase in 2004
      to
      $30.9 million from the $27.1 million in 2003. The increases in both years
      reflect the costs of additional personnel necessary for the Company to work
      towards increases in its customer base, as well as annual merit increases.
      Increases in salaries and employee benefits in both 2005 and 2004 were also
      attributable to higher medical costs incurred and bonuses earned, which are
      necessary to be competitive in attracting and retaining high quality and
      experienced personnel, as well as costs associated with related payroll taxes
      and other employee benefits.




-61-




The
      percentages of salaries and employee benefits as a percentage of total
      non-interest expenses for 2005, 2004, and 2003 are set forth in the following
      table:


**2005**
            
            2004
            
            2003**Employees
                at December 31,**Full-time
                employees
            
            
            **377**
            
            
            367
            
            
            351Part-time
                employees
            
            
            **39**
            
            
            43
            
            
            34**Salaries
                and employee ben****efits**
            
            (000’s,
                except percentages)Salaries
            
            **$**
            **17,806**
            
            $
            17,206
            
            $
            15,280Payroll
                taxes
            
            
            **1,843**
            
            
            1,774
            
            
            1,588Medical
                plans
            
            
            **3,936**
            
            
            3,775
            
            
            2,992Incentive
                compensation plans
            
            
            **6,891**
            
            
            5,542
            
            
            5,411Deferred
                compensation andemployee
                retirement plans
            
            
            **2,132**
            
            
            1,948
            
            
            1,268Other
            
            
            **624**
            
            
            613
            
            
            542Total
            
            **$**
            **33,232**
            
            $
            30,858
            
            $
            27,081Percentage
                of salaries andemployee
                benefits to totalnon-interest
                expenses
            
            
            **63.1**
            **%**
            
            59.9
            %
            
            59.9
            %




Occupancy
      and equipment expenses decreased in 2005 to $7,759,000, a 1.1 percent decrease
      compared to the 2004 amount of $7,849,000, which represents an increase of
      14.1
      percent over 2003. The decrease in 2005 is a result of decreases in rent expense
      and building maintenance due to the closing of the Mamaroneck branch in the
      2005
      first quarter, a decrease in maintenance expense related to the network
      infrastructure, and less depreciation expense due to fully depreciating certain
      fixed assets. The 2005 decrease was partially offset by increases in real estate
      taxes from adjustments of real estate taxes on owned properties in the prior
      year and higher utility costs due to rising energy prices. The increase in
      2004
      is due to the acquisition of Reliance Bank and its full service branch,
      increased utilization of the Company’s Corporate Headquarters, higher
      maintenance costs associated with the in-house IBM AS-400 computer and capital
      investments over the last several years in systems designed to enhance product
      delivery, communications, and bank-wide operating and processing capabilities.
      The 2004 increase was partially offset by adjustments of real estate taxes
      on
      owned properties.




Advertising
      and business development expense increased to $2,704,000, a 3.1 percent
      increase, compared to the $2,622,000 recorded in 2004, which reflects a decrease
      of 2.8 percent compared to 2003. The increase in 2005 is principally due to
      a
      new cable television and print ad campaign to further promote the Company’s
      brand, “Do business with us, do better with us.” The decrease in 2004 is
      primarily due to lower costs incurred for promotional and special
      events.




Professional
      fees decreased 31.1 percent to $1,926,000 in 2005 from $2,796,000 in 2004,
      which
      was a 97.7 percent increase from the $1,414,000 recorded in 2003. The 2005
      decrease reflects lower professional fees in connection with litigation related
      to the Dutch Hill loan and a decrease in fees due to efficiencies obtained
      in
      compliance with the Sarbanes-Oxley Act of 2002. The increase in 2004 reflects
      higher professional fees in connection with litigation related to the Dutch
      Hill
      Loan, compliance with the Sarbanes-Oxley Act of 2002, and the evaluation of
      strategic opportunities undertaken in the latter part of 2004.




Communications
      expense decreased 19.1 percent in 2005 to $1,218,000 from $1,506,000 in 2004,
      a
      15.3 percent increase from $1,306,000 in 2003. The decrease in 2005 reflects
      a
      decrease in costs to support the network infrastructure, while 2004 reflects
      increased costs related to data and telephone lines.




Stationery
      and printing expense decreased 11.5 percent to $572,000 in 2005 from $646,000
      in
      2004 and decreased 16.5 percent from $774,000 recorded in 2003. The decreases
      in
      expense in 2005 reflect a reduction in miscellaneous supplies for the branch
      network. The decrease in expense in 2004 reflects the Company’s increased use of
      in-house printing and technology.




Amortization
      of intangibles increased by $20,000 to $1,146,000 in 2005 compared to 2004,
      and
      increased by $111,000 to $1,126,000 in 2004 compared to 2003. The increases
      in
      2005 and 2004 reflect additional amortization related to the core deposit
      intangible allocated in the Reliance Bank acquisition in March
      2004.




Other
      non-interest expenses, as reflected in the following table, increased slightly
      in 2005 and 2004. The increase in other non-interest expense in 2005 primarily
      reflects higher credit card related costs associated with bonus awards,
      partially offset by a decrease in outside services and consulting fees. The
      increase in 2004 primarily reflects higher expenses due to increased courier
      fees from additional locations and customer pick-ups, Internet related fees,
      outside services and consulting fees and fees related to the conversion of
      Reliance Bank. The increase in other non-interest expenses in 2004 was
      substantially offset by a decrease in credit card related costs due to lower
      accruals for bonus awards.




(000’s,
                except percentages)**Other
                non-interest****expenses**
            
            **2005**
            
            2004
            
            2003Other
                insurance
            
            **$**
            **384**
            
            $
            370
            
            $
            367Courier
                fees
            
            
            **629**
            
            
            615
            
            
            598Dues,
                meetings, andseminars
            
            
            **544**
            
            
            528
            
            
            466Outside
                services
            
            
            **888**
            
            
            1,018
            
            
            761U.S.B.
                Foundation, Inc.
            
            
            **250**
            
            
            250
            
            
            250Credit
                card related costs
            
            
            **535**
            
            
            346
            
            
            760Other
            
            
            **640**
            
            
            699
            
            
            600Total
            
            **$**
            **3,870**
            
            $
            3,826
            
            $
            3,802Percentage
                of total non-interest expenses
            
            
            **7.3**
            **%**
            
            7.4
            %
            
            8.4
            %




To
      monitor and control the level of non-interest expenses and non-interest income,
      the Company continually monitors the system of internal budgeting, including
      analysis and follow-up of budget and prior period variances.




-62-




**Income
      Taxes**




Income
      tax provisions of $15,964,000, $13,860,000, and $16,031,000 were recorded in
      2005, 2004, and 2003, respectively. The Company is currently subject to a
      statutory Federal tax rate of 35.0 percent, the higher of a New York State
      tax
      of 7.5 percent of New York State income, a tax on alternative income, or a
      tax
      on assets, and a Metropolitan Transportation tax of 17.0 percent of the New
      York
      State tax (as defined), a Connecticut State tax rate of 7.5 percent of
      Connecticut State income, a New York City tax rate of 9.0 percent of New York
      City income, and a Delaware State Franchise tax based on the number of
      authorized shares. The Company paid a New York State tax on assets in 2005
      and
      2004. The Company’s overall effective income tax rate was 32.5 percent in 2005,
      33.1 percent in 2004, and 35.4 percent for 2003.




The
      lower
      effective income tax rate in all years as compared to statutory rates primarily
      reflects lower state income taxes and investments in tax exempt municipal bonds,
      as well as an adjustment to the income tax reserves from the completion of
      New
      York State and Federal income tax examinations of prior years in 2005 and 2004,
      respectively. As a result of a reduction in taxable income for state tax
      purposes, the Company has established a valuation allowance at December 31,
      2005
      and 2004 in the amount of $3.0 million and $2.6 million, respectively, to fully
      reserve the amount of the state deferred tax assets that is more likely than
      not, in management’s judgment, not realizable. Other pertinent income tax
      information is set forth in the Notes to the Consolidated Financial
      Statements.




**Comparison
      of Financial Condition**





**Securities
      Portfolio**




Securities
      are selected to provide safety of principal and liquidity, produce income on
      excess funds during structural changes in the composition of deposits during
      cyclical and seasonal changes in loan demand, and to leverage capital. The
      amount of securities purchased and maintained in the securities portfolio is
      dependent on the level of deposit growth in excess of loan growth, the ability
      to leverage capital, while maintaining adequate capital ratios and managing
      interest rate risk, and the ability of the Bank to borrow wholesale funds.
      In
      order to manage liquidity and control interest rate risk, the Company’s
      investment strategy focuses on a combination of securities that have short
      maturities, adjustable-rate securities or those whose cash flow patterns result
      in a lower degree of interest rate risk, and investments in fixed rate
      securities with longer-term maturities and call options by the issuer to
      maximize yield.




The
      Bank’s investment policy includes a determination of the appropriate
      classification of securities at the time of purchase. If management has the
      intent and ability to hold securities until a forecasted recovery or maturity
      occurs, they are classified as held to maturity and are carried at amortized
      historical cost. Securities held for indefinite periods of time and not intended
      to be held to maturity include securities that management intends to use as
      part
      of its asset/liability strategy and that may be sold in response to changes
      in
      interest rates, prepayment risk, and other factors. Such securities are
      classified as available for sale and carried at estimated fair
      value.




As
      of
      July 16, 2004, the Company transferred at fair value available for sale U.S.
      government agency securities with an amortized cost basis and fair value of
      approximately $307.6 million and $298.2 million, respectively, to held to
      maturity. The unrealized loss of $9.4 million, $6.2 million net of tax, was
      included as a component of other comprehensive income (loss) and is being
      accreted over the remaining life of the securities transferred. Management
      does
      not intend to sell these securities.




The
      Company has continued to exercise its conservative approach to investing by
      purchasing high credit quality investments and controlling interest rate risk
      by
      investing in securities with periodic cash flow or with interest rates that
      reprice periodically, and longer-term maturities to complement the
      asset/liability structure of the balance sheet. Generally, most securities
      may
      be used to collateralize borrowings and public deposits. As a result, the
      securities portfolio is an integral part of the Company’s funding strategy. The
      securities portfolio, including the Bank’s investment in FHLB stock, of $1,153.6
      million and $1,122.9 million at December 31, 2005 and 2004, consists of
      securities held to maturity totaling $746.9 million and $502.2 million,
      securities available for sale totaling $376.0 million and $589.6 million, and
      FHLB stock of $30.8 million and $31.1 million, respectively.




Securities,
      including FHLB stock, represent 42.2 percent, 46.5 percent, and 43.1 percent
      of
      average interest earning assets in 2005, 2004, and 2003, respectively. Emphasis
      on the securities portfolio will continue to be an important part of the
      Company’s asset/liability strategy. The size of the securities portfolio will
      depend on deposit and loan growth, the ability of the Company to take advantage
      of leverage opportunities, and the availability of high quality and rated
      securities with acceptable yields and structures. The carrying value, estimated
      fair value, weighted average yields, and maturity distributions of securities
      and information on securities in a gross unrealized loss position are included
      in the Notes to the Consolidated Financial Statements.




-63-




Obligations
      of U.S. government agencies principally include Federal Home Loan Bank, Fannie
      Mae and Freddie Mac debentures and notes. At December 31, 2005 and 2004, the
      outstanding balances held in such U.S. government agency securities totaled
      $710.4 million and $583.2 million, respectively. For 2005, U.S. government
      agency securities increased $127.3 million due to purchases of $345.0 million
      in
      U.S. government agency bonds, net discount accretion of $0.2 million, and $0.7
      million of amortization of the loss on transfer of available for sale securities
      to held to maturity, which were partially offset by redemptions of $217.3
      million and a decrease in the fair value of available for sale securities of
      $1.3 million. For 2004, U.S. government agency securities decreased $213.2
      million as purchases of $594.7 million in U.S. government agency bonds, net
      discount accretion of $0.6 million, and an increase in the fair value of
      available for sale securities of $5.6 million were offset by net sales and
      redemptions of $805.0 million and a reduction of $9.1 million as a result of
      the
      transfer from available for sale to held to maturity as previously discussed.
      In
      2005, the net new purchases of callable U.S. government agency securities were
      in fixed rate, while in 2004 net new purchases were both fixed and floating
      rate
      as the yields and spreads on these obligations were considered
      attractive.




The
      Company invests in mortgage-backed securities, including collateralized mortgage
      obligations (“CMOs”), which are primarily issued by Ginnie Mae, Fannie Mae, and
      Freddie Mac. Ginnie Mae securities are backed by the full faith and credit
      of
      the U.S. Treasury, assuring investors of receiving all of the principal and
      interest due from the mortgages backing the securities. Fannie Mae and Freddie
      Mac guarantee the payment of interest at the applicable certificate rate and
      the
      full collection of the mortgages backing the securities. However, these
      securities are not backed by the full faith and credit of the U.S.
      Treasury.




Mortgage-backed
      securities, including CMOs, decreased $119.4 million to $304.3 million, and
      decreased $24.4 million to $423.7 million at December 31, 2005 and 2004,
      respectively. The decrease in 2005 was due to principal paydowns of $158.0
      million and a decrease in fair value of available for sale securities of $2.4
      million, partially offset by purchases of $40.9 million and net discount
      accretion of $0.1 million. The decrease in 2004 was due to sales of $104.2
      million, principal paydowns of $156.9 million, and net premium amortization
      of
      $0.1 million, partially offset by purchases of $234.0 million and an increase
      in
      the estimated fair value of available for sale securities of $2.8
      million.




The
      following table sets forth additional information concerning mortgage-backed
      securities, including CMOs, as of the periods indicated:


(000’s)December
                31,**2005**
            
            2004
            
            2003U.S.
                government agency:Mortgage-backed
                securities:Fixed
                rate
            
            **$**
            **169,346**
            
            $
            164,609
            
            $
            124,958Adjustable
                rate
            
            
            **—**
            
            
            —
            
            
            2,078Collateralized
                mortgageobligations:Adjustable
                rate
            
            
            **134,709**
            
            
            259,030
            
            
            321,011Other
            
            
            **235**
            
            
            32
            
            
            39Total
            
            **$**
            **304,290**
            
            $
            423,671
            
            $
            448,086




Purchases
      and sales of mortgage-backed securities, including CMOs, are transacted when
      management considers such activities appropriate in order to react to market
      conditions to restructure the portfolio and manage interest rate risk. Fixed
      rate mortgage-backed securities provide a higher yield and cash flow for
      reinvestment in different interest rate environments. Interest rates on
      floating-rate CMO securities periodically adjust at certain spreads to market
      indices and typically contain maximum lifetime caps. Mortgage-backed securities
      cash flow is sensitive to changes in interest rates as principal prepayments
      generally accelerate during periods of declining interest rates and decrease
      during periods of rising interest rates.




The
      outstanding balances in obligations of states and political subdivisions at
      December 31, 2005 and 2004 were $108.0 million and $84.8 million with purchases
      of $34.4 million and $31.5 million, and net discount accretion of $0.1 million
      in 2005, partially offset by maturities and other decreases of $11.3 million
      and
      $21.4 million during 2005 and 2004, respectively. Municipal securities are
      considered core investments having favorable tax equivalent yields and
      diversified maturities. The obligations are principally New York State political
      subdivisions with diversified final maturities and substantially all are
      classified as held to maturity. Purchases of municipal securities are dependent
      upon their availability in the marketplace and the comparative tax equivalent
      yields of such securities compared to other securities of similar credit risk
      and maturity.




The
      Company invests in medium-term corporate debt securities, bank and other equity
      securities, and other securities that are rated investment grade by nationally
      recognized credit rating organizations at the time of purchase. The Company
      had
      outstanding balances in corporate securities of $0.1 and $0.2 million at
      December 31, 2005 and 2004, respectively, consisting of bank and other equity
      securities.




The
      total
      investment in FHLB stock was $30.8 million and $31.1 million at December 31,
      2005 and 2004, respectively. The decrease in 2005 reflects redemptions of $40.8
      million, partially offset by purchases of $40.5 million. The increase in 2004
      reflects purchases of $54.2 million, partially offset by redemptions of $53.7
      million. The Bank is a member of the FHLB. As a prerequisite to obtaining
      increased funding from the FHLB, the Bank may be required to purchase additional
      shares of FHLB stock. Conversely, the FHLB may require the Bank to redeem shares
      of FHLB stock if the Bank’s borrowings from the FHLB decline.




-64-




Except
      for securities of the U. S. government agencies (principally callable and
      mortgage-backed securities), Freddie Mac, Ginnie Mae, Fannie Mae, and Federal
      Home Loan Bank, there were no obligations of any single issuer that exceeded
      ten
      percent of stockholders’ equity at December 31, 2005 and 2004.




**Loan
      Portfolio**




Loans
      represent the largest and highest yielding earning asset of the Company. Loan
      volume is dependent on the Bank’s ability to originate loans in the competitive
      markets in which it operates. Critical factors include the credit worthiness
      of
      borrowers, the economy of the Bank’s markets, and the level of interest rates.
      Also, impacting net loan growth is the level of loan prepayments, which occur
      more frequently in the current low interest rate environment. The Company
      continues to originate a significant portion of loans collateralized by real
      estate within the markets it primarily conducts business. The favorable economic
      conditions for both commercial and residential real estate and the credit
      worthiness of new and existing customers allowed the Bank to increase net loans
      outstanding in 2004, while significant loan prepayments in 2005 resulted in
      a
      decrease in net loans outstanding.




The
      increase in the loan portfolio and maintaining the loan portfolio’s performance
      is an integral part of the Company’s business strategy and revenue growth.
      During 2005, the average balance of net loans of the Company increased $7.6
      million to $1,483.1 million, and increased $83.8 million in 2004 to $1,475.5
      million, as compared to the 2003 average balance of $1,391.7 million. At
      December 31, 2005, loans outstanding decreased $33.1 million to $1,475.0
      million, or a 2.2 percent decrease compared to loans outstanding at December
      31,
      2004. The 2005 loan decrease resulted from a decrease in construction and land
      development loans of $35.3 million; a decrease in demand loans of $18.2 million;
      a decrease in commercial mortgages of $8.1 million; a decrease in installment
      loans of $0.6 million; and a decrease in other loan categories net of deferred
      loan commitment fees of $3.5 million, partially offset by increases in
      residential mortgage and home equity loans of $28.6 and $3.6 million and credit
      card loans of $0.4 million.




Loans
      outstanding at December 31, 2004 increased $59.4 million to $1,508.1 million,
      or
      4.1 percent as compared to loans outstanding at December 31, 2003. The 2004
      loan
      growth resulted from: an increase in construction and land development loans
      of
      $20.7 million; an increase in residential mortgage loans of $10.0 million;
      an
      increase in time and demand loans of $26.9 million; an increase in home equity
      loans of $19.7 million; an increase in credit card loans of $0.8 million; and
      an
      increase in other loan categories, net of deferred loan commitment fees of
      $3.0
      million; partially offset by decreases in commercial mortgages and installment
      loans of $20.9 million and $0.8 million, respectively.




Real
      estate collateralized loans consisting of construction mortgages, interim and
      permanent commercial mortgages, home equity, and residential mortgages represent
      88.9 percent and 87.6 percent of total gross loans at December 31, 2005 and
      2004, respectively. Commercial mortgages, residential mortgages, and
      construction and land development loans will continue to be emphasized, as
      these
      loans represent quality real estate secured loans. At December 31, 2005 and
      2004, the Company had approximately $242.7 million and $221.6 million of
      committed but unfunded commercial mortgage loans, construction and land
      development loans, and $81.0 million and $83.0 million of committed and unfunded
      residential mortgage loans (both first and junior liens),
      respectively.




Time
      and
      demand loans are loans to businesses and individuals that are secured by
      collateral other than real estate (i.e., accounts receivable and inventory)
      or
      are unsecured. These loans decreased to $147.7 million in 2005 from $165.9
      million in 2004, and $139.0 million in 2003. The Company will continue its
      efforts to diversify its loan portfolio and offer a number of commercial
      customers (including commercial real estate customers) their lines of credit.
      Installment loans to individuals and businesses decreased in 2005 to $7.2
      million from $7.8 million in 2004, which was a decrease from $8.6 million in
      2003, as the Company experienced competition for these loans.




The
      Bank
      currently provides Union State Bank Visa and MasterCard credit cards. At
      December 31, 2005 and 2004, the Bank had unused credit card lines of $41.3
      million and $36.2 million, and outstanding balances of $6.8 million and $6.4
      million, respectively. The credit card business allows the Company to increase
      its consumer lending.




At
      December 31, 2005 and 2004, time and demand, installment, credit card, and
      other
      loans represented 11.1 percent and 12.4 percent of gross loans,
      respectively.




It
      is the
      Company’s policy to discontinue the accrual of interest on loans when, in the
      opinion of management, a reasonable doubt exists as to the timely collectibility
      of the amounts due. Regulatory requirements generally prohibit the accrual
      of
      interest on certain loans when principal or interest is due and remains unpaid
      for 90 days or more (with the exception of credit card loans for which the
      criteria is 180 days past due). Nonaccrual loans, which are primarily
      collateralized by real estate, increased at December 31, 2005 to $9.0 million
      compared to $1.6 million at December 31, 2004, and $6.1 million as of December
      31, 2003.




-65-




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




The
      most
      significant non-performing loans have typically been construction and real
      estate related commercial loans, and commercial lease finance loans. Although
      the Bank has an aggressive foreclosure policy, the process is often slow and
      can
      be hampered by legal and market factors. Loans considered to be impaired were
      $16.0 million and $1.3 million at December 31, 2005 and 2004, respectively.
      Net
      loan charge-offs against the allowance for loan losses were $0.1 million in
      2005, compared to $3.2 million in 2004 and $1.9 million in 2003. The charge-offs
      in 2004 and 2003 reflect $3.2, million and $1.8 million, respectively, related
      to the Dutch Hill Loan.




The
      increase in non-performing loans in 2005 is the result of loans related to
      two
      customer relationships of which loans related to one relationship have been
      placed on nonaccrual status as a result of fraudulent activity by the borrower
      related to the real estate collateral of the loans. The loans related to the
      other customer relationship involve a real estate construction project that
      has
      experienced unexpected delays in completing the construction. The loans in
      both
      relationships are supported by personal guarantees. The decrease in
      non-performing loans in 2004 is primarily due to the reduction of the Dutch
      Hill
      Loan from principal payments and charge-offs, which were partially offset by
      advances to complete the construction and maintain the operations of the
      project. For further information on non-performing loans, see Note 5 to the
      Notes to Consolidated Financial Statements.




**Allowance
      for Loan Losses**




The
      loan
      portfolio is evaluated on an ongoing basis. A comprehensive evaluation of the
      quality of the loan portfolio is performed by management on a quarterly basis
      as
      an integral part of the credit administration function, which includes the
      identification and evaluation of past due loans, non-performing loans, impaired
      loans and potential problem loans, assessments of the expected effects of the
      current economic environment, applicable industries, geographic and customer
      concentrations within the loan portfolio, and a review of historical loss
      experience.




The
      allowance for loan losses of $15.2 million at both December 31, 2005 and 2004,
      is available to absorb charge-offs from any loan category, while additions
      are
      made through charges to income and recoveries of loans previously charged-off.
      In addition to the allowance for loan losses (the “allowance”), a reserve for
      credit losses related to unfunded loan commitments and standby letters of credit
      (the “reserve”) at December 31, 2005 of $1,106,000 is included in other
      liabilities. At December 31, 2004, $542,000 of a reserve is included in other
      liabilities and the reserve for standby letters of credit of $413,000 million
      in
      2004 was included in the allowance for loan losses.




Based
      upon management’s assessment of the degree of risk associated with the various
      elements of the loan portfolio, it is estimated that at December 31, 2005 and
      2004, 8 percent and 9 percent of the allowance and the reserve is applicable
      to
      time and demand loans, 87 percent and 84 percent is related to loans
      collateralized by real estate, including commercial and construction loans,
      2
      percent and 4 percent is applicable to installment, credit card and other loans,
      and 3 percent and 3 percent are unallocated, respectively.




As
      with
      any financial institution, poor economic conditions, high inflation, high
      interest rates or high unemployment may lead to increased losses in the loan
      portfolio. Conversely, improvements in economic conditions tend to reduce the
      amounts charged against the allowance. Management has established various
      controls, in addition to Board approved underwriting standards, in order to
      limit future losses, such as (1) a “watch list” of possible problem loans, (2)
      various loan policies concerning loan administration (loan file documentation,
      disclosures, approvals, etc.), and (3) a loan review staff employed by the
      Company, as well as outside loan review consultants, to determine compliance
      with established controls, and to review the quality and identify anticipated
      collectibility issues of the portfolio. Management determines which loans are
      uncollectible and makes additional provisions, as necessary, to state the
      allowance and the reserve at the appropriate levels.




Management
      takes a prudent and cautious position in evaluating various business and
      economic uncertainties in relation to the Company’s loan portfolio. In
      management’s judgment, the allowance and reserve are considered adequate to
      absorb losses inherent in the credit portfolio. A substantial portion (88.9
      percent at December 31, 2005) of total gross loans of the Company is
      collateralized by real estate, primarily located in the New York Metropolitan
      area. The collectibility of the loan portfolio of the Company is subject to
      changes in the real estate market in which the Company operates. The provisions
      for credit losses established in 2005, 2004, and 2003, and the related allowance
      and reserve reflect net charge-offs and losses incurred with respect to real
      estate, time and demand, installment, credit card, and other loans, and the
      effect of the real estate market and general economic conditions of the New
      York
      Metropolitan area on the loan portfolio.




-66-




Management
      believes the allowance and the reserve at December 31, 2005 appropriately
      reflects the risk elements inherent in the total credit portfolio at that time.
      There is no assurance that the Company will not be required to make future
      adjustments to the allowance or the reserve in response to changing economic
      conditions or regulatory examinations. During 2005, the FRB and the FDIC
      completed examinations of the Company and the Bank, respectively. During 2004,
      the New York State Banking Department completed an examination of the Bank.
      As a
      result of these examinations, no adjustments to the allowance or the reserve
      were required.




**Loan
      Maturities and Sensitivity to Changes in Interest Rates**




The
      following table presents the maturities of loans outstanding at December 31,
      2005 (excluding installment loans to individuals and real estate loans other
      than construction loans), and the amount of such loans by maturity date that
      have predetermined interest rates and the amounts that have floating or
      adjustable rates.


(000’s,
                  except percentages)**After****1
                  But****Within**
              
              **Within**
              
              **After****1
                  Year**
              
              **5
                  Years**
              
              **5
                  Years**
              
              **Total**
              
              **Percent****Loans:**Time
                  and demand loans
              
              $
              101,540
              
              $
              40,915
              
              $
              5,279
              
              $
              147,734
              
              
              38
              %Commercial
                  installment loans
              
              
              26
              
              
              5,222
              
              
              394
              
              
              5,642
              
              
              1Mortgage
                  construction loans
              
              
              183,702
              
              
              51,528
              
              
              —
              
              
              235,230
              
              
              61**Total**
              
              $
              285,268
              
              $
              97,665
              
              $
              5,673
              
              $
              388,606
              
              
              100
              %**Rate
                  Sensitivity:**Fixed
                  or predetermined interest rates
              
              $
              10,853
              
              $
              24,003
              
              $
              3,069
              
              $
              37,925
              
              
              10
              %Floating
                  or adjustable interest rates
              
              
              274,415
              
              
              73,662
              
              
              2,604
              
              
              350,681
              
              
              90**Total**
              
              $
              285,268
              
              $
              97,665
              
              $
              5,673
              
              $
              388,606
              
              
              100
              %**Percent**
              
              
              73
              %
              
              25
              %
              
              2
              %
              
              100
              %





**Contractual
      Obligations**




In
      the
      normal course of business, the Company incurs contractual obligations. A summary
      of all significant contractual obligations as of December 31, 2005 are
      summarized below:


(000’s)**After
                  1**
              
              **After
                  3****But**
              
              **But****Within**
              
              **Within
                  3**
              
              **Within
                  5**
              
              **After
                  5****Contractual
                  Obligations**
              
              **1
                  Year**
              
              **Years**
              
              **Years**
              
              **Years**
              
              **Total**Operating
                  lease obligations
              
              $
              894
              
              $
              2,129
              
              $
              341
              
              $
              420
              
              $
              3,784Borrowings
              
              
              72,350
              
              
              85,041
              
              
              130,046
              
              
              334,722
              
              
              622,159Time
                  deposits
              
              
              595,005
              
              
              125,201
              
              
              47,873
              
              
              —
              
              
              768,079Employment
                  agreements
              
              
              3,835
              
              
              6,647
              
              
              500
              
              
              —
              
              
              10,982Total
              
              $
              672,084
              
              $
              219,018
              
              $
              178,760
              
              $
              335,142
              
              $
              1,405,004




Further
      information is included in Note 6, Note 7, Note 9, and Note 16 to the
      Consolidated Financial Statements, as applicable.




-67-





**Off
      Balance Sheet Commitments**





Off
      balance sheet commitments incurred in the normal course of business as of
      December 31, 2005 are summarized below:


(000’s)**After
                  1**
              
              **After
                  3****But**
              
              **But****Within**
              
              **Within
                  3**
              
              **Within
                  5**
              
              **After
                  5****Commercial
                  Commitments**
              
              **1
                  Year**
              
              **Years**
              
              **Years**
              
              **Years**
              
              **Total**Lines
                  of credit
              
              $
              417,995
              
              
              —
              
              $
              —
              
              $
              —
              
              $
              $417,995Standby
                  letters of credit
              
              
              41,950
              
              
              —
              
              
              —
              
              
              —
              
              
              41,950Other
                  loan commitments—
                  Commercial
              
              
              103,346
              
              
              —
              
              
              —
              
              
              —
              
              
              103,346—
                  Residential
              
              
              14,218
              
              
              —
              
              
              —
              
              
              —
              
              
              14,218**Total**
              
              $
              577,509
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              577,509





Lines
      of
      credit in the above table are available upon demand. It is not expected that
      standby letters of credit will be funded. Other loan commitments represent
      committed but not yet funded commercial and residential real estate
      loans.




**Deposits**




The
      Company’s fundamental source of funds supporting interest earning assets
      continues to be deposits, consisting of demand deposits (non-interest bearing),
      NOW, money market, savings, and various forms of time deposits. Retail deposits
      are obtained primarily by mass marketing efforts and are fee and interest rate
      sensitive. Commercial deposits are generally obtained through direct marketing
      and business relationship development efforts, as well as a result of lending
      relationships. The maintenance of a strong deposit base is key to the
      development of lending opportunities and creates long-term customer
      relationships, which enhance the ability to cross sell services. Depositors
      include individuals, small and large businesses, and governmental units. To
      meet
      the requirements of a diverse customer base, a full range of deposit instruments
      are offered, which has allowed the Company to maintain and expand the deposit
      base despite intense competition from other banking institutions and non-bank
      financial service providers.




Total
      deposits at December 31, 2005 decreased 0.6 percent to $1,847.2 million from
      $1,858.2 million at December 31, 2004, and increased 4.7 percent from $1,775.0
      million as of December 31, 2003. Excluding municipal time deposits, which are
      acquired on a bid basis, and brokered time deposits, total deposits decreased
      to
      $1,678.5 million or by 1.0 percent as of December 31, 2005 and increased to
      $1,695.5 million or by 2.8 percent as of December 31, 2004. Average deposits
      outstanding increased to $1,898.9 million or by 1.1 percent in 2005, and to
      $1,878.8 million or by 9.8 percent in 2004 from the $1,711.4 million as of
      December 31, 2003. Average deposits, excluding municipal time deposits and
      brokered time deposits, decreased to $1,734.4 million or by 0.1 percent in
      2005
      and increased to $1,735.3 million or by 9.8 percent in 2004 compared to the
      prior year.




Average
      non-interest bearing deposits increased 6.8 percent to $344.8 million in 2005
      compared to 2004, and 14.3 percent to $322.8 million in 2004 compared to 2003,
      due to expansion of the branch network and business development efforts. The
      2004 increase was also attributable to $4.9 million of non-interest bearing
      deposits assumed from Reliance Bank.




Average
      interest bearing deposits in 2005 decreased $1.9 million and in 2004 increased
      $127.1 million. The 2005 decrease reflects a decrease in money market deposits,
      partially offset by increases in all other deposit categories. The increase
      in
      2004 reflects increases in all deposit categories, except for savings deposits.
      Average balances in NOW deposits increased $19.8 million in 2005 and $30.5
      million in 2004, due principally to new and increased account activity by
      customers and an increase in average municipal deposits. The decrease of $49.1
      million in 2005 in average money market deposit accounts principally resulted
      from customers seeking higher rates on competitive products. The increase of
      $64.5 million in 2004 in average money market deposit accounts principally
      resulted from an increase due to the offering of attractively priced accounts
      in
      select markets and branch locations, and an increase in average municipal
      deposits in both years. Savings deposits average balances increased $10.9
      million and decreased $8.9 million in 2005 and 2004, respectively. The 2005
      increase was due to a promotional high yielding savings product offered
      throughout the year. The 2004 decrease was due to customers seeking more
      competitive products as a result of lower yields offered during this period
      of
      low interest rates, partially offset by $5.8 million of savings deposits assumed
      in the Reliance Bank acquisition.




-68-




In
      2005
      and 2004, average time deposits outstanding increased $16.5 million and $41.0
      million, respectively. Average time deposits increased in 2005, primarily by
      obtaining retail time deposits with short to medium term maturities by offering
      attractive rates. Average time deposits increased in 2004, primarily by
      obtaining municipal and brokered time deposits and by offering medium to
      long-term maturities by offering attractive rates. The 2004 increase was also
      due to $13.3 million of time deposits assumed in the Reliance Bank
      acquisition.




Municipal
      and brokered time deposits are used to fund loan growth, in excess of retail
      and
      commercial deposit growth, security purchases, and to leverage the balance
      sheet. Average municipal deposits increased $19.5 million in 2005 and $30.2
      million in 2004 to provide funding of average interest earning assets growth.
      In
      2004, brokered time deposits of $25.0 million were acquired as management
      obtained longer-term maturity deposits during a low interest rate period. In
      2005 and 2004, average time deposits over $100,000 (including municipal
      deposits) increased $28.7 million and decreased $9.3 million, respectively,
      compared to the prior years. Deposits of over $100,000 are generally for
      maturities of 30 to 180 days and are acquired to fund loans and
      securities.




Deposit
      costs generally increased in 2005 and decreased in 2004, which was a period
      of
      lower interest rates. The FRB increased short-term interest rates 200 basis
      points and 125 basis points during 2005 and 2004, respectively. The short-term
      rate increases caused average deposit rates to increase in the latter part
      of
      2004 and throughout 2005, resulting in an increase in overall average deposit
      rates during 2005 compared to 2004. It is expected that depositors will continue
      to favor short-term deposit products to react quickly to the rising short-term
      interest rate environment, which will result in higher volatility of net
      interest margins due to the quick repricing of deposits during periods of both
      rising and declining interest rates.




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


(000’s,
                except percentages)
              Year
                Ended December 31,**2005**
            
            2004
            
            2003**Average**
            
            **Average**
            
            Average
            
            Average
            
            Average
            
            Average**Amount**
            
            **Rate**
            
            Amount
            
            Rate
            
            Amount
            
            RateDemand
                deposits
            
            **$**
            **344,807**
            
            
            **—**
            **%**
            $
            322,753
            
            
            —
            %
            $
            282,469
            
            
            —
            %NOW
                accounts
            
            
            **187,537**
            
            
            **0.80**
            
            
            167,787
            
            
            0.44
            
            
            137,270
            
            
            0.42Money
                market accounts
            
            
            **173,734**
            
            
            **1.54**
            
            
            222,829
            
            
            1.21
            
            
            158,303
            
            
            1.26Savings
                deposits
            
            
            **436,963**
            
            
            **1.33**
            
            
            426,031
            
            
            0.56
            
            
            434,945
            
            
            0.64Time
                deposits
            
            
            **755,886**
            
            
            **2.99**
            
            
            739,379
            
            
            2.49
            
            
            698,372
            
            
            2.64Total
            
            **$**
            **1,898,927**
            
            
            **1.72**
            **%**
            $
            1,878,779
            
            
            1.29
            %
            $
            1,711,359
            
            
            1.39
            %





**Capital
      Resources**




Strong
      capitalization is fundamental to the successful operation of a banking
      organization. Management believes that the corporation-obligated mandatory
      redeemable capital securities of subsidiary trusts (“Capital Securities”) and
      related junior subordinated debt, future retained earnings and stock purchases
      under the employee benefit plans will provide the necessary capital for current
      operations and the planned growth in total assets. In addition, capital growth
      can be acquired through the reinstatement of the Company’s Dividend Reinvestment
      and Optional Stock Purchase Plan, which has been suspended, as well as by
      issuance of securities in the capital markets.




Stockholders’
      equity increased to $204.2 million in 2005, or 12.1 percent compared to $182.0
      million in 2004, and increased 8.2 percent in 2004 over the $168.3 million
      in
      2003. The increase in 2005 was attributable to net income of $33.2 million,
      common stock options exercised and related tax benefit of $12.3 million and
      other increases of $0.1 million, partially offset by cash dividends of $11.6
      million, purchases of treasury stock of $9.8 million, and an increase in
      accumulated other comprehensive loss of $2.0 million. The increase in 2004
      was
      attributable to net income of $28.1 million, common stock options exercised
      and
      related tax benefit of $2.9 million, and other increases of $0.4 million,
      partially offset by cash dividends of $9.6 million, purchases of treasury stock
      of $7.1 million, and an increase in accumulated other comprehensive loss of
      $1.0
      million.




The
      Company manages capital through its earnings, stock plans, dividend policy,
      and
      stock repurchase programs. During 2005 and 2004, the Company acquired 422,534
      and 329,771 common shares, respectively, through stock repurchase plans and
      common shares tendered in connection with stock option exercises.




-69-




Cash
      dividends on the Company’s common stock have been paid since 1986, the first
      dividend paid in the Company’s history. In the first quarter of 1988, the Board
      of Directors authorized a quarterly cash dividend policy. Junior preferred
      stock
      dividends issued by TPNZ were approximately $10,000 in 2005, 2004, and
      2003.




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




All
      banks
      and bank holding companies are subject to risk-based capital guidelines. These
      guidelines define capital as Tier I and Total capital. Tier I capital consists
      of common stockholders’ equity, qualifying preferred stock and Capital
      Securities, less intangibles and accumulated other comprehensive income (loss).
      Total capital consists of Tier I capital plus the allowance for loan losses
      and
      reserve related to unfunded loan commitments and standby letters of credit
      up to
      certain limits, qualifying preferred stock and certain subordinated and long
      term-debt securities. The guidelines require a minimum total risk-based capital
      ratio of 8.0 percent, and a minimum Tier I risk-based capital ratio of 4.0
      percent.




The
      risk-based capital ratios were as follows at December 31:


**2005**
              
              2004
              
              2003Tier
                  I Capital:Company
              
              
              **16.00**
              **%**
              
              14.15
              %
              
              12.80
              %Bank
              
              
              **15.67**
              **%**
              
              13.93
              %
              
              12.49
              %Total
                  Capital:Company
              
              
              **16.98**
              **%**
              
              15.07
              %
              
              13.70
              %Bank
              
              
              **16.65**
              **%**
              
              14.85
              %
              
              13.39
              %




The
      Bank
      and Company must also maintain a minimum leverage capital ratio of at least
      4
      percent, which consists of Tier I capital based on risk-based capital
      guidelines, divided by average quarterly tangible assets (excluding intangible
      assets that were deducted to arrive at Tier I capital).




The
      leverage capital ratios were as follows at December 31:


**2005**
            
            2004
            
            2003Company
            
            
            **9.47**
            **%**
            
            8.15
            %
            
            7.54
            %Bank
            
            
            **9.32**
            **%**
            
            8.00
            %
            
            7.34
            %





To
      be
      considered “well capitalized” under the Federal Deposit Insurance Corporation
      Improvement Act of 1991 (“FDICIA”), an institution must generally have a
      leverage capital ratio of at least 5 percent, Tier I capital ratio of 6 percent,
      and Total capital ratio of 10 percent. The Bank exceeds all current regulatory
      capital requirements and was in the “well capitalized” category at December 31,
      2005. Management fully expects that the Company and the Bank will maintain
      a
      strong capital position in the future.




For
      additional information on the Company’s and Bank’s Regulatory Capital
      requirements see Note 12 to the Consolidated Financial Statements.




**Liquidity**




As
      a
      banking institution, liquidity is of the utmost importance. The Company acquires
      funding through its retail and commercial deposits operations and through
      wholesale funding through borrowings, generally on a secured basis. Liquidity
      is
      also provided through cash flow from loan and investment security scheduled
      principal and interest payments, as well as prepayment of such assets. The
      Company’s contractual obligations are discussed under “Commitments and
      Contractual Obligations,” and, including investments in fixed assets, are not
      considered significant to the Company’s overall liquidity requirements. Risks
      regarding contractual agreements related to borrowings and the value of the
      underlying collateral to the borrowing can be impacted by changes in interest
      rates. These risks are addressed under “Risk Factors” in Item 1A of the Form
      10-K. Discussion of the various sources and uses of liquidity are discussed
      in
      detail below.




The
      Asset/Liability Committee (“ALCO”) establishes specific policies and operating
      procedures governing the Company’s liquidity levels and develops plans to
      address future liquidity needs. 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 requirements of customers who may be either
      depositors wanting to withdraw funds or borrowers needing assurance that
      sufficient funds will be available to meet their credit needs. ALCO has also
      established an ALCO Investment Subcommittee (“Investment Committee”), which
      discusses investment and borrowing strategies on a more technical level. The
      Investment Committee is critical in developing appropriate strategies to
      effectively manage the Bank’s investment portfolio, wholesale borrowings, and
      leverage strategies.




Aside
      from cash on hand and due from banks, liquid assets are federal funds sold,
      which are available daily, and interest bearing deposits with banks. Excess
      liquid funds are invested by selling federal funds, which mature daily, to
      other
      financial institutions in need of funds. At December 31, 2005 and 2004, the
      Bank
      sold overnight federal funds in the amounts of $22.3 million and $17.0 million,
      respectively. Average balances of overnight federal funds sold for the year
      ended December 31, 2005 and 2004 were $65.8 million and $27.5 million,
      respectively.




-70-




Other
      sources of asset liquidity include maturities of and principal and interest
      payments on securities and loans. The security and loan portfolios are of high
      credit quality and of mixed maturity, providing a constant stream of maturing
      and reinvestable assets, which can be converted into cash should the need arise.
      The ability to redeploy these funds is an important source of medium to
      long-term liquidity. The amortized cost of securities available for sale and
      held to maturity having the earlier of contractual maturities, expected call
      dates or weighted average lives of one year or less amounted to $23.1 million
      at
      December 31, 2005. This represented 2.1 percent of the amortized cost of the
      securities portfolio, compared to 14.7 percent at December 31, 2004. The
      foregoing amount reflects mortgage-backed securities maturities based on a
      weighted average life, which does not consider monthly principal payments and
      prepayments received on these securities. Including the estimated cash flow
      from
      principal payments of mortgage-backed securities, the total cash flow of the
      security portfolio in the one year time frame is approximately $56.5 million
      at
      December 31, 2005, or 5.0 percent of the amortized cost of the securities
      portfolio. Excluding installment loans to individuals and real estate loans
      other than construction loans, $285.3 million, or 73 percent of such loans
      at
      December 31, 2005 mature in one year or less.




As
      a
      preferred seller of mortgages to both Freddie Mac and Fannie Mae, the Bank
      may
      also increase liquidity by selling residential mortgages, or exchanging them
      for
      mortgage-backed securities that may be sold, in the secondary market.
      Residential mortgages may also be used as collateral for borrowings from the
      FHLB.




Demand
      deposits from individuals, businesses and institutions, as well as other
      transactional accounts and retail time deposits (“core deposits”) are a
      relatively stable source of funds. The deposits of the Bank generally have
      shown
      a steady growth trend. The trend of the deposit mix has generally been with
      a
      larger percentage of funds in demand accounts, savings deposits, and
      shorter-term certificates of deposit.




The
      Bank
      pledges certain of its assets as collateral for deposits of municipalities,
      FHLB
      borrowings, and securities sold under agreements to repurchase. The Bank had
      advances aggregating $71.8 million from the FHLB and borrowed $550.3 million
      under securities sold under agreements to repurchase at December 31, 2005.
      By
      utilizing collateralized funding sources, the Bank is able to access a variety
      of cost effective sources of funds. However, the pledging of assets for
      borrowings reduces the Bank’s ability to convert such assets to cash as the need
      arises. The assets pledged consisting of residential real estate loans, U.S.
      government agency securities, obligations of states and political subdivisions,
      and mortgage-backed securities totaled $959.5 million and $900.4 million at
      December 31, 2005 and 2004, respectively.




Additional
      liquidity is provided by the ability to borrow from the FRBNY discount window,
      which borrowings must be collateralized with U.S. Treasury or government agency
      securities. The Bank has never used its ability to borrow from the discount
      window.




Management
      monitors its liquidity requirements by assessing assets pledged, the level
      of
      assets available for sale, additional borrowing capacity, and other factors.
      Based upon certain assets that are available for pledge as collateral, the
      Bank
      has the potential to borrow up to an additional $510.7 million as of December
      31, 2005. The Bank may also borrow up to $75.0 million overnight under federal
      funds purchase agreements with six correspondent banks.




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




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




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




**Market
      Risk**




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




Interest
      rate risk is the exposure of net interest income to changes in interest rates.
      Interest rate sensitivity is the relationship between market interest rates
      and
      net interest income due to the repricing characteristics of assets and
      liabilities. If more liabilities reprice than assets in a given period (a
      liability-sensitive position), market interest rate changes will be reflected
      more quickly in liability rates. If interest rates decline, such positions
      will
      generally benefit net interest income, while an increase in rates will have
      an
      adverse effect on net interest income. Alternatively, where assets reprice
      more
      quickly than liabilities in a given period (an asset-sensitive position), a
      decline in market rates would have an adverse effect on net interest income,
      while an increase in rates would have a positive impact.




-71-




Changes
      in the shape of the yield curve will also impact net interest income for
      institutions such as the Bank, which price assets at varying terms, while
      liabilities are generally shorter-term. Generally, a steep yield curve (i.e.,
      lower short-term rates and higher medium to long-term rates) will have a
      positive effect on net interest income, while a flatter or inverted yield curve
      will have a negative effect. Excessive levels of interest rate risk can result
      in a material adverse effect on the Company’s future financial condition and
      profitability. Accordingly, effective risk management techniques that maintain
      interest rate risk at prudent levels are essential to the Company’s safety and
      soundness.




Substantially,
      all market risk sensitive instruments are held to maturity or available for
      sale. The Company does not acquire any significant amount of financial
      instruments for trading purposes. Federal funds, both purchased and sold, which
      rates have the potential to change daily, and loans and deposits tied to certain
      indices, such as the prime rate and LIBOR, are the most market rate sensitive
      and have the most stable fair values. The least market rate sensitive
      instruments, which have the least stable fair values include long-term fixed
      rate loans, capped floating and fixed rate securities with call options, and
      fixed rate time deposits. For those types falling between these extremes, the
      management of maturity and repricing distributions is as important as the
      balances maintained.




The
      management techniques for maturity and repricing distributions involve the
      matching or mismatching to increase net interest spreads, of interest rate
      maturities, as well as principal maturities, and is a key determinant of net
      interest income. In periods of rapidly changing interest rates, an imbalance
      between the rate sensitive assets and liabilities can cause fluctuations in
      net
      interest income and earnings. Establishing patterns of sensitivity that will
      enhance future growth regardless of frequent shifts in market conditions is
      one
      of the objectives of the Company’s asset/liability management
      strategy.




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




The
      Company uses two methods to evaluate its market risk to changes in interest
      rates, a “Static Gap” evaluation and a simulation analysis of the impact of a
      gradual parallel shift and gradual modified shift (flattening yield curve)
      in
      interest rates on the Company’s net interest income.




As
      further discussed below, the “Static Gap” analysis shows the Company as
      liability sensitive in the one-year time frame and the simulation analysis
      indicates an asset sensitive position. The simulation analysis more closely
      reflects the expected behavior of certain deposit accounts that do not reprice
      to the full extent of changes in interest rates (i.e., NOW, money market and
      savings accounts). The Company believes the simulation analysis is a more
      accurate analysis of its interest rate risk.




The
      “Static Gap” is presented in the table on page 75. Balance sheet items are
      categorized by contractual maturity, expected principal paydowns for
      mortgage-backed securities, or repricing dates, with floating rate loans
      constituting the bulk of the floating rate category. The determination of the
      interest rate sensitivity of non-contractual items is arrived at in a subjective
      fashion. Passbook and statement savings accounts, NOW, and money market accounts
      are viewed as a relatively stable source of funds and less price sensitive
      and
      are therefore classified partially as short-term and partially as intermediate
      term funds.




At
      December 31, 2005, the “Static Gap” shows a negative cumulative gap of $166.6
      million or 6.3 percent of interest earning assets in the one day to one year
      repricing period, due principally to higher levels of deposits that reprice
      within one year or less over the levels of floating rate and short-term
      repriceable assets. A significant portion of the loans in the over one year
      to
      five years category represents three and five year adjustable rate commercial
      mortgages. Origination of such loans has allowed the Company to generate an
      asset structure repriceable within three to five years to reduce long-term
      interest rate risk. Longer-term loans and securities are originated or purchased
      to maximize yield and provide protection if rates decrease.




The
      simulation analysis estimates the effect of an increase or decrease in interest
      rates based on the slope of the yield curve and the resulting impact on net
      interest income. This analysis incorporates management’s assumptions about
      maturities and repricing of existing assets and liabilities without
      consideration of future growth or other actions that may be taken to react
      to
      changes in interest rates and changing relationships between interest rates
      (i.e., basis risk). These assumptions have been developed through a combination
      of historical analysis and future expected pricing behavior.




-72-




For
      a
      given level of market interest rate changes, the simulation analysis can
      consider the impact of the varying behavior of cash flows from principal
      prepayments on the loan portfolio and mortgage-backed securities, call
      activities on investment securities, and consider embedded option risk by taking
      into account the effects of interest rate caps and floors. The Company assesses
      the results of the simulation analysis on a quarterly basis and, if necessary,
      implements suitable strategies to adjust the structure of its assets and
      liabilities to reduce potential unacceptable risks to net interest
      income.




Net
      interest income is forecasted using rising and declining interest rate
      scenarios. A base case scenario, in which current interest rates remain stable,
      is used for comparison to other scenario simulations.




The
      Company’s policy limit on interest rate risk, as measured by the simulation
      analysis, is that if interest rates were to gradually increase 200 basis points
      or decrease 200 basis points in 2005 and increase 200 basis points or decrease
      100 basis points in 2004 (normally a 200 basis points decrease during periods
      of
      higher interest rates) from current rates (“parallel shift”), then the
      percentage change in estimated net interest income for the subsequent 12-month
      measurement period should not decline by more than 5.0 percent. In addition,
      the
      Company has prepared the simulation analysis in the rising rate scenario for
      2005 and 2004 assuming short-term rates gradually increase 200 basis points,
      while medium to long-term interest rates increase 100 basis points to illustrate
      the flattening of the yield curve (“modified shift”).




The
      tables above illustrate the estimated exposures under the rising rate scenario
      and declining rate scenario calculated as a percentage change in estimated
      net
      interest income from the base case scenario, assuming a gradual parallel shift
      and modified shift for 2005 and 2004 in interest rates for the next 12 month
      measurement period beginning December 31, 2005 and 2004.




**2005****Gradual
                Parallel Shift in Interest
                Rates**
            
            Percentage
                Change inEstimated
                Net
              Interest
                Income+
                200 basis points
            
            
            1.8
            %-
                200 basis points
            
            
            (2.7
            )%**Gradual
                Shift in Interest Rates - Flattening yield curve
                (Modified Shift)**+
                200 basis points
            
            
            0.8
            %




**2004****Gradual
                Parallel Shift in Interest
                Rates**
            
            Percentage
                Change inEstimated
                Net
              Interest
                Income+
                200 basis points
            
            
            3.0
            %-100
                basis points
            
            
            (2.3
            )%**Gradual
                Shift in Interest Rates - Flattening yield curve
                (Modified Shift)**+
                200 basis points
            
            
            1.6
            %




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




-73-




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




Interest
      rate risk exposure is reviewed in weekly meetings in which guidelines are
      established for the following week and the longer-term. The interest rate gap
      and simulation are reviewed quarterly by ALCO and the Bank’s Board of
      Directors.




Risk
      can
      be mitigated by matching maturities or repricing more closely, and by reducing
      interest rate risk by the use of interest rate contracts. The Company does
      not
      use derivative financial instruments extensively, and no such contracts were
      outstanding at December 31, 2005 and 2004. However, as circumstances warrant,
      the Company may purchase derivatives such as interest rate contracts to manage
      its interest rate exposure. Any derivative financial instruments would be
      carefully evaluated to determine the impact on the Company’s interest rate risk
      in rising and declining interest rate environments, as well as the fair value
      of
      the derivative instruments. Use of derivative financial instruments is included
      in the Bank’s Statement on Interest Rate Risk Management as Related to
      Derivative Instruments and Hedging Activities Policy, which has been approved
      by
      the Bank’s Board of Directors.




-74-




**INTEREST
      RATE SENSITIVITY ANALYSIS BY REPRICING DATE**




The
      following table sets forth the interest rate sensitivity by repricing date
      as of
      December 31, 2005:


(000’s,
                except percentages)**One**
            
            **Over**
            
            **Over**
            
            **Over****Day
                and**
            
            **One
                Day**
            
            **Three**
            
            **One
                Year**
            
            **Over**
            
            **Non-****Floating**
            
            **to
                Three**
            
            **Months
                to**
            
            **to
                Five**
            
            **Five**
            
            **Interest****Rate**
            
            **Months**
            
            **One
                Year**
            
            **Years**
            
            **Years**
            
            **Bearing**
            
            **Total****Assets:**Loans,
                net
            
            $
            565,154
            
            $
            42,895
            
            $
            110,501
            
            $
            573,143
            
            $
            168,127
            
            $
            —
            
            $
            1,459,820Mortgage-backed
                securities
            
            
            —
            
            
            141,693
            
            
            23,473
            
            
            127,358
            
            
            11,765
            
            
            —
            
            
            304,289Other
                securities
            
            
            —
            
            
            3,469
            
            
            19,254
            
            
            50,397
            
            
            745,432
            
            
            —
            
            
            818,552Other
                interest earning assets
            
            
            22,300
            
            
            30,908
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            53,208Other
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            122,357
            
            
            122,357**Total
                assets**
            
            
            587,454
            
            
            218,965
            
            
            153,228
            
            
            750,898
            
            
            925,324
            
            
            122,357
            
            
            2,758,226**Liabilities
                and Equity:**Interest
                bearing deposits
            
            
            78,806
            
            
            538,795
            
            
            370,037
            
            
            544,408
            
            
            —
            
            
            —
            
            
            1,532,046Other
                borrowed funds
            
            
            1,332
            
            
            86,003
            
            
            10,015
            
            
            386,087
            
            
            138,722
            
            
            —
            
            
            622,159Subordinated
                debt issued inconnection
                with corporation-obligated
                mandatory redeemablecapital
                securities of subsidiarytrusts
            
            
            —
            
            
            41,239
            
            
            —
            
            
            —
            
            
            20,619
            
            
            —
            
            
            61,858Demand
                deposits
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            315,156
            
            
            315,156Other
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            128
            
            
            22,726
            
            
            22,854Stockholders’
                equity
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            204,153
            
            
            204,153**Total
                liabilities and equity**
            
            
            80,138
            
            
            666,037
            
            
            380,052
            
            
            930,495
            
            
            159,469
            
            
            542,035
            
            
            2,758,226**Net
                interest rate sensitivity gap**
            
            $
            507,316
            
            $
            (447,072
            )
            $
            (226,824
            )
            $
            (179,597
            )
            $
            765,855
            
            $
            (419,678
            )
            $
            —**Cumulative
                gap**
            
            $
            507,316
            
            $
            60,244
            
            $
            (166,580
            )
            $
            (346,177
            )
            $
            419,678
            
            $
            —
            
            $
            —**Cumulative
                gap to interest earning assets**
            
            
            19.2
            %
            
            2.3
            %
            
            (6.3
            )%
            
            (13.1
            )%
            
            15.9
            %
            
            —
            %
            
            —
            %





**Financial
      Ratios**




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




Years
                Ended December 31,**2005**
            
            2004
            
            2003**Earnings
                Ratios**Net
                income as a percentage of:Average
                interest earning assets
            
            
            **1.24**
            **%**
            
            1.00
            %
            
            1.15
            %Average
                total assets
            
            
            **1.19**
            **%**
            
            0.96
            %
            
            1.10
            %Average
                common stockholders’ equity
            
            
            **17.15**
            **%**
            
            16.13
            %
            
            18.05
            %**Capital
                Ratios**Total
                stockholders’ equity to assets
            
            
            **7.40**
            **%**
            
            6.63
            %
            
            5.79
            %Average
                total stockholders’ equity to average total assets
            
            
            **6.92**
            **%**
            
            5.96
            %
            
            6.10
            %Average
                total stockholders’ equity and corporation-obligated mandatory redeemable
                capitalsecurities
                of subsidiary trusts to average total assets
            
            
            **9.14**
            **%**
            
            7.99
            %
            
            7.98
            %Average
                net loans as a multiple of average total stockholders’
                equity
            
            
            **7.7**
            
            
            8.5
            
            
            8.6Leverage
                capital
            
            
            **9.47**
            **%**
            
            8.15
            %
            
            7.54
            %Tier
                I capital (to risk weighted assets)
            
            
            **16.00**
            **%**
            
            14.15
            %
            
            12.80
            %Total
                risk-based capital (to risk weighted assets)
            
            
            **16.98**
            **%**
            
            15.07
            %
            
            13.70
            %**Other**Allowance
                for loan losses as a percentage of year-end loans
            
            
            **1.03**
            **%**
            
            1.01
            %
            
            1.02
            %Loans
                (net) as a percentage of year-end total assets
            
            
            **52.93**
            **%**
            
            54.36
            %
            
            49.34
            %Loans
                (net) as a percentage of year-end total deposits
            
            
            **79.03**
            **%**
            
            80.34
            %
            
            80.78
            %Securities,
                including FHLB stock, as a percentage of year-end total
                assets
            
            
            **41.82**
            **%**
            
            40.89
            %
            
            46.45
            %Average
                interest earning assets as a percentage of average interest bearing
                liabilities
            
            
            **120.52**
            **%**
            
            116.78
            %
            
            118.25
            %Dividends
                per common share as a percentage of diluted earnings per common
                share
            
            
            **36.49**
            **%**
            
            35.88
            %
            
            26.71
            %







-75-