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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-10950
U.S.B. HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
------------------------
DELAWARE 36-3197969
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 DUTCH HILL RD., ORANGEBURG, NEW YORK 10962
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 365-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each Class which registered
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
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COMMON STOCK ($5.00 PAR VALUE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Class Outstanding at January 31, 1996
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COMMON STOCK 2,794,081 SHARES
($5.00 PAR VALUE)
The aggregate market value on January 31, 1996 of voting stock held by
non-affiliates of the Registrant was approximately $46,135,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1995 are incorporated by reference in Part II of this report.
Portions of the registrant's definitive Proxy Statement for the 1996 Annual
Meeting of Shareholders are incorporated by reference in Part III of this
report.
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PART I
ITEM 1. BUSINESS
U.S.B. Holding Co., Inc. (the "Company"), a Delaware corporation
incorporated on July 6, 1982, is a bank holding company which provides financial
services through its wholly-owned subsidiaries. The Company and its subsidiaries
derive substantially all of their revenue and income from the furnishing of
banking and related services to customers in Rockland and Westchester Counties,
New York and Baltimore and Carroll Counties, Maryland. The Company is a separate
and distinct legal entity from its subsidiaries. The Company's right to
participate in any distribution of the assets or earnings of its subsidiaries is
subject to prior claims of creditors of the subsidiaries.
Union State Bank (the "Bank"), the principal banking subsidiary, is a
state chartered full-service commercial bank which was established in 1969.
The Bank offers a complete range of retail banking services to individuals,
municipalities, corporations, and small and medium-size businesses. These
services include checking accounts, NOW accounts, money market deposit accounts,
savings accounts (passbook and statement), certificates of deposit, retirement
accounts, business loans, personal loans, residential, construction, home equity
(second mortgage) and condominium mortgage loans, loans for education, health
and similar expenditures, credit cards, other consumer oriented financial
services and safe deposit facilities. In addition, a full-time depository
service for personal checking accounts and a savings system whereby customers
may make deposits and withdrawals from any branch are also provided. The Bank
also makes available to its customers automated teller machines (ATM). The
deposits of the Bank are insured to the extent permitted by law pursuant to the
Federal Deposit Insurance Act.
The Company's other banking subsidiary, through December 31, 1995, was
Royal Oak Savings Bank, F.S.B. ("Royal"), a federal thrift subsidiary chartered
in Maryland. Royal offered a complete range of services to individuals and
businesses, including checking accounts, NOW accounts, money market accounts,
saving accounts (passbook and statement), certificates of deposit, personal
loans, construction loans, residential and home equity (second) mortgages and
ATM cards to utilize other banks' automated teller machines. In 1994, Royal
instituted a credit card program with a branch of a national organization, which
was expanded in 1995, as well as made available to the general public.
On December 31, 1995, Royal was sold to Monocacy Bancshares, Inc. (see Note
3 to the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
herein). Immediately prior to the sale, substantially all loans and investment
securities, including the credit card business, were sold to the Bank and the
Company. The Bank intends to maintain the loan portfolio, a portion of which is
serviced by Taneytown Bank & Trust Company, a wholly owned subsidiary of
Monocacy Bancshares, Inc., as it represents an attractive asset, and intends to
continue to expand the credit card business established by Royal. The Company
does not intend, however, to expand its lending market or other business, except
for its credit card business, in the Maryland market.
The Company's nonbank subsidiary, Ad Con, Inc., is an entity providing
advertising services for the Bank. Ad Con, Inc. does not expect to emphasize the
marketing of services to other banks in the near future.
EMPLOYEES
As of December 31, 1995, the Bank employed a total of 183 full-time and 28
part-time employees. The Company and its subsidiaries provide a variety of
benefit plans including group life, health, and stock ownership plans.
Management considers its employee relations to be satisfactory.
COMPETITION
The Bank's main office and ten of its branch offices are located in
Rockland County, New York. An additional Rockland County branch facility was
purchased in 1995 and opened in January, 1996. Five of the Bank's branch offices
are located in Westchester County, New York, one of which opened in January,
1995. Within this area, the Bank encounters competition in its banking business
from many other financial institutions offering comparable products. These
competitors include other commercial banks (both locally based independent banks
and local offices of major New York City commercial banks), as well as mutual
savings banks, mortgage bankers, savings and loan associations and credit
unions. In addition, the Bank experiences competition in marketing some of its
services from the local operations of insurance companies and brokerage firms.
1
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SUPERVISION AND REGULATION
The references under this heading to various aspects of supervision and
regulation are brief summaries which do not purport to be complete and which are
qualified in their entirety by reference to applicable laws, rules and
regulations.
The Company, as a "bank holding company" under the Bank Holding Company Act
of 1956 (the "BHC Act"), is regulated and examined by the Board of Governors of
the Federal Reserve System (the "FRB") and is required to file with the FRB an
annual report and such other information as may be required. The BHC Act
restricts the business activities and acquisitions that may be engaged in or
made by the Company. The FRB may make examinations of the Company and has the
authority (which it has not exercised) to regulate provisions of certain bank
holding company debt. The BHC Act requires every bank holding company to obtain
the prior approval of the FRB before acquiring substantially all the assets of,
or direct or indirect ownership or control of more than five percent of the
voting shares of, any bank which is not already majority-owned. The BHC Act also
prohibits a bank holding company, with certain exceptions, from engaging in or
acquiring direct or indirect control of more than five percent of the voting
shares of any company engaged in non-banking activities. One of the principal
exceptions to these prohibitions is engaging in, or acquiring shares of a
company engaged in, activities found by the FRB, by order or regulations, to be
so closely related to banking or the management of banks as to be a proper
incident thereto. The BHC Act prohibits the acquisition by a bank holding
company of more than five percent of the outstanding voting shares of a bank
located outside the state in which the operations of its banking subsidiaries
are principally conducted, unless such an acquisition is specifically authorized
by statute of the state in which the bank to be acquired is located. The BHC Act
and regulations of the FRB also prohibit a bank holding company and its
subsidiaries from engaging in certain tie-in arrangements in connection with any
extension of credit or the provision of any property or services.
Until December 31, 1995, the Company was also a savings and loan holding
company within the meaning of the Home Owners' Loan Act ("HOLA") and was
registered as such with the OTS. Upon the sale of Royal, the Company
deregistered as a savings and loan holding company.
The FRB requires bank holding companies to comply with risk-based capital
and leverage standards. These guidelines are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
Capital Resources.
The Bank is organized under the Banking Law of the State of New York. Its
operations are subject to Federal and State laws applicable to commercial banks
and to regulation by the Superintendent of Banks and the Banking Board of the
State of New York as well as by the FRB. The Superintendent of Banks examines
the affairs of the Bank for the purpose determining its financial condition.
Acquisitions of stock of other banks generally require prior approval of the
Superintendent of Banks and/or the Banking Board.
The Federal Deposit Insurance Company ("FDIC") insures deposits at the Bank
and, in that capacity, also regulates and examines the Bank. As a result, the
Bank is subject to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA").
FDICIA classifies banks in one of five categories according to capital
levels. With respect to banks not meeting their minimum capital levels, federal
bank regulators may be required to take corrective actions against
undercapitalized banks, including requiring an acceptable capital restoration
plan or placing a bank into conservatorship or receivership. In addition,
undercapitalized banks may be subject to certain restrictions on their
activities and operations, including restrictions on asset growth, rates of
interest paid on deposits, transactions with affiliates, engaging in material
transactions not in the ordinary course of business, and other activities. In
general, a bank is categorized as "critically undercapitalized" if its leverage
capital ratio is below two percent or such higher percentage that may be set by
the appropriate federal bank regulatory agency. As of December 31, 1995, the
Bank was "well-capitalized." See Management's Discussion and Analysis of
Financial Condition and Results of Operations under Capital Resources.
FDICIA makes it more difficult for undercapitalized banks to borrow funds
from the Federal Reserve's "discount window", thus possibly limiting or
eliminating a source of liquidity for such banks. FDICIA also limits, with
certain exceptions, the ability of banks to engage in activities or make equity
investments that are not permissible for national banks.
The Company does not expect such provisions to have a material adverse
effect on the Bank or the Company.
2
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GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and growth of the banking industry, the Company, and the Bank
are affected by general economic conditions, as well as by the credit policies
of monetary authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national supply of
bank credit in order to combat recession and curb inflationary pressures. Its
policies are used in varying combinations to influence overall growth of bank
loans, investments and deposits and may also affect interest rates charged on
loans or paid for deposits.
In view of changing conditions in the national economy and the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or their effect on
the business and earnings of the Company and the Bank.
ITEM 2. PROPERTIES
The main office of the Company and the Bank, including the executive
offices, Finance, Mortgage, Commercial Loan, Loan Support, Human Resources,
Internal Audit, Operations Center and Marketing Departments, are located at its
Corporate Headquarters at 100 Dutch Hill Road, Orangeburg, New York. The Bank's
main branch is located at 46 College Avenue, Nanuet, New York in premises which
are leased by the Bank. The Bank's Transit and Data Processing Departments are
located in a leased location on Route 59, directly across from the Bank's main
branch in Nanuet. A loan office previously located in White Plains, Westchester
County, was relocated in 1994 next to the newly opened North White Plains
branch. The Company also owns other real property in Orange County, where it may
open a future branch of the Bank and real property in Carroll County, Maryland,
which includes a bank branch facility which is leased.
In addition to the main office in Nanuet, the Bank operates ten branches in
Rockland County, New York: 270 South Little Tor Road, New City; 87 Route 59,
Monsey; 115 South Main Street, New City; 45 Kennedy Drive, Spring Valley; One
Broadway, Haverstraw; Route 9W and Railroad Avenue, West Haverstraw; 338 Route
59, Central Nyack; 230 North Middletown Road, Pearl River; 747 Chestnut Ridge
Road, Chestnut Ridge; and 100 Dutch Hill Road, Orangeburg. The premises of the
Chestnut Ridge, Nanuet, Central Nyack, Little Tor Road, and Spring Valley branch
offices are leased, while the other Rockland branch offices are owned by the
Bank. The Bank also operates five branches in Westchester County, New York: 131
Central Avenue, Tarrytown; 299 Bedford Road, Bedford Hills; and 3000 East Main
Street, Peekskill, which are owned, and leased locations at 76 Virginia Road,
North White Plains; and 88 Croton Avenue, Ossining. An eleventh Rockland
location which is owned, opened on January 24, 1996 at 35 South Liberty Drive,
Stony Point.
In the opinion of management, the premises, fixtures, and equipment used by
the Company and the Bank are adequate and suitable for the conduct of their
businesses. All the facilities are well maintained and provide adequate parking.
ITEM 3. LEGAL PROCEEDINGS
Various actions and proceedings are presently pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
consolidated financial statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION AND HOLDERS
The Company's common stock was held of record as of January 31, 1996 by
approximately 1,153 shareholders and is traded sporadically in the
over-the-counter market and in private transactions. To date there has been no
established public trading market for the Company's common stock and bid and
asked quotations by broker-dealers have been intermittent and infrequent.
National Quotation Bureau, Inc., a service which accumulates security price
quotations from broker-dealers, reports high and low bid prices for the
Company's Common Stock. Prices quoted by National Quotation Bureau, Inc. or
actual prices
3
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(adjusted for 10 percent stock dividend issued in 1995) where no such quote is
available are as follows:
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1995 1994
HIGH LOW High Low
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First Quarter $22.05 $21.14 $20.91 $20.91
Second Quarter $23.18 $21.36 $20.91 $20.91
Third Quarter $28.75 $23.50 $22.39 $21.59
Fourth Quarter $29.00 $23.50 $22.27 $21.59
January 31, 1996 $29.50 $23.50
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The foregoing prices represent inter-dealer quotations without adjustment
for retail markup, markdown or commission.
Due to the limited number of reported bid and asked quotations for the
Company's stock, they are not, in the management's opinion, sufficient to
establish a representative market value for the stock.
Under the Company's Dividend Reinvestment and Stock Purchase Plan, which
has been temporarily suspended, participants are permitted to reinvest cash
dividends in common stock at 100 percent of the current market price (as
determined under the Plan). In the third quarter of 1994, a stock purchase
feature of the Plan was added to allow stockholders to purchase at fair market
value up to $2,500 of common stock per quarter.
Under the Plan, shareholders reinvested cash dividends to purchase and made
optional purchases of common stock (adjusted for 10 percent stock dividend
issued in 1995) as follows:
<TABLE>
<CAPTION>
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1995 1994
SHARES Shares
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DIVIDEND OPTIONAL Price per Purchase Dividend Optional Price per
Purchase date REINVESTMENT PURCHASES share Date Reinvestment Purchases share
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<S> <C> <C> <C> <C> <C> <C> <C>
January 16, 9,390 4,620 $22.27 January 15 10,273 -- $17.27
April 14, 9,070 6,815 23.18 April 15 9,839 -- 20.91
May 25, -- -- -- May 25 8,974 -- 20.91
July 14, 7,513 8,238 25.75 July 15 9,892 -- 22.27
October 13, 7,669 8,144 28.00 October 15 9,364 5,138 22.27
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</TABLE>
DIVIDENDS
In 1988, the Board of Directors of the Company adopted a policy of paying
quarterly cash dividends to holders of its common stock. After adjustment for
the 10 percent stock dividend issued July 1, 1995, quarterly cash dividends of
$.09 per share were paid in 1993 to shareholders of record on March 31,
June 30, September 30 and December 31. In 1994, $.10 quarterly dividends were
paid to shareholders of record on March 31, June 30, September 30, and
December 31, in addition to a special $.09 cash dividend paid to shareholders
of record on May 25, 1994. In 1995, a $.10 and $.11 quarterly dividend was
paid to shareholders of record on March 31, and June 30, respectively, and $.12
quarterly dividends were paid to shareholders of record on September 30 and
December 31. A special dividend of $.15 per share was declared on
December 29, 1995 and paid to shareholders of record on January 26, 1996.
4
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Stock dividends of 10 percent were declared by the Company to shareholders
of record on June 15, 1995 and June 30, 1993, respectively, and a five percent
stock dividend was declared to shareholders of record on June 30, 1992.
Any funds which the Company may require in the future to pay cash
dividends, as well as various Company expenses, are expected to be obtained by
the Company, chiefly in the form of cash dividends from the Bank and secondarily
from stock issuances under the Company's Dividend Reinvestment and Stock Option
Plans. In this regard, the ability of the Company to declare and pay dividends
in the future will depend not only upon its future earnings and financial
condition, but also upon the future earnings and financial condition of the Bank
and upon the ability of the Bank to transfer funds to the Company in the form of
cash dividends and otherwise. The Company is a separate and distinct legal
entity from its subsidiaries. The Company's right to participate in any
distribution of the assets or earnings of its subsidiaries is subject to prior
claims of creditors of the subsidiaries.
Under New York Banking Law, a New York bank may declare and pay dividends
not more often than quarterly and no dividends may be declared, credited, or
paid so long as there is any impairment of capital stock. In addition, except
with the approval of the New York State Superintendent of Banks, the total of
all dividends declared in any year may not exceed the sum of a bank's net
profits for that year and its undistributed net profits for the preceding two
years, less any required transfers to surplus. A bank may be required to
transfer to surplus up to 10 percent of its net profits in any accounting period
if its combined capital stock, surplus and undivided profit accounts do not
equal 10 percent of its net deposit liabilities.
The payment of dividends by the Company may also be limited by the Federal
Reserve Board's capital adequacy and dividend payment guidelines applicable to
bank holding companies (see Item 1 - Business-Supervision and Regulation).
Under these guidelines, the Company is not expected to pay any dividends on
shares of the Company's common stock until such time as its debt to equity ratio
(as defined including long-term debt qualifying as capital) is below 30
percent.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from the
table entitled "Selected Financial Data" of the Company's 1995 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference from the
Company's 1995 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference from the
Company's 1995 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
The information required by Items 10, 11, 12 and 13 is incorporated by
reference from the Company's definitive Proxy Statement for its Annual Meeting
of Shareholders which will be filed with the Commission not later than 120 days
after December 31, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. AND 2. FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements and schedules of the Company and its
subsidiaries are incorporated in Item 8 by reference from the Company's 1995
Annual Report to Shareholders:
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED STATEMENTS OF CONDITION, DECEMBER 31, 1995 AND 1994
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994
AND 1993
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the Consolidated Financial Statements and the Notes thereto.
3. EXHIBITS
EXHIBIT NO. Exhibit
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(3) (a) Certificate of Incorporation of Registrant (incorporated herein
by reference from Registrant's Form S-14 Registration Statement,
file no. 2-79734, ("S-14"), Exhibit 3(a)).
(3) (b) Certificate of Amendment of Certificate of Incorporation of
Registrant filed on August 15, 1984 (incorporated herein by
reference from Registrant's annual report on Form 10-K for the
year ended December 31, 1984 ("1984 10-K"), Exhibit 3(b)).
(3) (c) Certificate of Amendment of Certificate of Incorporation of
Registrant filed on June 17, 1986 (incorporated herein by
reference from Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1986, Exhibit (1)).
(3) (d) Certificate of Amendment of Certificate of Incorporation of
Registrant filed on June 30, 1987 (incorporated herein by
reference from Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1987, Exhibit (1)).
(3) (e) Certificate of Amendment of the Certificate of Incorporation of
Registrant filed on December 29, 1988.
(3) (f) Certificate of Amendment of the Certificate of Incorporation of
the Registrant filed on May 24, 1991 (incorporated herein by
reference from Registrant's quarterly report on Form 10-Q ("1991
10-Q") for the quarter ended June 30, 1991, Exhibit (3j)).
(3) (g) Certificate of Designation of the Registrant filed on December
30, 1988.
(3) (h) Bylaws of Registrant (incorporated herein by reference from the
S-14, Exhibit 3(b)).
(10) (a) Agreement of Employment dated as of July 1, 1994 between the Bank
and Thomas E. Hales (incorporated herein by reference to 1994
10-K, Exhibit (10)(a)).
(10) (b) Registrant's 1984 Incentive Stock Option Plan (incorporated
herein by reference from Form S-8 Registration Statement, file
No. 2-90674, Exhibit 28 (b)).
(10) (c) Registrant's 1993 Incentive Stock Option Plan (incorporated
herein by reference from 1993 10-K, Exhibit (10)(c)).
(10) (d) Registrant's Employee Stock Ownership Plan with 401(K) Provision
(incorporated herein by reference from 1993 10-K, Exhibit
(10)(d)).
(10) (e) Registrant's Dividend Reinvestment and Stock Purchase Plan
(incorporated herein by reference from Form S-3 Registration
Statement, file No. 33-72788).
(10) (f) Registrant's Director Stock Option Plan (incorporated herein by
reference from the May 31, 1989 Proxy Statement for 1989 Annual
Meeting of Shareholders).
(10) (g) Registrant's Supplemental Employees' Investment Plan for Salaried
Employees (incorporated herein by reference from Registrant's
1994 10-K, Exhibit (10)(o)).
6
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(10) (h) Stock Purchase Agreement dated August 25, 1995 between U.S.B.
Holding Co., Inc., Monocacy Bancshares, Inc. and Royal Oak
Savings Bank, F.S.B.*
(11) Earnings per share.*
(13) Registrant's Annual Report to Shareholders for the year ended
December 31, 1995* (portions incorporated by reference in Form
10-K).
(21) Subsidiaries of the Registrant*
(23) Consent of Deloitte & Touche LLP*
* Filed Herewith
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(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1995.
7
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 27, 1996.
U.S.B. HOLDING CO., INC.
/s/ THOMAS E. HALES
------------------------------------------
By: Thomas E. Hales,
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities on March 27, 1996.
/s/ THOMAS E. HALES /s/ STEVEN T. SABATINI
- ------------------------------------ -------------------------------------
Thomas E. Hales, Chairman of the Steven T. Sabatini, Executive Vice
Board, President and Chief Executive President and Chief Financial Officer
Officer and Director
/s/ FRED F. GRAZIANO /s/ KENNETH J. TORSOE
- ------------------------------------ -------------------------------------
Fred F. Graziano, M.D., Treasurer Kenneth J. Torsoe, Director
and Director
/s/ MICHAEL H. FURY /s/ HERBERT PECKMAN
- ------------------------------------ -------------------------------------
Michael H. Fury, Esq., Secretary Herbert Peckman, Director
and Director
/s/ HOWARD V. RUDERMAN
- ------------------------------------
Howard V. Ruderman, Director
<PAGE>
MONOCACY BANCSHARES, INC.
TANEYTOWN, MARYLAND, AS BUYER;
U.S.B. HOLDING CO., INC.
ORANGEBURG, NEW YORK, AS SELLER:
ROYAL OAK SAVINGS BANK, FSB
RANDALLSTOWN, MARYLAND, AS ACQUIREE
August 25, 1995
<PAGE>
TABLE OF CONTENTS
Page
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1. THE STOCK PURCHASE. . . . . . . . . . . . . . . . . . . . . . . . 1
(a) Assets and Liabilities Excluded. . . . . . . . . . . . . . . 2
(b) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . 2
(c) Estimated Purchase Price . . . . . . . . . . . . . . . . . . 2
(d) Closing Adjustments and Determination
of Final Purchase Price. . . . . . . . . . . . . . . . . . 2
2. REPRESENTATIONS AND WARRANTIES BY BUYER . . . . . . . . . . . . . 3
(a) Organization, Good Standing, Authority,
Insurance, Etc.. . . . . . . . . . . . . . . . . . . . . . 3
(b) Agreement, Authority, Absence of Conflicts . . . . . . . . . 4
(c) Sufficient Resources, Etc. . . . . . . . . . . . . . . . . . 4
(d) Ownership of Acquiree Stock. . . . . . . . . . . . . . . . . 4
(e) Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . 4
(f) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 5
(g) Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . 5
(h) Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 5
(i) Accuracy of Representations. . . . . . . . . . . . . . . . . 5
(j) Compliance with Applicable Laws. . . . . . . . . . . . . . . 5
3. REPRESENTATIONS AND WARRANTIES BY SELLER AND ACQUIREE . . . . . . 6
(a) Organization, Good Standing, Authority, Deposit
Insurance, Etc.. . . . . . . . . . . . . . . . . . . . . . 6
(b) Capitalization, Investments. . . . . . . . . . . . . . . . . 6
(c) Financial Statements . . . . . . . . . . . . . . . . . . . . 6
(d) Absence of Certain Developments. . . . . . . . . . . . . . . 7
(e) Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(f) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 9
(g) Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . . 9
(h) Properties . . . . . . . . . . . . . . . . . . . . . . . . . 9
(i) Compliance with Applicable Laws. . . . . . . . . . . . . . . 10
(j) Contracts and Commitments, Etc.. . . . . . . . . . . . . . . 10
(k) Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 11
(l) No Guarantees. . . . . . . . . . . . . . . . . . . . . . . . 11
(m) Examination Reports. . . . . . . . . . . . . . . . . . . . . 11
(n) Agreement, Authority, Absence of Conflicts . . . . . . . . . 11
(o) Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . 12
(p) Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . 12
(q) Employee Benefit Plans . . . . . . . . . . . . . . . . . . . 12
(r) Labor Matters. . . . . . . . . . . . . . . . . . . . . . . . 12
(s) Environmental Matters. . . . . . . . . . . . . . . . . . . . 12
(t) Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 14
(u) Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . 14
(v) Financial Institutions Bond. . . . . . . . . . . . . . . . . 14
(w) Not Used . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(x) Assumability of Leases and Contracts . . . . . . . . . . . . 14
(y) Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(z) Not Used . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(aa) Trademarks, Trade Names. . . . . . . . . . . . . . . . . . . 15
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(bb) Accuracy of Representations. . . . . . . . . . . . . . . . . 15
(cc) Materiality. . . . . . . . . . . . . . . . . . . . . . . . . 15
(dd) Absence of Questionable Payments . . . . . . . . . . . . . . 15
(ee) Powers of Attorney, Guarantees . . . . . . . . . . . . . . . 16
(ff) Mortgage Servicing Agreements. . . . . . . . . . . . . . . . 16
4. ACCESS TO AND INFORMATION CONCERNING PROPERTIES, RECORDS, ETC.. . 16
(a) Bank Premises. . . . . . . . . . . . . . . . . . . . . . . . 17
5. AFFIRMATIVE COVENANTS OF BUYER. . . . . . . . . . . . . . . . . . 17
(a) Conduct of Business. . . . . . . . . . . . . . . . . . . . . 17
(b) Preservation of Business . . . . . . . . . . . . . . . . . . 18
(c) Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 18
(d) Laws, Rules, Etc.. . . . . . . . . . . . . . . . . . . . . . 18
(e) Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . 18
(f) Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(g) Randallstown Property. . . . . . . . . . . . . . . . . . . . 18
6. AFFIRMATIVE COVENANTS OF ACQUIREE . . . . . . . . . . . . . . . . 19
(a) Conduct of Business. . . . . . . . . . . . . . . . . . . . . 19
(b) Preservation of Business . . . . . . . . . . . . . . . . . . 19
(c) Properties . . . . . . . . . . . . . . . . . . . . . . . . . 19
(d) Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 20
(e) Contracts, Etc.. . . . . . . . . . . . . . . . . . . . . . . 20
(f) Financial Statements . . . . . . . . . . . . . . . . . . . . 20
(g) Laws, Rules, Etc.. . . . . . . . . . . . . . . . . . . . . . 21
(h) Corporate Existence. . . . . . . . . . . . . . . . . . . . . 21
(i) Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(j) Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . 21
(k) Cooperate in Transferring Deposit Accounts to Buyer. . . . . 22
7. NEGATIVE COVENANTS OF SELLER AND ACQUIREE . . . . . . . . . . . . 22
8. CONDITIONS TO THE OBLIGATIONS OF BUYER, SELLER AND ACQUIREE . . . 25
(a) Approval of Regulatory Agencies. . . . . . . . . . . . . . . 25
(b) Suits, Actions . . . . . . . . . . . . . . . . . . . . . . . 25
(c) Statutes, Orders . . . . . . . . . . . . . . . . . . . . . . 25
9. CONDITIONS TO THE OBLIGATIONS OF BUYER. . . . . . . . . . . . . . 25
(a) Representations, Warranties and Covenant . . . . . . . . . . 26
(b) Opinion of Special Counsel . . . . . . . . . . . . . . . . . 26
(c) Suit, Action, Etc. . . . . . . . . . . . . . . . . . . . . . 29
(d) Closing Documents. . . . . . . . . . . . . . . . . . . . . . 29
10. CONDITIONS TO THE OBLIGATIONS OF SELLER AND ACQUIREE. . . . . . . 29
(a) Representations and Warranties . . . . . . . . . . . . . . . 29
(b) Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . 30
(c) Suit, Action, Etc. . . . . . . . . . . . . . . . . . . . . . 32
(d) Deposit into Payment Fund. . . . . . . . . . . . . . . . . . 32
(e) Closing Documents. . . . . . . . . . . . . . . . . . . . . . 32
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11. CERTAIN TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . 32
(a) Internal Revenue Code Section 338(h)(10) Election. . . . . . 32
(b) Allocation of Purchase Price . . . . . . . . . . . . . . . . 33
(c) Returns, Indemnification and Liability for Taxes.. . . . . . 34
12. TERMINATION OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . 34
13. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
14. CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . 36
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC.. . . . . . . . . 36
16. CERTAIN POST-MERGER AGREEMENTS. . . . . . . . . . . . . . . . . . 36
(a) Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 37
(b) Indemnification of Buyer . . . . . . . . . . . . . . . . . . 37
(c) Indemnification of Seller. . . . . . . . . . . . . . . . . . 38
(d) FDIC Insurance Premium Adjustment Retroactively. . . . . . . 38
17. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 38
18. PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
19. AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . . . . . 39
20. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 39
21. COMMUNICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 39
22. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . 40
23. HEADINGS, ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . 40
24. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
25. NO THIRD PARTY BENEFICIARY. . . . . . . . . . . . . . . . . . . . 40
26. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
27. FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . 40
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made this 25th day of August,
1995, by and among MONOCACY BANCSHARES, INC., a Maryland corporation and bank
holding company having its principal office in Taneytown, Maryland ("Buyer"),
U.S.B. HOLDING CO., INC., a Delaware corporation and savings and loan holding
company having its principal office in Orangeburg, New York ("Seller") and ROYAL
OAK SAVINGS BANK, FSB, a federal savings bank having its principal office in
Randallstown, Maryland ("Acquiree").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Buyer, Seller and Acquiree
have approved and deem it advisable and in the best interests of their
respective companies to consummate the transactions provided in this Agreement;
WHEREAS, Buyer desires to purchase and Seller desires to sell 1,000 shares of
common stock $10.00 par value per share of the Acquiree (the "Acquiree Stock")
comprising all of Acquiree's capital stock issued and outstanding (the
acquisition of the Acquiree Stock is referred to herein as the "Stock
Purchase");
WHEREAS, Buyer may reorganize its corporate structure after the Stock
Purchase in such a way that the Acquiree will continue to be operated as a
separate subsidiary, will be merged with and into a subsidiary of Buyer or will
be liquidated, but for which the Buyer has not yet decided which form of
reorganization that it will effect;
NOW THEREFORE, in consideration of the premises, mutual promises, covenants,
agreements, representations and warranties hereinafter set forth, and of other
good and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. THE STOCK PURCHASE. Upon the terms and subject to the conditions set
forth herein, the Stock Purchase is to be accomplished at a closing (the
"Closing") on the effective date (the "Effective Date"), by means of the
delivery of funds by Buyer against delivery by Seller of the certificates
representing the Acquiree Stock and all rights of ownership of the Acquiree
Stock shall pass from Seller to Buyer, resulting in all outstanding shares of
Acquiree being owned by Buyer at and after the Effective Date. The parties shall
cooperate fully, and shall cause each of their affiliates to cooperate fully, in
the preparation and submission by them, as promptly as reasonably practicable,
of such notices, applications, petitions, and other documents and materials as
any of them may reasonably deem necessary (or desirable) to the Board of
Governors of the Federal Reserve System (the "Federal
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Reserve"), the Maryland state bank regulatory authorities, the Federal Deposit
Insurance Corporation ("FDIC"), the Office of Thrift Supervision (the "OTS"),
other regulatory authorities, and any other persons for the purpose of obtaining
any approvals or consents necessary to consummate the transactions contemplated
by this Agreement. Prior to the making of any such filings with any regulatory
authority or any third person (such as mailings to shareholders or press
releases), the parties shall submit to each other the materials to be filed,
mailed or released. Any such materials must be acceptable to the parties (such
acceptance not to be unreasonably withheld) with indications of acceptance
required prior to use, except to the extent that any party is legally required
to proceed (although still provide notice) prior to obtaining the acceptances of
the other parties.
(a) ASSETS AND LIABILITIES EXCLUDED. Prior to the Effective Date,
Acquiree shall transfer to Seller or such other entity as it deems
appropriate, or otherwise remove from its books, those assets and
liabilities described and quantified on Schedule 1(a) and updated as to
dollar amounts on an addendum to Schedule 1(a) prepared immediately prior
to the Effective Date (the "Excluded Assets and Liabilities"). The Excluded
Assets and Liabilities shall pass to the Seller and Buyer shall assume no
rights or obligations directly or indirectly associated with or in any way
related to the Excluded Assets and Liabilities.
(b) PURCHASE PRICE. The purchase price for the Stock Purchase shall
be determined as set forth on Schedule 1(b); provided, however, that such
purchase price shall be adjusted in accordance with the provisions of
Sections 1(c) and 1(d), hereof.
(c) ESTIMATED PURCHASE PRICE. At least five (5) days prior to the
Effective Date, Seller and Acquiree shall deliver to Buyer Schedule 1(b)
based upon information as of the most recent practicable date (the
"Estimated Purchase Price") together with details reconciling such amounts
with the corresponding amounts previously calculated as of the date hereof
in accordance with paragraph 1(b). The Estimated Purchase Price shall be
paid by Buyer at Closing with the understanding that such Estimated
Purchase Price shall be further adjusted in accordance with paragraph l(d),
hereof and Buyer shall receive a refund, or pay for any shortfall,
resulting from such adjustment.
(d) CLOSING ADJUSTMENTS AND DETERMINATION OF FINAL PURCHASE PRICE. As
soon as reasonably practicable following the Effective Date and in no event
more than ten (10) days thereafter, Seller shall prepare and deliver to
Buyer an unaudited final computation of the purchase price (the "Final
Purchase Price") measured as of the Effective Date, with the individual
amounts purporting to represent unaudited,
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<PAGE>
unadjusted book values presented thereon having been determined in
accordance with generally accepted accounting principles consistent with
Acquiree's past practices, together with adjustments to reconcile such
amounts to those previously presented on the schedule detailing the
Estimated Purchase Price. The parties shall cooperate in the preparation of
such final schedule and adjustments. Buyer shall provide Seller and its
designees with full access to the books, records, personnel and
representatives of Buyer and such information as Seller may reasonably
request in connection with the preparation of such schedule and
adjustments. The Parties shall cooperate in resolving any disputed amounts
set forth on the schedule and shall commence good faith negotiations with a
view toward promptly resolving any disagreement that arises. If Buyer and
Seller are unable to resolve their differences within 30 days following the
preparation of the Final Purchase Price and related adjustments, such
disagreement shall be referred to a firm of independent accountants
mutually agreed upon by Seller and Buyer for resolution of such
disagreement in accordance with the provisions of this Agreement. If Buyer
and Seller do not promptly agree on the selection of an independent
accounting firm, the respective independent public accountants of Buyer and
Seller shall select such firm. Buyer and Seller shall use their best
efforts to cause any independent accounting firm selected to render its
determination as soon as practicable after referral of the disagreement to
such firm, and each shall cooperate with such firm and provide such firm
with access to the books, records, personnel and representatives as such
firm may require in order to render its determination. All of the fees and
expenses of such independent accounting firm shall be paid one half by
Buyer and one half by Seller. The determinations of the parties or, if
required, the independent accounting firm with respect to any disagreement,
shall be final and binding upon the parties and the resulting amounts shall
be used to calculate any excess or deficiency. Seller shall promptly remit
to or collect from Buyer such excess or deficiency, as appropriate.
2. REPRESENTATIONS AND WARRANTIES BY BUYER. Buyer represents and warrants
to Acquiree and Seller as follows:
(a) ORGANIZATION, GOOD STANDING, AUTHORITY, INSURANCE, ETC. Buyer is a
Maryland corporation organized, validly existing and in good standing under
the laws of the State of Maryland. Buyer has all requisite corporate power
and authority to conduct its business as it is now conducted, to own and
operate its properties and assets and to lease properties used in its
business. Buyer has all requisite corporate power and authority to enter
into this Agreement and, subject to obtaining any required regulatory
approvals, to perform
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<PAGE>
and carry out the provisions of and all its obligations under this
Agreement.
(b) AGREEMENT, AUTHORITY, ABSENCE OF CONFLICTS. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein, have been duly and validly authorized by
the Board of Directors of Buyer. No other corporate action on the part of
Buyer is necessary for Buyer to authorize this Agreement or to consummate
the transactions contemplated herein. This Agreement has been duly executed
and delivered by Buyer and, assuming due authorization, execution and
delivery by Seller and Acquiree, constitutes a valid and binding obligation
of Buyer, enforceable in accordance with its terms. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated herein, will not constitute a violation or breach or a default
under the Articles of Incorporation or Bylaws of Buyer, any statute, rule,
regulation, order, writ, injunction, decree, or directive applicable to
Buyer, or any agreement, indenture or other instrument to which Buyer is a
party.
(c) SUFFICIENT RESOURCES, ETC. Buyer has and will have available at
the Effective Date available financial resources to enable it to lawfully
satisfy its obligations pursuant to this Agreement without the need to
borrow funds or to raise additional equity capital, unless otherwise
mandated by a regulatory authority after the date hereof. Prior to the
Effective Date, Buyer has and will have sufficient management and financial
resources to process the required regulatory and other applications to
consummate the transactions contemplated by this Agreement. On the date of
this Agreement, there is no pending or, to the knowledge of Buyer,
threatened legal or governmental proceeding against Buyer or any subsidiary
or affiliate thereof, and Buyer is unaware of any fact or circumstance
which would affect Buyer's ability to obtain any of the required regulatory
approvals or satisfy any other conditions required to be satisfied in order
to consummate the transactions contemplated by this Agreement.
(d) OWNERSHIP OF ACQUIREE STOCK. As of the date hereof, neither Buyer
nor its subsidiaries directly or indirectly own, or have any rights to
acquire, any shares of Acquiree Stock, other than pursuant to this
Agreement.
(e) FULL DISCLOSURE. None of the information with respect to Buyer or
Buyer's subsidiaries which has been furnished to Seller or Acquiree or
included in any application to, or filing with, any regulatory authority
made in connection with the transactions contemplated
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<PAGE>
hereby will, at the respective time it is furnished or filed, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements therein not misleading in
light of the circumstances under which they were made.
(f) LITIGATION. There is no material action, suit, claim,
counterclaim, or other litigation or proceeding or to the best knowledge of
Buyer, any investigation pending or known by the executive officers of
Buyer to be threatened, against Buyer before any court or governmental or
administrative agency, domestic or foreign, that could materially and
adversely affect the Buyer's ability to complete the Stock Purchase or the
transactions contemplated by this Agreement. There is no outstanding order,
writ, injunction, judgment, decree, directive, consent agreement or
memorandum of understanding involving Buyer and any federal regulatory
agency, state or local or governmental authority or arbitration tribunal
that could materially and adversely affect Buyer's ability to complete the
Stock Purchase or the transactions contemplated by this Agreement. Buyer is
unaware of any fact or condition presently existing that might give rise to
any litigation, investigation, or proceeding which, if determined adversely
to Buyer, would materially and adversely affect Buyer's ability to complete
the Stock Purchase or the transactions contemplated by this Agreement.
(g) BROKERAGE. There is no claim for brokerage commission, finders
fee or similar compensation arising out of or due to any act of Buyer in
connection with the transactions contemplated by this Agreement or based on
any agreement or arrangement made by or on behalf of Buyer.
(h) PROCEEDINGS. As of the date of this Agreement there is no pending
or, to the best knowledge of Buyer, threatened, legal or governmental
proceeding against Buyer and Buyer is unaware of any fact or circumstance
which could adversely affect Buyer's ability to obtain any required
regulatory approvals applicable to it or satisfy any of the other
conditions required to be satisfied by it in order to consummate the
transactions contemplated by this Agreement.
(i) ACCURACY OF REPRESENTATIONS. Until Closing, Buyer will promptly
notify Seller and Acquiree if any of the representations contained in this
Section 2 ceases to be true and correct subsequent to the date hereof.
(j) COMPLIANCE WITH APPLICABLE LAWS. Buyer is in compliance in all
material respects with all statutes, laws, ordinances, rules, regulations,
judgements, orders, decrees, directives, consent agreements, memoranda of
understanding, permits, concessions, grants, franchises, licenses and other
governmental authorizations or approvals applicable to Buyer,
5
<PAGE>
which are necessary to complete the Stock Purchase or the transactions
contemplated by this Agreement.
3. REPRESENTATIONS AND WARRANTIES BY SELLER AND ACQUIREE. Seller and
Acquiree represent and warrant to Buyer as follows:
(a) ORGANIZATION, GOOD STANDING, AUTHORITY, DEPOSIT INSURANCE, ETC.
Seller is a savings and loan holding company organized, validly existing
and in good standing under the laws of the state of Delaware. Acquiree is a
wholly-owned subsidiary of Seller and is a federal savings bank organized
and validly subsisting and, to the knowledge of Acquiree, is in good
standing under federal law. Acquiree has no subsidiary. Acquiree has all
requisite corporate power and authority to conduct its business as it is
now conducted, to own and operate its properties and assets and to lease
properties used in its business. Acquiree has all requisite corporate power
and authority to enter into this Agreement and, subject to obtaining any
required regulatory and shareholder approvals, to perform and carry out the
provisions of and all of its respective obligations under this Agreement.
The customer deposits held by Acquiree are insured by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC in accordance
with the Federal Deposit Insurance Act. Acquiree has paid all assessments
and filed all reports required by the Federal Deposit Insurance Act.
(b) CAPITALIZATION, INVESTMENTS. As of the date hereof, the
authorized capital stock of Acquiree consists solely of the Acquiree Stock
which shares are validly issued and outstanding, fully paid and
non-assessable. There are no authorized, issued or outstanding options,
convertible securities, warrants or other rights to purchase or acquire any
Acquiree Stock and there is no commitment of Seller or Acquiree to issue
same and, other than by operation of law, there are no outstanding
agreements, restrictions, contracts, commitments or demands of any
character to which Seller or Acquiree is a party, which relate to the
transfer or restrict the transfer of any shares of Acquiree Stock. To the
knowledge of Seller and Acquiree, there are no shareholder agreements,
understandings or commitments relating to the right of Acquiree to vote or
dispose of Acquiree Stock. No share of Acquiree Stock has been issued in
violation of the preemptive rights of any person.
(c) FINANCIAL STATEMENTS. Seller has furnished Buyer with unaudited
statements of financial condition, operations and various supporting
financial schedules as of, and for the periods ending on, each of the last
two
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fiscal quarters, all as included in the Thrift Financial Reports ("TFR's")
provided to the OTS. Seller and Acquiree have also provided Buyer with all
management letters from Seller's independent certified public accountants
since January 1, 1992, to the extent such letters or portions thereof
related to Acquiree. For purposes of this Agreement, the "Acquiree
Statement" shall mean the unaudited statements of financial condition for
Acquiree as of June 30, 1995 as included in the TFR's (but excluding the
amounts associated with Excluded Assets and Liabilities). The above
unaudited statements of financial condition and operations (excluding the
amounts associated with Excluded Assets and Liabilities) present fairly the
financial condition and results of operations of Acquiree at the dates
thereof, in accordance with the instructions for preparing TFR's and, where
applicable, with generally accepted accounting principles consistently
applied. Except as and to the extent reflected or reserved against in the
Acquiree Statement, or as otherwise disclosed pursuant to this Agreement
Acquiree had, at the date thereof, no material liabilities or obligations,
or any other liabilities or obligations which in the aggregate would be
material, secured or unsecured (whether accrued, absolute, contingent or
otherwise), which should be reflected in the Acquiree Statement in
accordance with the instructions for preparing TFR's and, where applicable,
with generally accepted accounting principles consistently applied. The
books and records of Acquiree are maintained in accordance with generally
accepted accounting principles consistently applied.
(d) ABSENCE OF CERTAIN DEVELOPMENTS. Since June 30, 1995, except as
set forth on Schedule 3(d) hereto, and as contemplated by Section l(a) or
any other provision hereof, there has been (i) no material adverse change
in the financial condition, business or results of operations of Acquiree
excluding changes resulting from or attributable to (a) any changes since
such date in any federal or state law, rule or regulation or in generally
accepted accounting principles that affect savings institutions or their
holding companies generally, or (b) reasonable expenses incurred since such
date in connection with the transactions contemplated by this Agreement,
(ii) no declaration, setting aside or payment of any dividend or other
distribution with respect to the stock of Acquiree other than cash
dividends, the timing and amounts of which are consistent with those
declared and paid in the prior fiscal year; (iii) no material loss,
destruction, or damage to the properties of Acquiree which loss,
destruction, or damage is not adequately covered by insurance; (iv) no
agreement, contract or commitment entered into or agreed to be entered into
except for those in the ordinary course of
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business and except for this Agreement; (v) no amendment or termination of
any material contract, lease, license, or other agreement to which Acquiree
is a party except in the ordinary course of business; and (vi) no change in
any of the accounting methods or practices or revaluation of any of the
assets of Acquiree, except as required by changes in generally accepted
accounting principles, or applicable laws, rules or regulations. Since such
date, Acquiree has conducted its business only in the ordinary course.
(e) TAXES. As of the date of this Agreement Acquiree is a "domestic
building and loan association" as defined in Section 7701(a)(19) of the
Internal Revenue Code of 1986, as amended (the "Code"). Except as set forth
on Schedule 3(e) hereto, (i) Acquiree has filed all tax returns (as
described below) that it is required to file and all taxes (as described
below) of Acquiree to be due from Acquiree have been duly paid, other than
taxes or charges which are not as yet due, delinquent or have not been
finally determined, and no extensions for the time of payment have been
requested; (ii) no additional assessments of tax have been proposed, are
pending or, to the best knowledge of Acquiree, threatened by any
governmental authority; and (iii) no waivers of statutes of limitation
concerning taxes associated with the Acquiree are in effect as of the date
hereof. Except as set forth on Schedule 3(e), Acquiree has properly made
all accruals and reserves for tax liabilities for the payment of any of
Acquiree's respective federal, state, county, municipal, local and foreign
tax liabilities, including interest and penalties, whether proposed,
pending, threatened or disputed, for any period ended on or prior to the
date hereof and for which Acquiree may, at said date, have been liable,
except as a result of the transactions contemplated by this Agreement.
Internal Revenue Service audits of Acquiree have never been conducted.
Copies of all returns (or portions thereof relating to Acquiree) filed as
well as all related material correspondence and documents concerning
federal, state, county, municipal or local income, capital stock,
franchise, or other similar taxes in respect of the two most recently
completed tax years have been made available to Buyer. Except as set forth
on Schedule 3(e), Acquiree has not executed or filed with the Internal
Revenue Service any agreement extending the period for assessment and
collection of any federal tax.
The Internal Revenue Service has not, to the knowledge of Acquiree,
commenced, or given notice of its intention to commence, any examination or
audit of the federal income tax returns of Acquiree for any year subsequent
to the year ended December 31, 1991.
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(f) LITIGATION. Except as set forth on Schedule 3(f) hereto, no
material action, suit, claim, counterclaim or other litigation or
proceeding, or to the best knowledge of Acquiree investigation, is pending,
or is known by the executive officers of Acquiree to be threatened, against
Acquiree before any court or governmental or administrative agency,
domestic or foreign. There are no outstanding orders, writs, injunctions,
judgments, decrees, directives, consent agreements or memoranda of
understanding involving Acquiree and any federal regulatory agency, state
or local court or governmental authority or arbitration tribunal that could
materially and adversely affect the condition, financial or otherwise,
assets, liabilities, business, operations or future prospects of Acquiree
or that in any manner restrict the right of Acquiree to conduct its
business as presently conducted. Acquiree is unaware of any fact or
condition presently existing that might give rise to any litigation,
investigation, or proceeding which, if determined adversely to Acquiree
would materially and adversely affect the condition, financial or
otherwise, of the assets, liabilities, business operations or future
prospects of Acquiree.
(g) BROKERAGE. Except as set forth on Schedule 3(g) hereto, there are
no claims for brokerage commissions, finder's fees or similar compensation
arising out of or due to any act of Acquiree in connection with the
transactions contemplated by this Agreement or based on any agreement or
arrangement made by or on behalf of Acquiree.
(h) PROPERTIES. Except as set forth on Schedule 3(h) hereto, Acquiree
has good and marketable title, free and clear of any mortgage, pledge,
lien, charge or other encumbrance, to all of its real or personal property
which is being retained by Acquiree pursuant to the terms of the Agreement,
except for (i) liens for current taxes not yet due; (ii) such imperfections
of title, encumbrances and easements, if any, as are not individually or in
the aggregate substantial or material in character, amount or extent and do
not materially detract from the value, or interfere with the present or
proposed use, of such properties; and (iii) dispositions of such property
or assets in the ordinary course of business. The structure and other
improvements to real estate, furniture, fixtures and equipment which is
being retained by Acquiree pursuant to the terms of the Agreement, are in
good operating condition and repair (ordinary wear and tear excepted) and
comply in all material respects with all applicable laws, ordinances and
regulations, including, without limitation, all building codes, zoning
ordinances and other similar laws. Except as set forth on Schedule 3(h),
Acquiree owns or has the right to use all real and personal property which
is being retained by Acquiree pursuant to the
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terms of the Agreement. Except as set forth on Schedule 3(h), each lease
pursuant to which Acquiree as lessee, leases real or personal property is
valid and in effect in accordance with its respective terms, and there is
not, under any of such leases, on the part of the lessee any material
existing default or any event which with notice or lapse of time, or both,
would constitute such a default, other than defaults which would not
individually or in the aggregate have a material adverse effect on the
financial condition, business, prospects, or operating results of Acquiree
taken as a whole. Except as set forth on Schedule 3(h), each of such leases
is assumable by Buyer or its assigns in accordance with the transactions
contemplated by this Agreement and without payment of any penalty or
special assessment.
(i) COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on Schedule
3(i) hereto, Acquiree is in compliance in all material respects with all
statutes, laws, ordinances, rules, regulations, judgments, orders, decrees,
directives, consent agreements, memoranda of understanding, permits,
concessions, grants, franchises, licenses, and other governmental
authorizations or approvals applicable to Acquiree's depository or other
liabilities, and all permits, concessions, grants, franchises, licenses,
certificates of authority, and other governmental authorizations and
approvals necessary for the conduct of the business of Acquiree as
presently conducted have been duly obtained and are in full force and
effect and there are no proceedings pending, or to the knowledge of
Acquiree threatened, which may result in the revocation, cancellation,
suspension or material adverse modification of any such permits,
concessions, grants, franchises, licenses, and other governmental
authorizations and approvals, and all filings, applications and
registrations have been made with federal, state, local, and foreign
governmental or regulatory bodies that are required in order to permit it
to carry on its business as it is presently conducted.
(j) CONTRACTS AND COMMITMENTS. ETC. Each written or oral contract
(other than loans to or contracts with customers reasonably incurred by
Acquiree in the ordinary course of business) which involves aggregate
payments or receipts in excess of $10,000 per year to which Acquiree is a
party, or by which Acquiree is bound, including without limitation every
employment benefit plan, agreement, lease, license and other commitment to
which Acquiree is a party or by which Acquiree or its properties may be
bound ("Material Contracts"), is identified in Schedule 3(j) hereto. Except
as disclosed on Schedule 3(j), all such Material Contracts are valid and in
full force and effect, and all parties thereto have in all material
respects performed all obligations required to be performed by them to date
and are not in
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default in any material respect and no event has occurred which, with the
lapse of time or notice by a third party or both could result in a default
by-Acquiree under such Material Contract, Charter or Bylaws of Acquiree.
Schedule 3(j) identifies each such Material Contract that requires the
consent or approval of third parties to the execution and delivery of this
Agreement or to the consummation of the transactions contemplated herein.
(k) INSURANCE. Set forth on Schedule 3(k) is a listing of all
insurance policies owned by Acquiree. Such policies are in effect and full
force pursuant to their terms. No notices of cancellation have been
received in connection therewith.
(l) NO GUARANTEES. Except as disclosed in Schedule 3(l) hereto,
Acquiree is not obligated as guarantor, co-signer or surety (or otherwise
in a secondary liability capacity) for any obligation of any kind of any
other person or entity.
(m) EXAMINATION REPORTS. Neither Seller nor Acquiree is subject to
any cease and desist order, written agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of, federal or state governmental
authorities charged with the supervision or regulation of savings and loan
associations or savings and loan holding companies or engaged in the
insurance of savings and loan deposits (collectively "Thrift Regulators"
and individually "Thrift Regulator"), nor has it been advised by any Thrift
Regulator that it is contemplating issuing or requesting (or is considering
the appropriateness of issuing or requesting) any such order, directive,
written agreement, memorandum of understanding, extraordinary supervisory
letter, commitment letter, board resolutions or similar undertaking.
(n) AGREEMENT, AUTHORITY, ABSENCE OF CONFLICTS. The execution,
delivery and performance of this Agreement have been duly and validly
authorized by the Boards of Directors of Seller and Acquiree, as the case
may be, and do not and, subject to obtaining all required authorizations
and approvals, will not violate (i) any of the provisions of, or constitute
a default under or give any person or party the right to accelerate payment
or performance under any Material Contract; (ii) the Charter or Bylaws of
Seller or Acquiree; or (iii) any order, writ, injunction, decree, statute,
rule or regulation applicable to Seller or Acquiree. This Agreement has
been duly executed and delivered by Seller and Acquiree
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and constitutes, assuming the due authorization, execution and delivery
thereof by Buyer, a valid and binding obligation of Seller and Acquiree,
respectively, enforceable in accordance with its terms except as
enforcement thereof may be limited by bankruptcy, insolvency or other
similar laws effecting the enforcement of creditor's rights generally or by
general principles of equity (whether applied in a proceeding in equity or
at law).
(o) REPORTING. Acquiree has timely filed all reports required to be
filed by it pursuant to rules and regulations of federal bank regulatory
authorities and all such reports when filed were complete and correct in
all material respects.
(p) FULL DISCLOSURE. None of the information with respect to Acquiree
which has been furnished to Buyer or included in any application to, or
filing with, any regulatory agency made in connection with the transactions
contemplated hereby will, at the respective time it is furnished,
distributed, mailed or filed, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to
make the statements therein not misleading in light of the circumstances
under which they were made.
(q) EMPLOYEE BENEFIT PLANS. All employee fringe or other benefits
applicable to Acquiree's employees are listed and described on Schedule
3(q).
(r) LABOR MATTERS. Acquiree is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is Acquiree the
subject of a proceeding asserting that Acquiree has committed an unfair
labor practice or seeking to compel Acquiree to bargain with any labor
organization as to wages and conditions of employment, nor is there any
strike or other labor dispute involving Acquiree pending, or, to the best
knowledge of Acquiree, threatened, that might materially or adversely
affect the condition, financial or otherwise, assets, liabilities, business
or operations of Acquiree. Except as set forth on Schedule 3(r) hereto,
Acquiree is not subject to or a party in any complaint or action before any
state human relations commission, Equal Employment Opportunity Commission
or the Department of Labor.
(s) ENVIRONMENTAL MATTERS. For purposes of this paragraph (s), the
following terms shall have the indicated meaning:
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"Environmental Law" means any federal, state or local law,
statute, ordinance, rule, regulation or code, license, permit,
authorization, approval relating to (1) the protection, preservation
or restoration of the environment (including, without limitation, air,
water vapor, surface water, groundwater, drinking water supply,
surface soil, subsurface soil, plant and animal life or any other
natural resource), and (2) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Substances. The term
Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42
U.S.C. Section 9601, ET SEQ.; the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. 6901, ET SEQ.; the Clean Air Act, as
amended, 42 U.S.C. Section 7401, ET SEQ.; the Federal Water Pollution
Control Act, as amended, 33 U.S.C. Section 1251, ET SEQ.,; the Toxic
Substances Control Act, as amended, 15 U.S.C. Section 9601, ET SEQ.;
the Emergency Planning and Community Right to Know Act, 42 U.S.C.
Section 11001, ET SEQ.; the Safe Drinking Water Act, 42 U.S.C. Section
300f, ET SEQ.; and all comparable state and local laws, and (2) any
common law (including without limitation common law that may impose
strict liability) that may impose liability or obligation for injuries
or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or
dangerous or otherwise regulated under any Environmental Law, whether
by type or by quantity, including any material containing any such
substance as a component. Hazardous Substances include without
limitation petroleum or any derivative or by-product thereof,
asbestos, radioactive material, and polychlorinated biphenyls.
Except as set forth on Schedule 3(s) (i) Acquiree has not received
notice of any violation of, or claim, citation, assessment, proposed
assessment or demand for abatement in connection with any Environmental
Laws, or generated, stored, or disposed of any Hazardous Substance, and to
the actual knowledge of Acquiree is not subject to any claim or lien under
any Environmental Laws; and (ii) no real estate to be
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retained by Acquiree pursuant to the terms of the Agreement, whether owned,
operated or leased by Acquiree, has been designated to Acquiree as
requiring any environmental cleanup or response action to comply with
Environmental Laws, or to the actual knowledge of Acquiree, has been the
site of release of any Hazardous Substance.
(t) PROCEEDINGS. As of the date of this Agreement, there is no
pending or, to the best knowledge of Acquiree, threatened, legal or
governmental proceeding against Acquiree and Acquiree and Seller are
unaware of any fact or circumstance which would adversely affect Seller's
or Acquiree's, ability to obtain any required regulatory approvals
applicable to them or satisfy any of the other conditions required to be
satisfied by them in order to consummate the transactions contemplated by
this Agreement.
(u) UNDISCLOSED LIABILITIES. Acquiree has incurred no liabilities or
obligations (whether absolute, contingent or otherwise) of any nature not
recorded or otherwise disclosed, except liabilities or obligations incurred
in the ordinary course of business or which would not have a material
adverse effect on the financial condition, business, prospects or operating
results of Acquiree taken as a whole.
(v) FINANCIAL INSTITUTIONS BOND. Since January 1, 1994, Acquiree has
continuously maintained in full force and effect a financial institutions
bond with coverage equal to or greater than that provided for on a "Form
24" insuring against acts of dishonesty by each of its employees. Except as
disclosed on Schedule 3(v) hereto, no claim has been made under any such
bond, and Seller and Acquiree are unaware of any fact or condition
presently existing which might form the basis of a claim under any such
bond. Seller and Acquiree have no reason to believe that Acquiree's present
financial institutions bond will not be renewed by its carrier on
substantially the same basis and terms as those now in effect.
(w) (NOT USED.)
(x) ASSUMABILITY OF LEASES AND CONTRACTS. Except as disclosed on
Schedule 3(x) hereto, all Material Contracts are assumable and assignable
and do not contain any term or provision that would accelerate or increase
payments that would otherwise be due by Acquiree to such person or entity
or change or modify the provisions or terms of such contract by reason of
this Agreement or the transactions contemplated hereby.
(y) LOANS. Except as disclosed on Schedule 3(y) hereto, each loan to
be retained by the Acquiree pursuant
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to the terms of the Agreement is, to Acquiree's knowledge, the legal, valid
and binding obligation of the obligor named therein, enforceable in
accordance with its terms, subject to bankruptcy, insolvency and other laws
of general applicability relating to or affecting creditors' rights and to
general equity principles. All such loans, and the collateral and other
security therefor, and the documentation for the same, meets the
requirements, rules, regulations or directives of the OTS, FDIC, or other
applicable governmental authorities.
(z) (NOT USED.)
(aa) TRADEMARKS, TRADE NAMES. Set forth in Schedule 3(aa) hereto is an
accurate and complete list and brief description of all trademarks, either
registered or common, trade names and copyrights and all applications and
licenses therefor owned by Acquiree or in which it has an interest.
Acquiree owns, or has the right to use, all trademarks, trade names and
copyrights used in or necessary for the ordinary conduct of its existing
business as heretofore conducted, and the consummation of the transactions
contemplated hereby will not alter or impair any such rights. Except as set
forth in Schedule 3(aa), no claims are pending for the use of any
trademarks, trade names or copyrights or challenging or questioning the
validity or effectiveness of any license or agreement relating to the same
nor is there any valid basis for any such claim, challenge or question,
and, to the best knowledge of Acquiree, the use of such trademarks, trade
names and copyrights by Acquiree does not infringe on the rights of any
person.
(bb) ACCURACY OF REPRESENTATIONS. Until Closing, Acquiree will
promptly notify Buyer if any of the representations contained in this
Section 3 ceases to be true and correct subsequent to the date hereof.
(cc) MATERIALITY. For purposes of this Section 3, unless otherwise
defined, the term "material" or "materially" refers to amounts in excess of
$200,000.
(dd) ABSENCE OF QUESTIONABLE PAYMENTS. From and after July 1, 1991,
Acquiree has not, nor, to the best knowledge of Seller and Acquiree, has
any director, officer, agent, employee, consultant or other person
associated with, or acting on behalf of, Acquiree (i) used any Acquiree
corporate funds for unlawful contributions, gifts, entertainment or
unlawful expenses relating to political activity; or (ii) made any direct
or indirect unlawful payments to governmental officials from any Acquiree
corporate funds, or established or maintained any unlawful or unrecorded
accounts with funds received from Acquiree.
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(ee) POWERS OF ATTORNEY, GUARANTEES. Except as set forth on Schedule
3(ee), Acquiree has no power of attorney outstanding, or any obligation or
liability, either actual, accruing or contingent, as guarantor, surety,
cosigner, endorser, comaker or indemnitor in respect of the obligation of
any person, corporation, partnership, joint venture, association,
organization or other entity, except for letters of credit issued in the
ordinary course of business which are listed on Schedule 3(ee).
(ff) MORTGAGE SERVICING AGREEMENTS. Acquiree has previously provided
Buyer true and complete copies of all mortgage servicing agreements to
which Acquiree is a party as of the date hereof (the "Mortgage Servicing
Agreements") and shall, by separate instrument, executed within ten (10)
days hereof enter into a servicing agreement pursuant to which Buyer will
service loans for Seller. Except as set forth in Schedule 3(ff), the
Mortgage Servicing Agreements set forth all applicable terms and conditions
and have not been modified in any material respect. Each Mortgage Servicing
Agreement is a valid and binding obligation of Acquiree and to Acquiree's
knowledge of all of the other parties thereto and is in full force and
effect, enforceable in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether applied in a proceeding in equity or at law).
Except as set forth in Schedule 3(ff), there is no default or claim of
default by any party under any such Mortgage Servicing Agreement, and
except for the consummation of the transactions contemplated by this
Agreement, no event has occurred which with the passage of time or the
giving of notice or both would constitute a default by any party under any
such Mortgage Servicing Agreement or would result in any such Mortgage
Servicing Agreement being terminable by any party thereto. As of the date
of this Agreement, there is no pending or, to the best knowledge of
Acquiree, threatened cancellation of any Mortgage Servicing Agreement.
Except as set forth in Schedule 3(ff), no material sanctions or penalties
have been imposed upon Acquiree under any Mortgage Servicing Agreement or
under any applicable regulation relating thereto.
4. ACCESS TO AND INFORMATION CONCERNING PROPERTIES, RECORDS, ETC. Seller
and Acquiree shall, to the extent permitted by law, give to Buyer, its counsel,
accountants, financial advisors and other representatives full access, at
reasonable times and upon reasonable notice (so as not to interfere unreasonably
with the ordinary course and conduct of business of Acquiree) throughout the
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period prior to the Closing, access to all of Acquiree's properties, books,
contracts, commitments and records, including, but not limited to, minute books,
Charter and Bylaws, and shall furnish to Buyer during such period all such
information concerning Acquiree and its affairs as Buyer may reasonably request.
In addition, Acquiree shall make its officers available at reasonable times and
upon reasonable notice to discuss with Buyer's designated representatives the
substance of all documents, financial statements and other information provided
by Acquiree, and other matters as Buyer shall reasonably deem pertinent to the
transactions contemplated by this Agreement. All information disclosed by any
party hereto or by any affiliate of a party hereto pursuant to this Section 4
shall be subject to Section 14 hereof (regarding confidential treatment of
confidential or non-public information).
(a) BANK PREMISES. Buyer shall be entitled to possession of the
branch facilities acquired in connection with this Agreement upon and after
the Effective Date. Seller shall coordinate with Buyer to have Acquiree's
signs, logos and related equipment removed from such branch premises as
soon as possible following the Effective Date at Seller's expense. Within
one (1) business day following the Effective Date, Seller shall remove all
of Acquiree's personal property not being transferred hereunder, including,
but not limited to, stationery, forms, labels, shipping material, brochures
and advertising material. Seller shall provide Buyer with reasonable access
to such premises at Buyer's request prior to the Closing to facilitate
Buyer's occupation of such premises and the smooth transition of the
transfer.
5. AFFIRMATIVE COVENANTS OF BUYER. Buyer covenants and agrees that,
throughout the period commencing on the date hereof and ending on the date of
Closing, except for specific proposed actions or inaction as shall be consented
to in writing by Acquiree, Buyer will for its own part:
(a) CONDUCT OF BUSINESS. Conduct its business and that of its
subsidiaries in a manner that will not adversely affect Buyer's ability to
obtain all necessary regulatory approvals for the transactions contemplated
hereby or Buyer's ability to perform its obligations under this Agreement
and conduct its and its subsidiaries businesses in the ordinary course;
provided that Buyer may undertake activities which are not in the ordinary
course on the condition that such activities will not result in a material
adverse change in the financial condition of Buyer and its subsidiaries
taken as a whole or impair Buyer's ability to consummate the transaction
contemplated by this Agreement;
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(b) PRESERVATION OF BUSINESS. Use its best efforts to maintain and
preserve its and its subsidiaries businesses;
(c) INSURANCE. Maintain in full force and effect insurance customary
with industry practices for the businesses conducted by Buyer and its
subsidiaries;
(d) LAWS, RULES, ETC. Comply with and perform in all material respects
all obligations and duties imposed upon it by all federal and state laws
and all rules, regulations and orders imposed by federal or state
governmental authorities, except in respects not materially adverse to the
financial condition of Buyer and its subsidiaries or which would not
materially impair the ability of Buyer to consummate the transactions
contemplated hereby;
(e) BEST EFFORTS. Use its best efforts to assure, to the extent
reasonably within its control, as soon as it is reasonably practicable, the
satisfaction of the conditions to the effectiveness of the transactions
contemplated hereunder and the transactions contemplated by this Agreement
including without limiting the generality of the foregoing, the Buyer shall
take all steps necessary to prepare, promptly file and prosecute all
required applications for regulatory approval of the transactions
contemplated by this Agreement;
(f) NOTICES. Notify Acquiree of (i) any fact or circumstance of which
the executive officers of Buyer or its subsidiaries have knowledge which
would, absent disclosure by Buyer to Acquiree and Acquiree's subsequent
consent to such fact or circumstance, not permit Buyer to satisfy the
conditions set forth in Section 9(a)(i) of this Agreement, (ii) any breach
of any of its covenants and agreements contained herein, and (iii) any
material adverse change in its financial condition on a consolidated basis;
and
(g) RANDALLSTOWN PROPERTY. Promptly obtain, at its own expense, a
building inspection report ("Inspection Report") and a Phase I
environmental study ("Phase I Study") for the Randallstown, Maryland branch
property. The Inspection Report and Phase I Study shall be conducted by
parties selected by Buyer and approved by Seller, which approval shall not
be unreasonably withheld. The results of the Inspection Report and the
Phase I Study shall be submitted to both Buyer and Seller and shall be
satisfactory to Buyer, in its sole discretion. Provided, however, that in
the event Buyer shall deem either the Inspection Report or the Phase I
Study, or both, to contain evidence of defects in the property that are
unacceptable to Buyer, the Buyer shall,
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within five (5) business days of receiving the respective written copies
thereof, notify Seller in writing describing any objectionable defects. In
such event, Seller shall be entitled to cure such defects provided that
such cure is effected or, with the Agreement of Buyer, initiated within
twenty (20) business days of receiving notice from Buyer. Such cure shall
be acceptable to Buyer in Buyer's sole discretion. In the event such cure
is unsatisfactory to Buyer or in the event Seller does not attempt to cure
any such defect, Buyer shall not be obligated to purchase the Randallstown,
Maryland branch property as part of this Agreement, or otherwise, but shall
proceed with the Stock Purchase and the remaining transactions contemplated
by this Agreement. In such event, the parties shall proceed in good faith
to enter into a lease agreement the provisions of which, exclusive of
price, shall, in all material respects, be substantially the same as the
lease agreement involving the Eldersburg, Maryland branch also entered into
as part of this Agreement.
6. AFFIRMATIVE COVENANTS OF ACQUIREE. Seller and Acquiree covenant and
agree that, throughout the period commencing on the date hereof and ending on
the date of Closing, except for specific proposed actions or inaction as shall
otherwise be consented to in writing by Buyer, Acquiree will for its own part,
and Seller will cause the Acquiree to:
(a) CONDUCT OF BUSINESS. Conduct Acquiree's business, including
extensions of credit, only in the ordinary course consistent with past
practices and written policies except as may be contemplated by Section
1(a) or any other provision hereof;
(b) PRESERVATION OF BUSINESS. Except as may be contemplated by
Section 1(a) hereof use their best efforts to maintain and preserve
Acquiree's business, including, but not limited to, maintaining goodwill
and relationships with customers and others having business dealings with
Acquiree, preserving and collecting all material claims and causes of
action belonging to Acquiree, and maintaining its books of account and
other records;
(c) PROPERTIES. Except as may be contemplated by Section 1(a) hereof
maintain and keep Acquiree's properties, both real property and tangible
personal property, in as good repair and condition in all material respects
as they presently exist, except for depreciation due to ordinary wear and
tear and damage due to unavoidable casualty;
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(d) INSURANCE. Maintain in full force and effect all insurance
policies presently in effect;
(e) CONTRACTS, ETC. Except as may be contemplated by Section 1(a)
hereof perform all material obligations under agreements, contracts,
leases, documents and instruments relating to or affecting Acquiree's
assets, properties and business;
(f) FINANCIAL STATEMENTS. Furnish to Buyer:
(i) As soon as practicable and in any event within
forty-five (45) days after the end of each of the fiscal quarters
beginning July 1, 1995 and ending prior to Closing, unaudited
statements of operations of Acquiree for the period beginning at the
commencement of the fiscal year and ending at the end of such
quarterly period, and an unaudited balance sheet of Acquiree as of the
end of such quarterly period;
(ii) As soon as practicable, copies of all such financial
statements and reports as it shall send to or file with the OTS or any
other banking regulatory authority;
(iii) Promptly upon any executive officer of Acquiree
obtaining knowledge of any condition or event which would constitute a
material violation of the terms and conditions of this Agreement or
which would constitute a material default under any material
indenture, mortgage, agreement or other instrument securing or
relating to any indebtedness of Acquiree for borrowed money, a
certificate of the Chairman of Acquiree, specifying the nature of such
material violation or default and what action Acquiree has taken or is
taking or proposes to take with respect thereto;
(iv) Promptly upon becoming aware that any person has given
notice to Acquiree or taken any other action with respect to a claimed
violation or default of the type referred to in subsection (iii) of
this Subsection (f), a written notice describing the notice given or
action taken by such person, the nature of such violation or default
and what action Acquiree has taken or is taking or proposes to take
with respect thereto; and
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(v) With reasonable promptness, such additional financial
data as Buyer may reasonably request;
(g) LAWS, RULES, ETC. Comply with and perform in all material
respects all material obligations and duties imposed upon it by all
federal, state, county, local and municipal laws and all rules,
regulations, directives, decrees, orders, and ordinances imposed by
federal, state, county, local or municipal governmental authorities,
including, but not by way of limitation of the above, compliance with
examination reports, regulations and rulings of the OTS;
(h) CORPORATE EXISTENCE. Maintain its existence as a savings bank
validly subsisting under the laws of the United States of America;
(i) NOTICES. Notify Buyer of (i) any fact or circumstance of which
the executive officers of Acquiree have knowledge which would, absent
disclosure by Acquiree to Buyer and Buyer's subsequent consent to such fact
or circumstance, not permit Acquiree to satisfy the conditions set forth in
Section 10(a)(i) of this Agreement and (ii) any material breach of any of
its covenants and agreements contained herein;
(j) BEST EFFORTS. Use its best efforts to assure, to the extent
reasonably within its control, as soon as it is reasonably practicable, the
satisfaction of the conditions to the effectiveness of the transactions
contemplated by this Agreement. Acquiree shall cooperate with Buyer and
shall use its best efforts to do or cause to be done all things reasonably
necessary or appropriate on its part in order to fulfill the conditions
precedent relating to it set forth in this Agreement and to consummate this
Agreement. In particular, without limiting the generality of the foregoing,
Acquiree shall:
(i) cooperate with Buyer in the preparation of all required
applications for regulatory approval of the transactions contemplated
by this Agreement;
(ii) take all actions which are necessary or appropriate on
its part in order to secure the approval and adoption of this
Agreement by its sole shareholder;
(iii) cooperate with Buyer in making the employees of Acquiree
reasonably available for training by Buyer prior to the Effective
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Date, to the extent such training is deemed reasonably necessary by
Buyer; and
(k) COOPERATE IN TRANSFERRING DEPOSIT ACCOUNTS TO BUYER. Acquiree
shall cooperate in marketing and promotional efforts directed at Acquiree's
depositors and customers for the purpose of inducing them to transfer their
existing depository accounts to, and open new accounts with Buyer.
Provided, however, that no promotional efforts shall be undertaken prior to
the receipt of all regulatory approvals, excluding any statutory waiting
periods, contemplated by this Agreement. Any promotional efforts undertaken
prior to the Effective Date shall be within Buyer's discretion, subject to
Seller's rights as contemplated by this Section 6(k). If Buyer engages in
promotional efforts prior to the Effective Date then, notwithstanding the
method of calculating the Final Purchase Price, as contemplated by Section
1(d), Buyer shall be responsible for the payment of a premium on the
deposits it assumes pursuant to this Agreement, in an amount that is no
less than the amount that would result from calculating such premium based
on the amount of deposits existing as of the close of business on the day
such promotional efforts are first undertaken, it being understood that
such day will be deemed to be the first day on which any promotional
materials are mailed or any direct advertising or solicitation is first
undertaken, whichever occurs first. In the event this Agreement is
terminated after Buyer engages in promotional efforts then Buyer shall be
responsible for the payment of a premium measured by the amount of
decrease, if any, in Acquiree's deposits between the day on which the
promotional efforts begin and the close of business on the date of
termination. Acquiree shall have the right to review and approve any
promotional material directed toward depositors as well as any letter
simply advising them of the transactions contemplated by this Agreement.
7. NEGATIVE COVENANTS OF SELLER AND ACQUIREE. Seller and Acquiree
covenant and agree that, throughout the period commencing on the date hereof and
ending on the date of Closing, except for proposed specific actions as shall
otherwise be consented to in writing by Buyer, they will not (subject to the
fiduciary obligations of Seller's and Acquiree's Boards of Directors with
respect to Sections 7(b), (d) and (i)):
(a) Amend Acquiree's charter or bylaws;
(b) Issue, sell or otherwise dispose of (or authorize or agree to
issue, sell or dispose of) any share of capital stock of Acquiree or any
securities or documents convertible into or representing a right or option
to purchase any such shares, or enter into any other agreements to issue or
sell any shares of capital stock or change the presently outstanding shares
of
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capital stock into a greater or lesser number of shares either by way of a
recapitalization, reorganization, consolidation of shares or the like, or
by a stock split, stock dividend, or by way of a merger or consolidation;
(c) Purchase, redeem, retire or otherwise acquire, or hypothecate,
pledge or otherwise encumber, any shares of capital stock of Acquiree;
(d) Merge Acquiree into, consolidate Acquiree with, or permit Acquiree
to be purchased or acquired by, any other corporation, entity or person (or
agree to any such merger, consolidation, affiliation, purchase or
acquisition), or permit (or agree to permit) any other corporation, entity
or person to be merged, consolidated or affiliated with Acquiree or be
purchased or acquired by it, or, except to realize upon collateral and
except for purchases or sales of loans in the ordinary course of its
business, permit Acquiree to acquire (or agree to acquire) all or
substantially all of the assets of any other corporation, entity or person
or except as contemplated by Section 1(a) hereof, sell or dispose (or agree
to sell or dispose) all or any substantial part of Acquiree's assets in
each case;
(e) Make, declare or pay any dividend on the Acquiree Stock or declare
or make any distribution on any shares of Acquiree's capital stock except
as contemplated by the terms of the Agreement;
(f) Enter into any employment contract, deferred compensation
arrangement, or other agreement affecting compensation or benefits, or pay
any bonus to, or increase the rate of compensation of any director,
officer, employee or consultant of Acquiree other than in the ordinary
course;
(g) Except for the payments of reasonable severance to employees who
do not remain with the Acquiree or Seller as of the Closing or within 30
days thereafter enter into or modify (except as may be required by
applicable law or to effect the transactions contemplated by this
Agreement) any pension, retirement, stock option, stock purchase,
severance, profit sharing, deferred compensation, consulting, bonus, group
insurance or other employee benefit, incentive or welfare contract, plan or
arrangement, or any trust agreement related thereto, in respect of any
current or former directors, officers or other employees of Acquiree;
(h) Except for indebtedness and contingent liabilities incurred in the
ordinary course of business (e.g., deposit liabilities, Federal Home Loan
Bank advances, or advances from Seller or Seller's affiliates)
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incur any indebtedness or liability for borrowed money evidenced by notes,
bonds, debentures or other similar obligations;
(i) Solicit or encourage inquiries or proposals with respect to, or
furnish any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a material
portion of Acquiree's assets (except as contemplated in Section l(a)
hereof) or of a substantial equity interest in Acquiree or any business
combination with Acquiree and except with respect to transactions
contemplated by Section 1(a) hereof Acquiree shall notify Buyer immediately
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated with, Acquiree; and Seller and Acquiree shall not permit any
officer, director, agent, advisor, or affiliate to do any of the above and
shall instruct their respective officers, directors, agents, advisors and
affiliates to comply with the above;
(j) Except in the ordinary course of business, enter into or assume
any material contract, incur any material liability or obligation, make any
material commitment, acquire or dispose of any property or asset (except as
contemplated in Section 1(a) hereof) or engage in a transaction or subject
any of Acquiree's properties or assets to any material lien, claim, charge,
or encumbrance of any kind whatsoever;
(k) Take or permit to be taken any action which would constitute a
breach of any representation, warranty or covenant set forth in this
Agreement;
(l) Enter into any related party transaction involving Acquiree except
such related party transactions relating to extensions of credit made in
accordance with applicable laws, regulations and rules and in the ordinary
course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable arm's
length transactions with other persons that do not involve more than the
normal risk of collectability or present other unfavorable features;
(m) Waive, release, grant or transfer any rights of value or modify or
change in any material respect any existing agreement to which Acquiree is
a party, other than the ordinary course of business, consistent with past
practice or as otherwise contemplated by the terms of this Agreement;
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(n) Except as is consistent with past practice, enter into, renew,
extend or modify any other transaction involving Acquiree and any
affiliate;
(o) Knowingly take any action that would, under any statute,
regulation or administrative practice of the Federal Reserve, the FDIC, the
state banking regulators, or the OTS, materially or adversely affect the
ability to obtain any required approvals for consummation of the
transactions contemplated by this Agreement; or
(p) materially alter or vary Acquiree's methods or policies of buying
or selling rights to service mortgage loans.
8. CONDlTIONS TO THE OBLIGATIONS OF BUYER, SELLER AND ACQUIREE. The
Closing shall be expressly conditioned upon the following:
(a) APPROVAL OF REGULATORY AGENCIES. All required consents and
approvals of all regulatory agencies and other authorities having
jurisdiction over the transactions contemplated by this Agreement,
including without limitation the FDIC, OTS and state banking regulators,
shall have been granted and obtained, all applicable notice and waiting
periods shall have expired or passed, it being expressly understood that no
term or provision of any regulatory approval or consent shall have imposed
any materially burdensome condition or requirement which is nonstandard for
a transaction such as the transaction contemplated by this Agreement and,
in the opinion of Buyer, renders consummation of this Agreement, or the
transactions contemplated therein or thereby, inadvisable. Provided,
however, that no issue concerning federal deposit insurance shall be deemed
nonstandard for these purposes;
(b) SUITS, ACTIONS. No party hereto shall be subject to any action,
suit, proceeding, order, decree or injunction of a court or agency of
competent jurisdiction which is intended to enjoin or prohibit the
consummation of the transaction contemplated by this Agreement; and
(c) STATUTES, ORDERS. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any governmental authority which prohibits, restricts or
makes illegal the consummation of the transactions contemplated by this
Agreement.
9. CONDITIONS TO THE OBLIGATIONS OF BUYER. Consummation by Buyer of the
transactions contemplated hereby is subject to the following conditions
precedent, any of which, however, may be
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waived, to the extent permitted by applicable law or regulation, by the consent
in writing of Buyer.
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS.
(i) The representations and warranties of Seller and
Acquiree contained herein (A) shall have been true and correct in all
material respects on the date hereof, and (B) other than as disclosed
by Acquiree to, and approved by, Buyer in writing prior to or at the
Closing, shall be true and correct in all material respects as of the
Closing, except as otherwise provided or permitted by this Agreement
and except as to any representation or warranty which specifically
relates to an earlier date.
(ii) Acquiree shall have duly performed or complied in all
material respects with all covenants, not otherwise waived by Buyer in
writing, required by this Agreement to be performed by Acquiree prior
to or at the Closing.
(iii) Buyer shall have received certificates of Seller and
Acquiree dated as of the Closing, signed by the Chairman and Chief
Financial Officer of each of Acquiree and Seller, certifying in such
detail as Buyer may reasonably request the fulfillment of the
conditions set forth in Sections 9(a)(i) and (ii) above.
(b) OPINION OF SPECIAL COUNSEL. All proceedings and legal details
incident to this Agreement shall be satisfactory to Buyer based on advice
of special counsel for Buyer and Buyer shall have received an opinion
reasonably satisfactory to it from Acquiree's counsel dated as of the date
of the Closing and addressed to Buyer, to the effect that:
(i) Acquiree is a savings bank organized and validly
subsisting under federal law and has the corporate power and authority
to execute, deliver and perform all transactions contemplated by the
Agreement and has the corporate power and authority to own and hold
its properties as of the Closing.
(ii) The authorized capital stock of Acquiree consists of
1,000 shares of common stock, par value $10.00 per share ("Acquiree
Stock") of which 1,000 shares are issued and
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outstanding on the Effective Date and no shares are held as treasury
shares. Each of the outstanding shares of Acquiree Stock has been
validly issued and is fully paid and nonassessable. None of such
outstanding shares of Acquiree Stock have been issued in violation of
any preemptive rights. To such counsel's actual knowledge, after
reasonable investigation, no unissued shares of Acquiree Stock or any
other securities of Acquiree are subject to any warrants, options,
commitments, preemptive or other rights of any kind or nature, and
Acquiree is not obligated to issue any additional shares of capital
stock or any other securities of any kind or nature.
(iii) Seller has the corporate power and authority to
execute, deliver and perform all transactions relating to it
contemplated by this Agreement.
(iv) The execution and delivery of the Agreement and
performance of all transactions contemplated by the Agreement have
been duly authorized by the Boards of Directors of Seller and of
Acquiree and do not violate any of the provisions of, or constitute a
default under or give any person or party the right to accelerate
payment or performance under, the articles of incorporation or bylaws
of Seller or Acquiree or to such counsel's actual knowledge, after
reasonable investigation, any material agreement, document or
instrument to which Acquiree is a party or by which it or any of its
properties or assets is bound.
(v) The Agreement has been duly authorized, executed and
delivered by Seller and Acquiree and constitutes valid and binding
obligations of Seller and Acquiree enforceable against Seller and
Acquiree in accordance with its terms, except as may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium, conservatorship,
receivership or other similar laws now or hereafter in effect relating
to or affecting the enforcement of creditors' rights generally or the
rights of creditors of federal savings institutions or their holding
companies, (ii) general equitable principles, and (iii) laws relating
to the safety and soundness of insured depository institutions, except
that no opinion need be expressed as to the effect or
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availability of equitable remedies or injunctive relief (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
(vi) To the actual knowledge of such counsel, after
reasonable investigation, the execution, delivery and performance of
the Agreement and the transactions contemplated thereunder by Seller
and Acquiree do not violate any provision of federal banking law,
regulation or rule applicable to Seller or Acquiree.
(vii) All consents and approvals of (and filings with) all
federal regulatory agencies or other authorities having jurisdiction
over the transactions contemplated by this Agreement required by law
to have been obtained or made by Seller and Acquiree have been
obtained or made; [such opinion to express those agencies or
authorities whose approvals have been obtained.]
(viii) To the actual knowledge of such counsel, after
reasonable investigation, there is no action, suit or proceeding
pending or threatened against Acquiree before any federal, state or
local court or governmental authority or before any arbitration
tribunal which seeks to modify, enjoin or prohibit or otherwise
adversely and materially affect the transactions contemplated by the
Agreement.
The opinion of Acquiree's special counsel shall be governed by the
Legal Opinion Accord ("Accord") of the American Bar Association Section of
Business Law (1991). The term "actual knowledge" as used herein shall have
the meaning set forth in the Accord. In addition, such opinion may be
limited to present statutes, regulations, rulings, and formal agency and
judicial interpretations and to facts as they presently exist; in rendering
such opinion, such counsel need assume no obligation to revise or
supplement it should the present laws be changed by legislative or
regulatory action, judicial decision or otherwise after such opinion is
rendered. Such counsel may assume that any agreement is the valid and
binding obligation of any parties to such agreement other than Seller or
Acquiree. In giving such opinion, such counsel may rely as to all matters
of fact on certificates of officers or directors of Seller or Acquiree and
certificates of public officials, so long as such reliance and the facts
thereunder are expressly stated.
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Such counsel's opinion shall be limited to matters governed by federal law.
With respect to matters involving the application of the law of other
jurisdictions, such counsel may rely, to the extent it deems proper and as
specified in its opinion, upon the opinion of local counsel.
(c) SUIT, ACTION, ETC. No suit, action or other proceeding shall be
pending or directly threatened by any federal, state or other governmental
agency, commission or authority having jurisdiction or authority over
Seller, Acquiree, or Buyer, or by any other person, in which it is sought
to restrain or prohibit consummation of the transactions contemplated by
this Agreement and which in the reasonable and good faith judgment of the
management of Buyer, in consultation with counsel, is meritorious and
adversely affects the prospects of such consummation.
(d) CLOSING DOCUMENTS. Seller and Acquiree shall have delivered to
Buyer (i) all consents and authorizations of landlords and other persons
that are necessary to permit this Agreement to be consummated without
violation of any lease or other agreement to which Acquiree is a party or
by which Acquiree or any of its properties are bound; and (ii) such other
certificates and documents as Buyer and their counsel may reasonably
request (all of the foregoing certificates and other documents being herein
referred to as "Acquiree Closing Documents").
10. CONDITIONS TO THE OBLIGATIONS OF SELLER AND ACQUIREE. Consummation by
Seller and Acquiree of the transactions contemplated hereby is subject to the
following conditions precedent, any of which, however, may be waived, to the
extent permitted by applicable law or regulation, by the consent in writing of
Seller and Acquiree.
(a) REPRESENTATIONS AND WARRANTIES.
(i) The representations and warranties of Buyer contained
herein (A) shall have been true and correct in all material respects
on the date hereof, and (B) other than as disclosed by Buyer to, and
approved by, Seller and Acquiree in writing prior to or at the
Closing, shall be true and correct in all material respects as of the
Closing, except as otherwise permitted by this Agreement and except as
to any representation or warranty which specifically relates to an
earlier date.
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(ii) Buyer shall have duly performed or complied in all
material respects with all covenants, not otherwise waived by Seller
and Acquiree in writing, required by this Agreement to be performed by
Buyer prior to or at the Closing.
(iii) Seller and Acquiree shall have received a certificate
of Buyer dated as of the Closing, signed by the President and the
Chief Financial Officer of Buyer, certifying in such detail as
Acquiree may reasonably request the fulfillment of the conditions set
forth in Sections 10(a)(i) and (ii) above.
(b) OPINION OF COUNSEL. All proceedings and legal details incident to
this Agreement shall be satisfactory to Seller and Acquiree on advice of
special counsel and Seller and Acquiree shall have received an opinion
reasonably satisfactory to it from Buyer's counsel dated as of the date of
the Closing and addressed to Seller and Acquiree to the effect that:
(i) Buyer is a corporation and is organized, validly
existing and in good standing under the laws of the State of Maryland
and has the corporate power and authority to execute, deliver and
perform all transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of all
transactions contemplated by the Agreement have been duly authorized
by the Board of Directors of Buyer and do not and will not violate any
of the provisions of, or constitute a default under, or give any
person or party the right to accelerate payment or performance under
the Articles of Incorporation or Bylaws of Buyer or to such counsel's
knowledge, after reasonable investigation, any material agreement,
document or instrument to which Buyer is a party or by which it or any
of its properties or assets is bound.
(iii) The Agreement has been duly authorized, executed and
delivered by Buyer and constitutes a valid and binding obligation of
Buyer enforceable against Buyer in accordance with its terms, except
as may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium, conservatorship, receivership or other similar laws now or
hereafter in effect relating to or affecting
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the enforcement of creditors' rights generally; (ii) general equitable
principles; and (iii) laws relating to the safety and soundness of
insured depository institutions, except that no opinion need be
expressed as to the effect or availability of equitable remedies or
injunctive relief (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(iv) To the actual knowledge of such counsel, after
reasonable investigation, the execution, delivery and performance as
of the date of the opinion of the Agreement and the transactions
contemplated thereunder by Buyer does not violate any provision of
law, regulation, rule, order or decree applicable to Buyer.
(v) All consents and approvals of (and filings with) all
federal or state regulatory agencies or other authorities having
jurisdiction over the transactions contemplated by the Agreement
required by law for Buyer to have been obtained or made have been
obtained or made; such opinion to express those agencies or
authorities whose approvals have been obtained or accomplished.
(vi) To the actual knowledge of such counsel, after
reasonable investigation, there is no action, suit or proceeding
pending or threatened against Buyer before any federal, state or local
court or government authority or before any arbitration tribunal which
seeks to modify, enjoin or prohibit or otherwise adversely and
materially affect the transactions contemplated by the Agreement.
The opinion of Buyer's special counsel shall be governed by the Legal
Opinion Accord ("Accord") of the American Bar Association Section of
Business Law (1991). The term "actual knowledge" as used herein shall have
the meaning set forth in the Accord. In addition, such opinions may be
limited to present statutes, regulation, rulings, and formal agency and
judicial interpretations and to facts as they presently exist; in rendering
such opinion, such counsel need assume no obligation to revise or
supplement it should the present laws be changed by legislation or
regulatory action, judicial decision or otherwise, after such opinion has
been rendered. Such counsel may assume that any agreement is the valid and
binding obligation of any parties to such agreement, other than Buyer. In
giving such opinion, such counsel
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officers or directors of Buyer and certificates of public officials, so
long as such reliance and the facts thereunder are expressly stated. Such
counsel's opinion shall be limited to matters governed by federal laws and
by the laws of the State of Maryland.
(c) SUIT, ACTION, ETC. No suit, action or other proceeding shall be
pending, or directly threatened by any federal, state or other governmental
agency, commission or authority having jurisdiction or authority over
Seller, Acquiree, or Buyer or by any other person, in which it is sought to
restrain or prohibit consummation of the transactions contemplated by this
Agreement.
(d) DEPOSIT INTO PAYMENT FUND. On or prior to the Effective Date,
Buyer shall have deposited cash into a payment fund in an amount sufficient
to enable Buyer to satisfy its obligations to pay the aggregate
consideration under this Agreement.
(e) CLOSING DOCUMENTS. Buyer shall have delivered to Seller and
Acquiree (i) all consents and authorizations necessary to permit this
Agreement to be consummated; and (ii) such other certificates and documents
as Seller and Acquiree and their counsel may reasonably request (all of the
foregoing certificates and other documents being herein referred to as
"Buyer Closing Documents").
11. CERTAIN TAX MATTERS. Seller, Acquiree and Buyer hereby covenant and
agree with respect to certain tax matters as follows:
(a) INTERNAL REVENUE CODE SECTION 338 (h)(10) ELECTION. With respect
to the Stock Purchase hereunder, Buyer shall make a timely election Section
338 (g) of the Code and Seller and Buyer shall jointly make an election
under Section 338 (h)(10) of the Code (and any corresponding elections
under state or local tax laws) (collectively, a "Section 338 (h)(10)
Election"). Seller and Buyer shall (i) cooperate with each other to take
all actions necessary and appropriate (including filing such forms,
returns, elections, schedules and other documents as may be required) to
effect and preserve a timely Section 338 (h)(10) Election in accordance
with Section 338 of the Code and the temporary regulations thereunder, or
any successor provisions, as promptly as practicable following the Closing
Date, but not later than the latest date on which such Section 338 (h)(10)
Election is permitted to be made, and from time to time thereafter, and
(ii) Seller and Buyer shall report the Stock Purchase pursuant to this
Agreement consistent with Section 338
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(h)(10) Election and shall take no position contrary thereto or
inconsistent therewith in any tax return, any discussion with or proceeding
before any a taxing authority, or otherwise.
(b) ALLOCATION OF PURCHASE PRICE. Schedule 11(a) sets forth the
tentative allocation (the "Tentative Allocation Schedule") of the purchase
price among the assets acquired and liabilities assumed. Buyer, Seller and
Acquiree acknowledge that the allocation contained in the Tentative
Allocation Schedule is based upon the purchase price calculated in
accordance with paragraph l(b). Buyer, Seller and Acquiree further
acknowledge that the Final Purchase Price determined in accordance with
Paragraph l(d) shall serve as the basis for a final revised allocation (the
"Final Allocation Schedule") of the Final Purchase Price among the assets
acquired and liabilities assumed by Buyer in connection with this
Agreement. All allocations utilized in connection with the determination of
the Final Allocation Schedule shall be prepared in accordance with Section
338(h)(10) of the Code and the applicable regulations promulgated
thereunder. Seller shall have the right to review the Final Allocation
Schedule and Seller and Buyer shall consult and resolve in good faith any
issues arising as a result of Seller's review of such schedule. If the
parties are unable to resolve any dispute within five business days of the
receipt by Seller of the Final Allocation Schedule, the parties shall
jointly request an independent accounting firm, selected in the same manner
as described in paragraph l(d), to resolve any dispute as promptly as
possible, with one half of the cost of such resolution to be borne by each
of Seller and Buyer. If such independent accounting firm is unable to make
a determination with respect to any dispute prior to the due date for the
filing of any required tax return for which such determination is
necessary, Buyer and Seller shall file such return without such
determination having been made, subject, however, to the parties'
obligation thereafter to file amended returns reflecting the final decision
by the independent accounting firm. Seller and Buyer (i) shall be bound by
the allocation contained in the Final Allocation Schedule for purposes of
determining any and all consequences with respect to income taxes
associated with the transactions contemplated herein; (ii) shall prepare
and file all returns required to be filed with any taxing authority in a
manner consistent with such allocations; (iii) shall take no position
inconsistent with such allocation in any return, in any discussion with or
preceding before any taxing authority, or otherwise. In the event such
allocation is disputed by any taxing authority and in the event that the
applicable statute of limitations has not expired with respect to either
party, the party receiving notice of such dispute shall promptly notify and
consult with the other party hereto concerning resolution of such dispute,
and no such dispute shall be finally settled or compromised
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without the mutual consent of Seller and Buyer, which consent shall not be
unreasonably withheld.
(c) RETURNS, INDEMNIFICATION AND LIABILITY FOR TAXES. Seller and
Acquiree shall prepare and file or caused to be prepared and filed on a
timely basis, without extension, all returns with respect to Acquiree for
all taxable periods ending on or before the Effective Date and, subject to
the terms and conditions of this Agreement, shall pay and shall indemnify
and hold Buyer and each affiliate of Buyer, harmless against and from, on
an after-tax basis, (i) all the taxes of Acquiree for all taxable years or
periods which end on or before the Effective Date which are not paid prior
to the Effective Date and for which adequate reserve was not made; (ii) all
taxes of all members of any Affiliated Group which Acquiree is or has been
a member prior to the Effective Date; (iii) all taxes of Acquiree due or
accrued or subsequently determined to be due through the Effective Date in
respect of any taxable year or period commencing before the Effective Date
and ending after the Effective Date to the extent that such taxes relate to
the period prior to the Effective Date; (iv) all taxes on income or gain
for the period up to and including the Effective Date imposed on Buyer by
any state or local taxing authority; and (v) Buyer shall prepare and file
or cause to be prepared and filed on a timely basis, without extension, all
returns and shall pay and shall indemnify and hold Seller and Acquiree
harmless against and from, on an after-tax basis, (i) all taxes of Buyer
and Acquiree for any taxable year or period commencing after the Effective
Date; and (ii) all taxes of Buyer and Acquiree which accrue after the
Effective Date and which relate to periods after such date.
12. TERMINATION OF AGREEMENT. This Agreement may be terminated at any time
prior to the Effective Date, whether before or after the receipt of required
approvals only if one or more of the following events shall occur:
(a) By any party to the Agreement, if the Closing shall not have
occurred on or before December 29, 1995, unless the failure to so
consummate by such time is due to the breach of this Agreement by the party
seeking to terminate, or such later date as shall have been agreed to by
the parties hereto (the "Termination Date").
(b) At any time by the mutual written agreement of the parties
hereto.
(c) Immediately upon the expiration of thirty (30) days from the date
that Buyer has given notice to Seller or Acquiree of their material
misrepresentation or breach of any warranty or representation or breach in
any material respect, individually or collectively, of any
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covenant or agreement herein; provided, however, that no such termination
shall take effect unless it is reasonably evident that Seller or Acquiree
cannot or will not fully and completely correct the grounds for termination
as specified in the aforementioned notice on or before the date of Closing.
(d) Immediately upon the expiration of thirty (30) days from the date
that Seller or Acquiree has given notice to Buyer of Buyer's material
misrepresentation or breach of any warranty or representation or breach in
any material respect, individually or collectively, of any covenant or
agreement herein; provided, however, that no such termination shall take
effect unless it is reasonably evident that Buyer cannot or will not fully
and completely correct the grounds for termination as specified in the
aforementioned notice on or before the date of Closing.
(e) By any party who has been informed in writing by the OTS or state
regulator that a required approval or consent will not be granted and the
time period for all appeals and reconsideration has expired.
13. EXPENSES.
(a) Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby in
the event of termination of this Agreement pursuant to Section 12 then this
Agreement shall thereafter become void and there shall be no liability on
the part of any party hereto or their respective officers or directors,
except as provided in Sections 13(b) and 14 hereof, and except that any
such termination shall be without prejudice to the rights of any party
hereto arising out of the willful breach of any covenant or willful
misrepresentation contained in this Agreement by any other party hereto.
(b) In the event any party shall default in its obligations
hereunder, any non-defaulting party may pursue any remedy available at law
or in equity to enforce its rights and shall be paid by the defaulting
party for all damages (except consequential damages), costs and expenses,
including legal, accounting, printing and mailing expenses, incurred or
suffered by the non-defaulting party in connection herewith or in the
enforcement of its rights hereunder. Any negligent misrepresentation or
negligent omission of information which is not material to this Agreement
is not grounds for default or rescission of this Agreement.
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14. CONFIDENTIALITY. Any non-public or confidential information disclosed
by either Seller or Acquiree or by Buyer to the other parties pursuant to this
Agreement or as a result of the discussions and negotiations leading to this
Agreement, or otherwise disclosed, or to which any other party has acquired or
may acquire access, and indicated (either expressly, in writing or orally, or by
the context of the disclosure or access) by the disclosing party to be
non-public or confidential, or which by the context thereof reasonably appears
to be non-public or confidential, shall be kept strictly confidential and shall
not be used in any manner by the recipient except in connection with the
transactions contemplated by this Agreement. To that end, the parties hereto
will each, to the maximum extent practicable, restrict knowledge of and access
to non-public or confidential information of the other party to its officers,
directors, employees and professional advisors who are directly involved in the
transactions contemplated hereby and reasonably need to know such information.
Further to that end, all non-public or confidential documents (including all
copies thereof) obtained or created hereunder by any party shall be returned as
soon as practicable after any termination of this Agreement.
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. No representation,
warranty or covenant contained in this Agreement, or in any exhibit, certificate
or other instrument referred to in this Agreement, and which are delivered or
made pursuant to this Agreement (or in connection with any transaction
contemplated by this Agreement) shall survive the Closing except for the
provisions of Sections 1, 14, and 16 hereof.
16. CERTAIN POST-MERGER AGREEMENTS. The parties hereto agree that:
(a) EMPLOYEES.
(i) On or before the Effective Date Buyer shall negotiate
individual employment agreements and arrangements with those of
Acquiree's employees that Buyer proposes to employ on an "at will"
basis or otherwise. Seller shall then notify each employee of Acquiree
that Buyer has not arranged to employ that it will offer to employ
such person or that their employment with Acquiree is terminated, as
Seller deems appropriate. Seller shall, if it so chooses, pay
termination benefits, as determined solely by Seller or Acquiree, to
each person who is terminated. Any employee who is employed by Buyer
but who is subsequently terminated within ninety (90) days of the
Effective Date may likewise be paid such termination benefits
36
<PAGE>
by Seller if, and to the extent determined by Seller. Nothing in this
Agreement shall obligate or require Buyer to hire or employ any of
Seller's or Acquiree's employees or to assume responsibility for any
vested benefit or claim, right or entitlement of any employee of
Acquiree or Seller relating to the period of employment preceding the
Effective Date.
(b) INDEMNIFICATION OF BUYER. On and after the Effective Date, Seller
shall indemnify, defend and hold harmless all former and then existing
directors, officers, employees and agents of Buyer and each subsidiary of
Buyer against all losses, claims, damages, costs, expenses, liabilities or
judgments or amounts that are paid in settlement (with the approval of
Seller, which approval shall not be unreasonably withheld) in connection
with any claim, action, suit, proceeding or investigation based in whole or
in part or arising in whole or in part due to the operation of Acquiree's
business prior to the Effective Date. The foregoing shall be deemed to
encompass, but shall not be limited to any loss claim, action, suit,
proceeding or investigation concerning or resulting from: (i) the failure
or alleged failure of any individual retirement account, Keogh plan account
or other depository account maintained by Acquiree prior to the Effective
Date to comply with applicable laws and regulations; (ii) any employment
related claim by any person employed or claiming to have been employed by
Acquiree prior to the Effective Date unless such claim is based wholly on
facts or events which relate to the period after the Effective Date; and
(iii) with respect to mortgage servicing rights being transferred by Seller
pursuant to this Agreement, any failure by Acquiree, prior to the Effective
Date, to comply with any applicable provision of any Mortgage Servicing
Agreement including any covenant, representation, warranty or any
applicable documentation requirement, regulation, directive, bulletin or
users guide related thereto.
(c) INDEMNIFICATION OF SELLER. On and after the Effective Date, Buyer
shall indemnify, defend and hold harmless all former and then existing
directors, officers, employees and agents of Seller and Acquiree and each
subsidiary of Seller against all losses, claims, damages, costs, expenses,
liabilities or judgements or amounts that are paid in settlement (with the
approval of Buyer which approval shall not be unreasonably withheld) in
connection with any claim, action, suit, proceeding or investigation based
in whole or in part or arising in whole or in part due to the operation of
the business of Acquiree subsequent to the Effective Date. The foregoing
shall be deemed to encompass, but shall not be limited to, any loss, claim,
action, suit, proceeding or investigation concerning or resulting from (i)
the failure or alleged failure of any individual retirement account, Keogh
plan account or other depository account
37
<PAGE>
maintained by Acquiree subsequent to the Effective Date to comply with
applicable laws and regulations; (ii) any employment related claim by any
person employed or claiming to have been employed by Acquiree or Buyer
subsequent to the Effective Date unless such claim is based wholly on facts
or events which relate to the period before the Effective Date; (iii) with
respect to mortgage servicing rights being transferred by Seller pursuant
to this Agreement, any failure by Acquiree or Buyer, subsequent to the
Effective Date, to comply with any applicable provision of any Mortgage
Servicing Agreement including any covenant, representation, warranty or any
applicable documentation requirement, rule, regulation, directive, bulletin
or users guide related thereto.
(d) FDIC INSURANCE PREMIUM ADJUSTMENTS APPLIED RETROACTIVELY. Any
adjustment in the deposit insurance premium, excluding any special
assessment to recapitalize the federal deposit insurance fund, applied by
the FDIC to Acquiree's deposits subsequent to the date hereof shall be
allocated to either Buyer or Seller depending on the time period of
coverage involved in relation to the Effective Date. By way of
illustration, any adjustment relating to the period prior to the Effective
Date shall be the Seller's responsibility, or benefit, depending on whether
such adjustment comprises an increase, or decrease, respectively. Likewise
any adjustment relating to the period on or subsequent to the Effective
Date shall be the Buyer's responsibility, or benefit, depending on whether
such adjustment comprises an increase, or decrease, respectively. Seller
and Acquiree shall be responsible for paying any special assessment to
recapitalize the federal deposit insurance fund unless (i) the assessment
is levied after November 30, 1995, regardless of when federal legislation
relating thereto is enacted into law or what date is chosen in such law for
purposes of determining deposit levels; and (ii) the Stock Purchase is
consummated, in which case Buyer shall be responsible for paying such
assessment.
17. ENTIRE AGREEMENT. This Agreement, and all exhibits and schedules
attached hereto, embody the entire agreement among the parties hereto with
respect to the matters agreed to herein. All prior negotiations, discussions and
agreements by and among the parties hereto with respect to matters agreed to in
this Agreement, or the exhibits or schedules hereto, are hereby superseded and
shall have no force or effect.
18. PUBLICITY. The content and timing of all publicity and announcements
concerning this Agreement, and all transactions contemplated by this Agreement,
shall be subject to joint consultation and approval of the parties hereto,
subject, however, to the legal obligations applicable to public companies.
38
<PAGE>
19. AMENDMENT AND WAIVER. Neither this Agreement, nor any term, covenant,
condition or other provision hereof, may be amended, modified, supplemented,
waived, discharged or terminated except by a document in writing signed by
responsible officers and duly authorized by the respective boards of directors
of the parties hereto.
20. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland except to the extent that
federal law is controlling.
21. COMMUNICATIONS. All notices, claims, requests, demands, consents and
other communications which are required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given if hand delivered,
sent by recognized overnight delivery service, sent by certified or registered
mail, postage prepaid, return receipt requested, or by confirmed telecopy as
follows:
(a) IF TO BUYER, to:
Frank W. Neubauer, President
MONOCACY BANCSHARES, INC.
222 East Baltimore Street
Taneytown, MD 21787
or to such other person or place as shall be designated to Seller and Acquiree
in writing, and with a copy to:
Paul A. Adams, Esquire
SHUMAKER WILLIAMS, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Phone: (717) 763-1121
Fax: (717) 763-7419
(b) IF TO SELLER AND ACQUIREE, to:
Thomas E. Hales, President
U.S.B. HOLDING CO., INC.
100 Dutch Hill Road
Orangeburg, NY 10962
or to such other person or place as shall be designated to buyer in writing, and
with a copy to:
Daniel P. Weitzel, Esquire
ELIAS, MATZ, TIERNAN HERRICK L.L.P.
12th Floor
734 15th Street NW
Washington, DC 20005
Phone: (202) 347-0300
Fax: (202) 347-2172
39
<PAGE>
Any such notice or other communication so addressed shall be deemed to have been
received by the addressee (i) if hand-delivered or sent by overnight delivery,
on the next business day following the date so delivered or sent, (ii) if sent
by registered or certified mail, five (5) business days following the date sent,
or (iii) if sent by telecopy, upon verbal telephone confirmation of receipt
thereof by an individual authorized to accept telecopy communications at the
above-specified telecopy number as of the date of such receipt or confirmation.
22. SUCCESSORS AND ASSIGNS. The rights and obligations of the parties
hereto shall inure to the benefit of and shall be binding upon the successors
and assigns of each of them; provided, however, that neither this Agreement nor
any of the rights, interest or obligations hereunder shall be assigned by any
party hereto without the prior written consent of the other party.
23. HEADINGS, ETC. The headings of the Sections and Subsections of this
Agreement have been inserted for convenience only and shall not be deemed to be
a part of this Agreement.
24. SEVERABILITY. In the event that any one or more provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, by any court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement and the
parties shall use their best efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
25. NO THIRD PARTY BENEFICIARY. Except as expressly provided for herein,
nothing in this Agreement is intended to confer upon any person who is not a
party hereto any rights or remedies of any nature whatsoever under or by reason
of this Agreement.
26. COUNTERPARTS. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required; and it shall not be necessary that
the signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
27. FURTHER ASSURANCES. Each party will execute and deliver such
instruments and take such other actions as the other party hereto may reasonably
request in order to carry out the intent and purposes of this Agreement.
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be duly executed, as of the date set forth
above.
ATTEST: MONOCACY BANCSHARES, INC.
By: /s/ By: /s/ Frank W. Neubauer
----------------------------------- -------------------------------
Frank W. Neubauer, President
ATTEST: U.S.B. HOLDING COMPANY, INC.
By: /s/ By: /s/ Thomas E. Hales
------------------------------------ -------------------------------
Thomas E. Hales, Chairman
of the Board, President
and Chief Executive
Officer
ATTEST: ROYAL OAK SAVINGS BANK, FSB
By: /s/ By: /s/ Thomas E. Hales
----------------------------------- -------------------------------
Thomas E. Hales, Chairman
of the Board and Chief
Executive Officer
41
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT DATED AUGUST 25, 1995
SCHEDULE 1(a)
EXCLUDABLE ASSETS
PAGE 1
- --------------------------------------------------------------------------------
Book Value
as of
December 31, 1995
-----------------
CASH:
Due from Bank - Time Accounts (listing attached) $ 886,101.21
Due from Bank - Demand - IBAA $ 52,920.00
INVESTMENTS AND RELATED RECEIVABLES (listing attached) $20,644,103.50
FEDERAL FUNDS SOLD - USB $(1,415,225.55)
LOANS:
Credit Cards (including unused lines) (listing attached) $ 37,563.42
Commercial Mortgages (listing attached) $ 1,683,913.00
Residential Mortgage Loans (listing attached) $16,538,918.81
Home Equity Loans (including unused lines) $ 3,557,114.33
(listing attached)
Installment Loans (listing attached) $ 288,998.16
Less: Allowance for Loan Losses (318,820.18)
--------------
$21,787,687.54
(1) Excludes 5% FHLMC participation in the amount of $96,948.60 that will be
retained by Royal Oak.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT DATED AUGUST 25, 1995
SCHEDULE 1(a)
EXCLUDABLE ASSETS
PAGE 2
- --------------------------------------------------------------------------------
FIXED ASSETS:
Building & Property located at 1350 Liberty Road $ 356,878.00
Less: Accumulated Depreciation (45,556.00)
--------------
311,322.00
Furniture & Equipment (net) (listing attached) $ 4,611.00
OTHER ASSETS:
Accrued Interest Receivable (listing attached) $ 269,033.47
Reimbursable foreclosure related expense $ 7,514.69
EXCLUDABLE LIABILITIES:
Other Liabilities - Escrow balances loans servicing purchased $ 7,841.54
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 1(a)
EXCLUDABLE F.F.&E.
- --------------------------------------------------------------------------------
NET BOOK
VALUE
AS OF
DECEMBER 31, 1995
-----------------
CREDIT CARD OFFICE
1 - Executive Chair
$ 497
2 - Side Chairs
CREDIT CARD OFFICE
1 - Personal Computer and
associated Printer 2,216
EXECUTIVE VICE PRESIDENT OFFICE
Contura Notebook 1,898
2 - Desks (Executive Officer's Offices) 0
1 - Four Drawer File (Ron Moss Office) 0
4 - Three Drawer File Cabinets (Credit Card Office) 0
1 - Photocopier (Credit Card Dept.) 0
1 - Conference Table (Credit Card Dept.) 0
6 - Side Chairs (Credit Card Dept.) 0
---------
$ 4,611
---------
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT DATED AUGUST 25, 1995
SCHEDULE 1(b)
PURCHASE PRICE CALCULATION
AS OF DECEMBER 31, 1995
SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Current Adjustments for Acquired
Balance Transaction Value
------- --------------- ---------
Category
- --------
<S> <C> <C> <C>
Assets:
Cash and cash items $45,210,824.71 $ - $ 45,210,824.71
Passbook and overdraft
loans (5) 352,210.45 $ - 352,210.45
FHLB Stock 226,800.00 226,800.00
FHLMC 5% participation 96,948.60 - 96,948.60
Mortgage Servicing Rights (5):
Sold to FHLMC ($23,825mm)
On-Balance Sheet Loans
($16,218mm)
Total Servicing
($40,043mm) - 281,943.00 (3) 281,943.00
Property:
Personal Property (6) 43,998.21 - 43,998.21
Randallstown Real
Property (6) 465,660.14 45,389.86 (1) 511,050.00
Certain Other Assets (5) 343,963.16 - 343,963.16
------------- ------------- -------------
Total Assets 46,740,396.27 327,332.86 47,067,729.13
Deposits (Including
escrows) (5) 42,329,079.87 3,595,932.00 (2) 38,733,147.87
(8)
Certain Other Liabilities 511,016.41 - 511,016.41
(5) ------------- ------------- -------------
Net Assets Acquired (7) $ 3,900,299.99 $3,923,264.86 $ 7,823,564.85
------------- ------------- -------------
</TABLE>
(1) Excess of agreed price over book value ($59,339.86), less amount of agreed
"repair" credit $13,950.00.
(2) 8.5% of deposits.
(3) .7041% of serviced balances.
(4) Aggregate premium:
Deposits $ 3,595,932.00
Servicing 281,943.00
Randallstown 45,389.86
--------------
$ 3,923,264.86
--------------
(5) Current balance per December 31, 1995 general ledger trial balance. In the
case of other assets and liabilities only applicable items are included.
(6) Current balance per fixed asset records.
(7) Current balance per December 31, 1995 general ledger trial balance.
Represents common stock, surplus and undivided profits.
(8) Excludes premium on $24,000 of escheatable deposits.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3(d)
CERTAIN DEVELOPMENTS
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (e)
TAX RETURNS NOT FILED, ACCRUALS NOT MADE, EXTENSIONS,
ASSESSMENTS OR WAIVERS
AS OF THE CLOSING,
DECEMBER 29, 1995
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (f)
MATERIAL LEGAL OR ADMINISTRATIVE ACTIONS,
SUITS, CLAIMS, ETC.
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (g)
BROKERAGE
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (h)
PROPERTIES
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
There are no disclosures required to be made pursuant to this schedule 3 (h).
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (i)
NON-COMPLIANCE ISSUES
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE, except with respect to certain Share Loans and Money Magic loans - see
schedule 3(y).
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (j)
CONTRACTS AND COMMITMENTS, ETC.
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- Royal Oak Savings Bank, F.S.B. has entered into a contract
with AT&T Global Information Solutions in which AT&T
provides data processing services.
- Royal Oak Savings Bank, F.S.B. has entered into a contract
with Internet, Inc. for ATM service.
- Royal Oak Savings Bank, F.S.B. has entered into a contract
to provide VISA card service to the Ancient Free and
Accepted Masons of Maryland(1).
- Royal Oak Savings Bank, F.S.B. has entered into a contract to provide
VISA card service to the Free and Accepted Masons of New Hampshire(1).
- Royal Oak Savings Bank, F.S.B. has entered into a contract with IBAA
Bancard in which IBAA Bancard processes credit card activity(1).
See schedule 3(x).
(1) To be retained by seller, and subsequently assigned to Union State Bank,
or cancelled.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (k)
INSURANCE
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See attached listing included in Schedule 3(K) as included in the
Stock Purchase Agreement dated August 25, 1995.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (l)
NO GUARANTEES
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
None, see schedule 3(ee)
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3(q)
EMPLOYEE BENEFITS
AS OF THE CLOSING,
DECEMBER 29, 1995
- --------------------------------------------------------------------------------
- - Medical Insurance: Empire BlueCross and BlueShield
- - Short-Term Disability: The First Rehabilitation Insurance
Company of America
- - Long-Term Disability: Provident Life and Casualty
Insurance Company
- - Life Insurance: C.U. Life Insurance Company
of New York
All contracts have been or will be cancelled as of December 31, 1995.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (r)
LABOR MATTERS
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (s)
ENVIRONMENTAL MATTERS
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (v)
FINANCIAL INSTITUTIONS BOND - CLAIMS
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3 (aa)
LIST OF TRADEMARKS, COPYRIGHTS, ALL LICENSES, ETC.
AS OF THE CLOSING
DECEMBER 29, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Royal Oak Savings Bank, F.S.B.
The above is based on common usage and is not a registered trademark.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3(x)
NON-ASSUMABLE CONTRACTS
AS OF THE CLOSING,
DECEMBER 29, 1995
- --------------------------------------------------------------------------------
- AT&T Global Information Solutions
- Data Processing
- Subject to cancellation penalties (1)
- Internet, Inc.
- ATM Participant Service Agreement
Includes: Internet sponsored Plus access, VISA Net
access and authorization processor
(1) AT&T has agreed to continue this contract and Buyer will make any
arrangements necessary directly with AT&T.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3(y)
LOAN EXCEPTIONS
AS OF THE CLOSING,
DECEMBER 29, 1995
- --------------------------------------------------------------------------------
None, except as follows:
Loan No. Loan Balance*
-------- -------------
SHARE LOANS
01-91-0000131 $10,709
01-91-0000200 2,250
01-91-0021129 2,007
01-91-0021134 4,051
01-91-0021135 1,227
01-91-0021138 3,441
01-91-0021161 5,385
01-91-0021162 6,932
01-91-0021163 2,927
01-91-0021164 81,000
01-91-0030851 17,500
--------
Total $137,429
--------
MONEY MAGIC
10006 $ 992
10019 0
10024 0
10025 451
10026 0
10027 504
10028 0
10029 0
10031 0
10033 0
10036 451
--------
Total $ 2,398
--------
* - AMOUNTS AS OF DECEMBER 26, 1995
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3(ee)
POWERS OF ATTORNEY, GUARANTEES
AS OF THE CLOSING,
DECEMBER 29, 1995
- --------------------------------------------------------------------------------
None, except for the guarantee of 131 (1) residential mortgage loans with
unpaid principal balances totalling $1,852,136 which were sold to FHLMC.
(1) Amount is as of December 22, 1995.
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 3(ff)
MORTGAGE SERVICING AGREEMENTS
EXCEPTIONS, DEFAULTS, ETC.
AS OF THE CLOSING,
DECEMBER 29, 1995
- --------------------------------------------------------------------------------
NONE
<PAGE>
ROYAL OAK SAVINGS BANK, F.S.B.
STOCK PURCHASE AGREEMENT
SCHEDULE 11(a)
TENTATIVE PURCHASE PRICE ALLOCATION
AS OF THE CLOSING,
DECEMBER 29, 1995
Amounts Presented in Thousands
- --------------------------------------------------------------------------------
Buyer expects to allocate amounts to assets acquired and liabilities assumed
based on Acquiree's respective book values with the following exceptions:
Mortgage Servicing Rights $ 283
Randallstown Real Property Premium 45
Deposit Premium 3,570
------
Total Premium Applied $3,898
------
<PAGE>
EXHIBIT 11
U.S.B. HOLDING CO., INC.
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
Weighted average number of common
shares outstanding 2,753,928 2,661,341
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options 111,871 102,701
--------- ---------
Weighted average common and common
equivalent shares outstanding 2,865,799 2,764,042*
========= =========
Net income per common and common
equivalent share $ 3.14 $ 2.42*
========= =========
* Adjusted for 10% stock dividend issued in 1995.
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1995 AND 1994
U.S.B. HOLDING CO., INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's, Except Share Data)
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 23,469 $ 19,464
Federal funds sold 13,800 5,001
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 37,269 24,465
Interest-bearing deposits in other banks 2,069 1,186
Securities:
Available for sale (at fair value) 170,889 75,944
Held to maturity (fair value $62,684 in 1995
and $143,961 in 1994) 60,266 149,580
Loans held for sale 394 3,272
Loans, net of allowance for loan losses
of $3,904 in 1995 and $3,320 in 1994 387,043 326,978
Premises and equipment, net 10,088 10,794
Accrued interest receivable 5,288 4,385
Other real estate owned 939 544
Other assets 4,538 5,455
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $678,783 $602,603
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 82,363 $ 78,585
Interest bearing deposits 528,272 465,277
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 610,635 543,862
Accrued interest payable 1,769 1,108
Dividend payable 794 98
Accrued expenses and other liabilities 4,252 1,516
Federal funds purchased -- 3,400
Federal Home Loan Bank advances 10,000 12,500
Long-term debt qualifying as regulatory capital -- 1,800
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 627,450 564,284
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6 and 13)
Stockholders' equity:
Preferred stock, no par value
Authorized shares: 100,000
Outstanding shares: 37,500 3,750 3,750
Common stock, $5 par value
Authorized shares: 7,000,000
Issued shares: 2,880,397 in 1995 and 2,535,400 in 1994 14,402 12,677
Additional paid-in capital 19,046 12,452
Retained earnings 14,072 13,180
Treasury stock at cost, 86,316 shares (1,075) (1,075)
Unrealized gain (loss) on available for sale securities, net of tax 1,138 (2,665)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 51,333 38,319
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $678,783 $602,603
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
U.S.B. HOLDING CO., INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's, Except Share Data)
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $33,216 $26,924 $22,145
Interest on federal funds sold 1,013 167 98
Interest and dividends on securities:
Mortgage-backed securities 7,741 6,032 5,935
U.S. Treasury and Government 2,851 1,140 891
Obligations of states and political subdivisions 3,381 3,532 3,194
Corporate and other 1,193 1,605 2,100
Interest on deposits in other banks 137 54 116
Dividends on Federal Home Loan Bank stock 160 147 65
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 49,692 39,601 34,544
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 23,438 15,345 12,922
Interest on federal funds purchased and Federal Home Loan Bank advances 816 451 92
Interest on long-term debt 64 137 124
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 24,318 15,933 13,138
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 25,374 23,668 21,406
Provision for loan losses 1,200 993 763
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,174 22,675 20,643
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain on securities transactions -- net 167 69 780
Gain (loss) on loans held for sale -- net 57 (381) 171
Net gain on sale of Royal Oak Savings Bank, F.S.B. 3,520 -- --
Mortgage servicing 340 362 330
Service charges and fees 2,599 2,620 2,286
Other income 632 485 336
- ------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 7,315 3,155 3,903
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 8,993 8,194 7,668
Occupancy and equipment expense 3,288 2,841 2,503
Advertising and business development 905 815 661
Professional fees 929 656 494
Communications 577 542 496
Stationery and printing 380 261 345
FDIC insurance 688 1,105 1,009
OREO expense -- net 186 102 258
Other expenses 1,905 1,188 1,307
- ------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 17,851 15,704 14,741
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,638 10,126 9,805
Provision for income taxes 4,311 3,126 3,605
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,327 $ 7,000 $ 6,200
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 3.14 $ 2.42* $ 2.27*
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,865,799 2,764,042* 2,585,051*
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for 10% stock dividend issued in 1995.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
U.S.B. HOLDING CO., INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,327 $ 7,000 $ 6,200
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for loan losses 1,200 993 763
Depreciation and amortization 1,496 1,324 1,284
Amortization/accretion of premiums/discounts on securities -- net 129 925 1,388
Gain on securities transactions -- net (167) (69) (780)
(Gain) loss on loans held for sale -- net (57) 381 (171)
Net gain on sale of Royal Oak Savings Bank, F.S.B. (3,520) -- --
Origination of loans held for sale (2,222) (17,018) (34,649)
Proceeds from sales of loans held for sale 4,140 13,093 20,656
Increase in accrued interest receivable (903) (536) (483)
(Decrease) increase in accrued interest payable 661 406 (133)
Other -- net 1,671 (1,291) 212
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 11,755 5,208 (5,713)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 56,942 33,481 --
Proceeds from sales of investment securities -- -- 20,241
Proceeds from principal paydowns and maturities of securities
available for sale 20,463 44,598 --
Proceeds from maturities of securities held to maturity 24,796 46,076 --
Proceeds from principal paydowns and maturities of investment securities -- -- 146,294
Purchases of securities available for sale (99,031) (79,331) --
Purchases of securities held to maturity (2,691) (54,389) --
Purchases of investment securities -- -- (159,870)
Cash and cash equivalents used in sale of Royal Oak Savings Bank,
F.S.B. (Note 3) (37,388) -- --
Net (increase) decrease in interest bearing deposits in other banks (883) 201 2,285
Loans originated, net of principal collections (61,898) (71,812) (51,589)
Loans purchased (398) (4,381) (1,770)
Acquisition of branch -- net -- -- 22,104
Purchases of premises and equipment -- net (1,211) (1,187) (890)
Proceeds from sales of OREO 1,062 1,267 1,081
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (100,237) (85,477) (22,114)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits, NOW, money market and
savings accounts 70,967 18,142 18,130
Increase (decrease) in time deposits, net of withdrawals and maturities 38,135 56,704 (835)
Increase (decrease) in federal funds purchased (3,400) 3,400 --
Net increase (decrease) in Federal Home Loan
Bank advances -- short-term (7,500) 7,500 --
Proceeds from Federal Home Loan Bank advance --long-term 5,000 5,000 --
Repayment of long-term debt (1,800) -- (200)
Cash dividends paid (1,974) (1,621) (1,230)
Redemption of preferred stock -- -- (250)
Proceeds from issuance of common stock 1,858 1,170 1,195
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 101,286 90,295 16,810
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,804 10,026 (11,017)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,465 14,439 25,456
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,269 $ 24,465 $ 14,439
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 23,657 $ 15,527 $ 13,271
- ------------------------------------------------------------------------------------------------------------------------------
Income tax payments $ 3,522 $ 3,793 $ 3,503
- ------------------------------------------------------------------------------------------------------------------------------
Transfer of assets to OREO -- net $ 1,599 $ 694 $ 123
- ------------------------------------------------------------------------------------------------------------------------------
Transfer of securities held to maturity to securities available for sale $ 68,145 $(42,181) $ 24,927
- ------------------------------------------------------------------------------------------------------------------------------
Loans securitized into mortgage-backed securities $ $ 20,910 $ 23,419
- ------------------------------------------------------------------------------------------------------------------------------
Change in unrealized gain/loss on securities available for sale -- net of tax $ 3,803 $ (2,665) $ --
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
U.S.B. HOLDING CO., INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's, Except
Share Data)
Unrealized
Common Stock Gain (Loss) on
Preferred --------------------- Additional Available
Stock, Shares $5 Par Paid-in Retained Treasury For Sale
No Par Value Outstanding Value Capital Earnings Stock Securities
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $4,000 2,091,056 $10,887 $ 9,087 $ 5,626 $(1,075)
Net income -- -- -- -- 6,200 --
Cash dividends:
Common ($.35* per share) -- -- -- -- (902) --
Preferred -- -- -- -- (328) --
Redemption of preferred stock (250) -- -- -- -- --
Common stock issued:
Incentive stock options exercised
($6.92 to $12.37 per share) -- 31,699 158 184 -- --
Directors' stock options exercised
($9.95 to $11.26 per share) -- 16,590 83 109 -- --
10% stock dividend -- 214,647 1,073 1,717 (2,795) --
Dividend reinvestment plan -- 44,566 223 438 -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 3,750 2,398,558 12,424 11,535 7,801 (1,075)
Adoption of SFAS No. 115 -- -- -- -- -- -- $ 919
Net income -- -- -- -- 7,000 -- --
Cash dividends:
Common ($.49* per share) -- -- -- -- (1,306) -- --
Preferred -- -- -- -- (315) -- --
Common stock issued:
Incentive stock options exercised
($23.00 per share) -- 400 2 7 -- -- --
Directors' stock options exercised
($11.82 per share) -- 2,310 12 16 -- -- --
Dividend reinvestment plan -- 47,816 239 894 -- -- --
Change in unrealized gain (loss) on
available for sale securities,
net of tax -- -- -- -- -- -- (3,584)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 3,750 2,449,084 12,677 12,452 13,180 (1,075) (2,665)
Net income -- -- -- -- 9,327 -- --
Cash dividends:
Common ($.60* per share) -- -- -- -- (1,659) -- --
Preferred -- -- -- -- (315) -- --
Incentive stock options exercised
($6.92 to $23.00 per share) -- 38,610 193 299 -- -- --
Directors' stock options exercised
($9.89 to $9.95 per share) -- 5,658 28 28 -- -- --
10% stock dividend -- 250,525 1,253 5,198 (6,461) -- --
Dividend reinvestment plan -- 50,204 251 1,069 -- -- --
Change in unrealized gain (loss)
on availablefor sale securities,
net of tax -- -- -- -- -- -- 3,803
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $3,750 2,794,081 $14,402 $19,046 $14,072 $(1,075) $1,138
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for 10 percent stock dividend issued in 1995.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.B. HOLDING CO., INC.
- --------------------------------------------------------------------------------
Balance sheet information as of December 31, 1993, 1992 and 1991 and income
statement information for the years ended December 31, 1992 and 1991, is not
covered by the independent auditors' report.
1. NATURE OF OPERATIONS
U.S.B. Holding Co., Inc. (the "Company"), a Delaware corporation
incorporated on July 6, 1982, is a bank holding company which provides financial
services through its wholly-owned subsidiaries. The Company and its subsidiaries
derive substantially all of their revenue and income from the furnishing of
banking and related services to customers in Rockland and Westchester Counties,
New York and, to a lesser extent, Baltimore and Carroll Counties in Maryland.
The Company is a separate and distinct legal entity from its subsidiaries.
Union State Bank (the "Bank"), the Company's principal banking subsidiary,
is a New York State chartered full-service commercial bank which was established
in 1969. The Bank offers a complete range of retail banking services to
individuals, municipalities, corporations, and small and medium-size businesses.
These services include checking accounts, NOW accounts, money market deposit
accounts, savings accounts (passbook and statement), certificates of deposit,
retirement accounts, business loans, personal loans, residential, construction,
home equity (second mortgage) and condominium mortgage loans, loans for
education, health and similar expenditures, credit cards, other consumer
oriented financial services and safe deposit facilities.
Royal Oak Savings Bank, F.S.B. ("Royal"), a federal thrift subsidiary
located in Randallstown, Maryland, also offered a complete range of services to
individuals and businesses, including checking accounts, NOW accounts, Money
Market accounts, savings accounts (passbook and statement), certificates of
deposit, personal loans, construction loans, and residential and home equity
(second) mortgages. In 1994, Royal also instituted a credit card program. On
December 31, 1995, Royal was sold to Monocacy Bancshares, Inc. (see Note 3).
Prior to the sale to Monocacy, Royal sold substantially all its investment and
loan assets (including the credit card program), and certain other assets and
liabilities to the Bank and the Company.
The Company's business is concentrated in Westchester and Rockland
Counties, New York, and Baltimore and Carroll Counties, Maryland (see Note 5.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned banking subsidiaries, Union
State Bank and, through December 31, 1995, Royal Oak Savings Bank, F.S.B., which
was sold to Monocacy Bancshares, Inc. (see Note 3), and its non-bank subsidiary,
Ad Con, Inc. (The Bank and Royal are herein referred to as the "Banks"). All
significant intercompany accounts and transactions are eliminated in
consolidation.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and predominant practices used within the banking industry. In
preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the consolidated statements of condition and the revenues and
expenses for the periods reported. Actual results could differ significantly
from those estimates.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for loan losses and the valuation of other
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
other real estate owned, management obtains independent appraisals for
significant properties.
SECURITIES: As of January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which had an after-tax effect of an
increase to stockholders' equity of $919,000, and revised its securities
accounting policy. 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 other similar
factors, were classified as available for sale and carried at fair value.
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. Unrealized gains
and losses on securities available for sale are shown on the Consolidated
Statements of Condition at fair value and the resulting after-tax adjustments
are shown as a separate component of stockholders' equity. Prior to adopting
SFAS No. 115, the Company accounted for securities using the amortized cost
method.
The decision to sell available for sale securities 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. Fair values for
securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
5
<PAGE>
The Company does not acquire securities for the purpose of engaging in
trading activities.
INTEREST RATE CONTRACTS: The Company uses various interest rate contracts
such as forward rate agreements and caps, primarily as hedges against specific
assets, liabilities or anticipated transactions. Contracts accounted for as
hedges must meet certain criteria including the following: the hedged item must
expose the Company to interest rate risk; the interest rate contract must reduce
that exposure; and must have a high correlation of change in fair value of the
interest rate contract and change in fair value of the item hedged or related
exposure to interest income and expense. For contracts designated as hedges,
gains or losses are deferred and recognized as adjustments to interest income or
expense of the underlying assets or liabilities over the life of the contract.
Gains or losses resulting from early terminations of contracts are deferred and
amortized over the remaining term of the underlying assets or liabilities. If
the contracts do not meet the criteria for hedge accounting, the contract is
valued at its fair value and any gain or loss is recorded in the Consolidated
Statements of Income. Any fees received or disbursed which represent adjustments
to the yield on interest rate contracts are capitalized and amortized over the
term of the interest rate contracts.
LOANS: Loans are reported at the principal amount outstanding, net of
unearned income and the allowance for loan losses. Interest income on loans is
recorded on an accrual basis until an interest or principal payment is more than
90 days past due and/or, in the opinion of management, there is a question as to
the ability of the debtor to continue to make payments. At the time a loan is
placed on nonaccrual status, interest accrued but not collected is reversed.
Interest payments received while a loan is in nonaccrual status are either
applied to reduce principal or, based on management's estimate of
collectibility, recognized as income. Loans are returned to accrual status when
factors indicating doubtful collectibility no longer exist.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of the related
loan's yield over the contractual life of the related loan, using a method that
approximates the interest method of amortization. Unamortized net fees for loans
sold are recognized in income at the time the loan is sold.
Certain residential mortgage loans held for sale are carried at lower of
aggregate cost or estimated market value, and are reported separately in the
Consolidated Statements of Condition as "Loans held for sale." Gains and losses
on sales of mortgage loans held for sale are shown as a separate component of
"Non-Interest Income" in the Consolidated Statements of Income.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is available to
absorb charge-offs from any loan category while additions are made through
charges to income and recoveries of loans previously charged off. An evaluation
of the quality of the loan portfolio is performed by management on a quarterly
basis as an integral part of the loan review function which includes the
identification of past due loans, non-performing loans, impaired loans,
assessment of the expected effects of the current economic environment and
review of historical loss experience. Based upon management's assessment of the
degree of risk associated with the various elements of the loan portfolio, it is
estimated that at December 31, 1995 and 1994, 10 percent of the allowance for
loan losses is applicable to time and demand loans, 80 percent and 75 percent,
respectively, relate to real estate secured loans, including commercial and
construction loans, and 10 percent and 15 percent, respectively, is applicable
to installment loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize possible loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the Company's service areas, Rockland and
Westchester Counties in New York, and Baltimore and Carroll Counties in
Maryland. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies may require additions to the allowance based on their judgments of
information available to them at the time of their examination.
As of January 1, 1995, the Company adopted SFAS No. 114, "Accounting for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," which requires
recognition of an impairment of a loan when it is probable that either principal
and/or interest are not collectible in accordance with the terms of the loan
agreement. Measurement of the impairment is based on the present value of
expected cash flows discounted at the loan's effective rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent. If the fair value of the
impaired loan is less than the related recorded amount, a specific valuation
allowance is established or the write down is charged against the allowance for
loan losses if the impairment is considered to be permanent. Small homogenous
loans such as residential mortgage, home equity, and installment loans are not
separately reviewed for impaired status. Such loans are typically collateralized
by residential or other personal property and require monthly payments. Separate
allocations to the allowance for loan losses are made based on payment trends
and prior loss experience and the composition of credit risk inherent in these
loan types. The impact of adopting these Statements did not have a material
effect on the Consolidated Financial Statements of the Company.
6
<PAGE>
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed on a
straight-line basis over the estimated useful lives (20 to 50 years for
buildings and 3 to 10 years for furniture, fixtures and equipment) of the
related assets. Amortization of leasehold improvements is computed on a
straight-line basis over the terms of the leases or, if shorter, the estimated
useful lives of the assets.
OTHER REAL ESTATE OWNED (OREO): OREO includes properties acquired in
satisfaction of loans. OREO properties are recorded at the lower of cost or fair
value, less estimated costs to sell. Losses arising at the time of acquisition
of such properties are charged against the allowance for loan losses. Net costs
of maintaining and operating foreclosed properties and any subsequent provisions
for and changes in valuation are charged or credited to operations when
incurred. Gains and losses realized from the sale of OREO are included in OREO
expenses. Sales of OREO financed by the Company are required to meet certain
underwriting standards.
INTANGIBLES: Intangible assets (included in other assets) were recorded in
connection with branch purchases and are being amortized over periods of five to
thirty years.
INCOME TAXES: The Company adopted SFAS No. 109, "Accounting for Income
Taxes," as of January 1, 1993. This Statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting for deferred
income taxes based on prevailing statutory tax rates. Adoption of this Statement
did not have a significant impact on the Consolidated Financial Statements of
the Company. The Company and its subsidiaries file a consolidated Federal tax
return, and the Company and the Bank file a consolidated New York State tax
return. Royal files a separate Maryland State return.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: Net income per common
share is based on net income after preferred stock dividend requirements and the
weighted average number of common shares outstanding adjusted for common stock
dividends, and in 1995 and 1994, common equivalent shares . Shares granted but
not yet issued under the Company's stock option plans are considered common
stock equivalents for earnings per share calculations; however, these options
have a minor dilutive effect (less than 3 percent) for 1993 and, therefore, are
not reflected in the earnings per share computations for that year.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS: In 1995, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." This Statement requires that
long-lived assets and certain identifiable intangibles, and goodwill related to
those assets, to be held and used by an entity, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the entity should estimate the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the asset.
This Statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for assets that are covered by
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." Assets that are covered by
Opinion No. 30 will continue to be reported at the lower of their carrying
amount or net realizable value.
Adoption of this Statement was not material to the Consolidated Financial
Statements of the Company.
PENDING ACCOUNTING PRONOUNCEMENTS: SFAS No. 122, "Accounting for Mortgage
Servicing Rights," modifies the treatment of the capitalization of servicing
rights by mortgage banking enterprises. The change eliminates the separate
treatment of servicing rights acquired through loans originated and those
acquired through purchase transactions, as previously required under SFAS No.
65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires
mortgage servicing rights, whether acquired or originated, to be recorded as
assets distinct from the loans to which they relate. SFAS No. 122 also requires
periodic evaluation of capitalized servicing rights for deterioration of value,
due to increases in prepayments and other factors. For the Company, adoption of
SFAS No. 122 is required as of January 1, 1996. The Company does not believe the
impact of SFAS No. 122 will be material to the consolidated financial statements
of the Company.
SFAS No. 123, "Accounting for Stock Based Compensation," establishes
financial accounting and reporting standards for stock based employee
compensation plans, including stock option plans.
7
<PAGE>
This Statement encourages all entities to account for stock based employee
compensation plans on a fair value based method. However, it also allows
entities to continue to account for those plans using the intrinsic based method
of accounting as prescribed by APB Opinion No. 25 "Accounting for Stock Issued
to Employees," but requires pro forma disclosure of net income and earnings per
share as if the fair value method was applied. The fair value method is
preferable to the Opinion No. 25 method for purposes of justifying a change in
accounting principle under APB Opinion No. 20, "Accounting Changes."
Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. For the Company, the accounting requirements of
this Statement are effective for transactions entered into in 1996, while the
Company's 1996 Consolidated Financial Statements will include comparable
information for 1995. While the Company has not yet determined the impact of
SFAS No. 123 on its Consolidated Financial Statements, management does not
believe that adoption of this statement will have a material effect.
CONSOLIDATED STATEMENTS OF CASH FLOWS: For purposes of presenting the
Consolidated Statements of Cash Flows, cash equivalents include amounts due from
banks and Federal funds sold.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year
accounts to conform to the current year's presentation.
3. DISPOSITION OF ROYAL OAK SAVINGS BANK, F.S.B.
On December 31, 1995, the Company completed the sale of its wholly-owned
subsidiary, Royal Oak Savings Bank, F.S.B., to Monocacy Bancshares, Inc., parent
company of Taneytown Bank & Trust Company, Taneytown, Maryland. Certain assets
and liabilities of Royal, principally the investment and loan portfolios
aggregating approximately $22 million and $24 million, respectively, were
purchased by the Bank and the Company, immediately prior to the sale.
Substantially all deposits, approximating $42 million at December 31, 1995,
certain loan servicing rights and certain other assets and liabilities were
retained by Royal, as well as cash deposited by the Company and the Bank, to
fund the purchase of the assets discussed above, as well as other net assets
acquired.
The proceeds to the Company on the sale of $7.8 million, were based upon
8.5 percent of deposits of Royal at December 31, 1995, and an agreed upon value
for other assets, liabilities and loan servicing rights, and an amount equal to
Royal's stockholder's equity at December 31, 1995. This transaction resulted in
a gain of $3.9 million, which was reduced by expenses of approximately $400,000
incurred as a result of the sale, including legal and accounting fees and
the management bonus on such gain. The gain after tax approximated $2.1 million.
Under the agreement of sale, Royal will continue to service certain loans
and will lease a bank branch from the Company.
Also as part of this transaction, the Company has agreed not to compete in
a five county region of Maryland, with certain exceptions, for a period of three
years from date of closing of the transaction.
The principal components of deposits and other assets and liabilities
assumed by the acquiror as a result of its acquisition of Royal are summarized
below:
- ----------------------------------------------------------------------------
(000's)
- ----------------------------------------------------------------------------
Deposits and other liabilities assumed
by acquiror $42,841
Assets sold, other than cash and
cash equivalents (1,530)
Excess of net liabilities assumed by
acquiror over net cash and cash
equivalents transferred (3,923)
- ----------------------------------------------------------------------------
Net cash and cash equivalents transferred
to acquiror $37,388
- ----------------------------------------------------------------------------
8
<PAGE>
4. SECURITIES
A summary of the amortized cost, and fair value of securities and related gross
unrealized gains and losses at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and Government agencies $ 46,011 $ 654 $ 95 $ 46,570
Obligations of states and political subdivisions 3,067 40 -- 3,107
Mortgage-backed securities 109,375 1,169 181 110,363
Corporate bonds 10,406 384 -- 10,790
Other 59 -- -- 59
- ------------------------------------------------------------------------------------------------------------------------------
Total available for sale securities $168,918 $2,247 $ 276 $170,889
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY:
Obligations of states and political subdivisions $ 60,266 $2,456 $ 38 $ 62,684
- ------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 60,266 $2,456 $ 38 $ 62,684
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1994 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and Government agencies $ 25,135 $ 10 $ 302 $ 24,843
Obligations of states and political subdivisions 2,000 15 -- 2,015
Mortgage-backed securities 52,837 5 3,837 49,005
Other 73 8 -- 81
- ------------------------------------------------------------------------------------------------------------------------------
Total available for sale securities $ 80,045 $ 38 $4,139 $ 75,944
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Treasury and Government agencies $ 4,500 $ -- $ 490 $ 4,010
Obligations of states and political subdivisions 73,116 274 1,515 71,875
Mortgage-backed securities 57,617 50 3,859 53,808
Corporate bonds 14,347 105 184 14,268
- ------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $149,580 $ 429 $6,048 $143,961
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In December 1995, the Company transferred, at fair value, securities
having a fair value of $68.8 million (amortized cost of $68.1 million) from its
"held to maturity" security portfolio to its portfolio of "available for sale"
securities. This was done to enhance the Company's ability to respond to changes
in interest rate.
The securities transferred represent all of the readily marketable
securities that were previously classified as "held to maturity," except for
obligations of states and political subdivisions securities. This transfer was
made in accordance with the FASB's "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" issued in
November 1995. Concurrent with the adoption of this guidance, corporations were
permitted, through December 31, 1995, to reclassify their "available for sale"
and "held to maturity" securities without calling into question the past intent
of an entity to hold securities to maturity. The effect of this transfer, after
tax, was a $.4 million increase in shareholders' equity.
During 1995, 1994 and 1993, proceeds from sales of securities were
$56,942,000, $33,481,000 and $20,241,000, respectively. Gross gains of $335,000,
$411,000 and $780,000 were realized in 1995, 1994 and 1993, respectively. There
were no losses on sales of securities recorded in 1993 and losses of $168,000
and $342,000 were realized in 1995 and 1994, respectively.
The following tables present the carrying value of securities at
December 31, 1995, distributed based on contractual maturity or the earliest put
date for obligations of states and
9
<PAGE>
political subdivisions and maturity or the earlier call date for securities
expected to be called, and unaudited weighted average yields computed on a tax
equivalent basis. Mortgage-backed securities which may have principal
prepayments are distributed to a maturity category based on estimated average
lives. Expected maturities differ from contractual obligations, since issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
MATURITIES OF AVAILABLE FOR SALE SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Amt. Yield Amt. Yield Amt. Yield Amt. Yield Amt. Yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury &
Government agencies $20,000 6.85% $26,011 6.60% -- -- -- -- $ 46,011 6.70%
Obligations of states and
political subdivisions 1,900 7.35 -- -- $ 481 7.44% $ 686 7.91% 3,067 7.49
Mortgage-backed
securities 5,306 7.22 34,843 6.44 41,539 6.53 27,687 7.34 109,375 6.74
Corporate bonds 2,995 9.01 7,411 8.29 -- -- -- -- 10,406 8.50
Other -- -- -- -- -- -- 59 -- 59 --
- ------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale
Securities $30,201 7.16% $68,265 6.70% $42,020 6.54% $28,432 7.34% $168,918 6.85%
- ------------------------------------------------------------------------------------------------------------------------------
Fair Value $30,359 $69,303 $42,591 $28,636 $170,889
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MATURITIES OF HELD TO MATURITY SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Amt. Yield Amt. Yield Amt. Yield Amt. Yield Amt. Yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 6,448 6.15% $22,423 7.13% $31,395 8.46% -- -- $60,266 7.73%
- ------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity
Securities $ 6,448 6.15% $22,423 7.13% $31,395 8.46% -- -- $60,266 7.73%
- ------------------------------------------------------------------------------------------------------------------------------
Fair Value $ 6,468 $22,941 $33,275 -- $62,684
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities having a carrying value of approximately $149,881,000 at
December 31, 1995, were pledged to secure public deposits as required by law.
The Bank is required to report deposits directly to the Federal Reserve and
to maintain reserves on a portion of these deposits. At December 31, 1995, the
reserve requirement for the Bank totalled $9,851,000.
5. LOANS
Major classifications of loans at December 31, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time and demand loans $ 22,597 $ 11,065 $ 9,249 $ 9,908 $ 11,709
Installment loans 14,887 20,757 18,698 21,203 22,128
Real estate loans
- Commercial 212,515 192,541 145,746 89,246 67,233
- Residential 66,380 59,441 58,875 49,784 63,708
- Construction and land development 41,889 26,950 22,748 36,344 37,264
- Home equity 25,221 21,734 19,556 24,451 28,302
Other 8,494 1,808 1,768 1,836 1,670
- ------------------------------------------------------------------------------------------------------------------------------
391,983 334,296 276,640 232,772 232,014
Deferred net commitment fees (642) (659) (664) (252) (107)
Unearned discount -- (67) (153) (271) (444)
Allowance for loan losses (3,904) (3,320) (2,852) (2,496) (1,889)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $387,437 $330,250 $272,971 $229,753 $229,574
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Loans held for sale, some of which are included in the above table and
others which are commitments which have not yet closed, are residential fixed
rate real estate loans with a cost of $394,000 and market value of $393,000 at
December 31,1995, and a cost of $3,770,000 and market value of $3,695,000 at
December 31, 1994.
Substantially all of the Company's commercial and residential lending
activities are with customers located in Westchester and Rockland Counties of
New York and, to a lesser extent, Baltimore and Carroll Counties, Maryland.
Although lending activities are diversified, a substantial portion of many of
the Company's customers' net worth is dependent on these counties' real estate
values.
Credit policies, applicable to each type of lending activity, have been
established, to evaluate the creditworthiness of each customer and, in most
cases, require collateral to be pledged. Generally, credit extension does not
exceed 60 to 80 percent of fair value of the collateral at the date of
extension, depending on the evaluation of the borrowers' creditworthiness. The
market value of collateral is monitored on an ongoing basis and additional
collateral is obtained when warranted. Real estate is the primary form of
collateral. While collateral provides assurance as a secondary source of
repayment, the primary source of repayment is ordinarily based on the borrower's
ability to generate continuing cash flow.
A summary of the allowance for loan losses for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's, EXCEPT PERCENTAGES)
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loans outstanding at end of the year $387,437 $330,250 $272,971 $229,753 $229,574
- ------------------------------------------------------------------------------------------------------------------------------
Average net loans outstanding during the year $352,244 $305,411 $244,813 $235,921 $236,062
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of the year $ 3,320 $ 2,852 $ 2,496 $ 1,889 $ 1,457
Provision charged to expense 1,200 993 763 745 970
- ------------------------------------------------------------------------------------------------------------------------------
4,520 3,845 3,259 2,634 2,427
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries (charge-offs) during the year:
Charge-offs:
Real estate (379) (469) (179) (30) (165)
Time and demand (200) (45) (139) (66) (356)
Installment (108) (94) (212) (252) ( 82)
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Time and demand 20 37 98 154 --
Installment 51 46 25 56 65
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs during the year (616) (525) (407) (138) (538)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of the year $ 3,904 $ 3,320 $ 2,852 $ 2,496 $ 1,889
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average net loans
outstanding during the year .17% .17% .17% .06% .23%
Ratio of allowance for loan losses to net loans
outstanding at end of the year 1.01% 1.01% 1.04% 1.09% .82%
Ratio of provision to net charge-offs (times) 1.9 1.9 1.9 5.4 1.8
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the Company's nonaccrual and restructured
loans and related interest income not recorded on nonaccrual loans for the year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
AS OF DECEMBER 31,
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans at year end $4,036 $5,904 $3,966 $3,854 $5,416
Restructured loans at year end 4,074 5,787 4,656 4,083 1,433
Additional interest income that would have been
recorded if these borrowers had complied
with contractual loan terms 226 500 339 308 253
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Substantially all of the nonaccruing loans are collateralized by real
estate. At December 31, 1995, the Company has no commitments to lend additional
funds to any customers with nonaccrual or restructured loan balances.
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 approximated $4.1 million ($3.3 million of
which were in nonaccrual status). Each impaired loan has a related allowance
for credit losses determined in accordance with SFAS No. 114. The total
allowance for credit losses related to impaired loans was $670,000 as of
December 31, 1995. The average recorded investment in impaired loans for the
year ended December 31, 1995 was approximately $4.0 million. For the year ended
December 31, 1995, interest income recognized by the Company on impaired loans
was not material.
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's)
1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,473 $ 2,814
Buildings 6,324 6,473
Leasehold improvements 824 951
Furniture, fixtures and equipment 4,400 5,155
- ----------------------------------------------------------------------------
14,021 15,393
Less accumulated depreciation and amortization 3,933 4,599
- ----------------------------------------------------------------------------
Premises and equipment, net $10,088 $10,794
- ----------------------------------------------------------------------------
</TABLE>
The Bank leases certain premises and equipment under noncancellable
operating leases. Certain of these lease agreements provide for periodic
increases in annual rental payments based on published price indices, renewal
options for varying periods and purchase options at amounts which are expected
to approximate the fair values of the related assets at the dates the options
become exercisable.
Rent expense for premises and equipment was $530,000 in 1995, $452,000 in
1994 and $424,000 in 1993.
The Bank leases a portion of its Corporate Headquarters and the Company
leases a bank branch facility to tenants under operating leases and recorded
rental income of approximately $495,000 in 1995, $505,000 in 1994 and $627,000
in 1993. The tenant of the bank branch facility has the right to purchase the
facility for the fair value of the property through December 31, 1996.
Future minimum lease payments are as follows:
- ----------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, (000's)
- ----------------------------------------------------------------------------
1996 $ 474
1997 468
1998 434
1999 375
2000 198
After 2000 1,158
- ----------------------------------------------------------------------------
Total minimum lease payments $3,107
- ----------------------------------------------------------------------------
As of December 31, 1995, future minimum lease receipts on all operating
leases are as follows:
- ----------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, (000's)
- ----------------------------------------------------------------------------
1996 $ 268
1997 222
1998 185
1999 69
2000 40
After 2000 200
- ----------------------------------------------------------------------------
Total minimum lease receipts $ 984
- ----------------------------------------------------------------------------
12
<PAGE>
7. DEPOSITS
A summary of deposits at December 31, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's)
1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
NON-INTEREST BEARING:
Deposits of:
Individuals, partnerships and corporations $ 70,358 $ 68,883
Certified and official checks 10,824 7,392
States and political subdivisions 1,181 2,310
- ----------------------------------------------------------------------------
Total non-interest bearing $ 82,363 $ 78,585
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
INTEREST BEARING:
Time deposits of:
Individuals, partnerships and corporations $149,755 $151,155
States and political subdivisions 77,298 60,696
Money market accounts 45,982 62,792
Savings deposits 181,998 115,779
NOW deposits 36,755 38,609
IRA's and Keogh's 36,484 36,246
- ----------------------------------------------------------------------------
Total interest bearing $528,272 $465,277
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, certificates of deposits and other time deposits
of $100,000 or more totalled $110,272,000 and $84,491,000, respectively. At
December 31, 1995, such deposits classified by time remaining to maturity were
as follows:
----------------------------------------
(000's)
----------------------------------------
3 months or less $ 69,959
Over 3 and through 6 months 29,819
Over 6 and through 12 months 5,417
Over 12 months 5,077
----------------------------------------
Total $110,272
----------------------------------------
8. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's)
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL:
Current $3,550 $2,375 $2,334
Deferred (350) (406) --
STATE:
Current 1,187 1,228 1,271
Deferred (76) (71) --
- ----------------------------------------------------------------------------
Total $4,311 $3,126 $3,605
- ----------------------------------------------------------------------------
</TABLE>
The income tax provision includes income taxes related to net gains on
securities transactions of approximately $71,000, $29,000 and $328,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Net deferred tax assets of $903,000 and $477,000 are included in the
Consolidated Statements of Condition at December 31, 1995 and 1994,
respectively. Management believes it is more likely than not that the net
deferred tax assets will be realized.
13
<PAGE>
The tax effects of temporary differences that give rise to the significant
portions of deferred tax assets at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
(000's)
1995 1994
------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses $749 $398
Deferred compensation 13 11
Deferred loan fees, net and depreciation 141 68
------------------------------------------------------------
Total deferred assets $903 $477
------------------------------------------------------------
</TABLE>
In addition to amounts in the above table, the Company recorded a
deferred tax liability of $833,000 in 1995 and a deferred tax asset of
$1,436,000 in 1994, relating to available for sale securities valued at fair
value in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
The following is a reconciliation of the Statutory Federal and effective
tax rates as a percentage of income before taxes for the years ended
December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 34.0% 34.0%
Interest on obligations of states and political subdivisions (7.3) (10.5) (9.9)
State income taxes, net of Federal tax benefit 5.3 7.5 8.6
Other (1.4) (0.1) 4.1
- ------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 31.6% 30.9% 36.8%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9. BORROWINGS AND LONG-TERM DEBT
In May, 1995, the Company repaid the $1,800,000 of Series "A" subordinated
notes outstanding at December 31, 1994 that qualified as Tier II capital under
risk-based capital guidelines. Interest on the notes was at prime plus one-half
percent, payable quarterly. The weighted average interest rates for the years
ended December 31, 1995, 1994 and 1993 were 9.39 percent, 7.64 percent and 6.50
percent, respectively.
At December 31, 1995 and 1994, the Bank had a $5.0 million advance from the
Federal Home Loan Bank of New York ("FHLB") with a final maturity on November
15, 1999, with options to prepay without penalty in whole or in part
semiannually on November 14th and May 14th. The advance has an interest rate
adjusting monthly to 20 basis points over the one month London Inter-Bank Offer
Rate ("LIBOR"). The interest rate at December 31, 1995 was 6.14 percent. At
December 31, 1995, the Bank also had a $5.0 million advance from the FHLB with a
final maturity of June 22, 1998. The advance, which is subject to a prepayment
penalty, bears interest at 6.20 percent. In addition, at December 31, 1994, the
Bank had purchased Federal funds of $3,400,000 from the FHLB at a rate of 5.125
percent, which matured on January 3, 1995.
At December 31, 1994, Royal had outstanding term advances due to the
Federal Home Loan Bank of Atlanta in the amount of $7,500,000: $4,500,000 due
January 3, 1995 with an interest rate of 5.64 percent and $3,000,000 due
January 19, 1995 with an interest rate of 6.01 percent.
The Bank is required to purchase stock in the FHLB before it can receive
advances through the FHLB. At December 31, 1995, the Bank had the ability to
borrow an additional $3,724,000 from the FHLB without having to purchase
additional FHLB stock. In addition, the Bank may borrow up to approximately
$156,800,000, upon the purchase of up to 187,988 additional shares of FHLB stock
at $100 per share.
Advances of the Bank are collateralized by stock in the FHLB and for Royal,
by stock in the Federal Home Loan Bank of Atlanta, and by certain mortgage loans
under blanket pledge agreements.
Details of Federal funds purchased and short-term Federal Home Loan Bank
advances for the years ended December 31, 1995, 1994 and 1993, are presented
below:
- ----------------------------------------------------------------------------
(000's)
1995 1994 1993
- ----------------------------------------------------------------------------
Balance at year-end $ -- $10,900 $ --
Average amount outstanding $5,321 $ 9,489 $2,858
Average interest rate for the year 6.26% 4.35% 3.22%
Average interest rate on year-end balance --% 5.57% --
- ----------------------------------------------------------------------------
14
<PAGE>
10. STOCKHOLDERS' EQUITY
The Company issued 10 percent stock dividends to shareholders of record at
June 15, 1995 and June 30, 1993, which were issued on July 1, 1995 and July 19,
1993, respectively. The weighted average shares outstanding and per share
amounts have been adjusted to reflect the stock dividends. The Company and the
Bank's ability to pay cash dividends in the future are restricted by various
regulatory requirements. The Company's ability to pay cash dividends to its
shareholders is primarily dependent upon the receipt of dividends from the Bank.
The Bank's dividends to the Company may not exceed the sum of the Bank's net
income for that year and its undistributed net income for the preceding two
years, less any required transfers to additional paid-in capital. At December
31, 1995, the Bank could pay dividends to the Company of $16.0 million without
having to obtain prior regulatory approval.
In December 1993, the Company implemented a Dividend Reinvestment Plan
("DRIP"). The DRIP allows stockholders to invest cash dividends in shares of
the Company's common stock at fair value and, in the third quarter of 1994, a
stock purchase feature was added to allow stockholders to purchase additional
common stock at fair value up to $2,500 per quarter. The DRIP was temporarily
suspended for dividends paid after January 1, 1996. As of December 31, 1995,
200,000 shares of common stock are reserved for issuance in connection with the
Plan, of which 98,020 shares have been issued.
The dividend rate on the Company's Series "A" non-voting preferred stock
issued to a single investor is determined quarterly and is subject to certain
minimum and maximum per annum dividend rates as specified in the agreement. The
weighted average dividend rates were at the minimum rates of 8.4 percent for
1995, 1994 and 1993. The agreement also provides for adjustments to the dividend
rate in the event of changes in the maximum Federal corporate tax rate or the
dividend exclusion rate. Dividends payable on account of the preferred shares
are cumulative. In the event of a liquidation of the Company, preferred
stockholders will be entitled to receive the stated value of their shares before
any payments are made to holders of any other class or series of capital stock
of the Company. On August 13, 1993, $250,000 of the preferred stock was redeemed
by the Company at stated value.
Federal bank agencies have established minimum capital standards for
banking institutions. Regulatory restrictions are imposed on institutions that
fail to meet or exceed one or more of these standards. The following summarizes
capital requirements at December 31, 1995:
- --------------------------------------------------------------------------------
Company's Capital Minimum
Capital Position at Capital Requirements
Standard December 31, 1995 at December 31, 1995
- --------------------------------------------------------------------------------
Total capital to risk-weighted assets 12.26% 8.0%
Tier I capital to risk-weighted assets 11.37% 4.0%
- --------------------------------------------------------------------------------
The capital requirements described above were developed to be responsive to
credit risk. Banks are subject to various other risks, such as those associated
with interest rate fluctuations, operational risk and asset concentrations. The
bank regulatory authorities also require a capital-to-average assets requirement
(leverage ratio) that is intended to address these additional risks and works in
tandem with the other requirements. Banks evaluated by the bank regulators as
being strong banking organizations are required to have a minimum leverage ratio
of 3%, while the requirements for others ranges upward to 5 percent. At
December 31, 1995, the Company's leverage ratio of 7.67 percent exceeded this
requirement.
Capital ratios are computed excluding unrealized gains or losses on
available for sale securities, net of tax effect, which is included as a
component of stockholders' equity for financial reporting purposes.
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," as
amended by SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments," requires disclosure of the estimated fair
values for certain financial instruments. The estimated fair values disclosed
below are as of December 31, 1995 and 1994, and have been determined using
available market information and various valuation estimation methodologies.
Considerable judgment is required to interpret the effects on fair value of such
items as future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. The
estimates presented herein are not necessarily indicative of the amounts that
the Company would realize in a current market exchange. Also, the use of
different market assumptions and/or estimation methodologies may have a material
effect on the determination of the estimated fair values.
The fair value estimates presented above are based on pertinent information
available to management as of December 31, 1995 and 1994. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts
15
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
1995 1994
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
ASSETS:
Cash, cash equivalents and other
short-term investments $ 39.3 $ 39.3 $ 25.7 $ 25.7
Securities and accrued interest receivable 233.6 236.0 227.7 222.1
Loans and accrued interest receivable 389.9 390.5 323.2 316.9
Loans held for sale and accrued interest receivable .4 .4 3.3 3.2
LIABILITIES:
Deposits without stated maturities 358.9 358.9 306.1 306.1
Time deposits and accrued interest payable 253.5 254.3 238.8 238.4
Federal funds purchased -- -- 3.4 3.4
Long-term debt -- -- 1.8 1.8
Federal Home Loan Bank advances 10.0 10.0 12.5 12.5
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
have not been comprehensively revalued since December 31, 1995 and 1994 and,
therefore, current estimates of fair value may differ significantly from the
amounts presented above.
Fair value methods and assumptions are as follows:
CASH, CASH EQUIVALENTS AND OTHER SHORT-TERM INVESTMENTS -- The carrying
amount is a reasonable estimate of fair value.
SECURITIES -- The fair value of securities is estimated based on quoted
market prices or dealer quotes, if available. If a quote is not available, fair
value is estimated using quoted market prices for similar securities.
LOANS -- For certain homogeneous fixed rate categories of loans, such as
residential mortgages, fair value is estimated using quoted market prices for
securities backed by similar loans. The fair value of other fixed rate loans
has been estimated by discounting projected cash flows using current rates for
similar loans reduced by specific and general loan loss allowances. For loans
which reprice frequently to market rates, the carrying amount is a reasonable
estimate of fair value. In conjunction with adopting SFAS No. 114, "Accounting
for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of Loans--Income Recognition and Disclosures," the fair value of
nonaccrual loans having a net carrying value of approximately $4,036,000 at
December 31, 1995 was estimated. The fair value of nonaccrual loans having a
net carrying value of $5,904,000 at December 31, 1994 was not estimated because
it was not practical to reasonably assess the timing of the cash flows or the
credit adjustment that would be applied in the marketplace for such loans.
DEPOSITS WITHOUT STATED MATURITIES -- Under the provisions of SFAS No. 107,
the estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings accounts, NOW accounts, money
market and checking accounts, is equal to the amount payable on demand.
TIME DEPOSITS -- The fair value of certificates of deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered at the reporting date for deposits of similar
remaining maturities.
LONG-TERM DEBT, FEDERAL FUNDS PURCHASED AND FEDERAL HOME LOAN BANK
ADVANCES -- The carrying amount is a reasonable estimate of fair value of
borrowings which are either short-term or for which applicable interest rates
reprice based upon changes in the market rates. For medium and long-term
advances, fair value is based on the discounted cash flow of advances at rates
currently offered at the reporting date for similar terms.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -- As described in Note
13, the Company is a party to financial instruments with off-balance sheet risk
at December 31, 1995 and 1994. Such financial instruments include commitments to
extend permanent financing and letters of credit. If the commitments are
exercised by the prospective borrowers, these financial instruments will become
interest-earning assets of the Company. If the commitments expire, the Company
retains any fees paid by the counterparty in order to obtain the commitment or
guarantee. The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate commitments, the fair
16
<PAGE>
value estimation takes into consideration an interest rate risk factor. The fair
value of guarantees and letters of credit is based on fees currently charged for
similar agreements. The fair value of these off-balance sheet items at December
31, 1995 and 1994, respectively, approximates the recorded amounts of the
related fees, which are not material to the consolidated financial position of
the Company. The Company also has an off balance sheet interest rate contract
which is further described in Note 13. The fair value of this contract is not
material at December 31, 1995 and 1994.
12. RELATED PARTY TRANSACTIONS
A summary of the transactions for the year ended December 31, 1995, with
respect to loans (in excess of $60,000 with respect to each party) to directors,
executive officers, stockholders or companies in which they had a 10 percent or
more beneficial interest is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's)
- ----------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1994 $ 635
New loans 200
Repayments (22)
- ----------------------------------------------------------------------------
Balance, December 31, 1995 $ 813
- ----------------------------------------------------------------------------
</TABLE>
The Company has made payments to organizations in which certain directors
have a beneficial interest for services rendered by such organizations. Such
payments are not considered to be material in the aggregate.
13. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Bank was committed under an employment agreement
with a key officer, director and shareholder requiring annual salary and other
payments of $370,000, increasing annually by $30,000 during the term of the
contract, annual stock option grants of 22,000 shares, issued at fair value (110
percent of fair value if the key officer's ownership of the Company equals or
exceeds 10 percent at the date of grant) and other benefits for the term of the
contract expiring July 1, 1999.
In the normal course of business, various commitments to extend credit are
made which are not reflected in the accompanying Consolidated Financial
Statements. At December 31, 1995 and 1994, formal credit line and loan
commitments which are primarily loans collateralized by real estate approximated
$101.8 million and $75.8 million, and outstanding letters of credit totalled
$8.3 million and $7.5 million, respectively. Such amounts represent the maximum
risk of loss on these commitments.
During 1995, 1994 and 1993, the Banks, which are approved Federal Home Loan
Mortgage Corporation ("FHLMC") seller/servicers, sold mortgage loans to FHLMC,
with net proceeds totalling $4.1 million, $13.1 million and $20.7 million,
respectively. In addition, in 1994 and 1993, $20.9 million and $23.4 million,
respectively, of mortgages were exchanged by the Banks with FHLMC for guaranteed
participation certificates in residential mortgage pools. At December 31, 1995,
the principal balance of the loans sold and exchanged which remain uncollected
totalled $90.7 million. The Bank is committed to service these loans.
At December 31, 1995, the Bank was also committed to service approximately
$800,000 of outstanding mortgage principal balances relating to the State of New
York Mortgage Agency ("SONYMA").
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a material
effect on the Company's consolidated financial position or results of
operations.
In connection with its asset and liability management program, during
1994 the Bank entered into a protected rate agreement ("cap") which has an
aggregate notional amount of $3.5 million at December 31, 1995 ($4.0 million
at December 31, 1994). The premium paid in the amount of $85,000 was
deferred and is being amortized over the five year life of the cap. Under
the terms of the cap, the Bank will be reimbursed for increases in one month
LIBOR for any month during the term of the agreement in which such rate
exceeds the "strike level" of 8.1875%. Interest rate cap agreements allow the
Bank to limit its exposure to unfavorable interest rate fluctuations over and
above the "capped" rate. The purchased cap hedges income payments from a
mortgage-backed security with an interest rate adjusted annually to the one
year Treasury rate. This agreement is subject to the counterparty's ability
to perform in accordance with the terms of the agreement. The Bank's risk of
loss is equal to the original premiums paid to enter into this agreement.
The Bank enters into forward commitments to sell residential first
mortgage loans to reduce market risk associated with originating and holding
loans for sale. A risk associated with these commitments arise from the
Bank's potential inability to generate loans to fulfill the contracts. To
control the risk associated with changes in interest rates, the Bank may also
use options to hedge loans closed and expected to close. No such contracts
were outstanding at December 31, 1995 and 1994.
14. EMPLOYEE BENEFIT PLANS
EXECUTIVE COMPENSATION PLAN
17
<PAGE>
The Company provides an executive compensation plan whereby certain key
officers (one of whom was a director and shareholder at December 31, 1995) are
entitled to compensation in addition to their salaries at varying percentages of
the Company's net income. The total amount of such additional compensation
cannot exceed 15 percent of the Company's net income in any year. During 1995,
1994 and 1993, such additional compensation aggregated $963,000, $900,000 and
$775,000, respectively, under the Plan.
EMPLOYEE STOCK OWNERSHIP PLAN (WITH CODE SECTION 401(K) PROVISIONS) (KSOP)
At January 1, 1994, the Company merged its two existing defined
contribution plans, Employee Stock Ownership Plan ("ESOP") and Profit Sharing
and Thrift Plan (401(k)) into a newly formed Employee Stock Ownership Plan (With
Code Section 401(k) Provisions) ("KSOP").
Under the ESOP feature, covering substantially all of the Bank's full-time
employees, the annual contribution determined by the Board of Directors,
intended to be invested primarily in the Company's common stock, was $120,000,
$123,000 and $225,000 during 1995, 1994 and 1993, respectively.
The 401(k) feature of the KSOP allows eligible employees of the Bank and
its affiliates to elect either to invest their voluntary contributions in a fund
which purchases common stock of the Company or in an investment fund. Employees
may elect to defer, through voluntary contributions, up to fifteen percent of
salary and the Company can elect to match fifty percent of the employee's
voluntary contributions to a maximum of four percent of salary. Employer
matching contributions for 1995, 1994 and 1993 aggregated $165,000, $144,000 and
$120,000, respectively.
SUPPLEMENTAL EMPLOYEES' INVESTMENT PLAN
During 1994, the Bank adopted a Supplemental Employees' Investment Plan
("SEIP") for certain salaried employees. The SEIP was established solely for the
purpose of providing, to certain management personnel who participate in the
KSOP, benefits attributable to contribution allocations which would otherwise be
made under the KSOP but for Internal Revenue limitations. Under the SEIP, salary
reduction contributions may be made in excess of the limitations on annual
contributions imposed by the Internal Revenue Code Section 415, and the Bank may
elect to match fifty percent of the employee's contribution under the SEIP. The
Bank's matching contribution in 1995 and 1994 was $31,000 and $24,000,
respectively.
DIRECTOR STOCK OPTION PLAN
In 1989, the stockholders of the Company approved a Director Stock Option
Plan (the "Plan") for an aggregate of 143,409 shares (after adjustment for stock
split and dividends) of the Company's common stock to be issued to all
non-employee members of the Company's Board of Directors. Under the terms of
the Plan, each eligible Director will automatically receive annually, effective
as of the close of each annual meeting of stockholders of the Company, a
non-qualified option (after adjustment for stock split and dividends) to
purchase 3,850 shares of common stock at an exercise price equal to the market
value of such shares on the date of the grant. The 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 were 60,786 shares
remaining to be granted at December 31, 1995 under the Plan.
Information with respect to Director stock options is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Number of Range of Option
Shares Price per Share
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, January 1, 1993 37,963 $9.05 -- $10.24
Granted -- May 26,1993 12,705 $10.75
Exercised (18,249) $9.05 -- $10.24
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1993 32,419 $9.05 -- $10.75
Granted -- May 25,1994 12,705 $20.91
Exercised (2,541) $10.75
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 42,583 $9.05 -- $20.91
Granted -- May 17, 1995 19,250 $23.18
Exercised (5,658) $9.05 -- $9.89
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 (36,925 exercisable) 56,175 $9.05 -- $23.18
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
EMPLOYEE STOCK OPTION PLAN
Under the 1984 and 1993 Employee Stock Option Plans for key employees of
the Company and its subsidiaries, options for the issuance of both incentive and
non-qualified stock options up to an aggregate of 175,349 and 220,000 shares,
respectively, (after adjustment for stock splits and stock dividends) may be
granted at market value at the time the options are granted. Each option holder
may exercise up to 50 percent of their options after a three month period
subsequent to the grant date and may exercise the remaining 50 percent six
months after the grant date. The options expire ten years from the date of grant
and option, and relates prices are adjusted for stock splits and stock
dividends. All shares available for grant under the 1984 Plan were fully
granted as of December 31, 1993. Shares totalling 129,302 were granted under
the 1993 plan at December 31, 1995.
Information with respect to the Employee stock options is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Number of Range of Option
Shares Price per Share
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, January 1, 1993 163,204 $6.29 -- $11.25
Granted 33,297 $10.75
Exercised and expired (35,920) $6.29 -- $11.25
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1993 160,581 $6.29 -- $10.75
Granted 52,600 $20.91 -- $23.00
Exercised (440) $20.91
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 212,741 $6.29 -- $23.00
Granted 55,550 $23.41 -- $25.75
Exercised (38,610) $6.29 -- $20.91
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1995 (all exercisable) 229,681 $6.29 -- $25.75
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15. CONDENSED FINANCIAL INFORMATION OF U.S.B.HOLDING CO., INC. (PARENT COMPANY
ONLY)
Condensed statements of condition are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's)
DECEMBER 31,
1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 2,949 $ 393
Securities (at fair value) 22 37
Investment in common stock of subsidiaries 50,447 40,190
Real estate 569 258
Other assets 78 97
- ----------------------------------------------------------------------------
TOTAL ASSETS $54,065 $40,975
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt qualifying as regulatory capital $ -- $ 1,800
Other liabilities 2,732 856
Stockholders' equity 51,333 38,319
- ----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,065 $40,975
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Condensed statements of income are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from Bank subsidiaries $ 3,150 $ 900 $ 750
Gain on sale of available for sale securities 26 -- --
Net gain on sale of Royal Oak Savings Bank, F.S.B. 3,520 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total income 6,696 900 750
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Interest on long-term debt 64 137 124
Other expenses 355 255 223
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 419 392 347
- ------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiaries
and provision for income taxes 6,277 508 403
Equity in undistributed income of subsidiaries 4,465 6,534 5,834
Provision for income taxes 1,415 42 37
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $9,327 $7,000 $6,200
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Condensed statements of cash flow are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,327 $ 7,000 $ 6,200
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of available for sale securities (26) -- --
Net gain on sale of Royal Oak Savings Bank, F.S.B. (3,520) -- --
Equity in undistributed income of subsidiaries (4,465) (6,534) (5,834)
Other -- net 1,895 179 65
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,211 645 431
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for sale securities 41 -- --
Proceeds from sale of Royal Oak Savings
Bank, F.S.B., net of expenses of sale 7,420 -- --
Net increase in investment in subsidiary (5,889) -- --
Other -- net (311) -- 200
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,261 -- 200
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt qualifying as
regulatory capital issuance (1,800) -- (200)
Dividends paid -- Common (1,659) (1,306) (902)
-- Preferred (315) (315) (328)
Repurchase of preferred stock -- -- (250)
Net proceeds from issuances of common stock 1,858 1,170 1,190
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,916) (451) (490)
- ------------------------------------------------------------------------------------------------------------------------------
Increase in cash 2,556 194 141
Cash, beginning of year 393 199 58
- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 2,949 $ 393 $ 199
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
[LETTERHEAD - DELOITTE & TOUCHE LLP]
BOARD OF DIRECTORS AND STOCKHOLDERS
U.S.B. HOLDING CO., INC.
We have audited the accompanying consolidated statements of condition of U.S.B.
Holding Co., Inc. and its subsidiaries (the "Company") as of December 31, 1995
and 1994 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31,1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S.B. Holding Co.,
Inc. and its subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As described in Note 2, the Company changed its method of accounting for
securities in 1994.
/S/ DELOITTE & TOUCHE LLP
January 26, 1996
Stamford, Connecticut
21
<PAGE>
January 26, 1996
TO THE STOCKHOLDERS OF
U.S.B. HOLDING CO., INC.
Re: 1995 Management Report
U.S.B. Holding Co., Inc. (the "Company") is responsible for the preparation,
integrity, and fair presentation of its published financial statements as of
December 31, 1995 and for the year then ended. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts based on informed judgments and
estimates made by management.
The consolidated financial statements have been audited by an independent
accounting firm, Deloitte & Touche LLP, which was given unrestricted access to
all management and personnel, and to all financial records and related data,
including minutes of all meetings of stockholders, the Board of Directors, and
committees of the Board.
INTERNAL CONTROL
Management is responsible for establishing and maintaining internal controls
over the preparation of its published financial statements. The Company's
internal controls are intended to provide reasonable assurance to the Company's
Board of Directors and management regarding the preparation of financial
statements in conformity with both generally accepted accounting principles and
the Federal Financial Institutions Examination Council instructions for
Consolidated Reports of Condition and Income (Call Report Instructions).
There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time. Accordingly,
even an effective internal control structure can provide only reasonable
assurance with respect to financial statement preparation.
Management assessed the institution's internal control structure over financial
reporting, as of December 31, 1995, based on criteria for effective internal
control over financial reporting, including safeguarding of assets, described in
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Company maintained an effective internal control structure
over financial reporting as of December 31, 1995.
22
<PAGE>
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with designated safety and soundness laws and
regulations and has maintained records of its determinations and assessments as
required by the FDIC. Based on this assessment, management believes that the
Company's principal insured depository subsidiary, Union State Bank, has
complied, in all material respects, with the designated safety and soundness
laws and regulations for the year ended December 31, 1995.
/S/ THOMAS E. HALES /S/ STEVEN T. SABATINI
Thomas E. Hales Steven T. Sabatini
Chief Executive Officer Chief Financial Officer
23
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
[LETTERHEAD - DELOITTE & TOUCHE LLP]
TO THE BOARD OF DIRECTORS
U.S.B. HOLDING CO., INC.
ORANGEBURG, NEW YORK
We have examined management's assertion that, as of December 31, 1995, U.S.B.
Holding Co., Inc. and subsidiaries maintained an effective internal control
structure over financial reporting, including safeguarding of assets, presented
in conformity with both generally accepted accounting principles and Federal
Financial Institutions Examination Council Instructions for Consolidated Reports
of Condition and Income (Call Report Instructions) in the accompanying 1995
Management Report to the stockholders.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing and evaluating the design and operating effectiveness of the
internal control structure over financial reporting, including safeguarding of
assets, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for
our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies may deteriorate.
In our opinion, management's assertion that, as of December 31, 1995, U.S.B.
Holding Co., Inc. maintained an effective internal control structure over
financial reporting, including safeguarding of assets, presented in conformity
with both generally accepted accounting principles and the Call Report
Instructions is fairly stated, in all material respects, based on the criteria
in "Internal Control--Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/S/ DELOITTE & TOUCHE LLP
January 26, 1996
Stamford, Connecticut
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This section presents discussion and analysis of the financial condition
and results of operations of U.S.B. Holding Co., Inc. (the "Company") and its
subsidiaries, including its banking subsidiaries (the "Banks"), Union State
Bank (the "Bank") and Royal Oak Savings Bank, F.S.B. ("Royal.") Royal was
sold as of December 31, 1995, as further discussed below and in Note 3 to the
Consolidated Financial Statements. This discussion and analysis should be
read in conjunction with the financial statements and supplemental financial
data contained elsewhere in this report.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000'S, except share data)
Year Ended December 31,
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Total interest income $ 49,692 $ 39,601 $ 34,544 $ 34,007 $ 33,211
Total interest expense 24,318 15,933 13,138 15,293 19,535
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 25,374 23,668 21,406 18,714 13,676
Provision for loan losses 1,200 993 763 745 970
Income before income taxes 13,638 10,126 9,805 7,449 4,003
Net income 9,327 7,000 6,200 4,750 2,825
Net income per common and
common equivalent share 3.14 2.42* 2.27* 1.78* 1.01*
Weighted average common and common
equivalent shares outstanding 2,865,799 2,764,042* 2,585,051* 2,481,595* 2,448,983*
Cash dividends per common share $ .60* $ .49* $ .35* $ .25* $ .19*
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Position:
Total loans, net $ 387,437 $ 330,250 $ 272,971 $ 229,753 $ 229,574
Total assets 678,783 602,603 508,638 462,634 390,464
Total deposits 610,635 543,862 469,016 429,272 361,670
Long-term debt qualifying
as regulatory capital -- 1,800 1,800 2,000 1,900
Stockholders' equity 51,333 38,319 34,435 28,525 24,219
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Quarterly Results of Operations
(000's, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
1995 QUARTERS 1994 Quarters
FOURTH THIRD SECOND FIRST Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $13,247 $12,739 $12,126 $11,580 $10,749 $10,061 $9,638 $9,153
Net interest income 6,808 6,481 6,142 5,943 6,082 5,928 5,853 5,805
Provision for loan losses 500 275 225 200 333 365 160 135
Income before
income taxes 5,889 3,109 2,231 2,409 2,396 2,420 2,579 2,731
Net income 4,052 2,075 1,500 1,700 1,718 1,685 1,755 1,842
Net income per common and
common equivalent share 1.37 .69 .50 .58* .59* .60* .64* .66*
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to reflect a 10% stock dividend issued in 1995.
Net income per common and common equivalent share for the four quarters in 1994
does not total to the year-end amount because common stock equivalents were not
dilutive in the first three quarters of that year.
25
<PAGE>
AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's, except for percentages)
Year Ended December 31,
1995 1994 1993
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Interest bearing deposits $ 2,132 $ 137 6.4% $ 1,169 $ 54 4.6% $ 3,009 $ 116 3.9%
Federal funds sold 16,917 1,013 6.0 4,325 167 3.9 3,952 98 2.5
Securities:
U.S. Treasury and
Gov't. agencies 42,013 2,907 6.9 24,563 1,140 4.6 21,797 891 4.1
Mortgage-backed securities 115,504 7,741 6.7 93,056 6,032 6.5 85,691 5,935 6.9
Obligations of states and
political subdivisions 69,427 5,295 7.6 74,402 5,352 7.2 65,041 4,913 7.6
Corporate bonds, FHLB stock,
and other securities 16,311 1,417 8.7 26,996 1,802 6.7 33,912 2,218 6.5
Loans, net 352,244 33,222 9.4 305,411 26,937 8.8 244,813 22,251 9.1
- ------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 614,548 51,732 8.4% 529,922 41,484 7.8% 458,215 36,422 7.9%
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 22,359 21,106 19,601
Other assets 18,240 16,982 16,799
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $655,147 $568,010 $494,615
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Money market $ 65,080 $ 1,945 3.0% $ 78,746 $ 1,889 2.4% $ 78,175 $1,763 2.3%
Savings 143,931 4,705 3.3 119,995 2,775 2.3 107,915 2,822 2.6
Time 268,611 16,144 6.0 211,398 10,077 4.8 179,511 7,684 4.3
NOW 40,667 644 1.6 39,610 604 1.5 36,006 653 1.8
Federal funds purchased and
Federal Home Loan Bank
advances 13,243 816 6.2 10,147 451 4.4 2,858 92 3.2
Long-term debt qualifying as
regulatory capital 710 64 9.0 1,800 137 7.6 1,908 124 6.5
- ------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 532,242 24,318 4.6 461,696 15,933 3.5 406,373 13,138 3.2%
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 75,564 65,120 52,855
Other liabilities 2,933 3,438 3,625
Stockholders' equity 44,408 37,756 31,762
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $655,147 $568,010 $494,615
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST EARNINGS $27,414 $25,551 $23,284
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
NET YIELD ON INTEREST
EARNING ASSETS 4.5% 4.8% 5.1%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The statistical data contained herein has been adjusted to a tax equivalent
basis, based on the federal statutory tax rates of 35% in 1995 and 34% in 1994
and 1993, and applicable state tax rates.
26
<PAGE>
SUMMARY OF RESULTS
The Company recorded its seventeenth consecutive year of increased net
income in 1995. Net income was $9.3 million for the year ended December 31,
1995, a 33 percent increase over 1994 net income of $7.0 million. Net income for
1994 reflected an increase of 13 percent over that recorded in 1993. Net income
per common and common equivalent share, increased to $3.14 per common and common
equivalent share in 1995, or an increase of 30 percent over the $2.42 per common
and common equivalent share recorded in 1994. Net income per common and common
equivalent share for 1994 was 7 percent higher than the $2.27 recorded in 1993.
Return on average common stockholders' equity was 22.17 percent in 1995,
compared to 19.66 percent in 1994 and 21.08 percent in 1993.
Results for 1995 include a net gain, after taxes, of $2.1 million, from the
sale of Royal. Before the net gain on the Royal transaction, the Company
recorded 1995 net income of $7.2 million (of which Royal contributed $.2 million
in 1995 compared to $.4 million in 1994), or a 3 percent increase over 1994 net
income. The 1995 results reflect higher net interest income and other operating
income, and a significant reduction in FDIC insurance, offset by a higher
provision for loan losses and higher operating expenses, as the Company made
additional investments in people, new branches, products and technology to
ensure its competitive position and increase its future revenue base.
Record net interest income for 1995 rose to $25,374,000 or a 7 percent
increase over the $23,668,000 recorded in 1994, compared to an 11 percent
increase in 1994 over 1993. These increases resulted principally from continuing
growth in interest earning assets, primarily loans, partially offset by a
narrowing interest rate spread. The interest rate spread in 1994 also decreased
due generally to increasing interest rates. Non-interest income increased $4.2
million in 1995 as compared to 1994, primarily due to the net gain before taxes
of $3.5 million from the sale of Royal, higher net gains on sale of securities
and loans of $536,000 and higher other income of $147,000, while mortgage
servicing income and service charges and fees were slightly lower than the prior
year. Non-interest income in 1994 was $748,000 lower than that recorded in
1993, primarily due to a net loss on security and loan sales of $312,000,
compared to a net gain of $951,000 in 1993, partially offset by higher service
charges and fees and other income. The overall increase in revenues was
partially offset by 14 and 7 percent increases in non-interest expense in 1995
and 1994, respectively, reflecting increases in such costs as employee salaries
and benefits, occupancy and equipment expense and other costs, as a result of
the continuing growth of the Company and its investment in people and
technology, partially offset in 1995 by the reduction in FDIC insurance
expense. Non-interest expense was also higher in 1995 as compared to 1994, due
to an employee settlement, a contribution to the U.S.B. Foundation, and higher
branch charge-offs (primarily as a result of check fraud.) A higher effective
tax rate in 1995 also reduced net income in 1995, while a lower effective tax
rate in 1994 contributed to higher net income compared to 1993.
Return on average total assets in 1995 increased to 1.42 percent, compared
to 1.23 percent in 1994, and 1.25 percent in 1993. The Company's total capital
ratio under the risk-based capital guidelines exceeds regulatory guidelines of 8
percent, as the total ratio equaled 12.26 percent and 11.82 percent at December
31, 1995 and 1994, respectively. The leverage capital ratio increased to 7.67
percent at December 31, 1995 from 7.21 percent in 1994, reflecting increased
retained earnings in 1995.
27
<PAGE>
INTEREST DIFFERENTIAL
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income between the years ended
December 31, 1995 and 1994, and the years ended December 31, 1994 and 1993, on a
tax equivalent basis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
1995 COMPARED TO 1994 1994 Compared to 1993
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN Due to Change in
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL Total
AVERAGE AVERAGE INCREASE Average Average Increase
VOLUME RATE (DECREASE) Volume Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest bearing deposits $ 56.3 $ 26.7 $ 83.0 $ (81.5) $ 19.5 $ (62.0)
Federal funds sold 711.4 134.6 846.0 10.0 59.0 69.0
Securities:
U.S. Treasury and Government agencies 1,045.0 722.0 1,767.0 120.5 128.0 248.5
Mortgage-backed securities 1,498.4 210.6 1,709.0 491.6 (394.9) 96.7
Obligations of states and
political subdivisions (369.2) 312.2 (57.0) 681.8 (242.8) 439.0
Corporate bonds, FHLB stock,
and other securities (835.3) 450.3 (385.0) (460.8) 45.0 (415.8)
Loans, net 4,327.9 1,957.1 6,285.0 5,365.2 (678.7) 4,686.5
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 6,434.5 3,813.5 10,248.0 6,126.8 (1,064.9) 5,061.9
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits:
Money market (361.2) 417.2 56.0 13.0 113.3 126.3
Savings 628.0 1,302.0 1,930.0 298.4 (345.7) (47.3)
Time 3,089.5 2,977.5 6,067.0 1,458.4 934.5 2,392.9
NOW 16.4 23.6 40.0 61.2 (109.9) (48.7)
Federal funds purchased and Federal Home
Loan Bank advances 161.1 203.9 365.0 312.4 46.5 358.9
Long-term debt qualifying as regulatory capital (94.7) 21.7 (73.0) (7.3) 20.3 13.0
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 3,439.1 4,945.9 8,385.0 2,136.1 659.0 2,795.1
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST
DIFFERENTIAL $2,995.4 $(1,132.4) $1,863.0 $3,990.7 $(1,723.9) $2,266.8
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The variance not solely due to rate or volume is allocated between the rate and
volume variances based upon their absolute relative weights to the total change.
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 on a tax equivalent basis for 1995 rose to $27.4
million, or a 7 percent increase over the $25.6 million for 1994. Net interest
income for 1994 reflects a 10 percent increase over the $23.3 million in 1993.
Net interest income benefited by the increase in the excess of average interest
earning assets over average interest bearing liabilities to $82.3 million in
1995 from $68.2 million and $51.8 million for 1994 and 1993, respectively.
Interest income is determined by the volume of, and related rates earned
on, interest earning assets. Volume increases in all components of interest
earning assets, except obligations of states and political subdivisions and
corporate and other securities, resulted in higher interest income in 1995.
Interest income was also higher in 1995 due to generally higher interest rates
earned on interest earning assets. Volume increases also contributed to higher
interest income in 1994, as compared to 1993, except for interest bearing
deposits and corporate and other securities, partially offset by lower average
interest rates in several asset categories. Average interest earning assets
increased in 1995 to $614.5 million over the $529.9 million in 1994, compared to
$458.2 million in 1993, reflecting a 16 percent increase in both 1995 and 1994.
The Company's ability to make changes in the asset mix allows management to
capitalize on more desirable yields, as available, on various interest earning
assets.
28
<PAGE>
Loans are the largest component of interest earning assets and due to their
significance are carefully reviewed with respect to the Company's overall
interest sensitivity position. In 1995, average net loan balances increased
$46.8 million to $352.2 million compared to 1994, while average net loans
increased $60.6 million in 1994. Net loans outstanding increased $57.2 million
to $387.4 million at December 31, 1995 from $330.3 million at December 31, 1994,
or a 17 percent increase, compared to an increase of $57.3 million in 1994 over
1993, or 21 percent. In 1995, the increase in interest income on loans was
attributable to increased volume, and also due to higher rates, continuing the
increase which began in the latter part of 1994 through the first quarter of
1995, while medium to long-term rates began to decline in the second through
fourth quarters of the year. Interest income on loans in 1994, increased due to
higher volume, partially offset by a decline in the average rates on loans, as
higher rate loans repriced to lower rates during a general decline in medium to
long-term interest rates in late 1993 and early 1994. Loan interest income was
also affected by interest income not recorded on nonaccrual loans of $226,000 in
1995, $500,000 in 1994 and $339,000 in 1993.
The average balances of total securities increased in both 1995 and 1994,
due principally to deposit growth exceeding loan demand and management's efforts
to balance the risk and liquidity of the entire portfolio. Overall, the net
volume increase in securities resulted in increased interest income on
securities in both years. Interest income on securities in 1995 was also
affected by higher short to medium-term yields for most of the year, while
generally declining yields on investments for the first half of 1994, partially
offset interest increases due to volume in 1994.
Interest expense is a function of the volume of, and rates paid for,
interest bearing liabilities. Interest expense in 1995 increased $8,385,000, or
53 percent to $24.3 million, following the 1994 increase of $2,795,000, or 21
percent, compared to 1993. Average balances in substantially all categories
(except for money market accounts in 1995, and long-term debt in both years)
increased in both 1995 and 1994, due principally to the opening of the Ossining
branch in 1995 and North White Plains branch in 1994, as well as continuing
growth of deposits in existing branches. In addition, management decided to
maximize leveraging of the Bank's capital by increasing time deposits of
municipalities and Federal Home Loan Bank advances and investing these funds in
short and medium-term investments. The level of non-interest bearing average
demand deposits which increased in 1995 to $75.6 million from $65.1 million in
1994, compared to $52.9 million in 1993, is an integral aspect of liability
management and has a direct impact on the determination of net interest income.
In May, 1995, the Company repaid its long-term debt, as it no longer was 100%
includable in Tier II capital due to its shorter term maturity, and also due to
its high cost. In 1995, interest rates on average interest bearing deposits
increased overall, principally due to the increases in rates on savings
accounts, money market and time deposits and other borrowings during a period
of higher short-term interest rates. Interest rates on average interest bearing
deposit liabilities in 1994 were also higher for time and money market deposits
and other borrowings, resulting from an increasing interest rate environment
in 1994, compared to the interest rate environment in 1993. Average interest
rates on savings and NOW accounts were lower in 1994 compared to 1993, as
management deferred rate increases for these accounts. The interest rate spread
on a tax equivalent basis for each of the three years in the period ended
December 31, 1995 is as follows:
- ----------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
Average interest rate on:
Total average interest-earning assets 8.4% 7.8% 7.9%
Total average interest-bearing liabilities 4.6 3.5 3.2
- ----------------------------------------------------------------------------
Total interest rate spread 3.8% 4.3% 4.7%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
The net interest spread decrease of 50 and 40 basis points between 1995 and
1994, and 1994 and 1993, respectively, is attributable to a shift in the Banks'
funding mix from lower cost savings and interest bearing transaction accounts to
higher cost savings and time deposit accounts, and higher average short-term
rates in 1995 and 1994, which significantly affect deposit rates, as well as a
lag in the repricing of assets in a rising rate environment in 1994 and early
1995. Management cannot predict what impact market conditions will have on its
interest rate spread, and, therefore, further compression in the net interest
margin may occur.
NON-INTEREST INCOME
Non-interest income for 1995 increased 132 percent to $7.3 million from the
$3.2 million recorded in 1994. Non-interest income for 1994 reflects a 19
percent decrease compared to the $3.9 million recorded in 1993. The principal
reason for the substantial increase in non-interest income in 1995 is the net
gain before income taxes of $3.5 million from the sale of Royal. Non-interest
income is also higher in 1995 compared to 1994, due to higher net gains from
security and loan sales of
29
<PAGE>
$536,000, and higher other income, partially offset by lower mortgage servicing
income and service charges and fees. Non-interest income in 1994 is lower than
that recorded in 1993, due to a net loss on security and loan sales of $312,000,
compared to net gain of $951,000 in 1993, partially offset by higher mortgage
servicing income, service charges and fees and other income.
The net gain on the sale of Royal reflects the sale of this banking
subsidiary on December 31, 1995, to Monocacy Bancshares, Inc., parent company of
Taneytown Bank & Trust Company, Taneytown, Maryland. The sales price of $7.8
million was determined based on an 8.5% premium on deposits of Royal at the date
of sale, plus an agreed upon premium for certain loan servicing and other assets
of Royal, and an amount equal to common stock, paid-in capital and retained
earnings at the date of sale. The sales price was reduced by the Company's
investment in Royal of $3.9 million, and expenses of sale and management bonus
of approximately $400,000.
Net gains on securities transactions of $167,000 in 1995, $69,000 in 1994
and $780,000 in 1993, principally resulted from the sales of mortgage-backed and
other securities to restructure the portfolio and reduce long-term market value
volatility of the portfolio in response to changes in interest rates. The major
components of the $167,000 net gain in 1995 include a net gain of $118,000 from
the sales of $21,702,000 of U.S. Government Agency securities that would prepay
in full prior to maturity as a result of lower interest rate levels, a net gain
of $64,000 from the sales of $18,227,000 of U.S. Government mortgage-backed
securities to reduce price volatility from adverse interest rate movements, a
net gain of $29,000 from the sales of $7,853,000 of U.S. Treasury securities
with a combined weighted average life of less than one year, whose gains would
disappear if the securities were allowed to reach final maturity, offset by a
net loss of $52,000 from the sales of $2,987,000 of low yielding Student Loan
Marketing Association securities. The $69,000 net gain in 1994 is primarily
comprised of gains of $177,000 from the sale of $4.0 million of Federal Home
Loan Mortgage Corporation ("FHLMC") mortgage-backed certificates due to
accelerated principal prepayments, offset by losses of $108,000 from the sales
of $23.0 million of 30 year FHLMC mortgage-backed certificates to reduce
interest rate risk. The $780,000 gain in 1993, reflects a gain of $640,000 from
the sales of $12.9 million of FHLMC mortgage-backed certificates due to an
acceleration of principal prepayments on the securities, a $48,000 gain from the
sales of $2.6 million of agency CMOs due to principal paydowns of these
securities, and a gain of $92,000 from the sale of a $1.5 million corporate bond
whose rating was downgraded.
Gains on loans held for sale of $57,000 in 1995 and $171,000 in 1993 were
realized from cash sales to FHLMC of residential mortgage loans held for sale
and originated principally from fixed rate mortgage promotions. Net losses on
loans held for sale of $381,000 in 1994 were due to losses on cash sales to
FHLMC and write-downs of fixed rate mortgage loans held for sale resulting from
the increasing interest rate environment in 1994. The decision to sell loans in
any period is influenced by the amount and type of loans originated in relation
to the total portfolio, the secondary market environment and the interest rate
environment.
Mortgage servicing fees decreased to $340,000 in 1995, or 6 percent from
$362,000 in 1994, which was a 10 percent increase from $330,000 in 1993.
Mortgage servicing fees decreased in 1995, due to a decrease in volume of
principally fixed rate loans sold to FHLMC with servicing retained, as the
Bank decided to retain approximately $5.5 million of residential loan
originations in portfolio. In addition, originations were lower in the first
half of 1995 due to higher interest rates. Although mortgage servicing fees
increased in 1994, residential mortgage originations decreased significantly
in 1994 compared to 1993, causing a slowdown in the increase in mortgage
servicing fees, due to a decrease in refinancing activity resulting from the
increase of mortgage interest rates in 1994. The Company expects to continue
to originate and sell/swap residential mortgages in the secondary market as
opportunities exist. Due to a change in accounting in 1996, a substantial
amount of mortgage servicing income will be reflected in gains on sales of
loans, due to an allocation of value to servicing retained on loans sold (see
Note 2 to the Consolidated Financial Statements included elsewhere herein).
Service charges and fees on deposit accounts remained relatively flat in
1995, compared to a 15 percent increase in 1994 over 1993. Although deposit
accounts increased in 1995, lower insufficient funds charges and higher
competition impacted increases in fees. The increase in 1994 was principally due
to higher transaction volume resulting from increases in deposit levels and
higher fee assessments on insufficient funds and returned check charges.
Other income increased $147,000 and $149,000 in 1995 and 1994,
respectively, compared to the prior year. Increases in both years reflect higher
income from merchant credit card transactions and other fees.
30
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense rose to $17.9 million for 1995, or 14 percent over the
$15.7 million for 1994, compared to a 7 percent increase in 1994 over the $14.7
million for 1993. The Company's overhead ratio measuring non-interest expense
to total adjusted revenue (taxable equivalent net interest income, plus
non-interest income excluding gains or losses on securities and loan sales and
the gain on sale of Royal) increased to 58 percent in 1995 from 54 percent in
1994 and 56 percent in 1993.
Salaries and employee benefits, the largest component of non-interest
expense, rose 10 percent in 1995 to $9.0 million, compared to a 7 percent
increase in 1994 to $8.2 million from the $7.7 million in 1993. During 1995 and
1994, the Bank opened one branch in each year, resulting in increased staff. The
increases in both years also reflect the costs of additional personnel necessary
for the Bank to accommodate the increases in both deposits and loans resulting
from the expansion of services and products available to customers, as well as
annual merit increases. Increases in salaries and employee benefits in both 1995
and 1994, were also attributable to incentive compensation programs and other
benefit plans necessary to be competitive in attracting and retaining high
quality and experienced personnel, and costs associated with related payroll
taxes and health care costs. The percentages of salaries and employee benefits
to total average assets remained flat in 1995 compared to 1994, while decreasing
in 1994 compared to 1993 and, as a percentage of total non-interest expense
decreased in 1995 compared to 1994, and remained flat in 1994 as compared to
1993.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
EMPLOYEES AT DECEMBER 31,
Full-time employees 183 177 176
Part-time employees 28 30 24
SALARIES AND EMPLOYEE BENEFITS (000's)
Salaries $6,168 $5,404 $5,014
Payroll taxes 623 556 527
KSOP 315 299 345
Medical plans 618 534 475
Incentive compensation plans 1,094 1,239 1,117
Other 175 162 190
- ----------------------------------------------------------------------------
Total $8,993 $8,194 $7,668
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Percentage of total average assets 1.4% 1.4% 1.6%
Percentage of total non-interest
expense 50% 52% 52%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
Occupancy and equipment expenses rose to $3.3 million in 1995, a 16 percent
increase over 1994, compared to $2.8 million in 1994, a 14 percent increase over
1993. The 1995 and 1994 increases were due to a full year of expenses for the
branch opened in the prior year, the current year branch opening and increased
utilization of the Corporate Headquarters by the Bank. Equipment expense
continued to increase as a result of higher depreciation and maintenance costs
associated with the in-house IBM AS-400 computer and capital investments over
the last several years in systems designed to enhance bank-wide operating and
processing capabilities. All years also reflect the rising costs of such items
as fuel, electricity, real estate taxes and other costs of operating the
branches.
Advertising and business development expense increased to $905,000, or an
11 percent increase over 1995 from the $815,000 recorded in 1994. Advertising
and business development expense increased 23 percent in 1994 over the 1993
level. The increases in both years were due principally to increased deposit
(savings and time deposit) promotions in connection with new branch openings,
mortgage/home equity loan promotional campaigns, and the expansion of the
Chairman's Council business development campaign programs.
Professional fees increased 42 percent to $929,000 in 1995 from $656,000 in
1994, which was a 33 percent increase from the $494,000 recorded in 1993. The
increases in 1995 and 1994 were due to professional fees associated with loan
collections and foreclosures, litigation associated with loan collections,
higher external audit fees due to implementation of certain reporting
requirements required by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), and other litigation costs.
Communications expense increased 6 percent in 1995 to $577,000 from
$542,000 in 1994, a 9 percent increase from $496,000 in 1993. The increases were
due principally to the additional telephone lines required for computer hookups
and telephones for the new branches.
FDIC insurance decreased by $417,000 to $688,000 in 1995, as the Bank
Insurance Fund reached its required level of 1.25 percent of insured deposits,
which resulted in a reduction of premiums from $.23 to $.04 per $100 of insured
deposits during the second quarter and throughout the second half of the year.
FDIC insurance increased 10 percent in 1994 to $1,105,000 from $1,009,000 in
1993, due to increasing deposit levels.
31
<PAGE>
- ----------------------------------------------------------------------------
(000's, except for percentages)
1995 1994 1993
- ----------------------------------------------------------------------------
FDIC insurance expense $ 688 $1,105 $1,009
Percentage of average deposits .12% .21% .22%
FDIC fee per $100 $.04-$.23 $ .23 $ .23
Percentage of total non-interest expense 3.9% 7.0% 6.8%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
The Company incurred $186,000, $102,000 and $258,000 in 1995, 1994 and
1993, respectively, in expenditures relating to the direct expenses of
maintaining foreclosed properties and additional write-downs of carrying values
on such properties. Costs increased in 1995 due to a higher level of OREO, while
1994 costs declined, primarily from higher gains realized on sales of OREO and a
declining level of assets classified as other real estate. Expenditures
associated with expenses in this category are comprised of real estate taxes,
insurance, utilities, maintenance and other charges required to protect the
Company's interest in the properties. In general, the longer the foreclosed
properties are held, the total cost to maintain such properties will increase;
however, to the extent time between acquisition of a property and its sale is
reduced, the holding cost per property should decline. In general, the Company
seeks to dispose of other real estate owned as expeditiously as possible.
However, the ability to dispose of other real estate owned is highly dependent
on market conditions in the area in which a property is located.
Other expenses, as reflected in the following table, increased 60 percent
in 1995, compared to a decrease of 9 percent in 1994 from 1993. The 1995
increase is primarily due to a $250,000 contribution to the USB Foundation, a
not-for-profit entity that makes contributions to worthwhile organizations
serving the community, an employee settlement of $236,000, an increase in teller
and branch charge-offs (primarily resulting from check fraud), and an increase
in credit card expense, as the introduction of this product was expanded in
1995. The 1994 decrease was primarily due to lower teller and branch
charge-offs.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's, except for percentages)
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Other expenses
Other insurance $ 206 $ 221 $ 219
Courier fees 202 164 184
Dues, meetings and seminars 253 254 213
Amortization of intangibles 89 96 118
Outside services 361 319 338
Employee settlement 236 -- --
U.S.B. Foundation 250 -- --
Credit card related expense 103 41 --
Other 205 93 235
- ----------------------------------------------------------------------------
Total $1,905 $1,188 $1,307
- ----------------------------------------------------------------------------
Percentage of total average assets .29% .21% .26%
- ----------------------------------------------------------------------------
Percentage of total non-interest expense 10.7% 7.6% 8.9%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
To monitor and control the level of non-interest expenses, as well as
non-interest income, the Company continually monitors the system of internal
budgeting, including analysis and follow-up of budget variances.
INCOME TAXES
Income tax provisions of $4,311,000, $3,126,000 and $3,605,000 were
recorded in 1995, 1994 and 1993, respectively. The Company is currently subject
to both a statutory Federal tax rate of 35 percent (34 percent in 1994 and
1993), and a New York State tax rate of 9 percent, plus a surcharge of 24-1/2
percent in 1995, 29-1/2 percent in 1994 and 32 percent in 1993. Royal's
operation is subject to a Maryland state tax rate of 7 percent. The Company's
overall effective tax rate was 31.6 percent, 30.9 percent and 36.8 percent in
1995, 1994 and 1993, respectively.
The increase in the overall effective tax rate in 1995 reflects a higher
Federal statutory rate and a lower percent of non-taxable security income. The
decrease in the 1994 effective tax rate was due to the recording of deferred tax
benefits and increased investment in tax-exempt securities. Other pertinent tax
information is set forth in the Notes to Consolidated Financial Statements
included elsewhere herein.
SECURITIES PORTFOLIO
Securities are selected to provide safety of principal and liquidity, and
produce income on excess funds during struc-
32
<PAGE>
tural changes in the composition of deposits, as well as during cyclical and
seasonal changes in loan demand. In order to manage liquidity and control
interest rate risk, the Company's investment strategy is primarily focused on
securities which have short maturities, adjustable rate securities, or those
whose cash flow patterns result in a lower degree of interest rate risk.
The securities portfolio of $231.2 million and $225.5 million at
December 31, 1995 and 1994, respectively, consists of securities held to
maturity totalling $60.3 million and $149.6 million, and securities available
for sale totalling $170.9 million and $75.9 million, respectively.
In accordance with SFAS No. 115, management's investment policy includes a
determination of the appropriate classification of securities at the time of
purchase. If management has the intent and ability to hold securities until
maturity, they are classified as held to maturity and carried at amortized
historical cost. Securities held for indefinite periods of time and not
intended to be held to maturity include securities that management intends to
use as part of its asset/liability strategy and that may be sold in response to
changes in interest rates, resultant prepayment risk and other factors. Such
securities are classified as available for sale and carried at fair value.
Upon implementation of SFAS No. 115 in 1994, the Company, acting upon
further regulatory clarification, transferred certain of its collateralized
mortgage obligations which met the new regulatory parameters to its held to
maturity portfolio. In 1995, the Company further reclassified all securities,
except for substantially all municipal securities, to available for sale, as
permitted by the Financial Accounting Standards Board (also see Note 4 to the
Notes to Consolidated Financial Statements included elsewhere herein).
Securities, including mortgage-backed securities and Federal Home Loan Bank
stock, represent approximately 40 percent, 41 percent and 45 percent of average
interest-earning assets in 1995, 1994 and 1993, respectively. Emphasis on the
securities portfolio will continue to be an important part of the Company's
investment strategy. The size of the securities portfolio will depend on
deposit and loan growth, and the ability of the Bank to take advantage of
leverage opportunities. The carrying value, fair value, weighted average yields
and maturity distributions of securities, are included in the Notes to the
Consolidated Financial Statements appearing elsewhere herein.
Obligations of U.S. Treasury and Government agencies principally consist of
U.S. Treasury obligations and Federal Home Loan Bank, Federal National Mortgage
Association ("FNMA") and FHLMC debentures and notes. Obligations of U.S.
Government agencies are often used as collateral for the Company's borrowing
requirements. In 1995 and 1994, average balances outstanding of such securities
increased $17.5 million and $2.8 million, respectively, primarily due to the
purchase of bonds, principally callable within one year and which are expected
by management to be called prior to maturity based upon its evaluation of
interest rates at the time of purchase.
The increases in 1995 and 1994, in average balances of mortgage-backed
securities of $22.4 million and $7.4 million, respectively, were principally due
to investments in triple A rated mortgage-backed securities consisting of FNMA
and FHLMC securities and participation certificates obtained in the secondary
market or pooled by the Banks. FNMA and FHLMC guarantee the payment of interest
at the applicable certificate rate and the full collection on the mortgages
backing the securities which they issue; however, such securities are not backed
by the full faith and credit of the United States. The Company invests in
mortgage-backed securities primarily to provide a source of collateral in
support of the Bank's funding activities and to strengthen the Bank's regulatory
capital position.
The following table sets forth information concerning mortgage-backed
securities at amortized cost for the periods indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(000's,)
December 31,
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Agency:
Mortgage-backed securities
Fixed rate $ 13,266 $ 33,882 $39,600
Adjustable rate 16,884 12,885 2,951
Collateralized mortgage obligations
Fixed rate 50,596 57,823 28,633
Adjustable rate 27,639 4,685 5,741
Other 990 1,179 903
- ----------------------------------------------------------------------------
Total $109,375 $110,454 $77,828
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
The decrease in fixed rate U.S. Government Agency mortgage-backed
securities in 1995 reflects, in addition to amortization and prepayments, sales
of $18,227,000 of these securities whose market values would decrease and the
weighted average lives would extend, as prepayments slow in a rising interest
rate environment. The increase in adjustable rate U.S. Government Agency
mortgage-backed securities is due primarily to the purchases of $6,628,000 of
adjustable rate
33
<PAGE>
mortgage-backed securities, partially offset by amortization and prepayments.
The decrease in fixed rate collateralized mortgage obligations ("CMOs") is
primarily due to amortization and prepayments, while adjustable rate CMOs
reflect the purchase of $23,048,000 of floating rate collateralized mortgage
obligations. The interest rates on these floating rate securities periodically
adjust at certain spreads to market indices and typically contain maximum
lifetime caps. These transactions generally resulted in a shortening of the
portfolio's average life or rate repricing period.
The decrease in U.S. Government Agency mortgage-backed fixed rate
securities in 1994 reflects amortization and prepayments, while new originations
of FHLMC participation certificates in 1994 were lower than 1993 due to the
rising interest rate environment. The increase in 1994 in the portfolio of fixed
rate collateralized mortgage obligations is a result of purchases due to their
current yields, as well as their favorable interest rate risk management
characteristics. The increase in adjustable rate U.S. Government Agency
mortgage-backed securities ("ARMs") in 1994 is due to the purchase of two ARM
pools aggregating approximately $10.5 million, adjusting to an index plus a
margin, with one adjusting annually to the one year Treasury rate and the other
adjusting semiannually to the six month LIBOR rate. Adjustable rate CMO's were
primarily impacted by principal amortization and prepayments.
The decrease in average balances of $5.0 million and increase of $9.4
million in obligations of states and political subdivisions securities in 1995
and 1994, respectively, result from lower yields for short and medium-term
securities compared to other instruments in 1995, while the tax equivalent
market yield for such investments was more favorable in 1994. At December 31,
1995, such obligations, principally of New York State and political subdivisions
have diversified final maturities. The Company considers such securities a core
investment, with further possible yield improvement if income tax rates increase
in the future, and have classified principally all such securities as held to
maturity.
The Company invests in FHLB stock and medium-term corporate debt securities
and other securities which are rated investment grade by nationally recognized
rating organizations. These securities may be used as collateral for the Bank's
borrowing requirements. The Company, as a matter of policy, does not invest in
non-rated securities or securities rated less than investment grade at the time
of purchase. Average balances of such securities decreased $10.7 million in 1995
compared to 1994, and $6.9 million in 1994 compared to 1993.
The company is a member of the Federal Home Loan Bank of New York, which
required ownership of $1.7 million of its stock at December 31, 1995. The Bank
utilizes the Federal Home Loan Bank of New York to sell Federal funds and obtain
advances for funding needs.
The Company has continued to exercise its conservative approach to
investing by making quality investments and controlling interest rate risk by
averaging investments in medium-term maturities.
Except for securities of the U. S. Treasury and Government agencies
(principally callable and mortgage-backed securities), there were no securities
which exceeded ten percent of Stockholders' equity at December 31, 1995.
LOAN PORTFOLIO
During 1995, the average balances of loans of the Company increased $46.8
million to $352.2 million, and balances in 1994 increased $60.6 million to
$305.4 million, as compared to the 1993 balance of $244.8 million. At December
31, 1995, net loans outstanding increased $57.2 million to $387.4 million, or a
17 percent increase compared to 1994. Net loans outstanding at December 31,
1994 increased $57.3 million, or 21 percent over 1993. The growth in both 1995
and 1994, resulted principally from an increase of $20.0 million and $46.8
million, respectively, in commercial mortgages which principally reprice after
three years to an index based on the three year Treasury bill. Also in 1995 and
1994, construction and land development loans, principally variable rate loans
which are based on the prime rate as published in the Wall Street Journal
increased $14.9 million and 4.2 million, respectively, as both the real estate
market and business activity increased during each year. Time and demand loans
also contributed $11.5 million to the 1995 increase, as well as a $17.1 million
increase in residential real estate loans, home equity and other loans, while
installment loans declined $5.9 million.
Real estate collateralized loans consisting of construction mortgages,
interim and permanent commercial mortgages, home equity and residential
mortgages, represent approximately 88 and 90 percent of total gross loans in
1995 and 1994, respectively. The Bank is approved by FHLMC and FNMA as a
preferred seller of residential mortgages, which allows more active
participation in the home mortgage market, enabling the Bank to meet the
community's needs for housing. This also allows the Bank the flexibility to
determine if profit margins are best
34
<PAGE>
achieved by retention or sale of earning assets and also generates loan
origination fees and loan servicing income from the collection and processing of
monthly loan payments.
As part of its secondary marketing activities,15 and 30 year residential
real estate loans with fixed rates are originated with an intent of selling
qualifying loans. During 1995, 1994 and 1993, the Company took advantage of the
secondary market by selling for cash $4.1 million, $13.1 million and $20.7
million to FHLMC, and exchanged $20.9 million and $23.4 million with FHLMC for
guaranteed participation certificates in residential mortgage pools, in 1994 and
1993, respectively. Commercial mortgages, which increased significantly in both
1995 and 1994, and generally involve more risk than residential loans, will
continue to be emphasized as such loans presented are quality real estate
secured loans. At December 31, 1995, the Bank has approximately $6.8 million and
$16.2 million of committed but unissued residential mortgage loans and
commercial mortgages, respectively. At December 31, 1995 and 1994, $.4 million
and $3.8 million, respectively, of fixed rate residential loans (including
commitments) were held for sale.
Installment loans to individuals and businesses represented 4 percent, 6
percent and 7 percent of total gross loans in 1995, 1994 and 1993, respectively.
The declining trend of installment loans to gross loans was due to normal
principal repayments by borrowers, a slowdown in automobile loans as automobile
manufacturers offered special financial incentives, including lower interest
rates, and the inability of borrowers to deduct interest under the existing tax
laws.
In 1994, Royal established a Visa credit card business, which was sold to
the Bank in 1995. Affinity cards with the Masons of Maryland and New Hampshire,
and a Union State Bank card are offered. At December 31, 1995, the Bank had
credit card lines of $10.6 million, and outstanding balances of $2.6 million.
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, unless the loan is both well secured and in
the process of collection. Nonaccrual loans, which are principally secured by
real estate, decreased in 1995 and increased in each of the years ended December
31, 1994 and 1993, to $4.0 million, $5.9 million and $4.0 million, respectively.
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 provisions for loan losses, incur higher collection costs, and other costs
associated with the management and disposition of foreclosed properties.
LOAN MATURITIES AND SENSITIVITY TO CHANGE IN INTEREST RATES
The following table presents the maturities of loans outstanding at December 31,
1995 (excluding installment loans to individuals and real estate loans other
than construction loans) and the amount of such loans by maturity date that have
predetermined interest rates and the amounts that have floating rates.
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1995
After
1 But
WITHIN Within After
(000's, except for percentages) 1 YEAR 5 Years 5 Years Total Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOANS:
Time and demand loans $20,004 $ 2,593 $ -- $22,597 30%
Commercial installment loans 809 9,609 700 11,118 15
Mortgage construction loans 26,902 14,987 -- 41,889 55
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $47,715 $27,189 $700 $75,604 100%
- ------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY:
Fixed or predetermined interest rate $ 4,570 $ 6,650 $ -- $11,220 15%
Floating or adjustable interest rates 43,145 20,539 700 64,384 85
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $47,715 $27,189 $700 $75,604 100%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PERCENT 63% 36% 1% 100%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
The most significant non-performing loans have been in construction loans
and real estate related commercial loans. Although the Bank has an aggressive
foreclosure policy, the process is slow and is hampered by market factors. The
level of non-performing assets has negatively impacted the Company's net
interest income and operating results. Management believes that the level of
non-performing assets will continue to impact net interest income in 1996. Net
loan charge-offs against the allowance for loan losses increased in 1995 to
$616,000 from $525,000 in 1994 and $407,000 in 1993. At December 31, 1995,
restructured loans decreased to $4.1 million from $5.8 million in 1994, compared
to $4.7 million in 1993.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is available to absorb charge-offs from any
loan category, while additions are made through charges to income and recoveries
of loans previously charged-off. An evaluation of the quality of the loan
portfolio is performed by management on a quarterly basis as an integral part of
the loan function which includes the identification of past due loans,
non-performing loans, impaired loans, assessments of the expected effects of the
current economic environment and review of the historical loss experience. Based
upon management's assessment of the degree of risk associated with the various
elements of the loan portfolio, it is estimated that at December 31, 1995 and
1994, 10 percent of the allowance for loan losses is applicable to time and
demand loans, 80 percent and 75 percent, respectively, relate to real estate
secured loans, including commercial and construction loans, and 10 percent and
15 percent, respectively, is applicable to installment loans.
As with any financial institution, poor economic conditions, high
inflation, high interest rates, or high unemployment may lead to increased
losses in the loan portfolio. Conversely, improvements in economic conditions
tend to reduce the amounts charged against the allowance. Management has
established various controls in order to limit future losses, such as (1) a
"watchlist" of possible problem loans, (2) various loan policies concerning loan
administration (loan file documentation, disclosures, approvals, etc.), and (3)
a loan review staff employed by the Company to audit for adherence to
established controls and to review the quality and anticipated collectibility of
the portfolio. Management determines which loans are possibly uncollectible and
makes additional provisions, if necessary, to state the allowance at a
satisfactory level.
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 is considered adequate to absorb
potential losses inherent in the credit portfolio. A substantial portion (88
percent at December 31, 1995) of the loans of the Company are secured by real
estate, primarily located in the New York and Maryland areas. 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 loan losses established
in 1995, 1994 and 1993, and the related allowance for loan losses as set forth
in the Notes to Consolidated Financial Statements reflect the effect of net
charge-offs, losses incurred with respect to real estate foreclosures and the
effect of the real estate market in both the New York and Maryland area on the
loan portfolio.
As of January 1, 1995, the Company adopted SFAS No. 114 "Accounting for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosure." SFAS No. 114
requires recognition of a loan as impaired when principal or interest is not
collectible under the contractual terms of the loan. Impairment is recognized
based on the fair value of the loan measured by the present value of expected
cash flows discounted at the loan's effective rate, or, as a practical
expedient, at the loan's observable market price or the fair value of
collateral, if the loan is collateral-dependent. The adoption of those
Statements did not have a material effect on the allowance for loan losses.
Management believes the allowance for loan losses at December 31, 1995,
appropriately reflects the risk elements inherent in the total loan portfolio at
that time. There is no assurance that the Company will not be required to make
future adjustments to the allowance in response to changing economic conditions
or regulatory examinations. During 1995, the Federal Reserve Bank and FDIC
completed an examination of the Company and the Bank, respectively, and during
1994, the New York State Banking Department completed an examination of the
Bank. The Office of Thrift Supervision examined Royal in 1995. The regulatory
agencies concluded that the process of internal asset review and the allowance
for loan losses were adequate.
DEPOSITS
The Company's fundamental source of funds supporting interest earning
assets continues to be deposits, consisting of demand deposits (non-interest
bearing), money market, savings, NOW and various forms of time deposits. 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
36
<PAGE>
include individuals, small and large businesses and governmental units. To meet
the requirements of a diverse customer base, a full range of deposit instruments
are offered, which has allowed the Company to maintain and expand the deposit
base despite intense competition from other banking institutions and non-bank
financial service providers.
Total deposits at the end of 1995 increased 12 percent to $610.6 million,
from $543.9 million at December 31, 1994, an increase of 16 percent from $469.0
million in 1993. Average deposits outstanding increased 15 percent in 1995 and
13 percent in 1994. Average non-interest bearing deposits increased 16 percent
or $10.4 million at December 31, 1995 compared to 1994, and 23 percent in 1994
compared to 1993 due to business development efforts, which was partially offset
by depositors switching to interest bearing accounts. Average interest bearing
deposits in 1995 increased $68.5 million and in 1994 increased approximately
$48.1 million, reflecting increases in all deposit categories, except for money
market accounts in 1995. Savings deposits average balances increased $23.9
million in 1995 and $12.1 million in 1994, as certain customers were reluctant
to commit to term time deposits during a volatile interest rate period, and due
to the introduction, in 1995, of a higher interest rate savings account tied to
the Federal discount rate. Average balances in NOW deposits increased $1.1
million in 1995 and $3.6 million in 1994, due principally to increased account
activity by customers. The decrease of $13.7 million in 1995 and the slight
increase in 1994 of $.6 million in average money market deposit balances
principally resulted from decreased deposits of local municipalities and
customers, as the rate on the money market account was maintained at a lower
competitive rate, and customers switched to time deposits and, in 1995, the new
savings account product discussed above. In 1995, average time deposits
outstanding increased $57.2 million from 1994 due to promotion of attractive
rate products as interest rates increased in the first part of the year, and
several promotions were offered during the entire year. These factors, as well
as higher sustained short-term rates in 1995, caused average rates on interest
bearing liabilities to increase from 3.5 percent to 4.6 percent. Also in 1995
and 1994, time deposits over $100,000 increased $25.8 million and $34.8 million,
respectively, from aggressive bidding on deposits of large depositors and local
municipalities. Deposits of over $100,000 are generally for maturities of 30 to
180 days and were acquired to fund loans and securities temporarily, under the
Company's asset liability policy and to leverage excess capital by matching such
funds with short-term investments.
Rates offered on deposit products generally increased in 1995 and 1994, as
the Federal Reserve maintained higher short-term rates to control inflation. All
market interest rates had declined precipitously throughout 1993 due to the
efforts of the Federal Reserve to stimulate economic growth during that period.
It is expected that depositors will continue to favor short-term deposit
products, which result in higher volatility of interest margins due to the quick
repricing of deposits during periods of both rising and declining interest
rates.
CAPITAL RESOURCES
Strong capitalization is fundamental to the successful operation of a
banking organization. Stockholders' equity increased to $51.3 million in 1995,
or 34 percent over $38.3 million in 1994. There was an 11 percent increase in
1994, over the $34.4 million in 1993. The increases in all years were due to the
Company's record net income and common stock issuances under the Company's
various stock plans. Stockholders' equity was also increased $3.8 million at
December 31, 1995 and was reduced by $2.7 million at December 31,
The following table summarizes the average amounts and rates of various
classifications of deposits for the periods indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's, except for percentages)
Year Ended December 31,
1995 1994 1993
AVERAGE AVERAGE Average Average Average Average
AMOUNT RATE Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 75,564 -- $ 65,120 -- $ 52,855 --
Money market deposits 65,080 3.0% 78,746 2.4% 78,175 2.3%
Savings deposits 143,931 3.3 119,995 2.3 107,915 2.6
Time deposits 268,611 6.0 211,398 4.8 179,511 4.3
NOW deposits 40,667 1.6 39,610 1.5 36,006 1.8
- ------------------------------------------------------------------------------------------------------------------------------
Total $593,853 3.9% $514,869 3.0% $454,462 2.8%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
1994, resulting from the implementation of SFAS No. 115, which reflects the
effect of unrealized gains and losses on available for sale securities, net of
deferred taxes. Cash dividends on the Company's common stock have been paid
since 1986, the first dividend paid in the Company's history. In the first
quarter of 1988, the Board of Directors authorized a quarterly cash dividend
policy. Cash dividends on the Company's preferred stock commenced in 1989. The
various components and changes in stockholders' equity are reflected in the
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993, appearing elsewhere herein. Management
believes that future retained earnings, and purchases under the employee benefit
plans, will provide the necessary capital for current operations and the planned
growth in total assets. In addition, capital growth can be acquired through the
reinstatement of the Company's Dividend Reinvestment and Optional Stock Purchase
Plan, which has been temporarily suspended.
All banks are subject to risk-based capital guidelines. These guidelines
define capital as Tier I and Tier II capital. Tier I capital consists of common
stockholders' equity and qualifying perpetual preferred stock, less intangibles;
and Tier II capital consists of Tier I capital plus the allowance for possible
loan losses up to certain limits, preferred stock and certain subordinated and
term-debt securities. The guidelines require a minimum total (Tier I plus Tier
II) risk-based capital ratio of 8.0 percent, and a minimum Tier I risk-based
capital ratio of 4.0 percent.
The risk-based capital ratios at December 31 follows:
- ----------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
Tier I Capital
Company 11.37% 10.58% 10.33%
Bank 11.19% 10.77% 10.48%
Royal -- 15.82% 18.05%
Total Capital
Company 12.26% 11.82% 11.74%
Bank 12.08% 11.60% 11.31%
Royal -- 17.21% 19.58%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Banks must also maintain minimum leverage ratio of at least 3 percent,
which consists of Tier I capital based on risk-based capital guidelines
divided by average tangible assets (excluding intangible assets that were
deducted to arrive at Tier I capital).
The leverage ratios were as follows at December 31:
- ----------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
Company 7.67% 7.21% 6.90%
Bank 8.12% 7.53% 7.34%
Royal -- 7.04% 6.56%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
To be considered "well-capitalized" under FDICIA, an institution must
generally have a leverage ratio of at least 5 percent, Tier I ratio of 6 percent
and Tier II ratio of 10 percent. The Bank significantly exceeds all current
regulatory capital requirements and was in the "well-capitalized" category at
December 31, 1995. Management fully expects that the Bank will maintain a strong
capital position in the future.
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") and further expanded by the FDICIA, Royal was required to
meet minimum regulatory tangible (1.50 percent), core leverage (3 percent), and
risk-based capital ratios. Since its acquisition by the Company, Royal exceeded
all current and fully-phased-in capital requirements as stipulated by each of
these acts.
LIQUIDITY
The Asset/Liability Committee ("ALCO") establishes specific policies and
operating procedures governing the Company's liquidity levels and develops plans
to address future liquidity needs. The primary functions of asset/liability
management are to provide safety of depositor and investor funds, assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
A practice of asset/liability management is to determine and maintain an
appropriate level of liquid interest earning assets. Aside from Cash on hand
and Due from banks, the Bank's liquid assets are Federal funds sold, which are
available daily and interest bearing deposits with banks. The Bank uses excess
funds daily to sell Federal funds which mature daily with other commercial
institutions in need of funds. At December 31, 1995, the Bank sold overnight
Federal funds in the amount of $13.8 million at a rate of 5.38 percent.
38
<PAGE>
Other sources of asset liquidity include loan and securities principal
and interest payments and maturing securities and loans. The securities and
loan portfolios are of high credit quality and of mixed maturity, providing a
constant stream of maturing and reinvestable assets, which can be converted
into cash should the need arise. The ability to redeploy these funds is an
important source of medium to long-term liquidity. The amortized cost of
securities available for sale having contractual maturities or expected call
dates or average lives of one year or less amounted to $30.2 million, while
held to maturity securities maturing in one year or less amounted to $6.4
million, for a total of $36.6 million at December 31, 1995. This represented
16 percent of the amortized cost of the securities portfolio, compared to 30
percent of the securities portfolio maturing within one year at December 31,
1994. Excluding installment loans to individuals and real estate loans, $47.7
million, or 12 percent of loans (including loans held for sale) at December
31, 1995, mature in one year or less. The approval of the Bank as a
preferred seller of mortgages to both FHLMC and FNMA, has improved liquidity
as residential mortgages maybe mortgages to be sold or swapped in the
secondary market. The Bank is a member of the Federal Home Loan Bank of New
York ("FHLB"). The Bank may take advances at various terms on the security
of the FHLB capital stock owned by the Bank and by certain mortgage loans
under blanket pledge agreements. Union State Bank had advances aggregating
$10.0 million from the Federal Home Loan Bank of New York at December 31,
1995 (see Note 9 to the Consolidated Financial Statements).
Demand deposits from individuals, businesses and institutions, as well as
retail time deposits ("core deposits") are a relatively stable, low-cost source
of funds underlying a substantial portion of community funding of the Bank's
interest earning assets provided that the individual categories of deposits are
appropriately priced. The deposits of the Bank generally have shown a steady
growth trend. However, the trend of the deposit mix has generally been toward
deposits of shorter average maturity, with a larger percentage of funds in
savings deposits and shorter term certificates of deposit, while money market
accounts and NOW accounts as a percentage of total deposits declined as
depositors favored higher rates offered by high balance savings accounts and CD
products. Additional liquidity is provided by the ability to purchase Federal
funds from correspondent banks and the ability to borrow from the Federal
Reserve Bank's discount window, which borrowings must be collateralized with
U.S. Treasury and Government Agency securities.
The Bank has pledged certain of its assets as collateral for deposits of
municipalities and FHLB borrowings. By utilizing collateralized funding
sources, the Bank is able to access a variety of cost effective sources of
funds. The assets pledged consist of mortgage-backed and other securities.
Management monitors its liquidity requirements by assessing assets pledged,
the level of assets available for sale, additional borrowing capacity and
other factors. Management does not anticipate any negative impact to its
liquidity from its pledging activities. The Bank also has the ability to
enter into repurchase agreements collateralized by its assets to generate
cash liquidity.
Another source of stable funding for the Company is capital market funds
which includes preferred stock, convertible debentures, common stock, retained
earnings and long-term debt qualifying as regulatory capital. As profits
increase, retained earnings and common stock issuances account for a growing
share of the funding sources of the Company.
Each of the Company's sources of liquidity is vulnerable to various
uncertainties beyond the control of the Company. Scheduled loan payments are a
relatively stable source of funds, while loan prepayments and deposit flows vary
widely in reaction to market conditions, primarily prevailing interest rates.
Asset sales are influenced by general market interest rates and other unforeseen
market conditions. The Company's ability to borrow at attractive rates is
affected by its credit rating and other market conditions.
Management considers the Company's sources of liquidity to be adequate to
meet any expected funding needs and also to be responsive to changing interest
rate markets.
INTEREST RATE SENSITIVITY MANAGEMENT
Closely related to the concept of liquidity is the degree of rate
sensitivity which varies greatly among different classes of assets and
liabilities. Federal funds, both purchases and sales, on which rates change
daily, and loans and deposits tied to certain indices, such as the prime rate
and Federal Discount rate, are the most sensitive. The least sensitive vehicles
include long-term fixed rate loans and securities and fixed rate retail savings
deposits. On those types falling between these extremes, the management of
maturity distributions is as important as the balances maintained. The
management techniques for maturity distributions involve the matching of
interest rate maturities as well as principal maturities and is a
39
<PAGE>
key element to net interest income. In periods of rapidly changing interest
rates, an imbalance between the rate sensitive assets and liabilities "gap" can
cause major fluctuations in net interest income and, hence, in earnings. The
Company's management of liquidity and the interest rate sensitivity gap has been
successful in the past, as evidenced by the net interest income growth
performance during very difficult economic cycles. Continuing to establish
patterns of sensitivity which will enhance future growth regardless of frequent
shifts in market conditions is one of the objectives of the Company's
asset/liability management strategy.
In the following table, balance sheet items are appropriately categorized
by contractual maturity, expected average lives for mortgage-backed securities,
or repricing dates with prime rate indexed loans and certificates of deposit,
including IRAs, NOW accounts, savings accounts tied to the Federal Discount
rate, and retail money market deposits constituting the bulk of the floating
rate category. The determination of the interest rate sensitivity of
noncontractual items is arrived at in a more subjective fashion. Passbook and
statement savings accounts are viewed as a relatively stable source of funds and
are therefore classified as intermediate funds.
On December 31, 1995, the table shows a cumulative gap of $94.9 million in
the one day to one year repricing period, due principally to fixed rate
securities and loans in the over one year to five years and over five year
categories to maximize yield on assets. A significant portion of the loans in
the over one year to five year category represents three year adjustable
commercial mortgages. Origination of such loans has allowed the Company to
generate an adjustable rate asset repriceable within three years to reduce
long-term interest rate risk.
The previous discussion of net interest income stated that as market
interest rates began increasing during the second half of 1994 and first part of
1995, the cost of funds rose from 3.5 percent in 1994 to 4.6 percent in 1995 on
interest-bearing liabilities, while the yield on earning assets increased to 8.4
percent in 1995, compared to 7.8 percent in 1994. The Company's liabilities at
December 31, 1995, as reflected in the following table, are more "sensitive"
than its assets to short-term interest rate movements. Interest rate sensitivity
is the relationship between market interest rates and net interest income due to
the repricing characteristics of assets and liabilities. If more liabilities
than assets reprice in a given period -- a liability-sensitive position --
market interest rate changes will be reflected more quickly in liability rates.
If interest rates decline, such positions will generally benefit net interest
income. Alternatively, where assets reprice more quickly than liabilities in a
given period -- an asset-sensitive position -- a decline in market rates could
have an adverse effect on net interest income.
One way to minimize interest rate risk is to maintain a balanced or matched
interest rate sensitivity position. However, profits are not always maximized
by matched funding. To increase net interest earnings, the Company selectively
mismatches asset and liability repricing to take advantage of short-term
interest rate movements and the shape of the yield curve. The magnitude of the
mismatch depends on a careful assessment of the risks presented by forecasted
interest rate movements. The risk inherent in such a mismatch, or gap, is that
interest rates may not move as anticipated. For this reason, the Company
assumes the larger portion of its interest rate mismatch in the early periods of
the repricing schedule from one day to one year.
Short-term interest rate risk exposure is reviewed in weekly meetings in
which guidelines are established for the following week and the longer term
exposure. The structural interest rate mismatch is reviewed periodically by the
Company's Asset and Liability Policy Committee.
40
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
BY REPRICING DATE
DECEMBER 31, 1995
<TABLE>
<CAPTION>
(000's, except for percentages)
- ---------------------------------------------------------------------------------------------------------------
One Over Over Over
Day and One Day Three One Year Over Non-
Floating to Three Months to to Five Five Interest
Rate Months One Year Years Years Bearing Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans $140,610 $ 18,671 $ 59,984 $124,043 $ 44,129 $ -- $387,437
Mortgage-backed securities 27,639 2,809 3,485 34,267 42,163 -- 110,363
Other securities 4,400 3,160 25,991 55,846 31,395 -- 120,792
Other earning assets 13,800 1,673 297 99 -- -- 15,869
Other assets -- 1,656 -- -- -- 42,666 44,322
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 186,449 27,969 89,757 214,255 117,687 42,666 678,783
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY:
Interest bearing deposits 203,272 75,286 115,538 134,176 -- -- 528,272
Other borrowed funds -- 5,000 -- 5,000 -- -- 10,000
Demand deposits -- -- -- -- -- 82,363 82,363
Other liabilities -- -- -- -- -- 6,815 6,815
Stockholders' equity -- -- -- -- -- 51,333 51,333
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and equity 203,272 80,286 115,538 139,176 -- 140,511 678,783
- ---------------------------------------------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $(16,823) $(52,317) $(25,781) $ 75,079 $117,687 $(97,845) $ --
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Cumulative Gap $(16,823) $(69,140) $(94,921) $(19,842) $ 97,845 -- --
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Cumulative Gap to
Interest-Earning Assets (2.64)% (10.87)% (14.92)% (3.12)% 15.38% -- --
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company also manages its interest rate risk exposure by simulating the
effects on the portfolio in increasing and decreasing interest rate
environments. Risk is mitigated by matching maturities or repricing more
closely, and by reducing interest rate risk by the use of interest rate
contracts. The Company does not use derivative financial instruments
extensively. However, as circumstances warrant, the Company will purchase
derivatives such as interest rate contracts to manage its interest rate
exposure. Any derivative financial instruments are carefully evaluated to
determine the impact on the Company's interest rate risk in rising and
declining interest rate environments, as well as the fair value of the
derivative instruments. Use of derivative financial instruments is included
in the Bank's investment policy, which has been approved by the Board of
Directors.
At December 31, 1995, the Company is party to one interest rate contract
with a notional amount of $3,500,000. Under the terms of the interest rate
contract, the Bank will be reimbursed for increases in one month LIBOR for any
month during the term of the agreement in which such rate exceeds the "strike
level" of 8.1875%. The purpose of this contract is to limit the interest rate
risk on an investment with a variable interest rate and an interest rate cap.
41
<PAGE>
FINANCIAL RATIOS
Significant ratios of the Company for the periods indicated are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS RATIO
Net Income as % of:
Average earning assets 1.52% 1.32% 1.35%
Average total assets 1.42% 1.23% 1.25%
Average common stockholders' equity 22.17% 19.66% 21.08%
Average total stockholders' equity 21.00% 18.54% 19.52%
CAPITAL RATIOS
Average common stockholders' equity to average total assets 6.21% 5.99% 5.63%
Average total stockholders' equity to average total assets 6.78% 6.65% 6.42%
Average total stockholders' equity and long-term debt to average total assets 6.89% 6.96% 6.81%
Average net loans as a multiple of average total stockholders' equity 7.93 8.09 7.71
Leverage capital 7.67% 7.21% 6.90%
Tier I capital 11.37% 10.58% 10.33%
Total risk-based capital 12.26% 11.82% 11.74%
OTHER
Allowance for loan losses as a % of year-end net loans 1.01% 1.01% 1.04%
Loans (net) as a % of year-end total assets 57.1% 54.8% 53.7%
Loans (net) as a % of year-end total deposits 63.4% 60.7% 58.2%
Securities as a % of year-end total assets 34.1% 37.4% 39.7%
Dividends per share as a % of net income per common and common equivalent share 19.1% 20.2% 15.4%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
STATEMENTS OF CONDITION (UNAUDITED)
DECEMBER 31, 1995 AND 1994
UNION STATE BANK
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's)
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 23,469 $ 18,530
Federal funds sold 13,800 4,000
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 37,269 22,530
Interest bearing deposits in other banks 2,069 593
Securities:
Available for sale (at fair value) 170,867 71,357
Held to maturity (fair value $62,684 in
1995 and $128,940 in 1994) 60,266 133,123
Loans held for sale 394 3,272
Loans, net of allowance for loan losses
of $3,904 in 1995 and $2,994 in 1994 387,043 302,322
Premises and equipment, net 9,519 9,671
Accrued interest receivable 5,288 4,117
Other real estate owned 939 544
Other assets 4,460 4,445
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $678,114 $551,974
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Non-interest bearing deposits $ 85,312 $ 78,132
Interest bearing deposits 528,272 427,011
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 613,584 505,143
Accrued interest payable 1,769 1,070
Accrued expenses and other liabilities 2,314 505
Federal funds purchased -- 3,498
Federal Home Loan Bank advances 10,000 5,000
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 627,667 515,216
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6 and 13)
Stockholder's equity:
Common stock 2,203 2,203
Additional paid-in capital 13,953 8,064
Retained earnings 33,153 28,862
Unrealized gain (loss) on available for sale securities, net of tax 1,138 (2,371)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 50,447 36,758
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $678,114 $551,974
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
EXHIBIT 21
U.S.B. HOLDING CO., INC.
SUBSIDIARIES OF THE REGISTRANT
The following are the subsidiary companies of the Registrant as of December 31,
1995, all of which are 100% owned.
State of Incorporation
or Organization
----------------------
Union State Bank New York
Ad Con, Inc. New York
The above are included in the consolidated financial statements.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS'
- --------------------------------
We consent to the incorporation by reference in Registration Statement Nos.
33-72788 and 33-38077 of U.S.B. Holding Co., Inc. on Forms S-3 of our report
dated January 26,1996, incorporated by reference in this Annual Report on
Form 10-K of U.S.B. Holding Co., Inc. for the year ended December 31, 1995.
Deloitte & Touche LLP
Stamford, Connecticut
March 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 23,469
<INT-BEARING-DEPOSITS> 2,069
<FED-FUNDS-SOLD> 13,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 170,889
<INVESTMENTS-CARRYING> 60,266
<INVESTMENTS-MARKET> 62,684
<LOANS> 391,341
<ALLOWANCE> 3,904
<TOTAL-ASSETS> 678,783
<DEPOSITS> 610,635
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,815
<LONG-TERM> 10,000
0
3,750
<COMMON> 14,402
<OTHER-SE> 33,181
<TOTAL-LIABILITIES-AND-EQUITY> 678,783
<INTEREST-LOAN> 33,216
<INTEREST-INVEST> 15,166
<INTEREST-OTHER> 1,310
<INTEREST-TOTAL> 49,692
<INTEREST-DEPOSIT> 23,478
<INTEREST-EXPENSE> 24,318
<INTEREST-INCOME-NET> 25,374
<LOAN-LOSSES> 1,200
<SECURITIES-GAINS> 167
<EXPENSE-OTHER> 17,851
<INCOME-PRETAX> 13,638
<INCOME-PRE-EXTRAORDINARY> 13,638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,327
<EPS-PRIMARY> 3.27
<EPS-DILUTED> 3.14
<YIELD-ACTUAL> 4.5
<LOANS-NON> 4,036
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,320
<CHARGE-OFFS> 687
<RECOVERIES> 71
<ALLOWANCE-CLOSE> 3,904
<ALLOWANCE-DOMESTIC> 3,904
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
