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 September 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 NOVEMBER 3, 1996
----- -------------------------------
Common stock, par value 3,085,609
$5 per share
<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
SEPTEMBER 30, 1996 (UNAUDITED) AND
DECEMBER 31, 1995 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) 4
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION AND SIGNATURES 22
- i -
<PAGE>
PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CONDITION
September 30, December 31,
1996 1995
Unaudited
------------ ------------
(000's, Except Share Data)
ASSETS
Cash and due from banks $ 22,872 $ 23,469
Federal funds sold 13,800 13,800
-------- --------
Cash and cash equivalents 36,672 37,269
Interest bearing deposits in other banks 99 2,069
Securities:
Available for sale (at fair value) 173,471 170,889
Held to maturity (fair value $83,474
in 1996 and $62,684 in 1995) 81,936 60,266
Loans held for sale 60 394
Loans, net of allowance for loan losses of
$5,224 in 1996 and $3,904 in 1995 486,220 387,043
Premises and equipment, net 10,446 10,088
Accrued interest receivable 6,169 5,288
Other real estate owned (OREO) 699 939
Other assets 6,952 4,538
-------- --------
TOTAL ASSETS $802,724 $678,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 96,038 $ 82,363
Interest bearing deposits:
Money Market 53,128 55,672
Savings 213,156 182,567
NOW 40,627 38,111
Time 301,643 251,922
-------- --------
Total deposits 704,592 610,635
Accrued interest payable 1,815 1,769
Accrued expenses and other liabilities 2,219 5,046
Securities sold under agreements to repurchase 20,020 --
Federal Home Loan Bank advances 20,534 10,000
-------- --------
Total liabilities 749,180 627,450
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, no par value; authorized
shares 100,000; outstanding shares:
32,500 in 1996 and 37,500 in 1995 3,250 3,750
Common stock, $5 par value; 7,000,000
shares authorized and issued shares of
3,163,173 in 1996 and 2,880,397 in 1995 15,816 14,402
Additional paid-in capital 26,478 19,046
Retained earnings 10,361 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 (1,395) 1,138
-------- --------
Total stockholders' equity 53,544 51,333
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $802,724 $678,783
======== ========
See notes to consolidated financial statements.
1
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
September 30, September 30,
1996 1995
------------ ------------
(000's, Except Share Data)
INTEREST INCOME:
Interest and fees on loans $ 10,497 $ 8,480
Interest on federal funds sold 103 147
Interest and dividends on securities:
Mortgage-backed securities 1,718 2,140
U.S. Treasury and Government 1,463 764
Obligations of states and political subdivisions 822 826
Corporate and other 100 306
Interest on deposits in other banks 1 38
Dividends on Federal Home Loan Bank stock 47 38
-------- --------
Total interest income 14,751 12,739
-------- --------
INTEREST EXPENSE:
Interest on deposits 6,551 6,011
Interest on borrowings 554 247
-------- --------
Total interest expense 7,105 6,258
-------- --------
NET INTEREST INCOME 7,646 6,481
Provision for loan losses 600 275
-------- --------
Net interest income after provision for loan losses 7,046 6,206
-------- --------
NON-INTEREST INCOME:
Gain on securities transactions - net -- 140
Gain on loans sold 10 --
Service charges and fees 593 653
Other income 251 247
-------- --------
Total non-interest income 854 1,040
-------- --------
NON-INTEREST EXPENSES:
Salaries and employee benefits 2,610 2,271
Occupancy and equipment expense 837 851
Advertising and business development 273 219
Professional fees 260 217
Communications 145 143
Stationery and printing 92 95
FDIC insurance 1 (1)
Other expenses 351 342
-------- --------
Total non-interest expenses 4,569 4,137
-------- --------
Income before income taxes 3,331 3,109
Provision for income taxes 1,156 1,034
-------- --------
NET INCOME $ 2,175 $ 2,075
======== ========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .65 $ .63
======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,248,247 3,176,188
======== ========
See notes to consolidated financial statements.
2
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended
September 30, September 30,
1996 1995
------------ -------------
(000's, Except Share Data)
INTEREST INCOME:
Interest and fees on loans $ 29,424 $ 24,327
Interest on federal funds sold 490 601
Interest and dividends on securities:
Mortgage-backed securities 5,194 5,720
U.S. Treasury and Government 3,540 2,077
Obligations of states and political subdivisions 2,373 2,575
Corporate and other 470 922
Interest on deposits in other banks 37 104
Dividends on Federal Home Loan Bank stock 115 119
--------- ---------
Total interest income 41,643 36,445
--------- ---------
INTEREST EXPENSE:
Interest on deposits 18,885 17,172
Interest on borrowings 1,031 707
--------- ---------
Total interest expense 19,916 17,879
--------- ---------
NET INTEREST INCOME 21,727 18,566
Provision for loan losses 1,675 700
--------- ---------
Net interest income after provision for loan losses 20,052 17,866
--------- ---------
NON-INTEREST INCOME:
Gain on securities transactions - net 592 124
(Loss) gain on loans sold and held for sale (68) 14
Service charges and fees 1,807 1,950
Other income 731 735
--------- ---------
Total non-interest income 3,062 2,823
--------- ---------
NON-INTEREST EXPENSES:
Salaries and employee benefits 7,462 6,508
Occupancy and equipment expense 2,514 2,428
Advertising and business development 711 652
Professional fees 753 688
Communications 454 426
Stationery and printing 284 243
FDIC insurance 2 606
Other expenses 947 1,389
--------- ---------
Total non-interest expenses 13,127 12,940
--------- ---------
Income before income taxes 9,987 7,749
Provision for income taxes 3,437 2,474
--------- ---------
NET INCOME $ 6,550 $ 5,275
========= =========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ 1.95 $ 1.61
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,242,234 3,131,038
========== ==========
See notes to consolidated financial statements.
3
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30, September 30,
1996 1995
------------- -------------
(000's)
OPERATING ACTIVITIES:
Net income $ 6,550 $ 5,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,675 700
Depreciation and amortization 975 1,113
Amortization/accretion of premiums/discounts on
securities - net 187 91
Gain on securities transactions - net (592) (124)
Loss (gain) on loans sold and held for sale - net 68 (14)
Origination of loans held for sale (1,628) (1,862)
Proceeds from loans sold -- 2,674
Increase in accrued interest receivable (881) (969)
Other - net (2,666) 453
-------- -------
Net cash provided by operating activities 3,688 7,337
-------- -------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 47,113 43,569
Proceeds from principal paydowns and maturities
of securities available for sale 13,619 16,290
Proceeds from maturities of securities held
to maturity 5,515 18,067
Purchases of securities available for sale (67,104) (97,044)
Purchases of securities held to maturity (27,378) (2,401)
Net decrease (increase) in interest bearing deposits
in other banks 1,970 (883)
Loans originated, net of principal collections (99,739) (35,708)
Loans purchased -- (372)
Purchases of premises and equipment - net (1,316) (1,091)
Purchases of Federal Home Loan Bank stock (1,016) --
Proceeds from sales of OREO 1,346 652
-------- -------
Net cash used for investing activities (126,990) (58,921)
-------- -------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market, and savings accounts 44,236 29,541
Increase in time deposits, net of withdrawals
and maturities 49,721 28,672
Net decrease in federal funds purchased and
Federal Home Loan advances - short-term -- (7,400)
Proceeds from Federal Home Loan Bank
advances - long-term 10,797 5,000
Repayment of Federal Home Loan Bank
advances - long-term (263) --
Proceeds from securities sold under agreements
to repurchase 20,020 --
Redemption of long-term debt qualifying as
regulatory capital -- (1,800)
Cash dividends paid (1,571) (1,141)
Redemption of preferred stock (500) --
Proceeds from issuance of common stock 15 1,610
Proceeds from issuance of treasury stock 250 --
-------- -------
Net cash provided by financing activities 122,705 54,482
-------- -------
-Continued-
4
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
Nine Months Ended
September 30, September 30,
1996 1995
------------ -------------
(000's)
(Decrease) Increase in Cash and Cash Equivalents (597) 2,898
Cash and Cash Equivalents, Beginning of Period 37,269 24,465
-------- --------
Cash and Cash Equivalents, End of Period $ 36,672 $ 27,363
======== ========
Supplemental Disclosures:
Interest paid $ 19,870 $ 17,150
-------- --------
Income tax payments $ 5,755 $ 2,465
-------- --------
Transfer of assets to OREO $ 781 $ 1,199
-------- --------
Transfer of loans held for sale to loans held to
maturity at lower of cost or fair value $ 1,962 $ --
-------- --------
Change in unrealized gain/loss on securities
available for sale - net of tax $ (2,533) $ 2,654
-------- --------
See notes to consolidated financial statements.
5
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 6,550
Cash dividends:
Common
($.44 per share) (1,345)
Preferred (226)
Redemption of
preferred stock (500)
Common stock issued:
Incentive stock options
exercised ($8.46 -
$10.75 per share) 2,864 14 13
10% stock dividend 279,912 1,400 7,278 (8,690)
Issuance of treasury
stock 8,752 141 109
Change in unrealized
gain (loss) on
available for sale
securities, net of tax (2,533)
--------- --------- --------- --------- --------- --------- ---------
Balance at
September 30, 1996 $ 3,250 3,085,609 $ 15,816 $ 26,478 $ 10,361 $ (966) $ (1,395)
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
6
<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 September 30, 1996, the results of operations for the
three and nine month periods ended September 30, 1996 and 1995, cash flows
for the nine month periods then ended, and changes in stockholders' equity
for the nine months ended September 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 loan receivables. In connection with the determination of
the allowance for loan losses and other real estate owned, management
obtains independent appraisals for significant properties, where
applicable.
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 incurs
7
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
4. Accounting for Stock-Based Compensation (Cont'd)
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 nine months ended September 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 within its scope 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 of the allowance for loan losses are made based on
payment trends and prior loss experience and the composition of credit risk
inherent in
8
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
6. Accounting for Impairment of a Loan (Cont'd)
these loan types. The impact of adopting these Statements did not have a
material effect on the Consolidated Financial Statements of the Company.
At September 30, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 approximated $8.0 million. Impaired loans
aggregating $7.1 million were in nonaccrual status. Restructured loans in
the amount of $878,00 that are considered to be impaired due to a reduction
in the contractual interest rate are on accrual status since the collateral
securing the loan is sufficient to protect the contractual principal and
interest of the restructured loans. These loans have been performing for a
reasonable period of time. Interest accrued on these loans not yet
collected as of September 30, 1996 approximated $6,000.
A related allowance for loan losses determined in accordance with SFAS No.
114 is allocated to each impaired loan, as applicable. The total allowance
for credit losses related to impaired loans was $1,345,000 as of September
30, 1996. The average recorded investment in impaired loans for the three
and nine month periods ended September 30, 1996 was approximately $8.0
million and $7.2 million, respectively. For the three and nine month
periods ended September 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
9
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
7. Securities and Loans Held for Sale (Cont'd)
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.
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
September 30, 1996, the effect of SFAS No. 115 resulted in a reduction of
securities available for sale of $2,417,000 which, after the applicable tax
effect, resulted in a reduction to stockholders' equity of $1,395,000,
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 September 30, 1996 and December 31,
1995, follows:
<TABLE>
<CAPTION>
===============================================================================================================
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1996: Cost Gains Losses Value
===============================================================================================================
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and Government
agencies $ 73,566 $ -- $ 1,100 $ 72,466
Obligations of states and
political subdivisions 3,066 26 -- 3,092
Mortgage-backed securities 95,273 400 1,862 93,811
Corporate bonds 3,894 119 -- 4,013
Other 89 -- -- 89
- ---------------------------------------------------------------------------------------------------------------
Total available for sale securities $175,888 $ 545 $ 2,962 $173,471
- ---------------------------------------------------------------------------------------------------------------
Held to Maturity:
Obligations of states and
political subdivisions $ 62,141 $ 1,802 $ 82 $ 63,861
Mortgage-backed securities 9,797 -- 156 9,641
U.S. Government agencies 9,998 -- 26 9,972
- ---------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 81,936 $ 1,802 $ 264 $ 83,474
===============================================================================================================
</TABLE>
10
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
7. Securities and Loans Held for Sale (Cont'd)
<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
===============================================================================================================
</TABLE>
At September 30, 1996 and December 31, 1995, residential fixed rate real
estate loans held for sale had a cost of $60,000 and $394,000 and fair
value of $61,000 and $393,000, respectively. There were no commitments of
loans available for sale which had not yet closed at September 30, 1996.
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.
During the third quarter of 1996, the Bank transferred additional
residential fixed rate real estate loans with an aggregate cost of $618,000
to its held to maturity portfolio, which did not result in a write down as
the fair value exceeded the cost of the loans at the time of the transfer.
8. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
At September 30, 1996, the Bank had outstanding term advances with the
Federal Home Loan Bank of New York ("FHLB") in the amount of $20,534,000
with maturities and interest rates as follows:
11
<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)
Date of Outstanding Interest
Borrowing Advance Amount Rate Maturity Date
---------------------------------------------------------------------------
November 14, 1994 $5,000,000 5.70% November 15,1999
June 21, 1995 5,000,000 6.20 June 22, 1998
February 15, 1996 3,647,000 5.41 March 1, 2001
April 24, 1996 4,000,000 6.49 April 26, 1999
April 24, 1996 2,887,000 6.72 May 1, 2003
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.
As of September 30, 1996, the Bank is party to two repurchase agreements.
These agreements represent funds borrowed in the amount of $20.0 million on
a short-term basis through the sale of securities to a counterparty under
agreements to repurchase the same securities on October 28, 1996 ($9.8
million) and December 23, 1996 ($10.2 million). The transaction proceeds
are recorded as "Securities sold under agreements to repurchase" and the
underlying securities remain in the Bank's securities portfolio. The
agreements are secured by U.S. Government agency and mortgage-backed
securities with an amortized cost of $20.5 million and fair value of $20.3
million at September 30, 1996. Interest for the repurchase agreements
adjusts monthly to the one month and three month LIBOR rates, which were
5.38 percent and 5.50 percent at September 30, 1996 for the repurchase
agreements maturing on October 28, 1996 and December 23, 1996,
respectively.
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 nine month periods ended September 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 totaling $71,000 and $79,000 for each three
month period and $226,000 and $236,000 for each nine month period ended
September 30, 1996 and 1995, respectively. The Company redeemed $250,000 of
preferred stock on both May 15, 1996 and August 15, 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.
12
<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 DRIP was temporarily suspended for dividends paid after January 1,
1996. As of September 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.
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 September 30, 1996, the Bank could pay
dividends to the Company of $15.6 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 nine month
periods ended September 30, 1995, adjusted for the common stock dividend
distributed in 1996). Outstanding stock options granted that are dilutive
and currently exercisable under the Company's stock option plans are
considered to be 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 September 30, 1996, the Bank was committed under an employment agreement
with a key officer, director and shareholder requiring annual salary and
other payments of $400,000, increasing annually by $30,000 during the term
of the contract, annual stock option grants of 24,200 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.
13
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
9. Commitments and Contingencies (Cont'd)
In the normal course of business, various commitments to extend credit are
made which are not reflected in the accompanying Consolidated Financial
Statements. At September 30, 1996, formal credit line and loan commitments
which are primarily loans collateralized by real estate approximated $102.8
million, and outstanding letters of credit totaled $14.9 million. Such
amounts represent the maximum risk of loss on these commitments.
During the nine month period ended September 30, 1995, the Bank sold in the
secondary market for cash, mortgage loans with net proceeds totaling $2.7
million. There were no such sales during the nine months ended September
30, 1996.
At September 30, 1996, the principal balance of the loans sold and
exchanged with the Federal Home Loan Mortgage Corporation which remain
uncollected approximated $84.8 million. The Bank is committed to service
these loans.
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 September 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.
14
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
FINANCIAL CONDITION
At September 30, 1996, the Company had total assets of $802.7 million, an
increase of 18.3 percent, or $123.9 million from December 31, 1995. Total
deposits increased $94.0 million for the nine month period ended September 30,
1996, to $704.6 million, which represented a 15.4 percent increase from December
31, 1995. Time deposits accounted for the greatest component of deposit
increases, $49.7 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 $34.7 million as part of the Bank's overall leveraging
strategy. IRAs/Keoghs increased by $11.1 million due to promotions of this
product during 1996. Other time deposits under $100,000 increased by $11.9
million due primarily to time deposit promotions associated with the opening of
the Bank's seventeenth and eighteenth branches in Stony Point (January 1996) and
Nanuet (September 1996), respectively, and relocation of the Bank's Orangeburg
branch (September 1996). Retail time deposits over $100,000 decreased by $8.1
million during the nine month period ended September 30, 1996. Such deposits
included a temporary deposit of approximately $8.0 million which matured in July
1996. Savings deposits increased by $30.6 million, as the Company introduced and
promoted two new products, the "Golden Statement" account, which replaced the
Liquid Gold account, and the Golden Passbook account, accounting for the
majority of the increase in the savings deposit category. Both of these accounts
provide attractive yields for high balance accounts. NOW accounts and demand
deposits increased by $2.5 million and $13.7 million, respectively, while money
market deposits decreased by $2.5 million as customers generally switched money
market account balances to higher yielding deposit products.
The securities portfolio of $255.4 million and $231.2 million at September 30,
1996 and December 31, 1995, respectively, consists of securities held to
maturity at amortized cost of $81.9 million and $60.3 million, and securities
available for sale at fair value totaling $173.5 million and $170.9 million,
respectively.
Obligations of U.S. Treasury and other Government agencies increased $35.9
million during the nine months ended September 30, 1996 due primarily to
purchases of $72.6 million, net of sales that occurred during the first quarter
of $32.0 million, maturities and securities called of $3.0 million, and a
decline in fair value of available for sale securities of $1.7 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. Mortgage-backed securities decreased $6.8 million as principal
amortization and prepayments of $8.6 million, sales of $10.0 million, a decline
in fair value of available for sale securities of $2.5 million, offset purchases
of $14.3 million. The security transactions that took place for the nine months
ended September 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 $1.9
million during the first nine months of 1996, as the Bank purchased $7.6 million
of such securities during the second and third quarters, which offset maturities
that occurred throughout the first nine months 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,
15
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
FINANCIAL CONDITION (Cont'd)
compared to other securities of equivalent credit risk and 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 nine months ended September 30, 1996, such securities
decreased by $6.8 million, principally due to sales of $4.5 million and
maturities of such securities 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 September 30, 1996, net loans were $486.3 million, a net increase of $98.8
million or 25.5 percent over December 31, 1995 due to net increases in all major
loan categories, principally commercial and construction mortgages. Outstanding
loan balances increased $49.0 million in commercial mortgages, $33.1 million in
construction and real estate secured loans, $12.1 million in residential
mortgages and $5.2 million in credit card balances outstanding. During the third
quarter 1996, the Bank purchased a credit card portfolio with outstanding
balances of $1.8 million to increase its volume of business and market share.
The Bank had approximately $102.8 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, collateralized by lease
receivables, to Bennett Funding Group, a lease finance company, which filed for
bankruptcy protection during the first quarter of 1996. Collection of the Bank's
loan continues to be delayed by the bankruptcy proceedings. The Bank has not yet
determined the extent of losses, if any, that 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 September 30, 1996.
The Bank's allowance for loan losses increased $1.3 million or 33.8 percent to
$5.2 million at September 30, 1996, from $3.9 million at December 31, 1995. The
allowance for loan losses represented 1.06 percent of gross loans outstanding at
September 30, 1996, compared to one percent at December 31, 1995. The allowance
reflects a provision of $1,675,000 and net charge-offs of $355,000 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, the allowance is considered adequate to
absorb potential losses inherent in the loan portfolio.
During the nine months ended September 30, 1996, the Bank increased the amount
of outstanding advances with the Federal Home Loan Bank of New York by $10.5
million. In addition, in the second and third quarters, the Bank entered into
repurchase agreements aggregating of $20.0 million. These agreements represent
funds borrowed on a short-term basis
16
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
FINANCIAL CONDITION (Cont'd)
through the sale of securities to a counterparty under an agreement to
repurchase the same securities on October 28, 1996 ($9.8 million) and December
23, 1996 ($10.2 million). These transactions took place as part of the Bank's
overall leveraging strategy.
Stockholders' equity increased to $53.5 million at September 30, 1996, an
increase of $2.2 million from the December 31, 1995 balance of $51.3 million.
The increase partially results from net income of $6.6 million for the nine
month period ended September 30, 1996, which was offset by cash dividends on
preferred stock of $226,000 and common stock of $1,345,000. 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 nine month
period ended September 30, 1996, was to decrease stockholders' equity, net of
tax effect, by $2,533,000.
The Company's leverage ratio at September 30, 1996 was 7.04 percent, compared to
7.43 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 10.13 percent and 11.10 percent at September 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 nine month periods ended September 30, 1996,
increased $100,000 or 4.8 percent to $2.2 million and $1,275,000 or 24.2 percent
to $6.6 million, compared to the same periods in 1995, respectively. Net income
per common and common equivalent share increased to $.65 per common share and
$1.95 per common share in the quarter and nine months ended September 30, 1996
from $.63 per common share and $1.61 per common share recorded in the same
periods in 1995. The annualized return on average total assets increased to 1.19
percent for the nine months ended September 30, 1996 from 1.10 percent for the
nine months ended September 30, 1995. The overall increase in earnings for both
periods reflect higher net interest income resulting from increased volumes and
effective leveraging of the balance sheet, offset by a higher loan loss
provision, lower service fee income, and higher non-interest expenses to support
increased business, while the nine months ended September 30, 1996 was also
favorably impacted by a significant reduction in FDIC insurance. The nine month
period ended September 30, 1996 is also favorably impacted by higher gains on
sales of available for sale securities, while the third quarter of 1995 compared
to the third quarter 1996 was also favorably impacted by security gains. 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
17
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Net Interest Income (Cont'd)
component of the Company's consolidated earnings. For the three month period
ended September 30, 1996, net interest income increased 18.0 percent to $7.6
million from $6.5 million in the year earlier period. Net interest income
increased $3.2 million or 17.0 percent to $21.7 million for the nine months
ended September 30, 1996, compared to the nine month period ended September 30,
1995. Net interest income increased in both the three and nine month periods
ended September 30, 1996, due to volume increases of average earning assets,
partially offset by a decrease in the net interest spread. For the three and
nine months ended September 30, 1996, the interest spread (yield on earning
assets less cost of funds) was 4.11 percent and 4.10 percent, respectively,
compared to 4.26 percent and 4.15 percent for the year earlier periods. Yields
on interest earning assets decreased during the three and nine month periods
ended September 30, 1996, while the cost of funds decreased slightly for both
the three and nine months ended September 30, 1996, compared to the same periods
in 1995. The cost of funds decreased at a lesser rate compared to the decrease
in yield on earning assets, resulting in the negative impact on the net interest
spread. The decreases in 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 branch opening promotions and an IRA/Keogh
promotion during 1996. In addition, new savings products, "Golden Statement
Account" and "Golden Passbook," were introduced during the first and third
quarters of 1996, respectively. The new products, which have tiered rates, pay
an interest rate which is administratively set of up to 5.00 percent and 5.04
percent for the highest tiers for Golden Statement ($100,000) and Golden
Passbook ($50,000), respectively. These products are similar to the Liquid Gold
product which was discontinued for new deposits in the fourth quarter of 1995.
Liquid Gold also pays a tiered rate which is set at the Federal Reserve discount
rate (currently 5 percent) for balances of $25,000 or more. Increased borrowings
to fund growth and effect leverage strategies also resulted 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 $325,000 to $600,000 for the three month
period ended September 30, 1996, compared to the same period in 1995 and
$975,000 to $1,675,000 for the nine months ended September 30, 1996 compared to
the year earlier period. Net charge-offs in the first nine months of 1996
totaled $355,000 relating primarily to real estate loans, compared to $663,000
of net charge-offs (principally real estate and commercial loans) during the
same period in 1995. Nonaccrual loans were $7.6 million at September 30, 1996,
compared to $4.0 million at December 31, 1995, and $6.1 million at September 30,
1995. The Bank has approximately $3.3 million of loans, collateralized 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 the
extent of losses, if any, that 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.
18
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Provision for Loan Losses (Cont'd)
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 September 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.
Non-Interest Income
Non-interest income for the three months ended September 30, 1996 decreased to
$854,000 from $1,040,000 in the same period of 1995. For the nine months ended
September 30, 1996, non-interest income was $3,062,000, which represented a 8.5
percent increase, or $239,000, over the same period in 1995. The third quarter
decrease is related to higher gains on securities transactions ($140,000) in the
three month period ended September 1995, and lower service charges and fees
($60,000). The increase in non-interest income for the nine months ended
September 30, 1996, compared to 1995, resulted from an increase in the gains on
securities transactions ($468,000), which offset decreases in gains/losses on
loans held for sale ($82,000), and service charges income ($143,000). The
relationship of non- interest income to non-interest expenses was 18.7 percent
and 23.3 percent for the three and nine months periods ended September 30, 1996
compared to 25.1 percent and 21.8 percent for the three and nine month periods
ended September 30, 1995, respectively.
The net gain on securities transactions of $592,000 for the nine month period
ended September 30, 1996, was a result of activity that occurred in the
securities portfolio, while maintaining the overall yield and quality of the
portfolio. During the first half of 1996, the Bank sold approximately $46.5
million of securities, principally callable U.S. Government agencies ($12.0
million), U.S. Treasuries ($20.0 million), mortgage-backed securities ($10.0
million), and corporate bonds ($4.5 million). 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
gain on securities transactions of $124,000 for the nine months ended September
30, 1995, was a result of sales of mortgage-backed securities during the third
quarter to increase yield and shorten maturity, and of callable U.S. Government
agencies which likely would have been called during the remainder of 1995 and
January, 1996.
The net loss of $68,000 during the nine months ended September 30, 1996 for
loans held for sale principally resulted from the write-down of loans ($78,000)
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 nine months of 1995 of $14,000 was
principally due to the sale of $2.7 million of fixed rate residential mortgages.
19
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Non-Interest Income (Cont'd)
Service charges decreased $60,000 and $143,000 in the three and nine month
periods ended September 30, 1996, respectively, compared to the prior year.
Although there were more deposit accounts in 1996 compared to 1995, lower
insufficient funds charges and increased competition impacted the level of fees
charged.
Other income , which consists of credit card fees, loan servicing income, wire
transfer fees, safe deposit, and other fees, remained relatively flat for each
period, as growth in credit card revenue was offset by lower fees in other
categories.
Non-Interest Expenses
Non-interest expenses increased $432,000 to $4,569,000 and $187,000 to
$13,127,000 for the three and nine month periods ended September 30, 1996,
respectively, from the comparable periods in 1995. The primary reasons for these
increases result from an increase in salaries and other operating costs to
support growth offset by an employee settlement and higher branch charge-offs in
the nine month period ended September 30, 1995 and lower FDIC Insurance premium
for the nine months ended September 30, 1996. The following discusses each
component of non-interest expense.
Salaries and benefits are the largest component of non-interest expense.
Increases of $339,000 and $954,000 occurred during the three and nine month
periods ended September 30, 1996, respectively, compared to the previous year,
which represented increases of 14.9 percent and 14.7 percent, respectively.
Full-time equivalent employees of 221 at September 30, 1996 represented an
increase from 207 full-time equivalent employees at September 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 two new branches in 1996, and annual merit increases. These
increases were partially offset by the decrease in Royal personnel as Royal was
sold on December 31, 1995.
These changes also occurred 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 coverage, tuition
reimbursement, and training.
The changes in the other components of non-interest expenses for the three and
nine month periods ended September 30, 1996 compared to September 30, 1995, were
due to the following:
o Decrease of $14,000 (1.6%) and an increase of $86,000 (3.5%), respectively,
in occupancy and equipment expense were due principally to maintenance
expenses associated with the severe winter of 1996, an increase in
maintenance contracts relating to the Bank's branch and computer related
equipment, and additional rental expense associated with new branch
openings in 1996 offset by a decrease in expenses due to the sale of Royal
on December 31, 1995.
20
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Non-Interest Expenses (Cont'd)
o Increases of $54,000 (24.7%) and $59,000 (9.0%), respectively, in
advertising and business development. The increases reflect advertising and
promotion of new deposit products and new branches and increased business
development activities.
o Increases of $43,000 (19.8%) and $65,000 (9.5%), respectively, in
professional fees. The increases relate 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, foreclosures and other litigation.
o Increases of $2,000 (1.4%) and $28,000 (6.6%), 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 additions,
transfer of credit card operations from Maryland to New York, and upgrading
of data lines throughout the Bank.
o Decrease of $3,000 (3.2%) and increase of $41,000 (16.9%), respectively, in
stationery and printing. The overall increase occurred due to increased
loan and deposit volume, and growth of the credit card operation which
offset the decrease caused by the sale of Royal.
o Increase of $2,000 and decrease of $604,000 (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 a refund of the
third quarter premium in 1995, and a decrease in the annual FDIC premium
for the Bank to $2,000 annually.
o Increases of $9,000 (2.6%) and decreases of $442,000 (31.8%) in other
expenses. The decrease was due to higher 1995 second quarter expenses
resulting from a settlement with a former executive officer of the Company
and higher 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 September 30, 1996 and
1995 were 34.7 percent and 33.3 percent, respectively, while the effective tax
rates for the nine month periods ended September 30, 1996 and 1995 were 34.4
percent and 31.9 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, while total assets have increased significantly
during 1996. The purchases of tax-exempt 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.
21
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit XI - Statement re: Computation of Earnings Per Share
(b) Reports on Form 8-K. None were filed during the quarter ended
September 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 November 13, 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, President Executive Vice President Finance,
Chief Executive Officer and Director Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
22
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Three Months Nine Months
Ended Ended
September 30, 1996
---------------------------
(000's, Except Share Data)
Weighted average number of common shares outstanding 3,084,521 3,081,484
Assuming exercise of options reduced by the number of
shares which could have been purchased with the
proceeds from exercise of such options 163,766 160,750
---------- ----------
Weighted average common and common equivalent shares 3,248,287 3,242,234
---------- ----------
Net income $ 2,175 $ 6,550
Less: Preferred stock dividend requirements 71 226
---------- ----------
Net income available to common shareholders $ 2,104 $ 6,324
========== ==========
Net income per common and common equivalent share $ 0.65 $ 1.95
========== ==========
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