**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,**  **D.C.**  **20549**





**FORM**  **10-Q**


(Mark
      One)




x
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934




For
      the
      quarterly period ended September
      30, 2006 ,
      or




 ̈
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934




For
      the
      transition period from ____________________ to
      _____________________




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 of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)**100
                DUTCH HILL ROAD, ORANGEBURG, NEW YORK**
            **10962**(Address
                of Principal Executive Offices)
            (Zip
                Code)




**845-365-4600**


(Registrant's
      Telephone Number (including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes:   x No:  ̈





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 Exchange Act).


Yes:    ̈ No: x





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





**CLASS**
            
            **NUMBER
                OF SHARES****OUTSTANDING AT NOVEMBER 1, 2006**Common
                stock, par value $0.01 per share
            
            
            21,741,169








**U.S.B.
      HOLDING CO., INC.**





**TABLE
      OF CONTENTS**





**PAGE
                NO.****PART
                I. FINANCIAL INFORMATION****ITEM
                1.**
            FINANCIAL
                STATEMENTS (UNAUDITED)CONDENSED
                CONSOLIDATED STATEMENTS OF CONDITION AS OF SEPTEMBER 30, 2006 AND
                DECEMBER
                31, 2005
            
            1CONDENSED
                CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER
                30,
                2006 AND 2005
            
            2CONDENSED
                CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
                30,
                2006 AND 2005
            
            3CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER
                30, 2006 AND 2005
            
            4CONDENSED
                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE NINE
                MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
            
            5NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            
            7**ITEM
                2.**
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            
            23**ITEM
                3.**
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            37**ITEM
                4.**
            CONTROLS
                AND PROCEDURES
            
            38**PART
                II. OTHER INFORMATION****ITEM
                1A.**
            RISK
                FACTORS
            
            39**ITEM
                2.**
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            
            39**ITEM
                6.**
            EXHIBITS
            
            40SIGNATURES
            
            
            41





-i-


**ITEM
      1.**




**PART
      I - FINANCIAL INFORMATION**




**U.S.B.
      HOLDING CO., INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)**





**(000’s,
                except share data)****September
                30,**
              **2006**
            
            **December
                31,**
              **2005****ASSETS**Cash
                and due from banks
            
            $
            132,191
            
            $
            58,635Federal
                funds sold
            
            
            76,500
            
            
            22,300Cash
                and cash equivalents
            
            
            **208,691**
            
            
            **80,935**Interest
                bearing deposits in other banks
            
            
            179
            
            
            132Securities:Available
                for sale (at estimated fair value)
            
            
            440,385
            
            
            375,990Held
                to maturity (estimated fair value of $729,470 as of 2006 and $740,269
                as
                of 2005)
            
            
            738,124
            
            
            746,851Loans,
                net of allowance for loan losses of $15,822 as of 2006 and $15,164
                as of
                2005
            
            
            1,518,634
            
            
            1,459,820Premises
                and equipment, net
            
            
            13,619
            
            
            13,762Accrued
                interest receivable
            
            
            17,756
            
            
            18,184Federal
                Home Loan Bank of New York stock
            
            
            34,523
            
            
            30,776Intangible
                assets, net
            
            
            2,816
            
            
            3,826Goodwill
            
            
            1,380
            
            
            1,380Other
                assets
            
            
            28,413
            
            
            26,570**TOTAL
                ASSETS**
            
            **$**
            **3,004,520**
            
            **$**
            **2,758,226****LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities:**Non-interest
                bearing deposits
            
            $
            378,820
            
            $
            315,156Interest
                bearing deposits:NOW
                accounts
            
            
            277,386
            
            
            163,295Money
                market accounts
            
            
            164,395
            
            
            158,286Savings
                deposits
            
            
            376,922
            
            
            442,386Time
                deposits
            
            
            792,514
            
            
            768,079**Total
                deposits**
            
            
            **1,990,037**
            
            
            **1,847,202**Accrued
                interest payable
            
            
            10,624
            
            
            8,546Accrued
                expenses and other liabilities
            
            
            15,928
            
            
            14,180Securities
                sold under agreements to repurchase
            
            
            606,363
            
            
            550,332Federal
                Home Loan Bank of New York advances
            
            
            101,814
            
            
            71,827Subordinated
                debt issued in connection with corporation-obligated mandatory redeemable
                capital securities of subsidiary trusts
            
            
            61,858
            
            
            61,858**Total
                liabilities**
            
            
            **2,786,624**
            
            
            **2,553,945**Minority-interest
                in junior preferred stock of consolidated subsidiary
            
            
            128
            
            
            128Commitments
                and contingencies (Note 11)**Stockholders’
                equity:**Preferred
                stock, no par valueAuthorized
                shares: 10,000,000; no shares outstanding as of 2006 and
                2005
            
            
            —
            
            
            —Common
                stock, $0.01 par value; authorized shares 50,000,000; Issued shares
                of
                23,134,075 as of 2006 and 23,120,733 as of 2005
            
            
            231
            
            
            231Additional
                paid-in capital
            
            
            212,415
            
            
            211,686Retained
                earnings
            
            
            35,990
            
            
            21,654Treasury
                stock at cost, common shares 1,392,906 as of 2006 and 1,406,928 as
                of
                2005
            
            
            (22,612
            )
            
            (21,670
            )Common
                stock held for benefit plans
            
            
            (3,091
            )
            
            (2,927
            )Deferred
                compensation obligation
            
            
            3,091
            
            
            2,927Accumulated
                other comprehensive loss
            
            
            (8,256
            )
            
            (7,748
            )**Total
                stockholders’ equity**
            
            
            **217,768**
            
            
            **204,153****TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            **$**
            **3,004,520**
            
            **$**
            **2,758,226**




*See
      notes to condensed consolidated financial statements.*


1


**U.S.B.
      HOLDING CO., INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**




**(000’s,
                except share data)**
              **Three
                Months Ended**
              **September
                30,****2006**
            
            **2005****INTEREST
                INCOME:**Interest
                and fees on loans
            
            $
            27,931
            
            $
            25,124Interest
                on federal funds sold
            
            
            396
            
            
            724Interest
                and dividends on securities:U.S.
                government agencies
            
            
            9,942
            
            
            9,300Mortgage-backed
                securities
            
            
            5,789
            
            
            3,915Obligations
                of states and political subdivisions
            
            
            1,037
            
            
            1,049Corporate
                and other
            
            
            41
            
            
            39Dividends
                on Federal Home Loan Bank of New York stock
            
            
            489
            
            
            395**Total
                interest income**
            
            
            **45,625**
            
            
            **40,546****INTEREST
                EXPENSE:**Interest
                on deposits
            
            
            12,816
            
            
            8,863Interest
                on borrowings
            
            
            8,223
            
            
            6,662Interest
                on subordinated debt issued in connection with corporation - obligated
                mandatory redeemable capital securities of subsidiary
                trusts
            
            
            1,436
            
            
            1,236**Total
                interest expense**
            
            
            **22,475**
            
            
            **16,761****NET
                INTEREST INCOME**
            
            
            **23,150**
            
            
            **23,785**Provision
                for credit losses
            
            
            37
            
            
            95**Net
                interest income after provision for credit losses**
            
            
            **23,113**
            
            
            **23,690****NON-INTEREST
                INCOME:**Service
                charges and fees
            
            
            826
            
            
            918Other
                income
            
            
            853
            
            
            931Gains
                on securities transactions
            
            
            426
            
            
            —Gains
                on sales of loans
            
            
            —
            
            
            314**Total
                non-interest income**
            
            
            **2,105**
            
            
            **2,163****NON-INTEREST
                EXPENSES:**Salaries
                and employee benefits
            
            
            8,363
            
            
            8,277Occupancy
                and equipment
            
            
            1,995
            
            
            1,921Advertising
                and business development
            
            
            666
            
            
            804Professional
                fees
            
            
            379
            
            
            588Communications
            
            
            337
            
            
            302Amortization
                of intangibles
            
            
            277
            
            
            285Stationery
                and printing
            
            
            136
            
            
            110FDIC
                insurance
            
            
            61
            
            
            63Other
                expense
            
            
            891
            
            
            1,040**Total
                non-interest expenses**
            
            
            **13,105**
            
            
            **13,390**Income
                before income taxes
            
            
            12,113
            
            
            12,463Provision
                for income taxes
            
            
            3,968
            
            
            4,032**NET
                INCOME**
            
            **$**
            **8,145**
            
            **$**
            **8,431****BASIC
                EARNINGS PER COMMON SHARE**
            
            **$**
            **0.37**
            
            **$**
            **0.39****DILUTED
                EARNINGS PER COMMON SHARE**
            
            **$**
            **0.36**
            
            **$**
            **0.37****WEIGHTED
                AVERAGE COMMON SHARES**
            
            
            **21,751,565**
            
            
            **21,685,896****ADJUSTED
                WEIGHTED AVERAGE COMMON SHARES**
            
            
            **22,641,540**
            
            
            **22,605,328****DIVIDENDS
                PER COMMON SHARE**
            
            **$**
            **0.14**
            
            **$**
            **0.14**


*See
      notes to condensed consolidated financial statements.*


2


**U.S.B.
      HOLDING CO., INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**




**(000’s,
                except share data)**
              **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005****INTEREST
                INCOME:**Interest
                and fees on loans
            
            $
            80,886
            
            $
            73,745Interest
                on federal funds sold
            
            
            1,018
            
            
            1,252Interest
                and dividends on securities:U.S.
                government agencies
            
            
            29,822
            
            
            25,666Mortgage-backed
                securities
            
            
            14,549
            
            
            12,448Obligations
                of states and political subdivisions
            
            
            3,251
            
            
            2,978Corporate
                and other
            
            
            131
            
            
            112Dividends
                on Federal Home Loan Bank of New York stock
            
            
            1,270
            
            
            1,058**Total
                interest income**
            
            
            **130,927**
            
            
            **117,259****INTEREST
                EXPENSE:**Interest
                on deposits
            
            
            34,182
            
            
            23,027Interest
                on borrowings
            
            
            23,223
            
            
            20,004Interest
                on subordinated debt issued in connection with corporation - obligated
                mandatory redeemable capital securities of subsidiary
                trusts
            
            
            4,145
            
            
            3,540**Total
                interest expense**
            
            
            **61,550**
            
            
            **46,571****NET
                INTEREST INCOME**
            
            
            **69,377**
            
            
            **70,688**Provision
                for credit losses
            
            
            1,344
            
            
            571**Net
                interest income after provision for credit losses**
            
            
            **68,033**
            
            
            **70,117****NON-INTEREST
                INCOME:**Service
                charges and fees
            
            
            2,489
            
            
            2,749Other
                income
            
            
            2,749
            
            
            2,806Gains
                on securities transactions
            
            
            431
            
            
            —Gains
                on sales of loans
            
            
            —
            
            
            314**Total
                non-interest income**
            
            
            **5,669**
            
            
            **5,869****NON-INTEREST
                EXPENSES:**Salaries
                and employee benefits
            
            
            24,627
            
            
            24,866Occupancy
                and equipment
            
            
            5,885
            
            
            5,783Advertising
                and business development
            
            
            1,941
            
            
            1,974Professional
                fees
            
            
            1,153
            
            
            1,726Communications
            
            
            980
            
            
            970Amortization
                of intangibles
            
            
            838
            
            
            861Stationery
                and printing
            
            
            432
            
            
            423FDIC
                insurance
            
            
            197
            
            
            209Other
                expense
            
            
            2,810
            
            
            2,910**Total
                non-interest expenses**
            
            
            **38,863**
            
            
            **39,722**Income
                before income taxes
            
            
            34,839
            
            
            36,264Provision
                for income taxes
            
            
            11,354
            
            
            11,633**NET
                INCOME**
            
            **$**
            **23,485**
            
            **$**
            **24,631****BASIC
                EARNINGS PER COMMON SHARE**
            
            **$**
            **1.08**
            
            **$**
            **1.14****DILUTED
                EARNINGS PER COMMON SHARE**
            
            **$**
            **1.03**
            
            **$**
            **1.10****WEIGHTED
                AVERAGE COMMON SHARES**
            
            
            **21,746,909**
            
            
            **21,567,925****ADJUSTED
                WEIGHTED AVERAGE COMMON SHARES**
            
            
            **22,708,031**
            
            
            **22,466,223****DIVIDENDS
                PER COMMON SHARE**
            
            **$**
            **0.42**
            
            **$**
            **0.40**





*See
      notes to condensed consolidated financial statements.*


3


**U.S.B.
      HOLDING CO., INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**





**(000’s)**
              **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005****OPERATING
                ACTIVITIES:**Net
                income
            
            $
            23,485
            
            $
            24,631Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for credit losses
            
            
            1,344
            
            
            571Depreciation
                and amortization
            
            
            2,554
            
            
            2,600Amortization
                of discounts on securities - net
            
            
            (181
            )
            
            (337
            )Deferred
                income tax benefit, net
            
            
            (385
            )
            
            (2,474
            )Gains
                on securities transactions
            
            
            (431
            )
            
            —Gains
                on loan sales
            
            
            —
            
            
            (314
            )Share
                based compensation
            
            
            868
            
            
            —Excess
                income tax benefits from share-based payment arrangements
            
            
            (841
            )
            
            —Non-cash
                benefit plan expense
            
            
            21
            
            
            133Decrease
                in accrued interest receivable
            
            
            428
            
            
            1,819Increase
                in accrued interest payable
            
            
            2,078
            
            
            337Other
                - net
            
            
            1,451
            
            
            9,296**Net
                cash provided by operating activities**
            
            
            **30,391**
            
            
            **36,262****INVESTING
                ACTIVITIES:**Proceeds
                from sales of securities available for sale
            
            
            47,413
            
            
            —Proceeds
                from principal repayments, redemptions and maturities of:Securities
                available for sale
            
            
            40,486
            
            
            224,121Securities
                held to maturity
            
            
            18,978
            
            
            134,225Purchases
                of securities available for sale
            
            
            (153,061
            )
            
            (14,750
            )Purchases
                of securities held to maturity
            
            
            (9,653
            )
            
            (351,825
            )Net
                (purchases) redemptions of Federal Home Loan Bank of New York
                stock
            
            
            (3,747
            )
            
            1,793Net
                (increase) decrease in interest bearing deposits in other
                banks
            
            
            (47
            )
            
            143Proceeds
                from sales of loans
            
            
            —
            
            
            7,505Net
                (increase) decrease in loans outstanding
            
            
            (60,226
            )
            
            31,144Purchases
                of premises and equipment - net
            
            
            (1,401
            )
            
            (249
            )**Net
                cash (used for) provided by investing activities**
            
            
            **(121,258**
            **)**
            
            **32,107****FINANCING
                ACTIVITIES:**Net
                increase in non-interest bearing deposits, NOW, money market and
                savings
                accounts
            
            
            118,400
            
            
            219,031Net
                increase (decrease) in time deposits, net of withdrawals and
                maturities
            
            
            24,435
            
            
            (414
            )Net
                decrease in securities sold under agreements to repurchase -
                short-term
            
            
            (61,469
            )
            
            (21,900
            )Proceeds
                from securities sold under agreements to repurchase -
                long-term
            
            
            210,000
            
            
            —Repayment
                of securities sold under agreement to repurchase -
                long-term
            
            
            (92,500
            )
            
            —Proceeds
                from Federal Home Loan Bank of New York advances -
                long-term
            
            
            100,000
            
            
            ―Repayment
                of Federal Home Loan Bank of New York advances - long term
            
            
            (70,013
            )
            
            (10,877
            )Cash
                dividends paid
            
            
            (9,149
            )
            
            (8,814
            )Excess
                income tax benefits from share-based payment arrangements
            
            
            841
            
            
            —Proceeds
                from exercise of common stock options
            
            
            1,994
            
            
            3,069Purchases
                of treasury stock
            
            
            (3,916
            )
            
            (1,409
            )**Net
                cash provided by financing activities**
            
            **$**
            **218,623**
            
            **$**
            **178,686****Increase
                in Cash and Cash Equivalents**
            
            **$**
            **127,756**
            
            **$**
            **247,055****Cash
                and Cash Equivalents, Beginning of Period**
            
            
            **80,935**
            
            
            **65,295****Cash
                and Cash Equivalents, End of Period**
            
            **$**
            **208,691**
            
            **$**
            **312,350****Supplemental
                Disclosures:**Interest
                paid
            
            $
            (59,472
            )
            $
            (46,234
            )Income
                tax payments
            
            $
            (11,449
            )
            $
            (13,292
            )Purchases
                of available for sale securities not yet settled, including interest
                receivable
            
            $
            —
            
            $
            (26,185
            )Purchases
                of held to maturity securities not yet settled, including interest
                receivable
            
            $
            —
            
            $
            (1,346
            )Amortization
                of loss on transfer of available for sale securities to held to maturity
                securities
            
            $
            (507
            )
            $
            (507
            )Change
                in shares held in trust for deferred compensation
            
            $
            (164
            )
            $
            (213
            )Change
                in deferred compensation obligation
            
            $
            164
            
            $
            213Change
                in accumulated other comprehensive income
            
            $
            (508
            )
            $
            (1,072
            )Non-cash
                exercise of stock options and related tax benefit
            
            $
            1,494
            
            $
            7,367Non-cash
                purchases of treasury stock related to the exercise of stock
                options
            
            $
            (197
            )
            $
            (5,895
            )Non-cash
                issuance of treasury stock related to the exercise of stock
                options
            
            $
            653
            
            $
            3,496


*See
      notes to condensed consolidated financial statements* *.*





4




**U.S.B.
      HOLDING CO., INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)**







**FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006**
              **(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**
              **Loss**
            
            **Total**
              **Stockholders’**
              **Equity**Balance
                at January 1, 2006
            
            
            21,713,805
            
            $
            231
            
            $
            211,686
            
            $
            21,654
            
            $
            (21,670
            )
            $
            (2,927
            )
            $
            2,927
            
            $
            (7,748
            )
            $
            204,153Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            23,485
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            23,485Other
                comprehensive loss:Net
                unrealized securities loss arising during the period, net of tax
                benefit
                of $272
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (505
            )
            
            (505
            )Reclassification
                adjustment of net gain for securities sold, net of tax of
                $2
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3
            )
            
            (3
            )Other
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (508
            )
            
            (508
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,977Cash
                dividends:Common
                ($0.42 per share)
            
            
            
            
            
            
            
            
            
            
            
            (9,139
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (9,139
            )Junior
                preferred stock
            
            
            
            
            
            
            
            
            
            
            
            (10
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10
            )Common
                stock options exercised and related tax benefit
            
            
            216,186
            
            
            
            
            
            317
            
            
            
            
            
            3,171
            
            
            
            
            
            
            
            
            
            
            
            3,488Amortization
                related to stock options vested during the period
            
            
            
            
            
            
            
            
            868
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            868Purchases
                of treasury stock
            
            
            (188,822
            )
            
            
            
            
            (456
            )
            
            
            
            
            (4,113
            )
            
            
            
            
            
            
            
            
            
            
            (4,569
            )Deferred
                compensation obligation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (164
            )
            
            164
            
            
            
            
            
            ―**Balance
                at September 30, 2006**
            
            
            **21,741,169**
            
            **$**
            **231**
            
            **$**
            **212,415**
            
            **$**
            **35,990**
            
            **$**
            **(22,612**
            **)**
            **$**
            **(3,091**
            **)**
            **$**
            **3,091**
            
            **$**
            **(8,256**
            **)**
            **$**
            **217,768**


*See
      notes to condensed consolidated financial statements.*


5


**U.S.B.
      HOLDING CO., INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)**






**FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2005**
              **(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**
              **Loss**
            
            **Total**
              **Stockholders’**
              **Equity**Balance
                at January 1, 2005
            
            
            20,346,814
            
            $
            220
            
            $
            184,166
            
            $
            26,336
            
            $
            (22,855
            )
            $
            (2,780
            )
            $
            2,746
            
            $
            (5,787
            )
            $
            182,046Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            24,631
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            24,631Other
                comprehensive loss:Net
                unrealized securities loss arising during the period, net of tax
                benefit
                of $577
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,072
            )
            
            (1,072
            )Other
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,072
            )
            
            (1,072
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            23,559Five
                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
                ($0.40 per share)
            
            
            
            
            
            
            
            
            
            
            
            (8,784
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,784
            )Junior
                preferred stock
            
            
            
            
            
            
            
            
            
            
            
            (10
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10
            )Common
                stock options exercised and related tax benefit
            
            
            657,007
            
            
            
            
            
            1,201
            
            
            
            
            
            9,235
            
            
            
            
            
            
            
            
            
            
            
            10,436Purchases
                of treasury stock
            
            
            (304,562
            )
            
            
            
            
            (285
            )
            
            
            
            
            (7,019
            )
            
            
            
            
            
            
            
            
            
            
            (7,304
            )ESOP
                shares committed tobe
                released
            
            
            
            
            
            
            
            
            67
            
            
            
            
            
            
            
            
            34
            
            
            
            
            
            
            
            
            101Deferred
                compensation obligation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (213
            )
            
            213
            
            
            
            
            
            ―**Balance
                at September 30, 2005**
            
            
            **21,732,559**
            
            **$**
            **231**
            
            **$**
            **211,353**
            
            **$**
            **15,938**
            
            **$**
            **(20,639**
            **)**
            **$**
            **(2,959**
            **)**
            **$**
            **2,959**
            
            **$**
            **(6,859**
            **)**
            **$**
            **200,024**





*See
      notes to condensed consolidated financial statements.*




6




**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




**1.**
            **Principles
                of Consolidation**





The
      condensed consolidated financial statements include the accounts of U.S.B.
      Holding Co., Inc. and its wholly-owned subsidiaries (the “Company”), Union State
      Bank (the “Bank”) and Ad Con, Inc. The condensed consolidated financial
      statements also include the Bank’s wholly-owned subsidiaries, Dutch Hill Realty
      Corp., U.S.B. Financial Services, Inc., and USB Delaware Inc., including its
      majority-owned subsidiary, TPNZ Preferred Funding Corporation (“TPNZ”). All
      significant intercompany accounts and transactions are eliminated in
      consolidation.





The
      Company also has four subsidiary trusts, Union State Capital Trust I, Union
      State Statutory Trust II, USB Statutory Trust III, and Union State Statutory
      Trust IV (collectively, the “Trusts”), that are not consolidated with the
      Company for financial reporting purposes in accordance with accounting
      principles generally accepted in the United States of America (“GAAP”). The
      Trusts were established by the Company in 1997, 2001, 2002, and 2004,
      respectively, for the purpose of issuing corporation-obligated mandatory
      redeemable capital securities (“Capital Securities”) and acquiring junior
      subordinated debt from the Company. See Note 10 to the Company’s Consolidated
      Financial Statements included in the Company’s 2005 Annual Report to
      Stockholders for a further discussion of the Capital Securities and the junior
      subordinated debt issued by the Company. 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 on the receipt of dividends from the Bank. See Note 9 of
      these notes to condensed consolidated financial statements for a discussion
      of
      the limits on the Bank’s ability to pay dividends to the Company.





**2.**
            **Basis
                of Presentation**





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements include all adjustments (comprised of only normal and
      recurring adjustments) necessary to present fairly the financial position of
      the
      Company as of September 30, 2006, the Company’s operations for the three and
      nine months ended September 30, 2006 and 2005, and the Company’s cash flows and
      changes in stockholders’ equity for the nine months ended September 30, 2006 and
      2005. For purposes of presenting the condensed consolidated statements of cash
      flows, cash and cash equivalents include cash and due from banks, as well as
      federal funds sold. Certain reclassifications have been made to prior year
      accounts to conform to the current year’s presentations.





The
      condensed consolidated financial statements have been prepared in accordance
      with GAAP and predominant practices used within the banking industry. A summary
      of the Company's significant accounting policies is set forth in Note 3 to
      the
      Consolidated Financial Statements included in the Company's 2005 Annual Report
      to Stockholders. 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 condensed consolidated
      statements of condition and the revenues and expenses for the periods reported.
      Actual results could differ significantly from those estimates.


7


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





These
      condensed consolidated financial statements should be read in conjunction with
      the Company’s Consolidated Financial Statements for the year ended December 31,
      2005 and related notes included in the Company’s 2005 Annual Report to
      Stockholders and Form 10-K.





**3.**
              **Accounting
                  Pronouncements**





**Accounting
      for Exchanges of Nonmonetary Assets:** In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 153, “Accounting for
      Exchanges of Nonmonetary Assets” (“SFAS No. 153”). SFAS No. 153 amends
      Accounting Principles Board (“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 nonmonetary asset exchanges occurring in fiscal periods
      beginning after June 15, 2005. The Company’s adoption of SFAS No. 153 effective
      as of January 1, 2006 did not have a material impact on its consolidated
      financial statements.





**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.





**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 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 of 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 did not have a
      material impact on its consolidated financial statements.





8


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




**Accounting
      for Uncertainty in Income Tax Positions:** In
      June
      2006, the FASB issued Financial Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN
      No. 48”). FIN No. 48 prescribes a recognition threshold and measurement
      attribute, as well as clear criteria for subsequently recognizing, derecognizing
      and measuring income tax positions, for financial statement purposes. FIN No.
      48
      establishes a “more-likely-than-not” recognition threshold that must be met
      before an income tax benefit can be recognized in the consolidated financial
      statements. To meet this threshold, a company must determine that upon
      examination by the taxing authority, the income tax position is more likely
      than
      not to be sustained based on the technical merits of the position. Once the
      recognition threshold has been met, a company is required to recognize the
      largest amount of income tax benefit that is greater than 50 percent likely
      of
      being realized upon ultimate settlement with the taxing authority. FIN No.
      48 is
      effective for fiscal years beginning after December 15, 2006. The Company
      intends to adopt FIN No. 48 on January 1, 2007. Management is in the process
      of
      evaluating the impact of the adoption of FIN No. 48 on the Company’s
      consolidated financial statements.





**Fair
      Value Measurements:** In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”), which defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements. SFAS No. 157
      emphasizes that fair value is a market-based measurement, not an entity-specific
      measurement. A fair value measurement should be determined based on the
      assumptions that market participants would use in pricing an asset or liability.
      SFAS No. 157 applies only to fair value measurements already required or
      permitted by other accounting standards and does not impose requirements for
      additional fair value measurements. This statement is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. Management does not expect the
      adoption of SFAS No. 157 to have a material impact on the Company’s consolidated
      financial statement.





**Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans:** In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Pension and Other Postretirement Plans - An Amendment of FASB Statements No.
      87,
      88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to (1)
      recognize the overfunded or underfunded status of a defined benefit
      postretirement plan, which is measured as the difference between plan assets
      at
      fair value and the benefit obligation, as an asset or liability in its statement
      of financial position; (2) recognize changes in that funded status in the year
      in which the changes occur through comprehensive income; and (3) measure the
      defined benefit plan assets and obligations as of the date of its year-end
      statement of financial position. SFAS No. 158 also requires additional
      disclosures related to net actuarial gains or losses, prior service costs or
      credits and transition assets or obligations and their impact on comprehensive
      income and net periodic benefit cost. SFAS No. 158 does not change how an
      employer measures plan assets and benefit obligations as of the date of its
      statement of financial position or how it determines the amount of net periodic
      benefit cost. An employer with publicly traded equity securities is required
      to
      initially recognize the funded status of a defined benefit postretirement plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after December 15, 2006. The requirement to measure defined benefit plan assets
      and obligations as of the date of an employers’ year-end statement of financial
      position is effective for fiscal years ending after December 15, 2008. The
      Company intends to adopt SFAS No. 158 on January 1, 2007. Management does not
      expect the adoption of SFAS No. 158 to have a material impact on the Company’s
      consolidated financial statements.


9


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**4.**
            **Accounting
                for Stock Based
                Compensation**





SFAS
      No.
      123, “Accounting for Stock Based Compensation” (“SFAS No. 123”), was revised in
      December 2004 (“SFAS No. 123R”) 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. Under the
      SFAS
      No. 123R transition method, compensation cost is recognized, net of estimated
      forfeitures, 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. Prior to SFAS No. 123R, forfeitures were recorded as they occurred.
      Management has decided SFAS No. 123R will be applied prospectively beginning
      January 1, 2006. Accordingly, prior period amounts have not been
      restated.





On
      May
      25, 2005, the stockholders of the Company approved the 2005 Director Stock
      Option Plan (the “Director Plan”) under which options to purchase an aggregate
      of 525,000 shares (as adjusted for common stock dividends) of the Company’s
      common stock may be granted to non-employee members of the Company’s Board of
      Directors. The Director Plan has a term of ten years. 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 have been options to purchase 192,297
      shares (as adjusted for common stock dividends) granted under this plan, and
      there were options to purchase 332,703 shares (as adjusted for common stock
      dividends) remaining to be granted at September 30, 2006.





Under
      the
      terms of the Director Plan, each eligible director will receive, effective
      as of
      the close of each annual meeting of stockholders of the Company, a non-qualified
      option 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 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 dividends).





Under
      the
      Tappan Zee Directors’ Stock Option Plan (the “Tappan Zee Directors’ Plan”),
      which was assumed by the Company, options to purchase 80,057 shares (as adjusted
      for common stock dividends) were authorized for grant to non-employee directors.
      Option terms and conditions are similar to those under the Tappan Zee Stock
      Option Plan (described below), except that all director options are
      non-qualified options. There have been options to purchase an aggregate of
      66,710 shares (as adjusted for common stock dividends) granted under this plan.
      Upon the change in control that resulted when Tappan Zee Financial, Inc.
      (“Tappan Zee”) was acquired by the Company, all options under this plan became
      vested. This plan expired at the end of August 2006, and no further options
      may
      be granted under this plan.


10


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




The
      Company maintains a 1998 Director Plan and 1989 Director Plan under which
      options to purchase an aggregate of 563,818 and 935,646 shares (as adjusted
      for
      common stock dividends), respectively, have been granted. No additional options
      will be granted under the 1998 Director Plan or the 1989 Director
      Plan.





A
      summary
      of the activity in the director stock option plans and related information
      for
      the nine months ended September 30, 2006 is as follows:




**2006**
            
            **($
                in 000’s)****Options**
            
            **Weighted-Average**
              **Exercise
                Price**
            
            **Aggregate**
              **Intrinsic
                Value**Vested
                outstanding at January 1,
            
            
            558,082
            
            $
            13.09
            
            $
            4,990Unvested
                outstanding at January 1,
            
            
            94,811
            
            
            20.14
            
            
            182**Outstanding
                at January 1, 2006**
            
            
            **652,893**
            
            
            **14.11**
            
            
            **5,172**Granted
            
            
            97,486
            
            
            21.88
            
            
            17Exercised
            
            
            (69,009
            )
            
            8.79
            
            
            (899
            )**Outstanding
                at September 30, 2006**
            
            
            **681,370**
            
            
            **15.76**
            
            
            **4,290**Unvested
                outstanding at September 30
            
            
            (97,486
            )
            
            21.88
            
            
            (17
            )**Exercisable
                at September 30, 2006**
            
            
            **583,884**
            
            **$**
            **14.74**
            
            **$**
            **4,273**Weighted
                average fair value of options granted during the nine months ended
                Sept.
                30, 2006
            
            
            
            
            $
            7.38





The
      following table summarizes the range of exercise prices for stock options
      outstanding and exercisable under the director stock option plans at September
      30, 2006:









**Options
                Outstanding**
            
            **Options
                Exercisable**Range
                of Exercise Price
            
            Number
              Outstanding
            
            Weighted-
              Average
              Remaining
              Contractual
              Life
            
            Weighted-
              Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-
              Average
              Exercise
              Price$
                9.43 to $12.54
            
            
            195,800
            
            
            3.27
            
            $
            10.36
            
            
            195,800
            
            $
            10.3612.55 to 15.66
            
            
            201,145
            
            
            5.60
            
            
            13.97
            
            
            201,145
            
            
            13.9715.67 to 20.14
            
            
            94,811
            
            
            8.65
            
            
            20.14
            
            
            94,811
            
            
            20.1420.15
                to 21.88
            
            
            189,614
            
            
            8.69
            
            
            21.06
            
            
            92,128
            
            
            20.20$
                9.43 to $21.88
            
            
            681,370
            
            
            6.22
            
            $
            15.76
            
            
            583,884
            
            $
            14.74





On
      May
      25, 2005, the stockholders of the Company approved the 2005 Employee Stock
      Option Plan under which options to purchase an aggregate of 1,890,000 shares
      (as
      adjusted for common stock dividends) of the Company’s common stock were
      authorized to be granted to key employees of the Company and its
      subsidiaries.





Under
      the
      2005 Employee Stock Option Plan, both incentive and nonqualified stock options
      were authorized for grant at exercise prices at least equal to the fair market
      value of the Company’s common stock on the date of grant (for incentive stock
      options, 110 percent of fair market 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 Company stock).





For
      option grants prior to January 1, 2006, each option holder may exercise up
      to
      one-half of his or her options after a three month period subsequent to the
      grant date and may exercise the remaining one-half six months after the grant
      date. For option grants after January 1, 2006, excluding option grants related
      to reload grants under employment agreements that will continue to vest in
      accordance with option grants prior to January 1, 2006, options will vest over
      a
      three year period from the date of the grant and be eligible to be exercised
      in
      one-third annual increments from 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 Company stock). There have been options to
      purchase 441,684 shares (as adjusted for common stock dividends) granted under
      this plan, and there were options to purchase 1,448,737 shares (as adjusted
      for
      common stock dividends) remaining to be granted at September 30,
      2006.


11


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





Under
      the
      Tappan Zee Stock Option Plan, which was assumed by the Company, options to
      purchase 186,798 shares (as adjusted for common stock dividends) were authorized
      for grant to employees. 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 when Tappan Zee was acquired by the
      Company. There have been options to purchase 133,430 shares (as adjusted for
      common stock dividends) granted under this plan. This plan expired at the end
      of
      August 2006, and no further options may be granted under this plan.





The
      Company also maintains a 2001 Employee Stock Option Plan and 1997 Employee
      Stock
      Option Plan under which options to purchase an aggregate of 1,907,467 and
      1,857,670 shares (as adjusted for common stock dividends), respectively, have
      been granted. No additional options will be granted under the 2001 Employee
      Stock Option Plan or the 1997 Employee Stock Option Plan.





A
      summary
      of the activity in the employee stock option plans and related information
      for
      the nine months ended September 30, 2006 is as follows:





**2006**
            
            **($
                in 000’s)****Options**
            
            **Weighted-Average**
              **Exercise
                Price**
            
            **Aggregate**
              **Intrinsic
                Value**Vested
                outstanding at January 1,
            
            
            2,651,175
            
            $
            14.16
            
            $
            20,982Unvested
                outstanding at January 1,
            
            
            1,560
            
            
            22.26
            
            
            —**Outstanding
                at January 1, 2006**
            
            
            **2,652,735**
            
            
            **14.16**
            
            
            **20,982**Granted
            
            
            321,586
            
            
            21.96
            
            
            33Exercised
            
            
            (147,177
            )
            
            10.77
            
            
            (1,670
            )Expired
            
            
            (69,858
            )
            
            22.34
            
            
            —Forfeited
            
            
            (200
            )
            
            21.93
            
            
            —**Outstanding
                at September 30, 2006**
            
            
            **2,757,086**
            
            
            **15.04**
            
            
            **19,345**Unvested
                outstanding at September 30,
            
            
            (317,819
            )
            
            21.96
            
            
            (32
            )**Exercisable
                at September 30, 2006**
            
            
            **2,439,267**
            
            **$**
            **14.14**
            
            **$**
            **19,313**Weighted
                average fair value of options grantedduring
                the nine months ended Sept. 30, 2006
            
            
            
            
            $
            6.92





12


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




The
      following table summarizes the range of exercise prices for stock options
      outstanding and exercisable under the employee stock option plans at September
      30, 2006:






**Options
                Outstanding**
            
            **Options
                Exercisable**Range
                of Exercise Price
            
            Number
              Outstanding
            
            Weighted-
              Average
              Remaining
              Contractual
              Life
            
            Weighted-
              Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-
              Average
              Exercise
              Price$
                9.45 to $13.12
            
            
            1,048,082
            
            
            3.32
            
            $
            10.65
            
            
            1,048,082
            
            $
            10.6513.13 to 16.80
            
            
            753,058
            
            
            4.85
            
            
            14.22
            
            
            753,058
            
            
            14.2216.81 to 20.48
            
            
            610,216
            
            
            8.12
            
            
            19.67
            
            
            610,216
            
            
            19.6720.49 to 24.34
            
            
            345,730
            
            
            9.22
            
            
            22.01
            
            
            27,911
            
            
            22.55$
                9.45 to $24.34
            
            
            2,757,086
            
            
            5.54
            
            $
            15.04
            
            
            2,439,267
            
            $
            14.14





For
      the
      three and nine months ended September 30, 2006, the adoption of SFAS No. 123R
      resulted in stock based compensation expense of $0.4 million and $0.9 million,
      a
      decrease in net income of $0.2 million and $0.6 million, a decrease in basic
      earnings per common share of $0.01 and $0.03, and a decrease in diluted earnings
      per common share of $0.01 and $0.02, respectively. The income tax benefit
      related to the stock based compensation cost for the three and nine months
      ended
      September 30, 2006 was $0.1 million and $0.3 million, respectively.





For
      the
      three months ended September 30, 2006 and 2005, $0.4 million and $0.6 million
      was received from the exercise of stock options, and $0.1 million and $0.6
      million was realized as income tax deductions, respectively. For the nine months
      ended September 30, 2006 and 2005, $2.0 million and $3.1 million was received
      from the exercise of stock options, and $0.8 million and $1.5 million was
      realized as income tax deductions, respectively.





As
      of
      September 30, 2006, there was $2.3 million of total unrecognized compensation
      cost related to non-vested share-based compensation awards granted under the
      stock option plans. The cost is expected to be recognized over thirty-one
      months. 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 weighted average assumptions were used for the director and employee
      stock option plans for the three and nine months ended September 30, 2006 and
      2005:




**Three
                months ended**
            
            **Nine
                months ended****Director
                Plan Assumptions:**
            
            **Sept.
                30, 2006**
            
            **Sept.
                30, 2005**
            
            **Sept.
                30, 2006**
            
            **Sept.
                30, 2005**Expected
                stock price volatility
            
            
            31.31
            %
            
            33.16
            %
            
            32.22
            %
            
            35.65
            %Risk-free
                interest rate
            
            
            5.07
            
            
            4.04
            
            
            4.56
            
            
            3.98Expected
                dividend yield
            
            
            2.43
            
            
            2.60
            
            
            2.51
            
            
            2.34Expected
                annual forfeitures
            
            
            1.70
            
            
            n/a
            
            
            1.70
            
            
            n/aExpected
                life (in years)
            
            
            7.81
            
            
            7.69
            
            
            7.75
            
            
            7.67**Employee
                Plan Assumptions:**Expected
                stock price volatility
            
            
            30.52
            %
            
            33.69
            %
            
            30.54
            %
            
            34.19
            %Risk-free
                interest rate
            
            
            5.03
            
            
            4.06
            
            
            5.03
            
            
            4.07Expected
                dividend yield
            
            
            2.43
            
            
            2.60
            
            
            2.43
            
            
            2.60Expected
                annual forfeitures
            
            
            1.29
            
            
            n/a
            
            
            1.29
            
            
            n/aExpected
                life (in years)
            
            
            6.86
            
            
            7.31
            
            
            6.87
            
            
            7.32




n/a
      -
      Prior to adopting SFAS No. 123R, forfeitures were recorded as they
      occurred.


13


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





SFAS
      No.
      123 established 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 APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”). 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
      three
      and nine months ended September 30, 2005. The fair value for these options
      was
      estimated at the date of grant using a Black-Scholes option-pricing model and
      recognized over the options’ vesting period.




**(000’s,
                except share data)****Three
                Months Ended**
              **September
                30, 2005**
            
            **Nine
                Months Ended**
              **September
                30, 2005**Net
                income, as reported
            
            $
            8,431
            
            $
            24,631Less:
                junior preferred stock dividends
            
            
            —
            
            
            10Less:
                total stock based compensation expensedetermined under the fair value based methodfor
                all awards, net of related tax effects
            
            
            928
            
            
            1,800Pro
                forma net income available to common stockholders
            
            $
            7,503
            
            $
            22,821Earnings
                per common share:Basic
                - as reported
            
            $
            0.39
            
            $
            1.14Basic
                - pro forma
            
            
            0.35
            
            
            1.06Diluted
                - as reported
            
            $
            0.37
            
            $
            1.10Diluted
                - pro forma
            
            
            0.33
            
            
            1.02





**5.**
            **Intangible
                Assets**





The
      gross
      carrying amount and accumulated amortization of intangible assets acquired
      in
      connection with branch and bank acquisitions and a favorable lease were $9.0
      million and $6.2 million as of September 30, 2006, and $9.0 million and $5.3
      million as of December 31, 2005, respectively. The intangible amortization
      expense for the three and nine months ended September 30, 2006 was $0.3 million
      and $0.8 million, respectively. The intangible amortization expense for the
      three and nine months ended September 30, 2005 was $0.3 million and $0.9
      million, respectively. The annual amortization expense for the remaining life
      of
      all intangibles will vary throughout the amortization periods. During such
      periods, the maximum amount of amortization will be $1.1 million on an annual
      basis. The Company also has a net intangible asset related to the Retirement
      Plan for non-employee Directors of U.S.B. Holding Co., Inc. and Certain
      Affiliates (the “Director Retirement Plan”) of $0.1 million at both September
      30, 2006 and December 31, 2005, as further described in Note 11 to the condensed
      consolidated financial statements.





14


**U.S.B.
      HOLDING CO., INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




**6.**
            **Earnings
                Per Common Share
                (“EPS”)**





The
      computation of basic and diluted earnings per common share for the three and
      nine months ended September 30, 2006 and 2005 is as follows:




**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Numerator:**Net
                Income
            
            $
            8,145
            
            $
            8,431
            
            $
            23,485
            
            $
            24,631Less:
                preferred dividends
            
            
            —
            
            
            —
            
            
            10
            
            
            10Net
                income for basic and diluted earnings per common share - net income
                available to common stockholders
            
            $
            8,145
            
            $
            8,431
            
            $
            23,475
            
            $
            24,621**Denominator:**Denominator
                for basic earnings per common share - weighted average
                shares
            
            
            21,751,565
            
            
            21,685,896
            
            
            21,746,909
            
            
            21,567,925Effects
                of dilutive securities:director
                and employee - stock options
            
            
            889,975
            
            
            919,432
            
            
            961,122
            
            
            898,298Denominator
                for diluted earnings per common share - adjusted weighted average
                shares
            
            
            22,641,540
            
            
            22,605,328
            
            
            22,708,031
            
            
            22,466,223Basic
                earnings per common share
            
            $
            0.37
            
            $
            0.39
            
            $
            1.08
            
            $
            1.14Diluted
                earnings per common share
            
            
            0.36
            
            
            0.37
            
            
            1.03
            
            
            1.10




**7.**
              **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 condensed consolidated
      statements of condition at estimated fair value and the resulting net unrealized
      gains and losses, net of tax, are shown 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 similar 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 a significant amount of securities for the purpose of engaging
      in trading activities.


15




**U.S.B.
        HOLDING CO., INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





The
      Company had gross realized gains of $426,000 and $431,000 during the three
      and
      nine months ended September 30, 2006, respectively. The Company did not have
      realized losses during the three and nine months ended September 30, 2006.
      There
      were no gross realized gains or losses during the three and nine months ended
      September 30, 2005.





A
      summary
      of the amortized cost, estimated fair values, and related gross unrealized
      gains
      and losses on securities at September 30, 2006 and December 31, 2005 is as
      follows:




**(000’s)****September
                30, 2006**
            
            **Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value****Available
                for Sale:**U.S.
                government agencies
            
            $
            72,925
            
            $
            ―
            
            $
            1,797
            
            $
            71,128Mortgage-backed
                securities
            
            
            371,851
            
            
            2,205
            
            
            5,190
            
            
            368,866Obligations
                of states and political subdivisions
            
            
            230
            
            
            14
            
            
            ―
            
            
            244Corporate
                securities
            
            
            109
            
            
            38
            
            
            ―
            
            
            147**Total
                securities available for sale**
            
            **$**
            **445,115**
            
            **$**
            **2,257**
            
            **$**
            **6,987**
            
            **$**
            **440,385****Held
                to Maturity:**U.S.
                government agencies
            
            $
            639,663
            
            $
            —
            
            $
            10,933
            
            $
            628,730Obligations
                of states and political subdivisions
            
            
            98,461
            
            
            2,481
            
            
            202
            
            
            100,740**Total
                securities held to maturity**
            
            **$**
            **738,124**
            
            **$**
            **2,481**
            
            **$**
            **11,135**
            
            **$**
            **729,470**





**(000’s)****December
                31, 2005**
            
            **Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **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
            
            
            ―
            
            
            149**Total
                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
            
            
            109,829**Total
                securities held to maturity**
            
            **$**
            **746,851**
            
            **$**
            **2,501**
            
            **$**
            **9,083**
            
            **$**
            **740,269**





Available
        for sale and held to maturity obligations of states and political subdivisions
        are not subject to Federal income tax.


16




**U.S.B.
        HOLDING CO., INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


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




**September
                30, 2006**
            
            **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
            
            $
            181,151
            
            $
            1,052
            
            $
            518,707
            
            $
            11,678
            
            $
            699,858
            
            $
            12,730Mortgage-backed
                Securities
            
            
            29,092
            
            
            439
            
            
            126,441
            
            
            4,751
            
            
            155,533
            
            
            5,190Obligations
                of states and political subdivisions
            
            
            13,128
            
            
            20
            
            
            8,229
            
            
            182
            
            
            21,357
            
            
            202Total
                temporarily impaired securities
            
            $
            223,371
            
            $
            1,511
            
            $
            653,377
            
            $
            16,611
            
            $
            876,748
            
            $
            18,122





**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 and political subdivisions
            
            
            36,850
            
            
            164
            
            
            6,190
            
            
            217
            
            
            43,040
            
            
            381Total
                temporarily impaired securities
            
            $
            747,877
            
            $
            9,894
            
            $
            147,441
            
            $
            4,735
            
            $
            895,318
            
            $
            14,629





The
      Company’s U.S. government agency and mortgage-backed securities that are in an
      unrealized loss position at September 30, 2006 and December 31, 2005 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 September 30, 2006 and December
      31,
      2005, approximately $6.0 million and $5.3 million, respectively, of issuances
      were not rated, substantially all of which were bond or tax anticipation notes
      from local municipalities.






At
      September 30, 2006, the number of securities in an unrealized loss position
      included 24 U.S. government agencies, 27 mortgage-backed securities, and 48
      obligations of states and political subdivisions. 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. The temporary impairment on securities of less than
      12
      months and 12 months or more at September 30, 2006 and December 31, 2005 is
      due
      to the higher interest rate environment, as compared to the periods in which
      the
      securities were initially purchased. The higher interest rates 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.




17




**U.S.B.
        HOLDING CO., INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


8.
            **Loans**





Nonaccrual
      loans were $3.7 million and $9.0 million at September 30, 2006 and December
      31,
      2005, respectively. Total nonaccrual loans at September 30, 2006 primarily
      consisted of one customer relationship with loans aggregating $2.4 million.
      The
      loans involve a collateralized real estate construction project that has
      experienced unexpected delays in completing the construction. The loans are
      also
      supported by personal guarantees. The decrease in nonaccrual loans for the
      nine
      month period was primarily due to a $4.7 million pay off of loans that had
      been
      placed on nonaccrual status. Restructured loans were $0.1 million at both
      September 30, 2006 and December 31, 2005.





Substantially
      all of the nonaccruing and restructured loans are collateralized by real estate.
      At September 30, 2006, the Company had and continues to have no commitments
      to
      lend additional funds to any customers with nonaccrual or restructured loan
      balances, with the exception of one customer relationship involving real estate
      construction loans aggregating $2.4 million that are on nonaccrual status.
      A
      nominal amount of additional funds may be used by the customer towards
      completion of the real estate project. At September 30, 2006, there were loans
      aggregating $9.3 million, which were not on nonaccrual status, but were
      classified as potential problem loans, which may result in the loans being
      placed on nonaccrual status in the near future. Potential problem loans
      aggregating $6.8 million are related to one customer relationship. The potential
      problem loans are collateralized by real estate and supported by personal
      guarantees. Accruing loans that are contractually past due 90 days or more
      at
      September 30, 2006 are immaterial.





At
      September 30, 2006 and December 31, 2005, the recorded investment in loans
      that
      are considered to be impaired approximated $13.6 million and $16.0 million,
      respectively, of which $3.2 million and $8.7 million were in nonaccrual status
      at September 30, 2006 and December 31, 2005, respectively. The average recorded
      investment in impaired loans for the nine months ended September 30, 2006 and
      2005, and for the year ended December 31, 2005 was $14.7 million, $9.5 million,
      and $11.4 million, respectively. Interest income recognized by the Company
      on
      impaired loans for the three and nine months ended September 30, 2006 was $0.2
      million and $0.5 million, respectively. Interest income recognized by the
      Company on impaired loans for the three and nine moths ended September 30,
      2005
      was $0.3 million and $0.8 million, respectively. As applicable, each impaired
      loan has a related allowance for loan losses.





**9.**
            **Borrowings
                and Stockholders’
Equity**





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 generally mature
      between one and 365 days. The Bank may borrow, when available, under master
      security sale and repurchase agreements through four primary investment firms,
      the FHLB, and to a lesser extent, its customers. At September 30, 2006, the
      Bank
      had no short-term repurchase agreements with the FHLB. 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.


18




**U.S.B.
        HOLDING CO., INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


At
      September 30, 2006 and December 31, 2005, the Bank had short-term repurchase
      agreements with customers of $0.9 million and $1.3 million at a weighted average
      interest rate of 3.88 percent and 3.31 percent, respectively. These short-term
      customer borrowings were collateralized by securities with an aggregate carrying
      value and estimated fair value of $1.0 million at September 30, 2006 and an
      aggregate carrying value and estimated fair value of $1.4 million at December
      31, 2005.





Federal
      funds purchased represent overnight funds. The Bank has federal funds purchase
      lines available with six financial institutions for a total of $90.0 million.
      At
      September 30, 2006 and December 31, 2005, the Bank had no federal funds
      purchased balances outstanding.





Short-term
      FHLB advances are borrowings with original maturities between one and 365 days.
      There were no short-term FHLB advances outstanding at September 30, 2006 and
      December 31, 2005.





Additional
      information with respect to short-term borrowings as of and for the nine months
      ended September 30, 2006 and 2005 is presented in the following
      table:




**(000’s
                except percentages)****Short-Term
                Borrowings**
            
            **2006**
            
            **2005**Balance
                at September 30
            
            $
            863
            
            $
            5,423Average
                balance outstanding
            
            $
            46,901
            
            $
            15,442Weighted-average
                interest rate:As
                of September 30
            
            
            3.88
            %
            
            3.31
            %Paid
                during period
            
            
            4.72
            %
            
            2.96
            %





The
      Bank
      had long-term borrowings, which have original maturities of over one year,
      of
      $605.6 million and $488.0 million in securities sold under agreements to
      repurchase at September 30, 2006 and December 31, 2005, respectively. These
      borrowings have an original term of ten years at interest rates ranging from
      2.53 percent to 6.08 percent, and 1.99 percent to 6.08 percent, respectively,
      which are callable on certain dates after an initial noncall period at the
      option of the counterparty to the repurchase agreements. The long-term borrowing
      in securities sold under agreements to repurchase may not be repaid in full
      prior to maturity without penalty.





As
      of
      September 30, 2006, long-term repurchase agreements with the FHLB were
      collateralized by securities with an aggregate carrying value of $655.3 million
      and an estimated fair value of $648.9 million. As of December 31, 2005, both
      short and long-term repurchase agreements with the FHLB were collateralized
      by
      securities with an aggregate carrying value of $569.5 million and an estimated
      fair value of $566.0 million.





At
      September 30, 2006 and December 31, 2005, long-term FHLB advances totaled $101.8
      million and $71.8 million at interest rates ranging from 4.05 percent to 5.99
      percent and 4.55 percent to 5.99 percent, respectively. At September 30, 2006,
      borrowings totaling $1.8 million were amortizing advances having scheduled
      payments. Other borrowings totaling $100.0 million have an original term of
      ten
      years that are callable on certain dates after an initial noncall period at
      the
      option of the counterparty to the advance. 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. The long-term FHLB advances may not be repaid in
      full
      prior to maturity without penalty. At September 30, 2006 and December 31, 2005,
      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
      $125.6 million and $88.3 million, respectively.


19




**U.S.B.
        HOLDING CO., INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





A
      summary
      of long-term, fixed-rate borrowings distributed based upon remaining contractual
      payment date and expected option call date at September 30, 2006, with
      comparative totals for December 31, 2005, is as follows:




**(000’s
                except percentages)****Long-Term
                Borrowings**
            
            **Within**
              **1
                Year**
            
            **After
                1**
              **But
                Within**
              **5
                Years**
            
            **After**
              **5
                Years**
            
            **2006**
              **Total**
            
            2005
              TotalContractual
                Payment Date:Total
                long-term borrowing
            
            $
            19
            
            $
            192,591
            
            $
            514,704
            
            $
            707,314
            
            $
            559,828Weighted
                average interest rate
            
            
            5.99
            %
            
            5.61
            %
            
            4.03
            %
            
            4.46
            %
            
            4.37
            %Expected
                Call Date:Total
                long-term borrowing
            
            $
            122,019
            
            $
            323,591
            
            $
            261,704
            
            $
            707,314
            
            $
            559,828Weighted
                average interest rate
            
            
            3.66
            %
            
            4.67
            %
            
            4.56
            %
            
            4.46
            %
            
            4.37
            %





At
      September 30, 2006 and December 31, 2005, the Bank held 345,229 and 307,764
      shares, respectively, of capital stock of the FHLB with a carrying value of
      $34.5 million and $30.8 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
      borrowings up to an aggregate of 50 percent of total assets, or for collateral
      pledged by TPNZ, 75 percent of 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.





The
      ability of the Company and 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 September 30,
      2006, the Bank could pay dividends of $58.5 million to the Company without
      having to obtain prior regulatory approval.





On
      December 13, 2005, the Company’s Board of Directors authorized the repurchase of
      up to 300,000 common shares, or approximately 1.4 percent of the Company’s
      outstanding common stock at that date. Repurchases of common stock are
      authorized to be made from time to time in open-market and private transactions
      throughout 2006 as, in the opinion of management, market conditions may warrant.
      The repurchased common shares will be held as treasury stock and will be
      available for general corporate purposes. The December 13, 2005 stock repurchase
      plan replaced the previous March 23, 2005 repurchase plan, which authorized
      the
      repurchase of up to 315,000 common shares (as adjusted for common stock
      dividends). For the nine months ended September 30, 2006, the Company purchased
      179,900 shares of common stock under its repurchase plan at an aggregate cost
      of
      $3.9 million. For the nine months ended September 30, 2005, the Company
      purchased 70,140 shares of common stock under its repurchase plan at an
      aggregate cost of $1.4 million. There were also 8,922 and 237,762 shares of
      common stock for the nine months ended September 30, 2006 and 2005,
      respectively, acquired in connection with stock option
      exercises.


20




**U.S.B.
        HOLDING CO., INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**10.**
              **Corporation-Obligated
                  Mandatory Redeemable Capital Securities of Subsidiary
                  Trusts**





The
      total
      amount of Capital Securities outstanding as of September 30, 2006 is $60.0
      million. Capital Securities are generally permitted to be included in Tier
      I
      regulatory capital in an amount not in excess of 25 percent of Tier I Capital,
      with the remainder included in Total Capital. At September 30, 2006, Tier I
      Capital totaled $282.0 million, which included $60.0 million of Capital
      Securities.





**11.**
            **Commitments
                and Contingencies**





In
      the
      normal course of business, various commitments to extend credit are made that
      are not reflected in the accompanying condensed consolidated financial
      statements. At September 30, 2006, formal credit lines, loan commitments, which
      are primarily loans collateralized by real estate, and credit card loans
      approximated $406.2 million, $93.6 million, and $43.4 million, respectively.
      Outstanding standby letters of credit totaled $40.8 million. Such amounts
      represent the maximum risk of loss on these commitments.





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. In
      most
      cases, personal guarantees are obtained. Standby letters of credit are
      considered in the Bank’s evaluation of its reserve for unfunded loan
      commitments.





The
      Company is party to employment agreements with the Company’s Chief Executive
      Officer, Thomas E. Hales, and its President and Chief Operating Officer, Raymond
      J. Crotty, which are described in Note 16 to the Company’s Consolidated
      Financial Statements included in the 2005 Annual Report to
      Stockholders.





Effective
      May 19, 1999, the Company adopted the Director Retirement Plan. At September
      30,
      2006 and December 31, 2005, the Company had a recorded liability of $570,000
      and
      $549,000, respectively, to provide for the 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 periods. At September
      30,
      2006 and December 31, 2005, a net intangible asset of $67,000 and $140,000,
      respectively, was 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
      three and nine months ended September 30, 2006 was approximately $31,000 and
      $94,000, of which $24,000 and $73,000 represents amortization of prior service
      cost, and $7,000 and $21,000 represents current service cost, respectively.
      Benefit cost for the Director Retirement Plan for the three and nine months
      ended September 30, 2005 was approximately $36,000 and $107,000, of which
      $25,000 and $75,000 represents amortization of prior service cost, and $11,000
      and $32,000 represents current service cost, respectively.


21




**U.S.B.
      HOLDING CO., INC.**


**NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
 
 Other
        commitments are also described in Note 16 to the Company’s Consolidated
        Financial Statements included in the Company’s 2005 Annual Report to
        Stockholders.





The
      Company is party to various legal proceedings arising in the ordinary course
      of
      business. Because litigation is inherently unpredictable, particularly in cases
      where claimants seek substantial or indeterminate damages or where
      investigations and proceedings are in the early phases, 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 have been 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 such 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 in accordance with SFAS No. 5, “Accounting for
      Contingencies,” as required. The ultimate resolution of any legal proceedings
      may differ from the amounts reserved, if any.





**12.**
            **Segment
                Information**





The
      Company has one reportable segment, “Community Banking.” All of the Company’s
      activities are interrelated, and each activity is dependent and assessed based
      on how each of the activities of the Company supports the others. For example,
      commercial lending is dependent upon the ability of the Bank to fund itself
      with
      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, and
      Southern Connecticut and the surrounding area. For the nine months ended
      September 30, 2006 and 2005, there is no customer that accounted for more than
      ten percent of the Company’s revenue.


22




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**
  ***Forward-Looking
      Statements***




*This
      Quarterly Report on Form 10-Q contains a number of “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. 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 or affect the value of the Company’s investments; 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.*





**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 collateralized
      by real estate, including construction projects. The Company also acquires
      triple-A credit rated securities and obligations of local municipalities 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 and its four loan centers in Rockland, Westchester,
      and
      Orange counties, and New York City in New York and Stamford,
      Connecticut.




23


**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**
  The
      Company’s primary source of revenue is net interest income, which is the
      difference between interest income on 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. The market for and credit
      quality of loans is 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.




The
      Company’s core revenue, net interest income, has been adversely affected during
      the three and nine months ended September 30, 2006 by a decrease in the net
      interest margin as a result of an inverted U.S. Treasury yield curve in which
      short-term interest rates are at higher levels than medium- to long-term
      interest rates, and pricing pressures from increased competition for loans
      and
      deposits. The current slope of the U.S. Treasury yield curve, combined with
      continuing pricing pressures on deposits and loans in the Company’s marketplace,
      could continue to negatively affect net interest income by causing the net
      interest margin to compress further.




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 rate spreads to maintain or increase net
      interest income. Increasing the Company’s interest earning assets is challenging
      as a result of the inverted U.S. Treasury yield curve in the current interest
      rate environment, intense competition for loans, and difficulty in obtaining
      acceptable yields and structures on security investments, while managing
      interest rate risk. In addition, loan prepayments, particularly on commercial
      mortgage loans, also impact the Company’s ability to increase interest earning
      assets.




**Critical
      Accounting Policies**





The
      Company’s financial statements are prepared in accordance with GAAP. The
      Company’s significant accounting policies are more fully described in Note 3 to
      the Company’s Consolidated Financial Statements included in the Company’s 2005
      Annual Report to Stockholders. Certain accounting policies require management
      to
      make estimates and assumptions that affect the reported amounts of actual and
      contingent 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
      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, the reserve for unfunded loan commitments and standby letters
      of credit, the provision for credit losses, the classification of securities
      as
      either held to maturity or available for sale, the evaluation of other than
      temporary impairment of securities, and the evaluation of the valuation reserves
      for net deferred tax assets. These accounting policies 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 Company’s
      critical accounting policies are described in greater detail under the heading
      “Critical Accounting Policies” in the Management’s Discussion and Analysis of
      Financial Condition and Results of Operations included in the Company’s 2005
      Annual Report to Stockholders. 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 included in the Company’s 2005 Annual Report to
      Stockholders.


24




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**





**COMPARISON
      OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2006 AND DECEMBER 31,
      2005**





At
      September 30, 2006, the Company had total assets of $3,004.5 million, an
      increase of $246.3 million from December 31, 2005. The increase in total assets
      was primarily due to increases in federal funds sold, the securities portfolio
      and loans, net, as well as cash and due from banks resulting from seasonal
      municipal tax monies that were not yet invested in federal funds
      sold.





The
      securities portfolio, including investments in FHLB stock, totaled $1,213.0
      million and $1,153.6 million at September 30, 2006 and December 31, 2005,
      respectively, an increase of $59.4 million during the nine months ended
      September 30, 2006. The securities portfolio consisted of securities held to
      maturity at amortized cost of $738.1 million and $746.9 million, securities
      available for sale at estimated fair value totaling $440.4 million and $376.0
      million, and FHLB stock of $34.5 million and $30.8 million at September 30,
      2006
      and December 31, 2005, respectively.





Securities
      are selected to provide safety of principal and liquidity, produce income on
      excess funds during structural changes in the composition of deposits and during
      cyclical and seasonal changes in loan demand, and to leverage capital. The
      amount of securities purchased and maintained in the investment 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
      increase yield.





Generally,
      most securities may be used to collateralize borrowings and public deposits.
      As
      a result, the investment portfolio is an integral part of the Company’s funding
      strategy. The Company will continue to seek opportunities in utilizing the
      investment portfolio to invest excess cash flow and leverage capital, while
      managing interest rate risk. The weighted average life at September 30, 2006
      and
      December 31, 2005 of the investment portfolio was 9.29 years and 8.90 years,
      respectively.





During
      the nine months ended September 30, 2006, U.S. government agency securities
      increased $0.4 million primarily due to an increase of $0.5 million of
      amortization of the loss on transfer of available for sale securities to held
      to
      maturity and an increase of $0.1 million in discount accretion, partially offset
      by a decrease of $0.2 million in the estimated fair value of available for
      sale
      securities. U.S. government agency securities of $710.8 million as of September
      30, 2006, consisted of fixed rate securities with longer term maturities and
      call options by the issuer to increase yield. Mortgage-backed securities
      increased by $64.6 million primarily due to purchases of $153.1 million and
      an
      increase of $0.1 million in discount accretion, partially offset by sales of
      $47.0 million, principal paydowns of $40.5 million, and a decrease in the
      estimated fair value of available for sale securities of $1.1 million. The
      Bank’s investment in obligations of states and political subdivisions, or
      municipal securities, decreased by $9.3 million due primarily to maturities
      and
      redemptions of $19.0 million, partially offset by purchases of $9.7 million.
      Municipal securities are considered core investments having favorable tax
      equivalent yields and diversified maturities. These obligations are principally
      of New York State political subdivisions 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.


25




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**


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 million at both September
      30, 2006 and December 31, 2005 consisting of bank and other equity
      securities.





Loans
      represent the largest and highest yielding earning assets of the Company. The
      Company continues to originate a significant portion of loans collateralized
      by
      real estate within the markets in which it primarily conducts business. 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 and intense
      competition from other financial institutions.





At
      September 30, 2006, total loans, net were $1,518.6 million, a net increase
      of
      $58.8 million or 4.0 percent compared to December 31, 2005. A summary of the
      increase in total loans, net at September 30, 2006 compared to December 31,
      2005
      is as follows:




**(000’s)****September
                30, 2006**
            
            **December
                31, 2005**
            
            **Increase/**
              **(Decrease)**Time
                and demand loans
            
            $
            161,522
            
            $
            147,734
            
            $
            13,788Installment
                loans
            
            
            8,148
            
            
            7,248
            
            
            900Credit
                Card
            
            
            6,990
            
            
            6,769
            
            
            221Real
                Estate-
                Commercial
            
            
            585,322
            
            
            586,073
            
            
            (751
            )-
                Residential
            
            
            289,098
            
            
            277,211
            
            
            11,887-
                Construction and land development
            
            
            406,312
            
            
            366,457
            
            
            39,855-
                Home equity
            
            
            75,831
            
            
            83,782
            
            
            (7,951
            )Other
            
            
            3,266
            
            
            2,538
            
            
            728Gross
                loans
            
            
            1,536,489
            
            
            1,477,812
            
            
            58,677Deferred
                net loan commitment fees
            
            
            (2,033
            )
            
            (2,828
            )
            
            795Total
                loans
            
            
            1,534,456
            
            
            1,474,984
            
            
            59,472Allowance
                for loan losses
            
            
            (15,822
            )
            
            (15,164
            )
            
            (658
            )Total
                loans, net
            
            $
            1,518,634
            
            $
            1,459,820
            
            $
            58,814





The
      Company had approximately $406.2 million in formal credit lines outstanding,
      $93.6 million in loan commitments outstanding, which are loans primarily
      collateralized by real estate, $40.8 million of standby letters of credit
      outstanding, and $43.4 million of credit card loans outstanding. Management
      considers its liquid resources to be adequate to fund loans in the foreseeable
      future, principally by utilizing excess funds temporarily placed in federal
      funds sold, increasing deposits and borrowings, and receiving proceeds from
      loan
      and security repayments.




The
      Company's allowance for loan losses increased $0.7 million to $15.8 million
      at
      September 30, 2006, from $15.2 million at December 31, 2005. The increase in
      the
      allowance for loan losses (the “allowance”) was due to an increase in gross
      loans and additional reserves needed for nonaccrual and impaired loans. The
      allowance represents 1.03 percent of total loans outstanding at both September
      30, 2006 and December 31, 2005. The allowance and reserve for unfunded loan
      commitments and standby letters of credit (the “reserve”) reflect a provision of
      $1.3 million and net charge-offs of $0.8 million recorded for the nine months
      ended September 30, 2006. The reserve of $1.0 million at September 30, 2006
      and
      $1.1 million at December 31, 2005 is included in other liabilities. At September
      30, 2006, there were loans aggregating $9.3 million, which were not on
      nonaccrual status, but were classified as potential problem loans that may
      result in the loans being placed on nonaccrual status in the near future.
      Potential problem loans aggregating $6.8 million are related to one customer
      relationship. The potential problem loans are collateralized by real estate
      and
      supported by personal guarantees.


26




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**





As
      with
      any financial institution, poor economic conditions and high inflation, interest
      rates or 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 and classified loans, (2)
      various loan policies concerning loan administration (loan file documentation,
      disclosures, approvals, etc.), and (3) a loan review staff employed by the
      Company 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.





An
      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 industry, geographic,
      and customer concentrations within the loan portfolio, and a review of
      historical loss experience. 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.
      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 for the nine months ended September
      30,
      2006 and 2005, and the related allowance and reserve, reflect net charge-offs
      incurred and risks with respect to real estate, time and demand, installment,
      credit card, and other loans, as well as the effect of the real estate market
      and general economic conditions of the New York Metropolitan area on the loan
      portfolio. Management believes the allowance and the reserve at September 30,
      2006 appropriately reflect 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.




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 entities.
      To
      meet the requirements of a diverse customer base, a full range of deposit
      instruments is offered, which has allowed the Company to maintain the deposit
      base despite intense competition from other banking institutions and non-bank
      financial service providers.




Total
      deposits increased $142.8 million, or 7.7 percent, for the nine months ended
      September 30, 2006 to $1,990.0 million from $1,847.2 million at December 31,
      2005. The total deposit increase resulted from net increases in municipal
      deposits of $208.0 million, partially offset by net decreases in retail and
      commercial deposits of $15.6 million and a decrease in brokered deposits of
      $49.5 million.


27




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**


A
      summary
      of the increase in total deposits at September 30, 2006 compared to December
      31,
      2005 is as follows:




**(000’s)****September
                30,**
              **2006**
            
            **December
                31, 2005**
            
            **Increase/**
              **(Decrease)****Non-interest
                bearing deposits:**Individuals,
                partnerships, and corporations
            
            $
            272,178
            
            $
            294,350
            
            $
            (22,172
            )Certified
                and official checks
            
            
            10,924
            
            
            10,499
            
            
            425States
                and political subdivisions
            
            
            95,718
            
            
            10,307
            
            
            85,411Total
                non-interest bearing deposits
            
            
            378,820
            
            
            315,156
            
            
            63,664**Interest
                bearing deposits:**NOW
                accounts
            
            
            102,456
            
            
            117,512
            
            
            (15,056
            )Money
                market accounts
            
            
            140,963
            
            
            134,711
            
            
            6,252Savings
                deposits
            
            
            374,399
            
            
            440,299
            
            
            (65,900
            )States
                and political subdivisions - NOW, money market, and savings
                deposits
            
            
            200,885
            
            
            71,445
            
            
            129,440Time
                deposits of individuals, partnerships, corporations under
                $100,000
            
            
            381,387
            
            
            354,140
            
            
            27,247Time
                deposits of individuals, partnerships, corporations over
                $100,000
            
            
            205,335
            
            
            156,393
            
            
            48,942Brokered
                time deposits
            
            
            —
            
            
            49,499
            
            
            (49,499
            )States
                and political subdivisions - time deposits
            
            
            112,296
            
            
            119,170
            
            
            (6,874
            )IRAs
                and Keoghs
            
            
            93,496
            
            
            88,877
            
            
            4,619Total
                interest bearing deposits
            
            
            1,611,217
            
            
            1,532,046
            
            
            79,171Total
                deposits
            
            $
            1,990,037
            
            $
            1,847,202
            
            $
            142,835





28






**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**


The
      increase in municipal deposits was primarily due to temporary seasonal tax
      monies received during the end of the 2006 third quarter. The decrease in retail
      and commercial deposits at September 30, 2006 was primarily due to increased
      competition for demand and savings deposits combined with a competitive interest
      rate environment for such accounts. The decrease in retail and commercial
      deposits was partially offset by an increase in retail and commercial time
      deposits as a result of the Bank offering competitively priced short-term
      products. The decrease in brokered deposits was a result of maturities during
      the first nine months of 2006. The brokered deposits were not renewed as a
      result of alternative sources of funding (i.e., wholesale borrowings and
      municipal deposits) being more competitively priced.





As
      the
      amounts of deposits change and earning assets increase or decrease, the Bank
      will manage its funding with short-term borrowings. Short-term borrowings
      provide management with the ability to react to changes in levels of earning
      assets. As of September 30, 2006, the Bank did not have any FHLB short-term
      borrowings as a result of an increase in municipal deposits. Management will
      continue to evaluate the interest rate environment in order to determine the
      most effective combination of borrowings and deposits.





Stockholders'
      equity increased to $217.8 million at September 30, 2006 from the December
      31,
      2005 balance of $204.2 million, an increase of 6.7 percent. The increase
      primarily resulted from: $23.5 million of net income for the nine months ended
      September 30, 2006; $3.5 million of stock options exercised; and $0.9 million
      of
      amortization related to stock options vested during the period; partially offset
      by treasury stock purchases of $4.6 million; cash dividends paid of $9.1
      million; and an increase in other comprehensive loss of $0.5 million.





The
      Company's leverage ratio at September 30, 2006 was 9.75 percent, compared to
      9.47 percent at December 31, 2005. The increase in the Company’s leverage
      capital ratio is due primarily to the increase in stockholders’ equity,
      excluding accumulated other comprehensive loss, for the nine months ended
      September 30, 2006. The Company's Tier I and total capital ratios under
      applicable risk-based capital guidelines were 15.98 percent and 16.94 percent
      at
      September 30, 2006, and 16.00 percent and 16.98 percent at December 31, 2005,
      respectively. In addition, the Bank exceeded all current regulatory capital
      requirements and was in the “well-capitalized” category at September 30, 2006
      and December 31, 2005.





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
      2006
      AND 2005**





**Earnings**





Net
      income for the three months ended September 30, 2006 was $8.1 million compared
      to $8.4 million for the three months ended September 30, 2005, a decrease of
      $0.3 million, or 3.4 percent. Dilut ed
      earnings per common share for the quarter ended September 30, 2006 was $0.36
      compared to $0.37 for the prior year period, a decrease of 2.7 percent. The
      Company’s third quarter 2006 net income result ed
      in a
      15.27 percent return on average common stockholders’ equity and a 1.13 percent
      return on average total assets, as compared to 17.05 percent and 1.18 percent,
      respectively, for the prior year period.


29




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**





For
      the
      nine months ended September 30, 2006, net income was $23.5 million compared
      to
      $24.6 million for the nine months ended September 30, 2005, a decrease of $1.1
      million, or 4.7 percent. Diluted earnings per common share was $1.03 for the
      nine months ended September 30, 20 06
      compared to $1.10 for the prior year period, a decrease of 6.4 percent. The
      Company’s net income f or
      the
      nine months ended September 30, 2006 resulted in a 14.94 percent return on
      average common stockholders’ equity and a 1.11 percent return on average total
      assets, as compared to 17.21 percent and 1.17 percent, respectively, for the
      2005 period.





A
      discussion of the factors impacting the changes in the various components of
      net
      income follows.





**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 earning
      assets over interest bearing liabilities and an increase in the net interest
      spread between earning assets and interest bearing liabilities. Net interest
      income is adversely impacted by a combination of decreases in earning assets
      over interest bearing liabilities and a decrease in the net interest spread
      between earning assets and interest bearing liabilities. For the three and
      nine
      months ended September 30, 2006, net interest income decreased $0.6 million,
      or
      2.7 percent, to $23.2 million and $1.3 million, or 1.9 percent, to $69.4 million
      compared to $23.8 million and $70.7 million for the comparable 2005 periods,
      respectively.





30




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**


A
      summary
      of the average balances and interest yield/rates for the three months ended
      September 30, 2006 compared to the three months ended September 30, 2005 is
      as
      follows:







**(000’s,
                except percentages)**
              **For
                the three months ended September 30,****2006**
            
            **2005****Average
                Balance**
            
            **Interest**
            
            **Average
                Yield/Rate**
            
            **Average
                Balance**
            
            **Interest**
            
            **Average
                Yield/Rate****ASSETS**Interest
                earning assets:Federal
                funds sold
            
            $
            30,029
            
            $
            396
            
            
            5.16
            %
            $
            82,855
            
            $
            725
            
            
            3.42
            %Securities:U.S.
                government agencies
            
            
            712,931
            
            
            9,943
            
            
            5.58
            
            
            659,430
            
            
            9,300
            
            
            5.64Mortgage-backed
                securities
            
            
            410,217
            
            
            5,780
            
            
            5.64
            
            
            341,708
            
            
            3,912
            
            
            4.58Obligations
                of states and political subdivisions
            
            
            98,589
            
            
            1,595
            
            
            6.47
            
            
            102,106
            
            
            1,614
            
            
            6.32Corporate
                securities, FHLB of New York stock, and other securities
            
            
            36,930
            
            
            538
            
            
            5.83
            
            
            32,042
            
            
            436
            
            
            5.44Loans,
                net
            
            
            1,493,654
            
            
            27,976
            
            
            7.47
            
            
            1,480,898
            
            
            25,172
            
            
            6.74Total
                interest earning assets
            
            
            2,782,350
            
            
            46,228
            
            
            6.61
            %
            
            2,699,039
            
            
            41,159
            
            
            6.07
            %Non-interest
                earning assets
            
            
            112,440
            
            
            
            
            
            
            
            
            162,859**TOTAL**
            
            $
            2,894,790
            
            
            
            
            
            
            
            $
            2,861,898


**LIABILITIES
              AND STOCKHOLDERS’ EQUITY**Deposits:NOW
            
            $
            166,551
            
            $
            497
            
            
            1.20
            %
            $
            194,136
            
            $
            456
            
            
            0.93
            %Money
                market
            
            
            177,596
            
            
            1,209
            
            
            2.73
            
            
            166,750
            
            
            660
            
            
            1.57Savings
            
            
            405,041
            
            
            2,367
            
            
            2.34
            
            
            459,931
            
            
            1,836
            
            
            1.58Time
            
            
            799,036
            
            
            8,743
            
            
            4.33
            
            
            755,657
            
            
            5,911
            
            
            3.10Total
                interest bearing deposits
            
            
            1,548,224
            
            
            12,816
            
            
            3.27
            
            
            1,576,474
            
            
            8,863
            
            
            2.20Federal
                funds purchased, securities sold under agreements to repurchase and
                FHLB
                advances
            
            
            717,994
            
            
            8,223
            
            
            4.53
            
            
            602,716
            
            
            6,662
            
            
            4.38Subordinated
                debt issued in connection with corporation - obligatedmandatory
                redeemable capital securities of subsidiary trusts
            
            
            61,858
            
            
            1,436
            
            
            9.29
            
            
            61,858
            
            
            1,236
            
            
            7.99Total
                interest bearing liabilities
            
            
            2,328,076
            
            
            22,475
            
            
            3.82
            %
            
            2,241,048
            
            
            16,761
            
            
            2.94
            %Non-interest
                bearing liabilities and stockholders’ equity:Demand
                deposits
            
            
            314,263
            
            
            
            
            
            
            
            
            354,861Other
                liabilities
            
            
            39,078
            
            
            
            
            
            
            
            
            68,171Stockholders’
                equity
            
            
            213,373
            
            
            
            
            
            
            
            
            197,818**TOTAL**
            
            $
            2,894,790
            
            
            
            
            
            
            
            $
            2,861,898**NET
                INTEREST INCOME**
            
            
            
            
            $
            23,753
            
            
            
            
            
            
            
            $
            24,398**NET
                YIELD ON INTEREST EARNING ASSETS (NET INTEREST
                MARGIN)**
            
            
            
            
            
            
            
            
            3.41
            %
            
            
            
            
            
            
            
            3.62
            %




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 $0.6 million for both the three months
      ended September 30, 2006 and 2005. The estimated fair value adjustment on the
      available for sale securities is included in non-interest earning assets. Non
      accruing loans are included in average balances of loans, net. The amount of
      loan origination and commitment fees, net of certain direct loan origination
      costs, of $0.6 million and $0.4 million for the three months ended September
      30,
      2006 and 2005, respectively, are included in interest income on loans,
      net.


31


**U.S.B.
      HOLDING CO., INC.**


**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
      RESULTS OF OPERATIONS**




A
      summary
      of the average balances and interest yields/rates for the nine months ended
      September 30, 2006 compared to the nine months ended September 30, 2005 is
      as
      follows:





**(000’s,
                except percentages)**
              **For
                the nine months ended September 30,****2006**
            
            **2005****Average
                Balance**
            
            **Interest**
            
            **Average
                Yield/Rate**
            
            **Average
                Balance**
            
            **Interest**
            
            **Average
                Yield/Rate****ASSETS**Interest
                earning assets:Federal
                funds sold
            
            $
            27,472
            
            $
            1,018
            
            
            4.89
            %
            
            55,226
            
            
            1,256
            
            
            3.00
            %Securities:U.S.
                government agencies
            
            
            712,283
            
            
            29,822
            
            
            5.58
            
            
            614,863
            
            
            25,666
            
            
            5.57Mortgage-backed
                securities
            
            
            357,793
            
            
            14,549
            
            
            5.42
            
            
            378,940
            
            
            12,440
            
            
            4.38Obligations
                of states and political subdivisions
            
            
            104,147
            
            
            5,001
            
            
            6.40
            
            
            93,887
            
            
            4,580
            
            
            6.50Corporate
                securities, FHLB of New York stock, and other securities
            
            
            35,454
            
            
            1,401
            
            
            5.28
            
            
            32,663
            
            
            1,174
            
            
            4.79Loans,
                net
            
            
            1,486,081
            
            
            81,023
            
            
            7.22
            
            
            1,500,116
            
            
            73,891
            
            
            6.52Total
                interest earning assets
            
            
            2,723,230
            
            
            132,814
            
            
            6.49
            %
            
            2,675,695
            
            
            119,007
            
            
            5.92
            %Non-interest
                earning assets
            
            
            109,040
            
            
            
            
            
            
            
            
            125,309**TOTAL**
            
            $
            2,832,270
            
            
            
            
            
            
            
            $
            2,801,004**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Deposits:NOW
            
            $
            184,803
            
            $
            1,790
            
            
            1.29
            %
            $
            188,321
            
            $
            1,082
            
            
            0.77
            %Money
                market
            
            
            156,816
            
            
            2,598
            
            
            2.22
            
            
            180,288
            
            
            2,063
            
            
            1.53Savings
            
            
            420,733
            
            
            6,668
            
            
            2.12
            
            
            429,816
            
            
            3,700
            
            
            1.15Time
            
            
            775,008
            
            
            23,126
            
            
            3.98
            
            
            752,674
            
            
            16,182
            
            
            2.87Total
                interest bearing deposits
            
            
            1,537,360
            
            
            34,182
            
            
            2.97
            
            
            1,551,099
            
            
            23,027
            
            
            1.98Federal
                funds purchased,
              securities
                sold under
              agreements
                to repurchase
              and
                FHLB advances
            
            
            685,705
            
            
            23,223
            
            
            4.47
            
            
            611,937
            
            
            20,004
            
            
            4.36Subordinated
                debt issued in
              connection
                with
              corporation
                - obligated
              mandatory
                redeemable capital
              securities
                of subsidiary trusts
            
            
            61,858
            
            
            4,145
            
            
            8.93
            
            
            61,858
            
            
            3,540
            
            
            7.63Total
                interest bearing liabilities
            
            
            2,284,923
            
            
            61,550
            
            
            3.58
            %
            
            2,224,894
            
            
            46,571
            
            
            2.79
            %Non-interest
                bearing liabilities
              and
                stockholders’ equity:Demand
                deposits
            
            
            311,648
            
            
            
            
            
            
            
            
            341,446Other
                liabilities
            
            
            26,133
            
            
            
            
            
            
            
            
            43,903Stockholders’
                equity
            
            
            209,566
            
            
            
            
            
            
            
            
            190,761**TOTAL**
            
            $
            2,832,270
            
            
            
            
            
            
            
            $
            2,801,004**NET
                INTEREST INCOME**
            
            
            
            
            $
            71,264
            
            
            
            
            
            
            
            $
            72,436**NET
                YIELD ON INTEREST EARNING ASSETS (NET INTEREST
                MARGIN)**
            
            
            
            
            
            
            
            
            3.49
            %
            
            
            
            
            
            
            
            3.61
            %




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 $1.9 million and $1.7 million for the
      nine
      months ended September 30, 2006 and 2005, respectively. The estimated fair
      value
      adjustment on the available for sale securities is included in non-interest
      earning assets. Non accruing loans are included in average balances of loans,
      net. The amount of loan origination and commitment fees, net of certain direct
      loan origination costs, of $1.6 million for both the nine months ended September
      30, 2006 and 2005 are included in interest income on loans,
      net.


32


**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**





The
      following table sets forth the dollar amount of changes in interest income,
      interest expense, and net interest income between the three and nine months
      ended September 30, 2006 and 2005 on a tax equivalent basis:





**For
                the three months ended**
              **September
                30, 2006 compared to 2005**
            
            **For
                the nine months ended**
              **September
                30, 2006 compared to 2005****Increase
                (Decrease) due to change in**
            
            **Increase
                (Decrease) due to change in****Average**
              **Volume**
            
            **Average**
              **Rate**
            
            **Total
                Increase**
              **(Decrease)**
            
            **Average**
              **Volume**
            
            **Average**
              **Rate**
            
            **Total
                Increase**
              **(Decrease)****INTEREST
                INCOME:**Federal
                funds sold
            
            $
            (1,787
            )
            $
            1,458
            
            $
            (329
            )
            $
            (1,032
            )
            $
            794
            
            $
            (238
            )Securities
            
            
            1,734
            
            
            860
            
            
            2,594
            
            
            3,614
            
            
            3,299
            
            
            6,913Loans,
                net
            
            
            207
            
            
            2,597
            
            
            2,804
            
            
            (1,112
            )
            
            8,244
            
            
            7,132**Total
                interest earning assets**
            
            
            **154**
            
            
            **4,915**
            
            
            **5,069**
            
            
            **1,470**
            
            
            **12,337**
            
            
            **13,807****INTEREST
                EXPENSE:**Interest
                bearing deposits
            
            
            (1,058
            )
            
            5,011
            
            
            3,953
            
            
            (340
            )
            
            11,495
            
            
            11,155Federal
                funds purchased, securities sold under agreements to repurchase and
                FHLB
                advances
            
            
            1,324
            
            
            237
            
            
            1,561
            
            
            2,662
            
            
            557
            
            
            3,219Subordinated
                debt issued in connection with corporation - obligated mandatory
                redeemable capital securities of subsidiary trusts
            
            
            —
            
            
            200
            
            
            200
            
            
            —
            
            
            605
            
            
            605**Total
                interest bearing liabilities**
            
            
            **266**
            
            
            **5,448**
            
            
            **5,714**
            
            
            **2,322**
            
            
            **12,657**
            
            
            **14,979****Decrease
                in interest differential**
            
            **$**
            **(112**
            **)**
            **$**
            **(533**
            **)**
            **$**
            **(645**
            **)**
            **$**
            **(852**
            **)**
            **$**
            **(320**
            **)**
            **$**
            **(1,172**
            **)**





The
      decrease in net interest income for the three and nine months ended September
      30, 2006 resulted primarily from decreases in the net interest spread and margin
      on a tax equivalent basis. The decreases in the net interest spread and margin
      on a tax equivalent basis were primarily due to the rates on interest bearing
      liabilities increasing more rapidly than the yields on interest earning assets
      due to competitive pressures on loan and deposit pricing and an inverted to
      relatively flat U.S. Treasury yield curve. As of September 30, 2006, the
      Company’s balance sheet is in a liability interest rate sensitive
      position.





The
      net
      interest margin may continue to be negatively affected if the U.S. Treasury
      yield curve maintains an inverted position with short-term interest rates at
      higher levels than medium- to long-term interest rates, or, to a lesser extent,
      begins to flatten resulting in short-term interest rates at similar levels
      to
      medium- and long-term interest rates. If short-term interest rates begin to
      decrease, resulting in a steepening U.S. Treasury yield curve, the net interest
      margin would be positively affected.





Management
      continues to use its strong capital position to prudently leverage the balance
      sheet by purchasing government securities funded by borrowings. Although the
      leverage strategy results in narrower net interest spreads, the strategy
      increases net interest income without significant credit risk or increase in
      operating expenses. Management will continue to evaluate and manage the effect
      of the changing interest rate environment on the Company’s present and future
      operations, while continuing to competitively price its products and services
      throughout the markets it serves.





**Provision
      for Credit Losses**





The
      provision for credit losses for the three months ended September 30, 2006
      decreased nominally compared to the 2005 period. The provision for credit losses
      increased $0.8 million to $1.3 million for the nine months ended September
      30,
      2006 compared to $0.6 million for the 2005 period. The ratio of allowance for
      loan losses to total loans at September 30, 2006, December 31, 2005, and
      September 30, 2005 was 1.03 percent. The ratio of non-performing assets to
      total
      assets at September 30, 2006 was 0.12 percent compared to 0.33 percent at both
      December 31, 2005 and September 30, 2005. The decrease in the non-performing
      assets ratio at September 30, 2006 was primarily due to a payoff of
      non-performing construction loans totaling $4.7 million and charge-offs of
      two
      business loans totaling $0.4 million. During the nine months ended September
      30,
      2006, net charge-offs totaled $0.8 million compared to $0.1 million for the
      2005
      period. Net charge-offs during the nine months ended September 30, 2006
      primarily consisted of a standby letter of credit charge-off of $0.2 million
      for
      a non-performing real estate construction project of which the amount was fully
      reserved for during 2005 and two business loans totaling $0.4
      million.


33




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**


Nonaccrual
      loans were $3.7 million and $9.9 million at September 30, 2006 and 2005,
      respectively, compared to $9.0 million at December 31, 2005. Total nonaccrual
      loans at September 30, 2006 primarily consisted of one customer relationship
      with loans aggregating $2.4 million ($3.9 million at December 31, 2005). The
      loans involve a collateralized real estate construction project that has
      experienced unexpected delays in completing the construction. The loans are
      also
      supported by personal guarantees. Restructured loans were $0.1 million at both
      September 30, 2006 and December 31, 2005.





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).





Net
      income is adversely impacted by the level of non-performing assets caused by
      the
      deterioration of borrowers’ ability to meet scheduled interest and principal
      payments. In addition to foregone revenue, the Company must increase the level
      of its provision for credit losses and incur collection and other costs
      associated with the management and disposition of foreclosed properties. A
      substantial portion (88.4 percent at September 30, 2006) of total loans of
      the
      Company is collateralized by real estate, primarily located in the New York
      Metropolitan area. Accordingly, the collectibility of the loan portfolio of
      the
      Company is subject to changes in the real estate market in which the Company
      operates.





**Non-Interest
      Income**





Non-interest
      income decreased for the three months ended September 30, 2006 to $2.1 million
      from $2.2 million compared to the 2005 period. Non-interest income decreased
      for
      the nine months ended September 30, 2006 to $5.7 million from $5.9 million
      compared to the 2005 period. The decreases for the three and nine months ended
      September 30, 2006 compared to the 2005 periods were primarily due to lower
      levels of service charges on deposit accounts, loan prepayment fees, and
      investment product sales, as well as the absence of gains on sales of loans
      for
      the 2006 period, compared to gains on sales of loans $0.3 million from the
      sale
      of $7.1 million of residential mortgages during 2005. The decrease was partially
      offset by gains on securities transactions of $0.4 million from the sale of
      $47.0 million of collateralized mortgage obligations.





34




**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**


**Non-Interest
      Expenses**





Non-interest
      expenses decreased $0.3 million, or 2.1 percent, to $13.1 million and $0.9
      million, or 2.2 percent, to $38.9 million for the three and nine months ended
      September 30, 2006 compared to $13.4 million and $39.7 million for the 2005
      periods, respectively. The primary reasons for the decreases were lower levels
      of professional fees, advertising and business development expense, and other
      expense, and for the nine month period, salaries and benefits expense. The
      decreases were partially offset by increases in occupancy and equipment expense,
      and for the three month period, salaries and employee benefits
      expense.





Salaries
      and employee benefits expense, the largest component of non-interest expense,
      increased by $86,000, or 1.0 percent, during the three months ended September
      30, 2006 compared to the 2005 period. The increase for the three months ended
      September 30, 2006 was primarily due to an increase in stock option expense
      and
      higher payroll expense. The increase was partially offset by lower levels of
      incentive compensation expense and a higher level of deferred salaries and
      employee benefits expense related to loan originations. Salaries and employee
      benefits expense decreased $239,000, or 1.0 percent, during the nine months
      ended September 30, 2006 compared to the 2005 period. The decrease for the
      nine
      months ended September 30, 2006 was primarily due to lower levels of medical
      benefit costs, incentive compensation expense, and tuition costs. The decrease
      was partially offset by an increase in stock option expense.





Changes
      in non-interest expense for the three and nine months ended September 30, 2006
      compared to the 2005 periods were also primarily due to the
      following:




·
              Increase
                  of $74,000 (3.9 percent) and $102,000 (1.8 percent) in occupancy
                  and
                  equipment expense. The increases primarily reflect higher rent
                  expense for
                  the Stamford, Connecticut, and Manhattan locations, increases in
                  real
                  estate taxes and maintenance costs for various Bank owned locations,
                  and
                  higher utilities expenses. The increases were partially offset
                  by lower
                  levels of depreciation
                  expense.





C
                Decrease
                    of $138,000 (17.2 percent) and $33,000 (1.7 percent) in advertising
                    and
                    business development expense. The decreases primarily reflect
                    higher costs
                    in 2005 related to the “Get to Know Us” television campaign and decreases
                    in business development
                    expense.





C
              Decrease
                  of $209,000 (35.5 percent) and $573,000 (33.2 percent) in professional
                  fees. The decreases were primarily due to higher legal fees during
                  the
                  2005 period related to a non-performing real estate construction
                  loan and
                  costs related to compliance with Section 404 of the Sarbanes-Oxley
                  Act.





C
              Decrease
                  of $149,000 (14.3 percent) and $100,000 (3.4 percent) in other
                  expense.
                  The decreases were primarily due to lower credit card related expenses
                  and
                  expenses for courier runs to Bank
                  locations.





35


**U.S.B.
        HOLDING CO., INC.**
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**
 **Income
        Taxes**





The
      effective income tax rate for the three and nine months ended September 30,
      2006
      was 32.8 percent and 32.6 percent, respectively, compared to 32.4 percent and
      32.1 percent for the 2005 periods. The effective income tax rate for both the
      2006 and 2005 periods reflects nontaxable income from municipal bonds and in
      2005 the satisfactory completion of a Federal tax examination for prior income
      tax years.





As
      a
      result of a reduction in taxable income for New York State tax purposes, the
      Company has established a valuation allowance at September 30, 2006, December
      31, 2005, and September 30, 2005 in the amount of $3.6 million, $3.0 million,
      and $3.0 million, respectively. The valuation allowance reduces the New York
      State net deferred tax asset to the amount management believes will more likely
      than not be realized. As of September 30, 2006, the New York State deferred
      tax
      asset, net of state deferred tax liabilities, is fully reserved by the valuation
      allowance.






36


**U.S.B.
      HOLDING CO., INC.**


**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Market
      risk is the potential for economic losses to be incurred on market risk
      sensitive instruments as a result of adverse changes in market indices such
      as
      interest rates, foreign currency exchange rates, and commodity prices.
      Quantitative and qualitative disclosures about market risk at December 31,
      2005
      were reported in the Company’s 2005 Annual Report to Stockholders. There have
      been no material changes in the Company’s market risk exposures at September 30,
      2006 compared to December 31, 2005. Interest rate risk continues to be the
      Company’s primary market risk exposure since substantially all Company
      transactions are denominated in U.S. dollars with no direct foreign currency
      exchange or changes in commodity price exposures. Substantially all market
      risk
      sensitive instruments continue to be held to maturity or available for sale
      with
      no significant financial instruments entered into or acquired for trading
      purposes. The Company does not use derivative financial instruments such as
      interest rate swaps and caps and has not been party to any derivative financial
      instruments during the nine months ended September 30, 2006.





The
      Company continues to use two methods to evaluate its sensitivity to changes
      in
      interest rates, a “Static Gap” evaluation and a simulation analysis of the
      impact of changes in interest rates on the Company’s net interest income and
      cash flow. There have been no changes in the Company’s policy limit of
      acceptable variances to net interest income at September 30, 2006 as compared
      to
      December 31, 2005. The Company’s “Static Gap” at September 30, 2006 was a
      negative cumulative gap of $279.8 million in the one-year time frame compared
      to
      a negative cumulative gap of $166.6 million at December 31, 2005. If interest
      rates were to gradually increase 200 basis points or decrease 200 basis points
      from current rates, the percentage change in estimated net interest income
      for
      the subsequent twelve month measurement period would continue to be within
      the
      Company’s policy limit of not changing by more than 5.0
      percent.


37





**U.S.B.
      HOLDING CO., INC.**


**ITEM
      4.**  **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 (the “Exchange Act”) and the rules and forms of
      the Securities and Exchange Commission. This evaluation was made under the
      supervision and with the participation of management, including the Company’s
      Chief Executive Officer and Chief Financial Officer, as of September 30, 2006.
      The Chief Executive Officer and Chief Financial Officer have each concluded,
      based on their review, that as of September 30, 2006, the Company’s disclosure
      controls and procedures, as defined by Exchange Act Rules 13a-15(e) and
      15d-15(e), were 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
      Securities and Exchange Commission rules and forms and that such information
      is
      accumulated and communicated to management as appropriate to allow timely
      decisions regarding required disclosure. There was no change in the Company’s
      internal control over financial reporting that occurred during the fiscal
      quarter ended September 30, 2006 that has materially affected or is reasonably
      likely to materially affect the Company’s internal control over financial
      reporting.


38


**PART
      II - OTHER INFORMATION**




**ITEM
      1A.**  **RISK
      FACTORS**







There
      have been no material changes in the risk factors relevant to our operations
      from those disclosed in the Company’s 2005 Annual Report on Form 10-K in
      response to Item 1A to Part I of Form 10-K.





**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES** **AND
      USE OF PROCEEDS**




The
      following table sets forth information with respect to purchases made by the
      Company of its common stock during the three months ended September 30,
      2006.




**Period**
            
            **Total
                Number**
              **of
                Shares**
              **Purchased****1**
            
            **Average**
              **Price
                Paid**
              **Per
                Share**
            
            **Total
                Number**
              **of
                Shares**
              **Purchased
                as**
              **Part
                of Publicly**
              **Announced**
              **Programs**
            
            **Maximum**
              **Number
                of**
              **Shares
                that**
              **may
                yet be**
              **Purchased**
              **Under
                the**
              **Programs****2**July
                1 to July 31
            
            
            3,900
            
            
            21.88
            
            
            3,900
            
            
            175,800August
                1 to August 31
            
            
            47,400
            
            
            21.79
            
            
            47,400
            
            
            128,400September
                1 to September 30
            
            
            8,300
            
            
            21.95
            
            
            8,300
            
            
            120,100**Total**
            
            
            59,600
            
            
            21.82
            
            
            59,600
            
            
            120,100





1  Includes
      common stock acquired in connection with the exercise of stock
      options.


2  The Company
      authorized a common stock repurchase plan of up to 300,000 shares on December
      13, 2005 to expire on December 31, 2006.





39


**ITEM
      6.**   **EXHIBITS**




**Exhibit
                No.**
            
            **Exhibit**(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.




40


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized on November 9, 2006.




U.S.B.
      HOLDING CO., INC.




/s/ Thomas
              E.
              Hales
            
            
            /s/ Thomas
              M.
              BuonaiutoThomas
              E. Hales
            
            
            Thomas
              M. BuonaiutoChairman
                of the
                Board,
              Chief
                Executive Officer, and Director
            
            
            Executive
                Vice
                President,
              Chief
                Financial Officer, andAssistant
                Secretary
              (Principal Financial andAccounting
                Officer)   41