Document:

<PAGE>

                                                                    Exhibit 10.1

         THIS TEMPORARY WAIVER AND SECOND AMENDMENT (this "WAIVER AND
AMENDMENT"), dated as of October 11, 2000, is entered into by and among DIAMOND
BRANDS OPERATING CORP., a Delaware corporation (the "COMPANY"), the several
financial institutions (the "LENDERS") listed on the signature pages hereof, DLJ
CAPITAL FUNDING, INC., as Syndication Agent (the "SYNDICATION AGENT"), and WELLS
FARGO BANK, N.A., as Swing Line Lender and Administrative Agent (the
"ADMINISTRATIVE AGENT").

                                    RECITALS

     A.   The Company, the lenders party thereto, the Syndication Agent, the
Swing Line Lender and the  Administrative  Agent are  parties to the Credit
Agreement dated as of April 21, 1998 (as amended by the First  Amendment
thereto dated as of March 5, 1999, the "CREDIT  AGREEMENT"),  pursuant to which
the lenders party thereto have extended credit under various facilities to the
Company.

     B.   The Company has requested that such lenders waive the  applicability
of the financial covenants in the Credit Agreement for a limited time and make
certain amendments with respect to the Credit Agreement. The Lenders now wish to
grant a waiver and make such amendments under the Credit Agreement as set forth
in greater detail below.

         NOW, THEREFORE, the parties hereto hereby agree as follows:

          1. DEFINED TERMS.  Unless otherwise defined herein,  capitalized terms
used herein shall have the meanings assigned to them in the Credit Agreement.

          2. WAIVER.

              (a) The Lenders hereby temporarily waive compliance by the Company
with Section 7.06 of the Credit Agreement from the Effective Date through March
31, 2001. The parties hereto acknowledge and agree that should the financial
statements delivered by the Company for the fiscal quarters ending either
September 30, 2000 or December 31, 2000 evidence that the Company would not be
in compliance with Section 7.06 with respect to either of such fiscal quarters
but for this Waiver and Amendment, and such financial covenants are not
hereafter further waived or amended, an Event of Default shall exist on April 1,
2001. From the period commencing on the Effective Date until the expiration of
this waiver on March 31, 2001, no Event of Default or Potential Event of Default
shall exist solely on account of the fact that the Company has not complied
with, and is not likely to comply with, the covenants set forth in Section 7.06
of the Credit Agreement.

              (b) The Lenders hereby waive any Event of Default as may have
occurred as a result of the failure of the Company to provide written notice to
the Administrative Agent for distribution to the Lenders pursuant to Section
6.1(x) of the Credit Agreement of Empire Manufacturing Company v. Empire Candle,
Inc. District

                                       1
<PAGE>

Court, Wyandotte County, Kansas, a lawsuit in which Kent Meisemer,
prior owner of Empire Manufacturing Company, alleges that Diamond Brands did not
fully comply with required actions from the sales contract and alleges damages
of $1,200,000.

           3.INTERIM COVENANTS. The Company covenants and agrees that from the
Effective Date through March 31, 2001, unless the Requisite Lenders waive
compliance in writing, the Company shall perform and comply with the following
covenants. The Company's failure to observe the following covenants shall
constitute an Event of Default without notice to the Company or any grace
period.

              (a) MINIMUM FIXED CHARGE COVERAGE RATIO. The Company shall not
permit the ratio of (i) Consolidated EBITDA to (ii) Consolidated Fixed Charges
for any consecutive four-Fiscal Quarter period ending on the dates set forth
below to be less than the correlative ratio indicated:

                   FISCAL QUARTER       MINIMUM FIXED CHARGE
                     ENDING DATE          COVERAGE RATIO

                  September 30, 2000       0.80 to 1.0
                  December 31, 2000        0.70 to 1.0

              (b) MAXIMUM LEVERAGE RATIO. The Company shall not permit the
Consolidated Leverage Ratio at any time during any of the periods set forth
below to exceed the correlative ratio indicated:

                  PERIOD                MAXIMUM LEVERAGE RATIO

                  September 30, 2000       8.00 to 1.0
                  December 31, 2000        8.85 to 1.0

              (c) INTEREST COVERAGE RATIO. The Company shall not permit the
ratio of (i) Consolidated EBITDA to (ii) Consolidated Interest Expense for any
consecutive four-Fiscal Quarter period ending on the dates set forth below to be
less than the correlative ratio indicated:

                  FISCAL QUARTER        MINIMUM INTEREST
                   ENDING DATE           COVERAGE RATIO

                  September 30, 2000       1.20 to 1.0
                  December 31, 2000        1.0 to 1.0

              (d) COMPLIANCE CERTIFICATE. The Company shall deliver to the
Administrative Agent and each Lender, together with the financial statements it
delivers pursuant to Section 6.1(i) for the monthly period ending December 31,
2000, a Compliance Certificate demonstrating in reasonable detail compliance at
the end of such accounting period with the restrictions contained in Sections
3(a) through (c) above. The Company agrees that the Administrative Agent and the
Lenders may conclusively rely upon such Compliance Certificate in determining
whether an Event of Default exists under those Sections for such accounting
period.

                                       2
<PAGE>

           4. REVOLVING LOANS. Pursuant to Section 2.4(B)(ii) of the Credit
Agreement and commencing on the Effective Date, the Revolving Loan Commitments
shall be permanently reduced from $25,000,000 to $17,500,000 and such reduction
shall reduce the Revolving Loan Commitment of each Revolving Lender
proportionately to its Pro Rata Share. Notwithstanding the foregoing, the
Company shall not permit the Total Utilization of Revolving Loan Commitments (i)
from the Effective Date through December 31, 2000, to exceed $15,000,000 and
(ii) thereafter, to exceed $12,500,000. The Company acknowledges and agrees that
the foregoing shall not in any way limit the Company's obligation to pay
commitment fees on the entire amount of the unutilized Revolving Loan Commitment
as reduced by the first sentence of this Section.

           5. SWING LINE LOANS. The Company and the Swing Line Lender hereby
agree that, from the Effective Date until otherwise agreed in writing by the
Swing Line Lender, the Swing Line Lender shall have no obligation to make any
Swing Line Loans under the Credit Agreement.

           6. AMENDMENTS. The parties hereto hereby agree that the Credit
Agreement shall be amended as follows:

              (a) Section 1 is amended by deleting the definition of "Asset
Sale" therein in its entirety and replacing it with the following new
definition:

                  "Asset Sale" means the sale by Company or any of its
         Subsidiaries to any Person other than Company or any of its
         wholly-owned Subsidiaries of (i) any of the equity ownership of any of
         Company's Subsidiaries (other than directors' qualifying shares), (ii)
         substantially all of the assets of any division or line of business of
         Company or of its Subsidiaries, or (iii) any other assets (whether
         tangible or intangible) of Company or any of its Subsidiaries (other
         than (a) inventory sold in the ordinary course of business, (b) Cash
         Equivalents, and (c) any such other assets to the extent that (i) the
         aggregate value of such assets sold in any single transaction or
         related series of transactions is equal to $500,000 or less and (ii)
         the aggregate value of such assets sold in any Fiscal Year is equal to
         $1,000,000 or less).

              (b) Section 2.2(A) is amended by:

              (i) deleting subsection (i)(a)(I) and (II) thereof in their
entireties and replacing them with the following:

              (I) if a Base Rate Loan, then the sum of the Base Rate PLUS 2.50%;

              (II) if a Eurodollar Rate Loan, then at the sum of the Adjusted
     Eurodollar Rate plus 3.50%.

              AND

                                       3
<PAGE>

              (ii) deleting subsections (i)(b)(I) and (II) thereof in their
entireties and replacing them with the following:

              (I) if a Base Rate Loan, then the sum of the Base Rate PLUS 3.00%;

              (II) if a Eurodollar Rate Loan, then at the sum of the Adjusted
     Eurodollar Rate plus 4.00%.

              (c) Section 2.4(B)(iii) is amended by:

              (i) deleting subsection (a) thereof in its entirety and replacing
it with the following:

              (a) PREPAYMENTS AND REDUCTIONS FROM NET ASSET SALE PROCEEDS. No
     later than the fifth Business Day following the date of receipt by Company
     or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any
     Asset Sale, Company shall prepay the Loans and/or the Revolving Loan
     Commitments shall be permanently reduced in an aggregate amount equal to
     the amount of such Net Asset Sale Proceeds.

              AND

              (ii) deleting the second proviso in subsection (d) thereof and
replacing it with the following: "PROVIDED FURTHER that none of the Net
Securities Proceeds from the issuance of Subordinated Indebtedness permitted
hereunder shall be applied to the mandatory prepayment of the Loans pursuant to
this subsection 2.4(B)(iii)(d) to the extent that it is used to make scheduled
payments of principal and interest on the Senior Subordinated Notes".

              AND

              (iii) deleting the second paragraph of subsection (g) thereof in
its entirety.

              AND

              (iv) deleting the reference to "$5,000,000" in the third paragraph
of subsection (g) thereof and replacing it with the following: "$1,000,000".

              (d) Section 7.1(vi) is amended by inserting the following at the
end thereof: "or other Subordinated Indebtedness in an aggregate principal
amount not in excess of $10,000,000".

              (e) Section 7.3 is amended by:

                                       4
<PAGE>

              (i) inserting the following after subsection (i) thereof: "so long
as the Administrative Agent holds a perfected first priority security interest
in such Investments in Cash Equivalents and either takes possession of such
Investments in Cash Equivalents or enters into an account control agreement with
Company or its applicable Subsidiary and the entity in possession of such
Investments in Cash Equivalents in form and substance satisfactory to the
Administrative Agent".

              AND

              (ii) deleting the reference to "$8,000,000" in subsection (vi)
thereof and replacing it with the following "$500,000".

              (f) Section 7.4(iv) is amended by deleting the reference to
"$5,000,000" therein and replacing it with the following "$1,000,000".

              (g) Section 7.7 is amended by deleting subsection (ii) thereof
therefrom in its entirety and replacing the same with the following
"[Intentionally omitted]".

              (h) Section 7.8 is amended by deleting such Section in its
entirety and replacing it with the following:

              7.8 CONSOLIDATED CAPITAL EXPENDITURES.

              Holdings shall not, and shall not permit its Subsidiaries to make
     or incur Consolidated Capital Expenditures in an amount in excess of (x)
     $5,500,000 for Fiscal Year ending December 31, 2000 and (y) $4,000,000 for
     Fiscal Year ending December 31, 2001 and each Fiscal Year thereafter.

         7. REPRESENTATIONS AND WARRANTIES. The Company hereby represents
and warrants as follows:

              (a) The execution, delivery and performance by the Company of this
Waiver and Amendment have been duly authorized by all necessary corporate and
other action and do not and will not require any registration with, consent or
approval of, notice to or action by, any person (including any governmental
agency) in order to be effective and enforceable. The Credit Agreement, as
amended by this Waiver and Amendment, constitutes a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its respective terms, without defense, counterclaim or offset, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and subject to general principles of
equity, regardless of whether considered in a proceeding in equity or at law.

              (b) Except as set forth on Annex I, all representations and
warranties of the Company contained in the Credit Agreement are true and correct
in all

                                       5
<PAGE>

material respects as though made on and as of the Effective Date (except
to the extent such representations and warranties specifically relate to an
earlier date, in which case they were true and correct as of such earlier date).

              (c) The Company is entering into this Waiver and Amendment on the
basis of its own investigation and for its own reasons, without reliance upon
the Administrative Agent and the Lenders or any other person.

           8. EFFECTIVE DATE. This Waiver will become effective as of date that
each of the following conditions precedent is satisfied (the "EFFECTIVE DATE"):

              (a) the Administrative Agent or its counsel has received from the
Company and the Requisite Lenders a duly executed original or facsimile of this
Waiver and Amendment;

              (b) the Company has paid all amounts described in Section 9 below;

              (c) each of the Company and its Subsidiaries has executed and
delivered account control agreements in form and substance satisfactory to the
Administrative Agent with respect to each of its deposit accounts; and

              (d) to the extent that the Administrative Agent has been advised
by its counsel in the relevant states that such action is customary and
reasonable for a waiver and amendment of this general nature, the Company shall
have caused the title company or companies that issued policies of title
insurance in connection with the Credit Agreement to issue endorsements
substantially in the form of CLTA endorsements 110.5 and 111.10 to assure the
Lenders of the continuing priority of the Liens securing the Loans made after
the Effective Date hereunder and shall have taken such additional steps as are
necessary to enable such endorsements to be issued.

           9. WAIVER FEE. The Company shall pay to the Administrative Agent for
the account of each Lender that has delivered to the Administrative Agent or its
counsel a duly executed original or facsimile of this Waiver and Amendment by
12:00 Noon California time on October 11, 2000 a nonrefundable waiver fee equal
to 0.125% of such Lender's Commitment.

           10. RESERVATION OF RIGHTS. The Company acknowledges and agrees that
neither the Administrative Agent's nor the Lenders' execution and delivery of
this Waiver and Amendment shall be deemed to create a course of dealing or
otherwise obligate the Administrative Agent or the Lenders or any other party
hereto to execute similar waivers under the same or similar circumstances in the
future.

                                       6
<PAGE>

           11. MISCELLANEOUS.

              (a) Except as expressly set forth herein, this Waiver and
Amendment shall not by implication or otherwise limit, impair, constitute a
waiver of, or otherwise affect the rights or remedies of the Administrative
Agent or the Lenders under the Credit Agreement or any of the other Loan
Documents, and shall not alter, modify, amend, or in any way affect the terms,
conditions, obligations, covenants, or agreements contained in the Credit
Agreement or the other Loan Documents, all of which are hereby ratified and
affirmed in all respects and shall continue in full force and effect.

              (b) This Waiver and Amendment shall be binding upon and inure to
the benefit of the parties hereto and thereto and their respective successors
and assigns. No third party beneficiaries are intended in connection with this
Waiver and Amendment.

              (c) This Waiver and Amendment shall be governed by and construed
in accordance with the law of the State of New York.

              (d) This Waiver and Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.

              (e) This Waiver and Amendment, together with the Credit Agreement,
contains the entire and exclusive agreement of the parties hereto with reference
to the matters discussed herein and therein. This Waiver and Amendment
supersedes all prior drafts and communications with respect thereto. This Waiver
and Amendment may not be amended except in accordance with the provisions of
Section 10.6 of the Credit Agreement.

              (f) If any term or provision of this Waiver and Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision shall
be invalidated without affecting the remaining provisions of this Waiver and
Amendment or the Credit Agreement, respectively.

              (g) The Company hereby covenants to pay or to reimburse the
Administrative Agent, upon demand, for all reasonable costs and expenses
(including reasonable attorney costs) incurred in connection with the
development, preparation, negotiation, execution and delivery of this Waiver and
Amendment.

              (h) Hereafter, all references to the Credit Agreement or any Loan
Document contained in the Credit Agreement or any Loan Document or any
certificate delivered pursuant to the Credit Agreement or any Loan Document
shall be deemed to refer to the Credit Agreement and each Loan Document after
giving effect to the provisions of this Waiver and Amendment.

                                       7
<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Waiver and Amendment as of the
date first above written.

                                          DIAMOND BRANDS OPERATING CORP.

                                          By: __________________________________
                                          Name:
                                          Title:

                                          WELLS FARGO BANK, N.A., individually
                                          and as Swing Line Lender and
                                          Administrative Agent

                                          By: __________________________________
                                          Name:
                                          Title:

                                          DLJ CAPITAL FUNDING, INC.,
                                          individually and as Syndication Agent

                                          By: __________________________________
                                          Name:
                                          Title:

                                          PARIBAS CAPITAL FUNDING LLC

                                          By: __________________________________
                                          Name:
                                          Title:

                                          EATON VANCE MANAGEMENT

                                          By: __________________________________
                                          Name:
                                          Title:

                                       8
<PAGE>

                                          CAPTIVA III FINANCE LIMITED

                                          By: __________________________________
                                          Name:
                                          Title:

                                          ATHENA CDO, LIMITED

                                          By: __________________________________
                                          Name:
                                          Title:

                                          BLACK DIAMOND INTERNATIONAL

                                          By: __________________________________
                                          Name:
                                          Title:

                                          BLACK DIAMOND CLO

                                          By: __________________________________
                                          Name:
                                          Title:

                                          DELANO COMPANY

                                          By: __________________________________
                                          Name:
                                          Title:

                                       9
<PAGE>

                                          SENIOR DEBT PORTFOLIO

                                          By: __________________________________
                                          Name:
                                          Title:

                                          BHF-BANK AKTIENGESELLSCHAFT

                                          By: __________________________________
                                          Name:
                                          Title:

                                          BANK OF AMERICA, N.A. (formerly
                                          Bank of America National Trust and
                                          Savings Association)

                                          By: __________________________________
                                          Name:
                                          Title:

                                          U.S. BANK, NATIONAL ASSOCIATION

                                          By: __________________________________
                                          Name:
                                          Title:

                                       10
<PAGE>

                                          BANQUE PARIBAS

                                          By: __________________________________
                                          Name:
                                          Title:

                                          CREDIT AGRICOLE INDOSUEZ

                                          By: __________________________________
                                          Name:
                                          Title:

                                          FREMONT INVESTMENT

                                          By: __________________________________
                                          Name:
                                          Title:

                                          CANADIAN IMPERIAL BANK OF COMMERCE

                                          By: __________________________________
                                          Name:
                                          Title:

                                       11
<PAGE>

                                     ANNEX I

    EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES OF THE COMPANY, PURSUANT TO
                   SECTION 7(B) OF THIS WAIVER AND AMENDMENT

1.       With respect to Section 5.4 of the Credit Agreement, the Company notes
         that resin costs have escalated from prior years, adversely affecting
         operating earnings.

2.       With respect to Section 5.4 of the Credit Agreement, the Company notes
         that, in December 1999, the Company divested their holdings in Empire
         Candle Inc., with an associated loss on sale of assets.

                                       12
<PAGE>

                           ACKNOWLEDGMENT AND CONSENT

     The undersigned, each a guarantor or third-party pledgor or mortgagor with
respect to the Company's Obligations to the Lenders under the Credit Agreement,
each hereby (i) acknowledge and consent to the execution, delivery and
performance by Company of the foregoing Amendment, (ii) reaffirm and agree that
the respective guaranty, third-party pledge or security agreement, deed of
trust, or mortgage to which the undersigned is party and all other documents and
agreements executed and delivered by the undersigned to the Administrative Agent
or the Lenders in connection with the Credit Agreement are in full force and
effect, without defense, offset or counterclaim and continue to guaranty or
secure the full amount of the Obligations to the extent provided in the Loan
Documents, and (iii) confirm that this Acknowledgment and Consent is not
required by the terms of the Loan Documents and need not be obtained in
connection with any prior or future waivers of or amendments to the Loan
Documents. (Capitalized terms used herein have the meanings specified in the
Amendment.)

Dated:  October   , 2000                   DIAMOND BRANDS INCORPORATED
               ---

                                           By:      ____________________________
                                                    Name:
                                                    Title:

                                           EMPIRE CANDLE, INC.

                                           By:      ____________________________
                                                    Name:
                                                    Title:

                                           FORSTER, INC.

                                           By:      ____________________________
                                                    Name:
                                                    Title:

                                       13<PAGE>

                                                                   EXHIBIT 10(a)

                              EMPLOYMENT AGREEMENT

                                 BY AND BETWEEN

                            U.S.B. HOLDING CO., INC.
                                UNION STATE BANK

                                       AND

                                 THOMAS E. HALES

                       ----------------------------------
                           Made and Entered Into As of

                                November 16, 1998

                           As Amended November 8, 2000
                       ----------------------------------

<PAGE>

                              EMPLOYMENT AGREEMENT

         This Employment Agreement ("Agreement") is made and entered into as of
November 16, 1998 by and between U.S.B. HOLDING CO., INC., a publicly held
business corporation organized and operating under the laws of the State of
Delaware (the "Company") and Union State Bank (the "Bank"), both having an
office at 100 Dutch Hill Road, Orangeburg, New York 10962 and THOMAS E. HALES,
an individual residing at 66 Brookwood Drive, Briarcliff Manor, New York 10510
("Mr. Hales").

                                   WITNESSETH:

         WHEREAS, Mr. Hales currently serves the Company and the Bank in the
capacity of Chairman of the Board, President and Chief Executive Officer; and

         WHEREAS, the Company and the Bank desire to assure for themselves the
continued availability of Mr. Hales' services and the ability of Mr. Hales to
perform such services; and

         WHEREAS, Mr. Hales is willing to continue to serve the Company and the
Bank on the terms and conditions hereinafter set forth;

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions hereinafter set forth, the Company and the Bank and Mr.
Hales hereby agree as follows:

         SECTION 1.        EMPLOYMENT

         The Company and the Bank agree to continue to employ Mr. Hales in the
capacities stated above, and Mr. Hales hereby agrees to such continued
employment, during the period and upon the terms and conditions set forth in
this Agreement.

         SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD

         (a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this Section 2
("Employment Period"). The Employment Period shall be for a term of five years
beginning on the date of this Agreement and ending on the fifth anniversary date
of this Agreement (an "Anniversary Date"), plus such extensions, if any, as are
provided for in this Agreement or otherwise agreed to by the Boards of Directors
of the Company and the Bank (collectively, the "Boards").

         (b) Nothing in this Agreement shall be deemed to prohibit the Company
and/or the Bank at any time from terminating Mr. Hales' employment during the
Employment Period with or without notice for any reason; provided, however, that
the relative rights and obligations of the Company and the Bank and Mr. Hales in
the event of any such termination shall be determined under this Agreement.

                                  PAGE 1 of 16
<PAGE>

         SECTION 3. DUTIES

         Mr. Hales shall serve as Chairman of the Board, President and Chief
Executive Officer of the Company and the Bank, having such power, authority and
responsibility and performing such duties as are prescribed by or under the
By-Laws of the Company or the Bank and as are customarily associated with such
position. Mr. Hales shall devote his full business time and attention (other
than during weekends, holidays, approved vacation periods, and periods of
illness or approved leaves of absence) to the business and affairs of the
Company and the Bank and shall use his best efforts to advance the interests of
the Company and the Bank.

         SECTION 4. CASH COMPENSATION

         In consideration for the services to be rendered by Mr. Hales
hereunder, the Company and the Bank shall together pay to him a salary at an
initial annual rate of FIVE HUNDRED SIXTY THOUSAND DOLLARS ($560,000), payable
in approximately equal installments in accordance with the Company's and Bank's
customary payroll practices for senior officers. On July 1st of each year
occurring during the Employment Period, Mr. Hales' annual rate of salary shall
be increased by $30,000 per annum. In addition to salary, Mr. Hales may receive
other cash compensation from the Company or the Bank for services hereunder at
such times, in such amounts and on such terms and conditions as the respective
Boards may determine from time to time.

         The Company and the Bank agree to pay to Mr. Hales a minimum annual
bonus of 6.0 percent, or a percent as otherwise provided on mutual agreement
between the parties, to be computed based upon the net profits realized by the
consolidated earnings of the Company and the Bank and their affiliates in
accordance with the Executive Compensation Plan which has been adopted by the
Board.

         Mr. Hales shall be granted stock options by the Company of no less than
96,800 shares each year during the term of this Agreement under the Company's
Employee Stock Option Plans as may be established by the Company, such stock
options to be adjusted for stock dividends and stock splits after the date of
this Agreement by the Company during the term of this Agreement. Upon the
exercise of options with existing owned stock, additional options to purchase
stock will be issued to Mr. Hales in an amount equivalent to such Company stock
utilized in the exercise. In addition, if Mr. Hales sells existing owned stock
or stock acquired as a result of such exercise of options to pay income taxes as
a result of the exercise of options or sells stock acquired upon exercise of
options ("cashless exercise"), Mr. Hales shall be awarded new options to
purchase Company stock equivalent to the number of shares of Company stock sold
under the circumstances described in this sentence.

         The foregoing salary shall be in addition to the monthly Board fees
presently paid to Mr. Hales or as hereafter provided by the Boards or any Board
of Directors of an affiliate of the Company or the Bank.

         Mr. Hales, at his option, shall be allowed to defer any portion of his
cash compensation in accordance with any plan approved by the Company or the
Bank.

                                  PAGE 2 of 16
<PAGE>

         SECTION 5. INSURANCE

         If Mr. Hales should become disabled during the term of this Agreement,
the Company and the Bank will compensate Mr. Hales for the difference between
any disability insurance, the premiums for which are paid by the Company and the
Bank, and Mr. Hales' full salary for the balance of the term of this Agreement
and thereafter for a period of six months after the termination of this
Agreement. Full fringe benefits will continue through the earlier of (i) the
balance of the term of this Agreement or (ii) the period of Mr. Hales'
disability.

         In accordance with the foregoing, the Company and/or the Bank will
maintain and pay the premiums for the following life insurance policies on the
life of Mr. Hales: Life Policy No. 03260443 and Life Policy No. 83001432 of the
CNA Insurance Company in the amounts of $500,000 and $1,000,000, respectively,
and Universal Life Policy No. 1224430 of Security Mutual Life Insurance Company
in the amount of $2,000,000. The beneficiaries under these three (3) policies of
insurance shall be designated by Mr. Hales.

         Further, the Company and/or the Bank shall maintain and pay the
premiums for three (3) disabilities policies as follows: Disability Policy Nos.
D223373, D290049 and D290633 of the CNA Insurance Company.

         SECTION 6. EMPLOYEE BENEFIT PLANS AND PROGRAMS

         During the Employment Period, Mr. Hales shall be treated as an employee
of the Company and the Bank and shall be entitled to participate in and receive
benefits under any and all qualified or non-qualified retirement, pension,
savings, profit-sharing or stock bonus plans, any and all group life, health
(including hospitalization, medical and major medical), dental, accident and
long-term disability insurance plans, and any other employee benefit and
compensation plans (including but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover employees of,
the Company or the Bank, in accordance with the terms and conditions of such
employee benefit plans and programs and compensation plans and programs which
are consistent with the Company's and the Bank's customary practices.

         SECTION 7. INDEMNIFICATION AND INSURANCE

         (a) During the Employment Period and for a period of six (6) years
thereafter, the Company or the Bank shall cause Mr. Hales to be covered by and
named as an insured under any policy or contract of insurance obtained by it to
insure its directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
the Bank or service in other capacities at the request of the Company or the
Bank. The coverage provided to Mr. Hales pursuant to this Section 7 shall be of
the same scope and on the same terms and conditions as the coverage (if any)
provided to other officers or directors of the Company and the Bank.

         (b) To the maximum extent permitted under applicable law, during the
Employment Period and for a period of six (6) years thereafter, the Company and
the Bank shall indemnify Mr. Hales against and hold him harmless from any costs,
liabilities, losses and expenses to the fullest

                                  PAGE 3 of 16
<PAGE>

extent and on the most favorable terms and conditions that similar
indemnification is offered to any director or officer of the Company, the Bank
or any subsidiary or affiliate thereof.

         SECTION 8. OUTSIDE ACTIVITIES

         Mr. Hales may serve as a member of a board of directors of such
business, community and charitable organizations as he may disclose to and as
may be approved by the Boards, which approval shall not be unreasonably
withheld; provided, however, that such service shall not materially interfere
with the performance of his duties under this Agreement. Mr. Hales may also
engage in personal business and investment activities which do not materially
interfere with the performance of his duties hereunder; provided, however, that
such activities are not prohibited under any code of conduct or investment or
securities trading policy established by the Company and/or Bank and generally
applicable to all similarly situated executives. Mr. Hales may also serve as an
officer or director of any subsidiary of the Company or the Bank. If Mr. Hales
is discharged or suspended, or is subject to any regulatory prohibition or
restriction with respect to participation in the affairs of the Company or the
Bank, he shall continue to perform services for the Company and the Bank in
accordance with this Agreement but shall not directly or indirectly provide
services to or participate in the affairs of the Company and the Bank in a
manner inconsistent with the terms of such discharge or suspension or any
applicable regulatory order.

         SECTION 9. WORKING FACILITIES AND EXPENSES

         Mr. Hales' principal place of employment shall be at the Company's and
the Bank's executive offices at the address first above written, or at such
other location at which the Company or the Bank shall maintain its principal
executive offices, or at such other location as the Company and the Bank and Mr.
Hales may mutually agree upon. The Company or the Bank shall provide Mr. Hales
at his principal place of employment with a private office, secretarial
services, an automobile, and other support services and facilities suitable to
his position with the Company and the Bank and necessary or appropriate in
connection with the performance of his assigned duties under this Agreement. The
Company or the Bank shall provide to Mr. Hales for his exclusive use an
automobile owned or leased by the Company or the Bank appropriate to his
position, to be used in the performance of his duties hereunder, including
commuting to and from his personal residence. The Company or the Bank shall
reimburse Mr. Hales for his ordinary and necessary business expenses, including,
without limitation, all expenses associated with his business use of the
aforementioned automobile, fees for memberships in such clubs and organizations
as Mr. Hales and the Company or the Bank shall mutually agree are necessary and
appropriate for business purposes, and his travel and entertainment expenses
incurred in connection with the performance of his duties under this Agreement,
in each case upon presentation to the Company or the Bank of an itemized account
of such expenses in such form as the Company or the Bank may reasonably require.

         The Company and the Bank shall specifically pay the annual membership
fees of the Sleepy Hollow and the Rockland Country Clubs for the membership of
Mr. Hales.

         SECTION 10. VACATION

         Mr. Hales shall be entitled annually to vacation time of five (5) weeks
in total and two (2) personal days, or any additional vacation and personal time
agreed to by the parties or permitted by

                                  PAGE 4 of 16
<PAGE>

Company or Bank policy.

         SECTION 11. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS

         (a) Mr. Hales shall be entitled to the severance benefits described
herein in the event that his employment with the Company or the Bank terminates
during the Employment Period under any of the following circumstances:

         (i) Mr. Hales' voluntary resignation from employment with the Company
         and the Bank within ninety (90) days following:

                  (A) the failure of the Boards to appoint or re-appoint or
         elect or re-elect Mr. Hales to the office of the Chairman, President or
         C.E.O. (or a more senior office) of the Company and the Bank;

                  (B) the failure of the stockholders of the Company or the Bank
         to elect or re-elect Mr. Hales as a director of the Boards or the
         failure of the Boards (or the nominating committee thereof) to nominate
         Mr. Hales for such election or re-election;

                  (C) the expiration of a thirty (30) day period following the
         date on which Mr. Hales gives written notice to the Company and/or the
         Bank of its material failure, whether by amendment of the Company's or
         the Bank's Organization Certificate or By-laws, action of the Boards or
         the Company's or the Bank's stockholders or otherwise, to vest in Mr.
         Hales the functions, duties, or responsibilities prescribed in Section
         3 of this Agreement, unless, during such thirty (30) day period, the
         Company and/or the Bank cures such failure in a manner determined by
         Mr. Hales and the Boards to be satisfactory; or

                  (D) the expiration of a thirty (30) day period following the
         date on which Mr. Hales gives written notice to the Company and/or the
         Bank of its material breach of any term, condition or covenant
         contained in this Agreement (including, without limitation any
         reduction of Mr. Hales' rate of base salary in effect from time to time
         and any change in the terms and conditions of any compensation or
         benefit program in which Mr. Hales participates which, either
         individually or together with other changes, has a material adverse
         effect on the aggregate value of his total compensation package),
         unless, during such thirty (30) day period, the Company and/or the Bank
         cures such failure in a manner determined by Mr. Hales and the Boards
         to be satisfactory; or

         (ii)     Mr. Hales' death; or

         (iii) subject to the provisions of Section 12, the termination of Mr.
         Hales' employment with the Company or the Bank for any other reason not
         described in Section 11(a).

         (b) Upon the termination of Mr. Hales' employment with the Company
and/or the Bank under circumstances described in Section 11(a) of this
Agreement, the Company or the Bank shall pay and provide to Mr.
Hales (or, in the event of his death, to his estate):

                                  PAGE 5 of 16
<PAGE>

         (i) his earned but unpaid compensation (including, without limitation,
         all items which constitute wages under Section 190.1 of the New York
         Labor Law and the payment of which is not otherwise provided for under
         this Section 11(b)) as of the date of the termination of his employment
         with the Company and the Bank, such payment to be made at the time and
         in the manner prescribed by law applicable to the payment of wages but
         in no event later than thirty (30) days after termination of
         employment;

         (ii) the benefits, if any, to which he is entitled as a former employee
         under the employee benefit plans and programs and compensation plans
         and programs maintained for the benefit of the Company's and the Bank's
         officers and employees;

         (iii) continued group life, health (including hospitalization, medical
         and major medical and the insurance provided under Section 5), dental,
         accident and long term disability insurance benefits, in addition to
         that provided pursuant to Section 11(b)(ii), and after taking into
         account the coverage provided by any subsequent employer, if and to the
         extent necessary to provide for Mr. Hales, for the Remaining Unexpired
         Employment Period, coverage equivalent to the coverage to which he
         would have been entitled under such plans (as in effect on the date of
         his termination of employment, or, if his termination of employment
         occurs after a Change of Control, on the date of such Change of
         Control, whichever benefits are greater), if he had continued working
         for the Company and the Bank during the Remaining Unexpired Employment
         Period at the highest annual rate of compensation achieved during that
         portion of the Employment Period which is prior to Mr. Hales'
         termination of employment with the Company or the Bank;

         (iv) within thirty (30) days following his termination of employment
         with the Company and/or the Bank, a lump sum payment, in an amount
         equal to the present value of the salary that Mr. Hales would have
         earned if he had continued working for the Company and the Bank for
         three years at the highest annual rate of salary achieved during that
         portion of the Employment Period which is prior to Mr. Hales'
         termination of employment with the Company and the Bank, where such
         present value is to be determined using a discount rate equal to the
         applicable short-term federal rate prescribed under Section 1274(d) of
         the Internal Revenue Code of 1986 ("Code"), compounded using the
         compounding period corresponding to the Company's and the Bank's
         regular payroll periods for its officers, such lump sum to be paid in
         lieu of all other payments of salary provided for under this Agreement
         in respect of the period following any such termination. At the option
         of Mr. Hales, such payments may be made in equal monthly installments
         over a period of not less than three years, nor more than five years,
         in which case such payments will not be discounted;

         (v) within thirty (30) days following his termination of employment
         with the Company and/or the Bank, a lump sum payment in an amount equal
         to the present value of the additional employer contributions to which
         he would have been entitled under any and all qualified and
         non-qualified defined contribution plans maintained by, or covering
         employees of, the Company and the Bank, if he were 100% vested
         thereunder and had continued working for the Company and the Bank,
         during the Remaining Unexpired Employment Period at the highest annual
         rate of compensation achieved during that portion of the Employment
         Period which is prior to Mr. Hales' termination of employment with the

                                  PAGE 6 of 16
<PAGE>

         Company or the Bank, and making the maximum amount of employee
         contributions, if any, required under such plan or plans, such present
         value to be determined on the basis of a discount rate, compounded
         using the compounding period that corresponds to the frequency with
         which employer contributions are made to the relevant plan, equal to
         the applicable PBGC Rate. At the option of Mr. Hales, such payments may
         be made in equal monthly installments over a period of not less than
         three, nor more than five years, in which case such payments will not
         be discounted;

         (vi) the payment that would have been made to Mr. Hales under any cash
         bonus or long-term or short-term cash incentive compensation plan
         maintained by, or covering employees of, the Company or the Bank, if he
         had continued working for the Company or the Bank during the Remaining
         Unexpired Employment Period and had earned the maximum bonus or
         incentive award in each calendar year that ends during the Remaining
         Unexpired Employment Period, such payments to be equal to the product
         of:

                  (A) the maximum percentage rate at which an award was ever
         available to Mr. Hales under such incentive compensation plan,
         multiplied by

                  (B) net income of the Company for the most recent fiscal year
         which is prior to Mr. Hales' termination of employment with the
         Company;

         such payments to be made in a lump sum payment in an amount equal to
         the present value of such payments as if made in accordance with
         Company's and/or Bank's Executive Bonus Plan, where such present value
         is to be determined using a discount rate equal to the applicable
         short-term federal rate prescribed under Section 1274(d) of the Code,
         within thirty (30) days following Mr. Hales' termination of employment.
         At the option of Mr. Hales, such payments may be made in equal monthly
         installments over a period of not less than three, nor more than five
         years, in which case such payments will not be discounted;

         (vii) at the election of the Company and the Bank made within thirty
         (30) days following his termination of employment with the Company and
         the Bank, upon the surrender of stock options or stock appreciation
         rights issued to Mr. Hales under any stock option and appreciation
         rights plan or program maintained by, or covering employees of, the
         Company and the Bank, a lump sum payment in an amount equal to the
         product of:

                  (A) the excess of (i) the fair market value of a share of
         stock of the same class as the stock subject to the option or
         appreciation right, determined as of the date of termination of
         employment, over (ii) the exercise price per share for such option or
         appreciation right, as specified in or under the relevant plan or
         program; multiplied by

                  (B) the number of shares with respect to which options or
         appreciation rights are being surrendered.

         For purposes of this Section 11(b)(vii) and for purposes of determining
         Mr. Hales' right following his termination of employment with the
         Company or Bank to exercise any options or appreciation rights not
         surrendered pursuant hereto, Mr. Hales shall be deemed fully vested in
         all options and appreciation rights under any stock option or
         appreciation rights

                                  PAGE 7 of 16
<PAGE>

         plan or program maintained by, or covering employees of, the Company or
         Bank, even if he is not vested under such plan or program, and shall
         have a period of three months from the date of termination of
         employment to exercise such stock options or appreciation rights.

         (viii) at the election of the Company or the Bank made within thirty
         (30) days following Mr. Hales' termination of employment with the
         Company and the Bank, upon the surrender of any shares awarded to Mr.
         Hales under any restricted stock plan maintained by, or covering
         employees of, the Company and the Bank, a lump sum payment in an amount
         equal to the product of:

                  (A) the fair market value of a share of stock of the same
         class of stock granted under such plan, determined as of the date of
         Mr. Hales termination of employment; multiplied by

                  (B) the number of shares which are being surrendered.

         For purposes of this Section 11(b)(viii) and for purposes of
         determining Mr. Hales' right following his termination of employment
         with the Company and the Bank to any stock not surrendered pursuant
         hereto, Mr. Hales shall be deemed fully vested in all shares awarded
         under any restricted stock plan maintained by, or covering employees
         of, the Company and the Bank, even if he is not vested under such plan;

         (ix) the title to the car then currently provided to Mr. Hales shall be
         transferred to Mr. Hales.

The Company and the Bank and Mr. Hales hereby stipulate that the damages which
may be incurred by Mr. Hales following any such termination of employment are
not capable of accurate measurement as of the date first above written and that
the payments and benefits contemplated by this Section 11(b) constitute
reasonable damages under the circumstances and shall be payable without any
requirement of proof of actual damage and without regard to Mr. Hales' efforts,
if any, to mitigate damages. The Company and the Bank and Mr. Hales further
agree that the Company and the Bank may condition the payments and benefits (if
any) due under Sections 11(b)(iii), (iv), (v), (vi), and (vii) on the receipt of
Mr. Hales' resignation from any and all positions which he holds as an officer,
director or committee member with respect to the Company, the Bank or any
subsidiary or affiliate of either of them.

         SECTION 12. TERMINATION WITHOUT ADDITIONAL COMPANY/BANK LIABILITY

         (a) In the event that Mr. Hales employment with the Company and the
Bank shall terminate during the Employment Period on account of:

         (i) the discharge of Mr. Hales for "cause," which, for purposes of this
         Agreement shall mean: (A) Mr. Hales intentionally engages in dishonest
         conduct in connection with his performance of services for the Company
         or the Bank resulting in his conviction of a felony; (B) Mr. Hales is
         convicted of, or pleads guilty or NOLO CONTENDERE to, a felony or any
         crime involving moral turpitude; (C) Mr. Hales willfully fails or
         refuses to perform his duties under this Agreement and fails to cure
         such breach within sixty (60) days following written notice

                                  PAGE 8 of 16
<PAGE>

         thereof from the Company or the Bank; (D) Mr. Hales breaches his
         fiduciary duties to the Company or the Bank for personal profit; or (E)
         Mr. Hales' willful breach or violation of any law, rule or regulation
         (other than traffic violations or similar offenses), or final cease and
         desist order in connection with his performance of services for the
         Company or the Bank;

         (ii) Mr. Hales' voluntary resignation from employment with the Company
         and the Bank for reasons other than those specified in Section 11(a);
         or

         (iii) a determination that Mr. Hales is eligible for long-term
         disability benefits under the Company's or Bank's long-term disability
         insurance program or, if there is no such program, under the federal
         Social Security Act;

then the Company and the Bank shall have no further obligations under this
Agreement, other than the payment to Mr Crotty (or, in the event of his death,
to his estate) of his earned but unpaid salary as of the date of the termination
of his employment, and the provision of such other benefits, if any (including
but not limited to the benefits contemplated by Sections 5 and 7), to which he
is entitled as a former employee under the employee benefit plans and programs,
compensation plans and programs, and indemnification and insurance plans and
programs maintained by, or covering employees of, the Company or the Bank.

         (b) For purposes of Section 12(a)(i)(A) or (B), no act or failure to
act, on the part of Mr. Hales, shall be considered "willful" unless it is done,
or omitted to be done, by Mr. Hales in bad faith or without reasonable belief
that Mr. Hales' action or omission was in the best interests of the Company or
the Bank. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Boards or based upon the written advice of
counsel for the Company or the Bank shall be conclusively presumed to be done,
or omitted to be done, by Mr. Hales in good faith and in the best interests of
the Company or the Bank. The cessation of employment by Mr. Hales shall not be
deemed to be for "cause" within the meaning of Section 12(a)(i) unless and until
there shall have been delivered to Mr. Hales a copy of a resolution duly adopted
by the affirmative vote of three-fourths of the non-employee members of the
Boards at a meeting of the Boards called and held for such purpose (after
reasonable notice is provided to Mr. Hales and Mr. Hales is given an
opportunity, together with counsel, to be heard before the Boards), finding
that, in the good faith opinion of the Boards, Mr. Hales is guilty of the
conduct described in Section 12(a)(i) above, and specifying the particulars
thereof in detail.

         SECTION 13. TERMINATION UPON OR FOLLOWING A CHANGE OF CONTROL

         (a) A change of control of the Company or the Bank ("Change of
Control") shall be deemed to have occurred upon the happening of any of the
following events:

         (i) approval by the stockholders of the Company or the Bank of a
         transaction that would result in the reorganization, merger or
         consolidation of the Company or the Bank, respectively, with one or
         more other persons, other than a transaction following which:

                  (A) at least 51% of the equity ownership interests of the
         entity resulting from such transaction are beneficially owned (within
         the meaning of Rule 13d-3 promulgated under the Exchange Act) in
         substantially the same relative proportions by persons who, immediately

                                  PAGE 9 of 16
<PAGE>

         prior to such transaction, beneficially owned (within the meaning of
         Rule 13d-3 promulgated under the Exchange Act) at least 51% of the
         outstanding equity ownership interests in the Company or the Bank; and

                  (B) at least 51% of the securities entitled to vote generally
         in the election of directors of the entity resulting from such
         transaction are beneficially owned (within the meaning of Rule 13d-3
         promulgated under the Exchange Act) in substantially the same relative
         proportions by persons who, immediately prior to such transaction,
         beneficially owned (within the meaning of Rule 13d-3 promulgated under
         the Exchange Act) at least 51% of the securities entitled to vote
         generally in the election of directors of the Company or the Bank;

         (ii) the acquisition of all or substantially all of the assets of the
         Company or the Bank or beneficial ownership (within the meaning of Rule
         13d-3 promulgated under the Exchange Act) of 20% or more of the
         outstanding securities of the Company or the Bank entitled to vote
         generally in the election of directors by any person or by any persons
         acting in concert, or approval by the stockholders of the Company or
         the Bank of any transaction which would result in such an acquisition;

         (iii) a complete liquidation or dissolution of the Company or the Bank,
         or approval by the stockholders of the Company or the Bank of a plan
         for such liquidation or dissolution;

         (iv) the occurrence of any event if, immediately following such event,
         at least 50% of the members of the board of directors of the Company or
         the Bank do not belong to any of the following groups:

                  (A) individuals who were members of the board of directors of
         the Company or the Bank on the date of this Agreement; or

                  (B) individuals who first became members of the board of
         directors of the Company or the Bank after the date of this Agreement
         either:

                           (I) upon election to serve as a member of the board
                  of directors of the Company or the Bank by affirmative vote of
                  three-quarters of the members of such board, in office at the
                  time of such first election; or

                           (II) upon election by the stockholders to serve as a
                  member of the board of directors of the Company or the Bank,
                  but only if nominated for election by affirmative vote of
                  three-quarters of the members of the board of directors of the
                  Company or the Bank, or of a nominating committee thereof, in
                  office at the time of such first nomination;

         provided, however, that such individual's election or nomination did
         not result from an actual or threatened election contest (within the
         meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange
         Act) or other actual or threatened solicitation of proxies or consents
         (within the meaning of Rule 14a-11 of Regulation 14A promulgated under
         the Exchange Act) other than by or on behalf of the Board of the
         Company or the Bank.

                                 PAGE 10 of 16
<PAGE>

In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Company, the Bank, or a
subsidiary of either of them, by the Company, the Bank, or a subsidiary of
either of them, or by any employee benefit plan maintained by any of them. For
purposes of this Section 13(a), the term "person" shall have the meaning
assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act.

         (b) In the event of a Change of Control, Mr. Hales shall be entitled to
the payments and benefits contemplated by Section 11(b), provided, however, that
with respect to any such benefits or payments to be made thereunder, the
benefits or payments contemplated by Section 11(b) will be calculated as if the
remaining Unexpired Employment Period is equal to three years, in the event of
his termination of employment with the Company or the Bank under any of the
circumstances described in Section 11(a) of this Agreement or under any of the
following circumstances:

         (i) resignation, voluntary or otherwise, by Mr. Hales at any time
         during the Employment Period following his demotion, loss of title,
         office or significant authority or responsibility, or following any
         reduction in any element of his package of compensation and benefits;

         (ii) resignation, voluntary or otherwise, by Mr. Hales at any time
         during the Employment Period following any relocation of his principal
         place of employment or any change in working conditions at such
         principal place of employment which Mr. Hales, in his reasonable
         discretion, determines to be embarrassing, derogatory or otherwise
         adverse;

         (iii) resignation, voluntary or otherwise, by Mr. Hales at any time
         during the Employment Period following the failure of any successor to
         the Company or the Bank in the Change of Control to include Mr. Hales
         in any compensation or benefit program maintained by it or covering any
         of its executive officers, unless Mr. Hales is already covered by a
         substantially similar plan of the Company which is at least as
         favorable to him; or

         (iv) resignation, voluntary or otherwise, for any other reason
         whatsoever following the effective date of the Change of Control.

         SECTION 14. TAX INDEMNIFICATION

         (a) If Mr. Hales's employment terminates under circumstances entitling
him (or in the event of his death, his estate) to the payments or benefits under
Section 11(b), the Company or the Bank shall pay to Mr. Hales (or in the event
of his death, his estate) an additional amount intended to indemnify him against
the financial effects of the excise tax imposed on excess parachute payments
under section 280G and 4999 of the Code (the "Tax Indemnity Payment"). The Tax
Indemnity Payment shall be determined under the following formula:

         X =                     E X P
                  --------------------------------------------
                  1 - [(FI x (1 - SLI)) + SLI + E + M]

         where

                  E =   the rate at which the excise tax is assessed under
                        Section 4999 of the Code;

                                 PAGE 11 of 16
<PAGE>

                  P =   the amount with respect to which such excise tax is
                        assessed, determined without regard to this Section 14;

                  FI =  the highest  marginal rate of income tax  applicable to
                        Mr. Hales under the Code for the taxable year
                        in question;

                  SLI = the sum of the highest marginal rates of income tax
                        applicable to Mr. Hales under all applicable state and
                        local laws for the taxable year in question; and

                  M =   the highest marginal rate of Medicare tax applicable to
                        Mr. Hales under the Code for the taxable year in
                        question.

Such computation shall be made at the expense of the Company or the Bank by an
attorney or a firm of independent certified public accountants selected by Mr.
Hales and reasonably satisfactory to the Company (the "Tax Advisor") and shall
be based on the following assumptions: (i) that a change in ownership, a change
in effective ownership or control, or a change in the ownership of a substantial
portion of the assets, of the Bank or the Company has occurred within the
meaning of section 280G of the Code (a "280G Change of Control"); (ii) that all
direct or indirect payments made to or benefits conferred upon Mr. Hales on
account of his termination of employment are "parachute payments" within the
meaning of section 280G of the Code; and (iii) that no portion of such payments
is reasonable compensation for services rendered prior to Mr. Hales's
termination of employment.

         (b) With respect to any payment that is presumed to be a parachute
payment for purposes of section 280G of the Code, the Tax Indemnity Payment
shall be made to Mr. Hales on the earlier of the date the Company, the Bank or
any direct or indirect subsidiary or affiliate of the Company or the Bank is
required to withhold such tax or the date the tax is required to be paid by Mr.
Hales, unless, prior to such date, the Company or the Bank delivers to Mr. Hales
the written opinion, in form and substance reasonably satisfactory to him, of
the Tax Advisor or of an attorney or firm of independent certified public
accountants selected by the Company or the Bank and reasonably satisfactory to
Mr. Hales, to the effect that Mr. Hales has a reasonable basis on which to
conclude that (i) no 280G Change in Control has occurred, or (ii) all or part of
the payment or benefit in question is not a parachute payment for purposes of
section 280G of the Code, or (iii) all or a part of such payment or benefit
constitutes reasonable compensation for services rendered prior to the 280G
Change of Control, or (iv) for some other reason which shall be set forth in
detail in such letter, no excise tax is due under section 4999 of the Code with
respect to such payment or benefit (the "Opinion Letter"). If the Company or the
Bank delivers an Opinion Letter, the Tax Advisor shall recompute, and the
Company or the Bank shall make, the Tax Indemnity Payment in reliance on the
information contained in the Opinion Letter.

         (c) In the event that Mr. Hales's liability for the excise tax under
section 4999 of the Code for a taxable year is subsequently determined to be
different than the amount with respect to which the Tax Indemnity Payment is
made, Mr. Hales or the Company or the Bank, as the case may be, shall pay to the
other party at the time that the amount of such excise tax is finally
determined, an appropriate amount, plus interest, such that the payment made
under section 16(b), when increased by the amount of the payment made by the
Company or the Bank under this section 16(c) or decreased by the amount of the
payment made by Mr. Hales under this section 16(c), equals the

                                 PAGE 12 of 16
<PAGE>

amount that should have properly been paid to Mr. Hales under section 16(a). The
interest paid to the Company under this section 16(c) shall be determined at the
rate provided under section 1274(b)(2)(B) of the Code. The payment made to Mr.
Hales shall include such amount of interest as is necessary to satisfy any
interest assessment made by the Internal Revenue Service and an additional
amount equal to any monetary penalties assessed by the Internal Revenue Service
on account of an underpayment of the excise tax. To confirm that the proper
amount, if any, was paid to Mr. Hales under this section 16, Mr. Hales shall
furnish to the Company or the Bank a copy of each tax return which reflects a
liability for an excise tax, at least 20 days before the date on which such
return is required to be filed with the Internal Revenue Service. Nothing in
this Agreement shall give the Company or the Bank any right to control or
otherwise participate in any action, suit or proceeding to which Mr. Hales is a
party as a result of positions taken on his federal income tax return with
respect to his liability for excise taxes under section 4999 of the Code.

         SECTION 15. CONFIDENTIALITY

         Unless he obtains the prior written consent of the Company or the Bank,
Mr. Hales shall keep confidential and shall refrain from using for the benefit
of himself, or any person or entity other than the Company or the Bank or any
entity which is a subsidiary of the Company or the Bank or of which the Company
is a subsidiary, any material document or information obtained from the Company
or the Bank, or from its parent or subsidiaries, in the course of his employment
with any of them concerning their properties, operations or business (unless
such document or information is readily ascertainable from public or published
information or trade sources or has otherwise been made available to the public
through no fault of his own) until the same ceases to be material (or becomes so
ascertainable or available); provided, however, that nothing in this Section 15
shall prevent Mr. Hales, with or without the Company's or Bank's consent, from
participating in or disclosing documents or information in connection with any
judicial or administrative investigation, inquiry or proceeding to the extent
that such participation or disclosure is required under applicable law.

         SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS

         The termination of Mr. Hales' employment during the term of this
Agreement or thereafter, whether by the Company or the Bank or by Mr. Hales,
shall have no effect on the rights and obligations of the parties hereto under
the Company's or Bank's qualified or non-qualified retirement, pension, savings,
thrift, profit-sharing or stock bonus plans, group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Company or the Bank from time to time.

         SECTION 17. SUCCESSORS AND ASSIGNS

         This Agreement will inure to the benefit of and be binding upon Mr.
Hales, his legal representatives and testate or intestate distributees, and the
Company and the Bank, and its successors and assigns, including any successor by
merger or consolidation or a statutory receiver or any other person or firm or
corporation to which all or substantially all of the assets and business of the
Company or the Bank may be sold or otherwise transferred. Failure of the Company
and the Bank to obtain from any successor its express written assumption of the
Company's and the Bank's obligations hereunder at least sixty (60) days in
advance of the scheduled effective date of any such succession shall be deemed a
material breach of this Agreement.

                                 PAGE 13 of 16
<PAGE>

         SECTION 18. NOTICES

         Any communication required or permitted to be given under this
Agreement, including any notice, direction, designation, consent, instruction
objection or waiver, shall be in writing and shall be deemed to have been given
at such time as it is delivered personally, or five (5) days after mailing if
mailed, postage prepaid, by registered or certified mail, return receipt
requested, addressed to such party at the address listed below or at such other
address as one such party may by written notice specify to the other party:

         If to Mr. Hales:

                  Mr. Thomas E. Hales
                  66 Brookwood Drive
                  Briarcliff Manor, New York 10510

         If to the Company or the Bank:

                  U.S.B. Holding Co., Inc.
                  Union State Bank
                  100 Dutch Hill Road
                  Orangeburg, New York 10962
                  Attention: Corporate Secretary

         SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES

         The Company and the Bank shall indemnify, hold harmless and defend Mr.
Hales against reasonable costs, including legal fees, incurred by him in
connection with or arising out of any action suit or proceeding in which he may
be involved, as a result of his efforts, in good faith, to defend or enforce the
terms of this Agreement; provided, however, that Mr. Hales shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding, or in a settlement. For purposes of this Agreement, any settlement
agreement which provides for payment of any amounts in settlement of the
Company's and Bank's obligations hereunder shall be conclusive evidence of Mr.
Hales' entitlement to indemnification hereunder, and any such indemnification
payments shall be in addition to amounts payable pursuant to such settlement
agreement, unless such settlement agreement expressly provides otherwise.

         SECTION 20. SEVERABILITY

         A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.

                                 PAGE 14 of 16
<PAGE>

         SECTION 21. WAIVER

         Failure to insist upon strict compliance with any of the terms,
covenants or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition. A waiver of any provision of this Agreement must be made
in writing, designated as a waiver, and signed by the party against whom its
enforcement is sought. Any waiver or relinquishment of any right or power
hereunder at any one or more times shall not be deemed a waiver or
relinquishment of such right or power at any other time or times.

         SECTION 22. COUNTERPARTS

         This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.

         SECTION 23. GOVERNING LAW

         This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of New
York applicable to contracts entered into and to be performed entirely within
the State of New York.

         SECTION 24. HEADINGS AND CONSTRUCTION

         The headings of sections in this Agreement are for the convenience of
reference only and are not intended to qualify the meaning of any section. Any
reference to a section number shall refer to a section of this Agreement, unless
otherwise stated.

         SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS

         This instrument contains the entire agreement of the parties relating
to the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.

         SECTION 26. NON-DUPLICATION

         In the event that Mr. Hales performs services for the Company, the Bank
or an other direct or indirect subsidiary of the Company or the Bank, any
compensation or benefits provided to Mr. Hales by such other employer shall be
applied to offset the obligations of the Company and the Bank hereunder, it
being intended that this Agreement set forth the aggregate compensation and
benefits payable to Mr. Hales for all services to the Company, the Bank, and all
of its direct or indirect subsidiaries.

                                 PAGE 15 of 16
<PAGE>

         IN WITNESS WHEREOF, the Company and the Bank have caused this Agreement
to be executed by their duly authorized officers and Mr. Hales has hereunto set
his hand, all as of the day and year first above written.

                                    /s/ THOMAS E. HALES
                                    ----------------------------------
                                        THOMAS E. HALES

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

By /s/ MICHAEL H. FURY              By /s/ RAYMOND J. CROTTY
  ----------------------              ----------------------------------
       Secretary                      Name:  Raymond J. Crotty
                                      Title: Sr. Exec. V.P. & C.C.O.

                                    UNION STATE BANK

By /S/ MICHAEL H. FURY              By /s/ RAYMOND J. CROTTY
  ----------------------              ----------------------------------
       Secretary                      Name:  Raymond J. Crotty
                                      Title: Sr. Exec. V.P. & C.C.O.

                                 PAGE 16 of 16

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