SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996 Commission File No. 010950
U.S.B. HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3197969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 DUTCH HILL ROAD, ORANGEBURG, NEW YORK 10962
(Address of principal executive office with zip code)
914-365-4600
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES__X___ NO_______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 2, 1996
----- -----------------------------
Common stock, par value
$5 per share 3,083,955
<PAGE>
U.S.B. HOLDING CO., INC.
------------------------
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION AS
OF JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED) 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995 (UNAUDITED) 6
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 30, 1996 (UNAUDITED) 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 17
PART II. OTHER INFORMATION AND SIGNATURES 24
<PAGE>
PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
- ------------------------------------------------
June 30, December 31,
1996 1995
--------- ---------
(000's, Except Share Data)
ASSETS
Cash and due from banks $ 20,581 $ 23,469
Federal funds sold 11,500 13,800
--------- ---------
Cash and cash equivalents 32,081 37,269
Interest bearing deposits in other banks 99 2,069
Securities:
Available for sale (at fair value) 178,925 170,889
Held to maturity (fair value $82,046
in 1996 and $62,684 in 1995) 80,968 60,266
Loans held for sale 277 394
Loans, net of allowance for loan losses of
$4,924 in 1996 and $3,904 in 1995 442,417 387,043
Premises and equipment, net 10,443 10,088
Accrued interest receivable 6,089 5,288
Other real estate owned (OREO) 374 939
Other assets 6,325 4,538
--------- ---------
TOTAL ASSETS $ 757,998 $ 678,783
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing demand deposits $ 84,579 $ 82,363
Interest bearing deposits:
Money Market 51,931 55,672
Savings 210,475 182,567
NOW 41,070 38,111
Time 283,080 251,922
--------- ---------
Total deposits 671,135 610,635
Accrued interest payable 1,660 1,769
Accrued expenses and other liabilities 1,821 5,046
Securities sold under agreement to repurchase 10,170 --
Federal Home Loan Bank advances 20,797 10,000
--------- ---------
Total liabilities 705,583 627,450
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, no par value; authorized
shares 100,000; outstanding shares:
35,000 in 1996 and 37,500 in 1995 3,500 3,750
Common stock, $5 par value; 7,000,000
shares authorized and issued shares of
3,161,519 in 1996 and 2,880,397 in 1995 15,808 14,402
Additional paid-in capital 26,472 19,046
Retained earnings 8,719 14,072
Treasury stock at cost, 77,564 shares
in 1996 and 86,316 shares in 1995 (966) (1,075)
Unrealized (loss) gain on available for
sale securities, net of tax (1,118) 1,138
--------- ---------
Total stockholders' equity 52,415 51,333
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 757,998 $ 678,783
--------- ---------
See notes to consolidated financial statements.
-1-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------
Three Months Ended
June 30, June 30,
1996 1995
--------- ---------
(000's, Except Share Data)
INTEREST INCOME:
Interest and fees on loans $ 9,702 $ 8,131
Interest on federal funds sold 143 181
Interest and dividends on securities:
Mortgage-backed securities 1,713 1,850
U.S. Treasury and Government 1,293 713
Obligations of states and political
subdivisions 774 863
Corporate and other 147 307
Interest on deposits in other banks 2 41
Dividends on Federal Home Loan Bank stock 38 40
--------- ---------
Total interest income 13,812 12,126
--------- ---------
INTEREST EXPENSE:
Interest on deposits 6,269 5,751
Interest on borrowings 297 233
--------- ---------
Total interest expense 6,566 5,984
--------- ---------
NET INTEREST INCOME 7,246 6,142
Provision for loan losses 600 225
--------- ---------
Net interest income after provision for
loan losses 6,646 5,917
--------- ---------
NON-INTEREST INCOME:
Gain on securities transactions - net 145 41
Service charges and fees 593 653
Other income 245 240
--------- ---------
Total non-interest income 983 934
--------- ---------
NON-INTEREST EXPENSES:
Salaries 1,673 1,491
Employee benefits 809 624
Occupancy and equipment expense 845 801
Advertising and business development 210 245
Professional fees 270 286
Communications 151 137
Stationery and printing 101 76
FDIC insurance -- 304
Other expenses 257 656
--------- ---------
Total non-interest expenses 4,316 4,620
--------- ---------
Income before income taxes 3,313 2,231
Provision for income taxes 1,188 731
--------- ---------
NET INCOME $ 2,125 $ 1,500
--------- ---------
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE $ .63 $ .45
--------- ---------
- -Continued-
-2-
<PAGE>
- ------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Cont'd)
- ------------------------------------------------------
Three Months Ended
June 30, June 30,
1996 1995
--------- ---------
(000's, Except Share Data)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,247,792 3,135,748
--------- ---------
See notes to consolidated financial statements.
-3-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------
Six Months Ended
June 30, June 30,
1996 1995
----------- -----------
(000's, Except Share Data)
INTEREST INCOME:
Interest and fees on loans $ 18,927 $ 15,847
Interest on federal funds sold 387 454
Interest and dividends on securities:
Mortgage-backed securities 3,476 3,580
U.S. Treasury and Government 2,077 1,313
Obligations of states and political
subdivisions 1,551 1,749
Corporate and other 370 616
Interest on deposits in other banks 36 66
Dividends on Federal Home Loan Bank stock 68 81
----------- -----------
Total interest income 26,892 23,706
----------- -----------
INTEREST EXPENSE:
Interest on deposits 12,334 11,161
Interest on borrowings 477 460
----------- -----------
Total interest expense 12,811 11,621
----------- -----------
NET INTEREST INCOME 14,081 12,085
Provision for loan losses 1,075 425
----------- -----------
Net interest income after provision for
loan losses 13,006 11,660
----------- -----------
NON-INTEREST INCOME:
Gain (loss) on securities transactions - net 592 (16)
Gain (loss) on loans held for sale (78) 14
Service charges and fees 1,214 1,297
Other income 480 488
----------- -----------
Total non-interest income 2,208 1,783
----------- -----------
NON-INTEREST EXPENSES:
Salaries 3,255 2,965
Employee benefits 1,597 1,272
Occupancy and equipment expense 1,677 1,577
Advertising and business development 438 433
Professional fees 493 471
Communications 309 283
Stationery and printing 192 148
FDIC insurance 1 607
Other expenses 596 1,047
----------- -----------
Total non-interest expenses 8,558 8,803
----------- -----------
Income before income taxes 6,656 4,640
Provision for income taxes 2,281 1,440
----------- -----------
NET INCOME $ 4,375 $ 3,200
----------- -----------
- -Continued-
-4-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Cont'd)
- ------------------------------------------------------
Six Months Ended
June 30, June 30,
1996 1995
----------- -----------
(000's, Except Share Data)
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE $ 1.30 $ .98
----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,241,768 3,109,421
----------- -----------
See notes to consolidated financial statements.
-5-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------
Six Months Ended
June 30, June 30,
1996 1995
-------- --------
(000's)
OPERATING ACTIVITIES:
Net income $ 4,375 $ 3,200
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,075 425
Depreciation and amortization 647 738
Amortization/accretion of premiums/discounts on
securities - net 114 54
(Gain) loss on securities transactions - net (592) 16
(Gain) loss on loans held for sale - net 78 (14)
Origination of loans held for sale (1,227) (1,235)
Proceeds from sales of loans held for sale -- 2,674
Increase in accrued interest receivable (801) (737)
Other - net (2,666) 7
-------- --------
Net cash provided by operating activities 1,003 5,128
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale 47,109 32,415
Proceeds from principal paydowns and maturities
of securities available for sale 8,656 10,607
Proceeds from maturities of securities held to
maturity 4,425 14,327
Purchases of securities available for sale (67,097) (73,912)
Purchases of securities held to maturity (25,260) (2,401)
Net decrease (increase) in interest bearing
deposits in other banks 1,970 (1,277)
Loans originated, net of principal collections (55,763) (22,516)
Loans purchased -- (350)
Purchases of premises and equipment - net (991) (679)
Purchases of Federal Home Loan Bank stock (1,016) --
Proceeds from sales of OREO 1,346 652
-------- --------
Net cash used for investing activities (86,621) (43,134)
-------- --------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 29,342 11,072
Increase in time deposits, net of
withdrawals and maturities 31,158 38,379
Net decrease in federal funds purchased
and Federal Home Loan advances - short-term -- (2,400)
Proceeds from Federal Home Loan Bank advance -
long-term 10,797 5,000
Proceeds from securities sold under agreements
to repurchase 10,170 --
Redemption of long-term debt qualifying
as regulatory capital -- (1,800)
Cash dividends paid (1,038) (730)
- -Continued-
-6-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Cont'd)
- ----------------------------------------------------------
Six Months Ended
June 30, June 30,
1996 1995
-------- --------
(000's)
Redemption of preferred stock (250) --
Proceeds from issuance of common stock 1 1,225
Proceeds from issuance of treasury stock 250 --
-------- --------
Net cash provided by financing activities 80,430 50,746
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,188) 12,740
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 37,269 24,465
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,081 $ 37,205
-------- --------
Supplemental Disclosures:
-------- --------
Interest paid $ 12,920 $ 11,001
-------- --------
Income tax payments $ 4,448 $ 1,628
-------- --------
Transfer of assets to OREO $ 580 $ 199
-------- --------
Transfer of loans held for sale to loans
held to maturity at lower of cost
or fair value $ 1,344 $ --
-------- --------
Change in unrealized gain/loss on securities
available for sale - net of tax $ (2,256) $ 2,560
-------- --------
See notes to consolidated financial statements.
-7-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- ---------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (000's, Except Share Data)
<TABLE>
<CAPTION>
Unrealized
Preferred Gain (Loss)
Stock Common Stock Additional on Available
No Par Shares $5 Par Paid-In Retained Treasury for Sale
Value Outstanding Value Capital Earnings Stock Securities
--------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1996 $ 3,750 2,794,081 $ 14,402 $ 19,046 $ 14,072 $ (1,075) $ 1,138
Net income 4,375
Cash dividends:
Common
($.29 per
share) (883)
Preferred (155)
Redemption of
preferred
stock (250)
Common stock
issued:
Incentive
stock
options
exercised
($10.75 per
share) 1,210 6 7
10% stock
dividend 279,912 1,400 7,278 (8,690)
Issuance of
treasury
stock 8,752 141 109
Change in un-
realized gain
(loss) on avail-
able for sale
securities,
net of tax (2,256)
--------- --------- --------- --------- --------- --------- ---------
Balance at
June 30,
1996 $ 3,500 3,083,955 $ 15,808 $ 26,472 $ 8,719 $ (966) $ (1,118)
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
-8-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of U.S.B.
Holding Co., Inc. (the "Company"), Union State Bank (the "Bank"), the
Company's non- bank subsidiary, Ad Con, Inc., and until December 31, 1995,
its wholly-owned subsidiary, Royal Oak Savings Bank, F.S.B. ("Royal"). On
December 31, 1995, Royal was sold to Monocacy Bancshares, Inc., parent
company of Taneytown Bank & Trust Company, Taneytown, Maryland.
2. Reclassifications
-----------------
Certain reclassifications have been made to prior year accounts to conform
to the current year's presentation.
3. Basis of Presentation
---------------------
In the opinion of Management, the accompanying unaudited consolidated
financial statements include all adjustments (comprising only normal
recurring accruals) necessary to present fairly the financial position of
the Company as of June 30, 1996, the results of operations for the three
and six month periods ended June 30, 1996 and 1995, cash flows for the six
month periods then ended, and changes in stockholders' equity for the six
months ended June 30, 1996. A summary of the Company's significant
accounting policies is set forth in Note 2 to the Consolidated Financial
Statements included in the Company's 1995 Annual Report to Shareholders.
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.
4. Accounting for Stock-Based Compensation
---------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value based
method of accounting for stock-based compensation plans and encourages, but
does not require, entities to adopt that method in place of the provisions
of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," for all arrangements under which employees
receive shares of stock or other equity instruments of the employer or the
employer
-9-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
4. Accounting for Stock-Based Compensation (Cont'd)
------------------------------------------------
incurs liabilities to employees in amounts based on the price of the
Company's stock. SFAS No. 123 requires significantly expanded disclosure in
complete financial statements, including disclosure of pro forma net income
and earnings per share as if the fair value based method were used to
account for stock based compensation, if the intrinsic value method of APB
No. 25 is retained. SFAS No. 123 also establishes fair value as the
measurement basis for transactions in which an entity acquires goods or
services from non-employees in exchange for equity instruments.
The accounting provisions of SFAS No. 123 are effective for transactions
entered into after December 15, 1995. Effective January 1, 1996, the Company
adopted SFAS No. 123 and has decided that it will continue to measure
compensation cost for employee stock compensation plans in accordance with
the provisions of APB No. 25.
5. Accounting for Mortgage Servicing Rights
----------------------------------------
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 acquired or originated subsequent to December 31, 1995, 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.
The Company's adoption of SFAS No. 122 as of January 1, 1996 has not had any
effect on the Consolidated Financial Statements of the Company for the six
months ended June 30, 1996.
6. Accounting for Impairment of a Loan
-----------------------------------
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 homogeneous 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
-10-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
6. Accounting for Impairment of a Loan (Cont'd)
--------------------------------------------
adopting these Statements did not have a material effect on the
Consolidated Financial Statements of the Company.
At June 30, 1996, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 approximated $8.0 million ($6.5 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 $1,365,000
as of June 30, 1996. The average recorded investment in impaired loans for
the three and six month periods ended June 30, 1996 was approximately $7.6
million and $6.8 million, respectively. For the three and six month periods
ended June 30, 1996 and 1995, interest income recognized by the Company on
impaired loans was not material.
7. Securities and Loans Held For Sale
----------------------------------
The Company accounts for securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." 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, are 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.
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.
The Company does not acquire securities for the purpose of engaging in
trading activities.
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 rates. The securities transferred represented all of
the readily marketable securities that were previously classified as held
to maturity, except for obligations of states and political subdivisions.
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.
-11-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
7. Securities and Loans Held For Sale (Cont'd)
-------------------------------------------
Realized gains and losses on the sales of all securities are reported in
earnings. Unrealized gains and losses on available for sale securities are
shown, net of taxes, as a separate component of stockholders' equity. At
June 30, 1996, the effect of SFAS No. 115 resulted in a reduction of
securities available for sale of $1,936,000 which, after the applicable tax
effect, resulted in a reduction to stockholders' equity of $1,118,000,
representing the unrealized loss. At December 31, 1995, the effect of SFAS
No. 115 resulted in an increase of securities available for sale of
$1,971,000 which, after the applicable tax effect, resulted in an increase
to stockholders' equity of $1,138,000, representing the net unrealized
gain.
A summary of the amortized cost and fair value of securities and related
gross unrealized gains and losses at June 30, 1996 and December 31, 1995,
follows:
---------------------------------------------------------------------------
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996: Cost Gains Losses Value
---------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and Govern-
ment agencies $ 76,085 $ -- $ 1,565 $ 74,520
Obligations of states
and political sub-
divisions 3,066 14 3 3,077
Mortgage-backed
securities 97,732 921 1,436 97,217
Corporate bonds 3,889 133 -- 4,022
Other 89 -- -- 89
---------------------------------------------------------------------------
Total available for sale
securities $180,861 $1,068 $3,004 $178,925
---------------------------------------------------------------------------
Held to Maturity:
Obligations of states
and political sub-
divisions $ 61,170 $1,533 $ 165 $ 62,538
Mortgage-backed
securities 9,802 -- 148 9,654
U.S. Government agencies 9,996 -- 142 9,854
---------------------------------------------------------------------------
Total securities held to
maturity $ 80,968 $1,533 $ 455 $ 82,046
---------------------------------------------------------------------------
---------------------------------------------------------------------------
-12-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
7. Securities and Loans Held For Sale (Cont'd)
-------------------------------------------
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995: Cost Gains Losses Value
---------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and Govern-
ment agencies $ 46,011 $ 654 $ 95 $ 46,570
Obligations of states
and political sub-
divisions 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 sub-
divisions $ 60,266 $2,456 $ 38 $ 62,684
---------------------------------------------------------------------------
Total securities held to
maturity $ 60,266 $2,456 $ 38 $ 62,684
---------------------------------------------------------------------------
At June 30, 1996 and December 31, 1995, residential fixed rate real estate
loans held for sale had a cost of $944,000 and $394,000 and fair value of
$949,000 and $393,000, respectively, which included commitments not yet
closed at June 30, 1996 of $667,000. During the first quarter of 1996, the
Bank transferred residential fixed rate real estate loans with an aggregate
cost of $2,824,000, which included commitments not yet closed of
$1,445,000, representing its entire held for sale portfolio at that time,
to its held to maturity portfolio. This transfer resulted in a write-down
of $78,000, as the loans were transferred at the lower of cost or fair
value.
8. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
---------------------------------------------------------------------
At June 30, 1996, the Bank had outstanding term advances with the Federal
Home Loan Bank of New York ("FHLB") in the amount of $20,797,000 with
maturities and interest rates as follows:
Date of Outstanding Interest
Borrowing Advance Amount Rate Maturity Date
--------- -------------- ---- -------------
November 14, 1994 $5,000,000 5.68% November 15, 1999
June 21, 1995 5,000,000 6.20 June 22, 1998
February 15, 1996 3,825,000 5.41 March 1, 2001
April 24, 1996 4,000,000 6.49 April 26, 1999
April 24, 1996 2,972,000 6.71 May 1, 2003
-13-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
8. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
(Cont'd)
All of the advances are at fixed interest rates with the exception of the
November 14, 1994 advance, which has an interest rate adjusting monthly to
20 basis points over the one month London Inter-Bank Offer Rate ("LIBOR").
In addition, each advance is subject to prepayment penalties except for the
November 14, 1994 advance, which may be prepaid without penalty in whole or
in part semiannually on May 14th and November 14th. The advances taken on
February 15, 1996 and April 24, 1996 are fully amortizing.
The Bank has pledged under a blanket agreement to the FHLB, a security
interest in the Bank's holdings of capital stock in the FHLB, certain
mortgage loans, securities and other assets of the Bank for all FHLB
outstanding advances.
On June 25, 1996, the Bank entered into a repurchase agreement. This
agreement represents funds borrowed in the amount of $10.2 million on a
short-term basis through the sale of securities to a counterparty under an
agreement to repurchase the same securities on December 23, 1996. The
transaction proceeds are recorded as "Securities sold under agreement to
repurchase" and the underlying securities remain in the Bank's securities
portfolio. The agreement is secured by U.S. Government agency and
mortgage-backed securities with an amortized cost of $10.5 million and fair
value of $10.4 million at June 30, 1996. Interest for the repurchase
agreement adjusts monthly to the one month LIBOR rate and was 5.44 percent
at June 30, 1996.
The dividend rate on the Company's Series "A" 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. For the
three and six month periods ended June 30, 1996 and 1995, the weighted
average dividend rates were 8.4 percent (the minimum rate) for each period.
Net income per common share reflects the preferred stock dividends declared
and accrued totalling $76,000 and $79,000 for each three month period and
$155,000 and $158,000 for each six month period ended June 30, 1996 and
1995, respectively. The Company redeemed $250,000 of preferred stock on May
15, 1996, and intends to redeem an additional $250,000 during the quarter
ending September 30, 1996.
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 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
June 30, 1996, 200,000 shares of common stock are reserved for issuance in
connection with the Plan, of which 98,020 shares have been issued.
On March 3, 1996, the Company issued 8,752 shares of its treasury stock.
These shares were purchased by the Company's Employee Stock Ownership Plan
(with Code Section 401(k) Provisions) ("KSOP") and Supplemental Employees'
Investment Plan ("SEIP") at fair value.
-14-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
8. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
---------------------------------------------------------------------
(Cont'd)
--------
The Company declared a 10 percent stock dividend on April 24, 1996 to
shareholders of record May 31, 1996, which was distributed on June 14,
1996. In addition, the Company issued a 10 percent stock dividend to
shareholders of record June 15, 1995, which was distributed on July 1,
1995. The weighted average shares outstanding and per share amounts have
been adjusted to reflect the stock dividend distributed in 1996.
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 June 30, 1996, the Bank could pay dividends
to the Company of $13.8 million without having to obtain prior regulatory
approval.
Net income per common share is based on net income after preferred stock
dividend requirements, the weighted average number of common shares
outstanding and common equivalent shares (for the quarter and six month
periods ended June 30, 1995, adjusted for the common stock dividend
distributed in 1996). Shares granted but not yet issued under the Company's
stock option plans are considered common stock equivalents for earnings per
share calculations.
In May, 1995, the Company repaid the $1,800,000 of Series "A" subordinated
notes outstanding 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 rate was 9.39
percent for the period of January 1, 1995 through May 17, 1995 (the date
the notes were prepaid).
9. Commitments and Contingencies
-----------------------------
At June 30, 1996, 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 June 30, 1996, formal credit line and loan commitments which
are primarily loans collateralized by real estate approximated $112.2
million, and outstanding letters of credit totalled $17.6 million. Such
amounts represent the maximum risk of loss on these commitments.
-15-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
- ---------------------------------------------------------------
9. Commitments and Contingencies (Cont'd)
--------------------------------------
During the six month period ended June 30, 1995, the Bank sold in the
secondary market for cash, mortgage loans with net proceeds totalling $
million. There were no such sales during the six months ended June 30,
1996.
At June 30, 1996, the principal balance of the loans sold and exchanged
with the FHLMC which remain uncollected approximated $87.2 million. The
Bank is committed to service these loans. At June 30, 1996, the Bank was
also committed to service approximately $622,000 of outstanding mortgage
principal balances relating to the State of New York Mortgage Agency
("SONYMA"). The Bank has recently been notified by SONYMA of its intention
to terminate its servicing relationship with the Bank during the third
quarter of 1996 because of the limited volume of loans currently being
serviced.
In the ordinary course of business, the Company is party to various legal
proceedings, which in the opinion of management, will not have a material
effect in the aggregate 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 June 30, 1996. 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
percent. 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 premium paid to enter into this agreement.
-16-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
FINANCIAL CONDITION
- -------------------
At June 30, 1996, the Company had total assets of $758.0 million, an increase of
12 percent, or $79.2 million from December 31, 1995. Total deposits increased
$60.5 million for the six month period ended June 30, 1996, to $671.1 million,
which represented a 10 percent increase from December 31, 1995. Time deposits
accounted for the greatest component of deposit increases, $31.2 million. Time
deposits greater than $100,000 from local municipalities, which are obtained on
a bidding basis with maturities of 30 to 180 days, increased by $15.2 million as
part of the Bank's overall leveraging strategy. IRAs/Keoghs increased by $9.5
million due to promotions of this product during the first half of 1996. Time
deposits under $100,000 increased by $6.8 million due primarily to the time
deposit promotion associated with the opening of the Bank's seventeenth branch
in Stony Point. Retail time deposits over $100,000 decreased slightly by $.3
million during the six month period ended June 30, 1996. Such deposits include a
temporary deposit of approximately $8.0 million which matured in July 1996.
Savings deposits increased by $27.9 million, as the Company introduced and
promoted a new product, the "Golden Statement" account, which replaced the
Liquid Gold account and accounted for the majority of the increase in the
savings deposit category. NOW accounts and demand deposits increased by $3.0
million and $2.2 million, respectively, while money market deposits decreased by
$3.7 million as customers generally switched their balances to higher yielding
deposit products.
The securities portfolio of $259.9 million and $231.2 million at June 30, 1996
and December 31, 1995, respectively, consists of securities held to maturity at
amortized cost of $81.0 million and $60.3 million, and securities available for
sale at fair market value totalling $178.9 million and $170.9 million,
respectively.
Obligations of U.S. Treasury and other Government agencies increased $37.9
million during the six months ended June 30, 1996 due primarily to purchases of
$72.6 million, net of sales that occurred during the first quarter of $32.0
million, securities called of $.5 million, and a decline in fair value of
available for sale securities of $2.1 million. The U.S. Treasuries were sold to
take advantage of market conditions, while the U.S. Government agencies were
sold because of the expectation that they would be called. Obligations of other
Government agencies are often used as collateral for the Company's pledging
requirements. Mortgage-backed securities decreased $3.3 million as principal
amortization of $6.0 million, sales of $9.9 million, a decline in fair value of
available for sale securities of $1.5 million, and prepayments offset purchases
of $14.3 million. The security transactions that took place for the six months
ended June 30, 1996, resulted in maintaining the overall earnings and the high
quality nature of the portfolio. The Bank's investment in obligations of states
and political subdivisions (municipal securities) increased by $.9 million
during the first six months of 1996, as the Bank purchased $5.5 million of such
securities during the second quarter, which offset maturities that occurred
throughout the first half of the year. The Bank considers such securities as
core investments which are high yielding on a tax equivalent basis and have
diversified final maturities. Purchases of municipal securities are dependent
upon their availability in the marketplace and the yield of such securities on a
tax equivalent basis, compared to other securities of equivalent credit risk and
-17-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- --------------------------------------------
FINANCIAL CONDITION (Cont'd)
- ----------------------------
maturity. The Bank also maintains investments in medium-term corporate debt
securities and other securities which are rated investment grade by nationally
recognized rating organizations. For the six months ended June 30, 1996, such
securities decreased by $6.7 million, principally due to sales of $4.5 million
of such securities and maturities during the period.
The Company continues to exercise its conservative approach to investing by
making high quality investments and controlling interest rate risk by averaging
investments in medium-term maturities.
At June 30, 1996, net loans were $442.7 million, a net increase of $55.3 million
or 14 percent over December 31, 1995 due to net increases in all major loan
categories, particularly commercial and construction mortgages. Outstanding loan
balances increased $33.1 million in commercial mortgages, $17.5 million in
construction and real estate secured loans, $7.2 million in residential
mortgages and $2.7 million in credit card balances outstanding relating to the
Visa credit card business which was sold to the Bank by Royal in December 1995,
which offset a decrease of $3.5 million in time secured and unsecured loans. The
Bank had approximately $112.2 million in formal credit lines and loan
commitments outstanding. Management considers its liquid resources to be
adequate to fund future loans in the foreseeable future, principally by
utilizing excess funds temporarily placed in federal funds sold, increases in
deposits, Federal Home Loan Bank advances and securities sold under agreements
to repurchase, and loan repayments and maturing securities.
The Bank has approximately $3.3 million of loans, secured by lease receivables,
to Bennett Funding Group, a lease finance company, which filed for bankruptcy
protection during the first quarter of 1996. The Bank does not yet know if any
loss will be sustained on these loans. However, based upon Bennett's filing, the
loans have been placed on nonaccrual status. Including the Bennett loans, the
Bank's nonaccrual loans were less than one percent of total assets at June 30,
1996.
The Bank's allowance for loan losses increased $1.0 million or 26 percent to
$4.9 million at June 30, 1996, from $3.9 million at December 31, 1995. The
allowance for loan losses represented 1.09 percent of gross loans outstanding at
June 30, 1996, compared to one percent at December 31, 1995. The allowance
reflects a provision of $1,075,000 and net charge-offs of $55,000 recorded thus
far in 1996. Management takes a prudent and cautious position in evaluating
various business and economic uncertainties in relation to the Bank's loan
portfolio. In management's judgment, at June 30, 1996, the allowance is
considered adequate to absorb potential losses inherent in the credit portfolio.
During the six months ended June 30, 1996, the Bank increased the amount of
outstanding advances with the Federal Home Loan Bank of New York by $10.8
million. In addition, in the second quarter, the Bank entered into a repurchase
agreement in the amount of $10.2 million. This agreement represents funds
borrowed on a short-term basis through the sale of securities to a counterparty
under an agreement to repurchase the same securities on December 23, 1996. These
transactions took place as part of the Bank's overall leveraging strategy.
-18-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- --------------------------------------------
FINANCIAL CONDITION (Cont'd)
- ----------------------------
Stockholders' equity increased to $52.4 million at June 30, 1996, an increase of
$1.1 million from the December 31, 1995 balance of $51.3 million. The increase
results from net income of $4.4 million for the six month period ended June 30,
1996, which was offset by cash dividends on preferred stock of $155,000 and
common stock of $883,000. During the first quarter, the Company also issued
8,752 shares of treasury stock at fair market value in the aggregate amount of
$250,000. Due to market conditions that have occurred thus far this year, the
effect of SFAS No. 115 for the six month period ended June 30, 1996, was to
decrease stockholders' equity, net of tax effect, by $2,256,000.
The Company's leverage ratio at June 30, 1996 was 7.49 percent, compared to 7.67
percent at December 31, 1995, well above the "well-capitalized" level of 5
percent. The Company's Tier I and total capital ratios under the risk-based
capital guidelines were 10.63 percent and 11.61 percent at June 30, 1996 and
11.37 percent and 12.26 percent at December 31, 1995, respectively, which
remained above the "well-capitalized" levels of 6 percent (Tier I) and 10
percent (Total Capital).
RESULTS OF OPERATIONS
- ---------------------
Earnings
- --------
Net income for the three and six month periods ended June 30, 1996, increased
$625,000 or 42 percent to $2.1 million and $1,175,000 or 37 percent to $4.4
million, compared to the same periods in 1995, respectively. Net income per
common and common equivalent share increased to $.63 per common share and $1.30
per common share in the quarter and six months ended June 30, 1996 from $.45 per
common share and $.98 per common share recorded in the same periods in 1995. The
annualized return on average total assets increased to 1.23 percent for the six
months ended June 30, 1996 from 1.01 percent for the six months ended June 30,
1995. The overall increase in earnings for both periods reflect higher net
interest income and gains on sale of available for sale securities and lower
expenses, offset by a higher loan loss provision and lower service fee and other
income. A discussion of the factors impacting the changes in the various
components of net income follows.
Net Interest Income
- -------------------
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three month period ended June 30, 1996, net interest income increased 18
percent to $7.2 million from $6.1 million in the year earlier period. Net
interest income increased $2.0 million or 17 percent to $14.1 million for the
six months ended June 30, 1996, compared to the six month period ended June 30,
1995. Net interest income increased in both the quarter and six month periods
ending June 30, 1996, due to volume increases of average earning assets, and an
increase in the net interest spread and higher levels of non-interest bearing
funds (demand deposits and capital). For the quarter and six months ended June
30, 1996, the interest spread (yield on earning assets less cost of interest
bearing funds) was 3.61 percent and 3.58 percent, respectively, compared to 3.48
percent and 3.51
-19-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- --------------------------------------------
Net Interest Income (Cont'd)
- ----------------------------
percent for the year earlier periods. Yields on interest earning assets
decreased during the quarter and remained the same for the six month period
ended June 30, 1996, while the cost of funds decreased for both the quarter and
six months ended June 30, 1996, compared to the same periods in 1995. The cost
of funds decreased at a slightly increased rate compared to the yield on earning
assets, resulting in the favorable impact on the net interest spread.
The decreases in net asset and liability yields were partially as a
result of a prime rate and federal reserve discount rate decrease
which occurred in the first quarter of 1996. The
decreases in cost of funds were somewhat offset by higher yielding time deposits
due to the Stony Point branch opening promotion in the first quarter of 1996 and
an IRA/Keogh promotion during the first half of 1996. In addition, a savings
product ("Golden Statement Account") introduced during the first quarter of
1996, replaced the "Liquid Gold" product which pays a rate equal to the Federal
Reserve discount rate. The new product, which has a tiered rate, pays an
interest rate for the highest tier ($100,000 and over), which was the same as
the Liquid Gold product during the quarter ended June 30, 1996. Increased
borrowings to fund growth and effect leverage strategies also result in a higher
cost of funds, but has the effect of increasing net interest income, while
managing interest rate risk.
Provision for Loan Losses
- -------------------------
The provision for loan losses increased $375,000 to $600,000 for the three month
period ended June 30, 1996, compared to the same period in 1995 and $650,000 to
$1,075,000 for the six months ended June 30, 1996 compared to the year earlier
period. Net charge-offs in the first six months of 1996 totalled $55,000
relating primarily to real estate loans, compared to $205,000 of net charge-offs
(principally commercial loans) during the same period in 1995. Nonaccrual loans
were $7.1 million at June 30, 1996, compared to $4.0 million at December 31,
1995, and $7.5 million at June 30, 1995. The Bank has approximately $3.3 million
of loans, secured by lease receivables, to Bennett Funding Group, a lease
finance company, which filed for bankruptcy during the first quarter of 1996.
The Bank does not yet know if any loss will be sustained on these loans.
However, based upon Bennett's filing, the loans were placed on nonaccrual status
in March 1996. 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. Net income is adversely impacted by
the level of non-performing assets of the Bank since, in addition to foregone
revenue, it must increase the level of provision for loan losses, and incur
other costs associated with collections of past due balances.
An evaluation of the quality of the loan portfolio is performed by management on
an ongoing basis as an integral part of the loan function, which includes the
identification of past due loans, the recognition of the current economic
environment and the review of the historical loan experience. Management has
taken a prudent and cautious position in evaluating various business and
economic uncertainties in relation to the Company's loan portfolio and believes
that the allowance for loan losses at June 30, 1996 reflects the risk elements
inherent in the total loan portfolio at this time. The changes in the provision
charged to income and the allowance for loan losses reflects such uncertainties
on an ever increasing loan portfolio. 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.
-20-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- --------------------------------------------
Non-Interest Income
- -------------------
Non-interest income for the three months ended June 30, 1996 increased to
$983,000 from $934,000 in the same period of 1995. For the six months ended June
30, 1996, non-interest income was $2,208,000, which represented a 24 percent
increase, or $425,000, over the same period in 1995. The second quarter increase
is related to higher gains on securities transactions ($104,000) due to the sale
of mortgage-backed securities and corporate bonds in May 1996, compared to
modest gains on securities transactions for the three month period ended June
1995, offset by lower service charges and fees ($60,000). The increase in
non-interest income for the first half of 1996 compared to 1995 resulted from an
increase in the gains on securities transactions, which offset decreases in
gains/losses on loans held for sale, service charges and other income. The
relationship of non-interest income to non-interest expenses increased to 23
percent and 26 percent for the three and six months periods ended June 30, 1996,
respectively, compared to 20 percent for each of the same periods in 1995.
The net gain on securities transactions of $145,000 and $592,000 for the three
and six month periods ended June 30, 1996, was a result of activity that
occurred in the securities portfolio, which maintained the overall earnings of
the portfolio through sales gains and replacement yields, while maintaining high
quality securities. During the six months ended June 30, 1996, the Bank sold
approximately $47.1 million of securities, principally callable U.S. Government
agencies ($12.0 million) and U.S. Treasuries ($20.0 million) during the first
quarter and mortgage-backed securities ($7.4 million) and corporate bonds ($3.6
million) in the second quarter. The U.S. Government agencies were sold because
of the expectation that they would be called this year, while the remaining
securities were sold to take advantage of market conditions. The net loss on
securities transactions of $16,000 for the six months ended June 30, 1995, was a
result of transactions that occurred in the period to restructure the securities
portfolio by enhancing yield and improving liquidity, offset by gains on the
sale of U.S. Treasuries and certain callable securities which would have been
called during 1995.
The net loss of $78,000 during the six months ended June 30, 1996 for loans held
for sale resulted from the write-down of loans previously held for sale which
were transferred to the held to maturity portfolio. These loans were transferred
at the lower of cost or fair value. The net gain on loans held for sale in the
first half of 1995 of $14,000 was principally due to the sale of $2.7 million of
fixed rate residential mortgages.
Service charges decreased $60,000 and $83,000 in the three and six month periods
ended June 30, 1996, respectively, compared to the prior year. Although there
were more deposit accounts in the first half of 1996 compared to 1995, lower
insufficient funds charges and increased competition impacted increases in fees.
Other income increased $5,000 to $245,000 in the second quarter of 1996 compared
to the prior year, due principally to higher fee income from the Company's Visa
credit card program ($24,000), which was a start-up program in the first half of
1995, offset by lower mortgage servicing income as a result of a lower volume of
loans serviced. For the six months ended June 30, 1996, other income decreased
$8,000 to $480,000 compared to the same period in 1995 due to lower
-21-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- --------------------------------------------
Non-Interest Income (Cont'd)
- ----------------------------
mortgage servicing ($71,000) because of lower serviced loan volume, offset by
higher credit card income ($42,000) and other fee income.
Non-Interest Expenses
- ---------------------
Non-interest expenses decreased $304,000 to $4,316,000 and $245,000 to
$8,558,000 for the three and six month periods ended June 30, 1996,
respectively, from the comparable periods in 1995. The primary reasons for this
decrease results from an elimination of FDIC insurance and an employee
settlement and higher branch charge-offs in the 1995 periods, offset by increase
in salaries and other operating costs to support growth. The following discusses
each component of non-interest expense.
Salaries are the largest component of non-interest expense. Increases of
$182,000 and $290,000 occurred during the three and six month periods ended June
30, 1996, respectively, compared to the previous year, which represented
increases of 12 percent and 10 percent, respectively. Full-time equivalent
employees of 207 at June 30, 1996 represented an increase from 199 full-time
equivalent employees at June 30, 1995. The salary increases occurred due to
additional personnel necessary for the Bank to accommodate the increases in both
deposits and loans and their related services, the opening of the Stony Point
branch in January 1996, and annual merit increases, which offset the decrease in
Royal personnel as Royal was sold on December 31, 1995.
Employee benefits increased $185,000 to $809,000 and $325,000 to $1,597,000 for
the three and six month periods ended June 30, 1996, respectively, compared to
1995. These changes occurred primarily because of an increase in incentive
compensation programs which are based upon the Company's net income and overall
financial performance, higher payroll taxes during 1996 due to the higher salary
base and increases in other employee benefit programs such as medical, tuition
and training.
The changes in the other components of non-interest expenses for the three and
six month periods ended June 30, 1996 compared to June 30, 1995, were due to the
following:
o Increases of $44,000 (5%) and $100,000 (6%), respectively, in occupancy and
equipment expense were due principally to the Stony Point branch opened in
January 1996, maintenance expenses associated with the severe winter of 1996
and an increase in maintenance contracts relating to the Bank's branch and
computer related equipment.
o Decrease of $35,000 (14%) and an increase of $5,000 (1%), respectively, in
advertising and business development. The decrease for the quarter ending
June 30, 1996 was due to advertising in 1995 related to new deposit products
such as "Liquid Gold."
o Decrease of $16,000 (6%) and increase of $22,000 (5%), respectively, in
professional fees. The decrease in the second quarter relates to litigation
costs incurred in the second quarter of 1995 which pertained to a loan
related
-22-
<PAGE>
U.S.B. HOLDING CO., INC.
- ------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- --------------------------------------------
Non-Interest Expenses (Cont'd)
- ------------------------------
case. The increase for the six month period relates to examination fees for
the New York State Department of Banking examination which took place during
the second quarter of 1996 and professional fees associated with loan
collections and foreclosures.
o Increases of $14,000 (10%) and $26,000 (9%), respectively, in communications
were due to an increase in postage and telephone expenses that arose as a
result of higher postal volume, the new branch addition and transfer of
credit card operations from Maryland to New York.
o Increases of $25,000 (33%) and $44,000 (30%), respectively, in stationery and
printing because of the new branch opened in January 1996, increased loan and
deposit volume, and growth of the credit card operation.
o Decreases of $304,000 (100%) and $606,000 (100%), respectively, in FDIC
insurance premiums as the Bank Insurance Fund reached its required level of
1.25 percent of insured deposits in 1995, resulting in the reduction in
annual FDIC premium for the Bank to $2,000 in 1996.
o Decreases of $399,000 (61%) and $451,000 (43%) in other expenses. The
decreases were a result of 1995 second quarter expenses due to a settlement
with a former executive officer of the Company and branch charge-offs. In
addition, there has been a reduction in 1996 foreclosure related expenses
compared to the 1995 periods, lower amortization of intangible assets due to
intangible assets becoming fully amortized in 1995, offset by an increase in
credit card expenses in 1996 due to the growth of this program.
Income Taxes
- ------------
The effective tax rates for the three month periods ended June 30, 1996 and 1995
were 35.9 percent and 32.8 percent, respectively, while the effective tax rates
for the six month periods ended June 30, 1996 and 1995 were 34.2 percent and
31.0 percent, respectively. The increase in the overall effective tax rate in
1996 reflects a lower percent of non-taxable security income due to maturities
of these securities which have not been fully replaced by purchases during 1996.
The purchases of these securities are dependent upon their availability in the
marketplace and the yield of such securities on a tax equivalent basis, compared
to other securities of equivalent credit risks and maturity.
-23-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit XI - Statement re: Computation of Per Share Earnings
(b) Reports on Form 8-K. None were filed during the quarter ended June 30,
1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on August 12, 1996.
U.S.B. HOLDING CO., INC.
- ----------------------- --------------------------------
Thomas E. Hales Steven T. Sabatini
Chairman of the Board, Executive Vice President Finance,
President, Chief Financial Officer and
Chief Executive Officer Assistant Secretary
and Director (Principal Financial and
Accounting Officer)
-24-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit XI - Statement re: Computation of Per Share Earnings
(b) Reports on Form 8-K. None were filed during the quarter ended June 30,
1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on August 12, 1996.
U.S.B. HOLDING CO., INC.
/s/ Thomas E. Hales /s/ Steven T. Sabatini
- ----------------------- --------------------------------
Thomas E. Hales Steven T. Sabatini
Chairman of the Board, Executive Vice President Finance,
President, Chief Financial Officer and
Chief Executive Officer Assistant Secretary
and Director (Principal Financial and
Accounting Officer)
-25-
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------
Three Months Six Months
Ended Ended
--------- ---------
June 30, 1996
-------------
Weighted average number of common
shares outstanding 3,083,639 3,080,098
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options 164,153 161,670
--------- ---------
Weighted average common and common
equivalent shares outstanding 3,247,792 3,241,768
========= =========
Net Income $ 2,125 $ 4,375
Less: Preferred stock dividend requirements 76 155
--------- ---------
Net income available to common shareholders $ 2,049 $ 4,220
========= =========
Net Income Per Common and Common Equivalent $ 0.63 $ 1.30
Share ========= =========
-26-
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