<PAGE>
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, 1997 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 4, 1997
----- -------------------------------
Common stock, par value 6,214,586
$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, 1997 (UNAUDITED) AND DECEMBER 31, 1996........... 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)..... 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)...... 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)...... 4
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED)........................... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)......... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 19
PART II. OTHER INFORMATION AND SIGNATURES.............................. 25
-i-
<PAGE>
PART I--FINANCIAL INFORMATION
(UNAUDITED)
U.S.B. HOLDING CO., INC. SEPTEMBER 30, DECEMBER 31,
CONSOLIDATED STATEMENTS OF CONDITION 1997 1996
- ------------------------------------ ------------- ------------
(000'S, EXCEPT SHARE DATA)
ASSETS
Cash and due from banks......................... $ 31,471 $ 18,821
Federal funds sold.............................. 17,800 10,800
--------- ---------
Cash and cash equivalents....................... 49,271 29,621
Interest bearing deposits in other banks........ -- 99
Securities:
Available for sale (at fair value)............ 229,826 168,756
Held to maturity (fair value $125,356
in 1997 and $83,123 in 1996)................ 122,791 81,019
Loans held for sale............................. 89 274
Loans, net of allowance for loan losses
of $7,285 in 1997 and $5,742 in 1996.......... 538,045 497,495
Premises and equipment, net..................... 10,008 10,104
Accrued interest receivable..................... 8,695 5,820
Other real estate owned......................... 1,630 651
Federal Home Loan Bank stock.................... 10,054 4,238
Other assets.................................... 8,787 5,374
--------- ---------
TOTAL ASSETS.................................... $ 979,196 $ 803,451
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits................... $ 117,261 $ 97,251
Interest bearing deposits:
NOW........................................... 44,955 44,578
Money Market.................................. 45,532 56,284
Savings....................................... 246,547 217,111
Time.......................................... 343,804 267,056
--------- ---------
Total deposits.................................. 798,099 682,280
Accrued interest payable........................ 2,979 1,895
Accrued expenses and other liabilities.......... 3,981 2,718
Securities sold under agreements to repurchase.. 59,057 29,425
Federal Home Loan Bank advances................. 34,443 30,267
--------- ---------
Total liabilities............................... 898,559 746,585
Corporation-Obligated mandatory redeemable
capital securities of subsidiary trust........ 20,000 --
Minority interest-junior preferred stock
of consolidated subsidiary.................... 137 --
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, no par value; authorized
shares 100,000; outstanding shares: 32,500
in 1996..................................... -- 3,250
Common stock, $5 par value; 20,000,000 shares
authorized; issued shares of 6,337,100
in 1997 and 6,326,808 in 1996............... 31,686 31,634
Additional paid-in capital.................... 11,038 10,783
Retained earnings............................. 18,418 12,664
Treasury stock at cost, 132,522 shares in
1997 and 143,772 shares in 1996............. (896) (895)
Unrealized gain (loss) on available for sale
securities, net of tax...................... 254 (570)
--------- ---------
Total stockholders' equity...................... 60,500 56,866
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $ 979,196 $ 803,451
--------- ---------
--------- ---------
See notes to consolidated financial statements.
1
<PAGE>
THREE MONTHS ENDED
U.S.B. HOLDING CO., INC. SEPTEMBER 30, SEPTEMBER 30,
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) 1997 1996
- --------------------------------------------- ------------- -------------
(000'S, Except Share Data)
INTEREST INCOME:
Interest and fees on loans...................... $ 12,155 $ 10,497
Interest on federal funds sold.................. 105 103
Interest and dividends on securities:
Mortgage-backed securities.................... 2,552 1,718
U.S. Treasury and government.................. 2,620 1,463
Obligations of states and political
subdivisions................................ 828 822
Corporate and other........................... 7 100
Interest on deposits in banks................. -- 1
Dividends on Federal Home Loan Bank stock....... 166 47
----------- -----------
Total interest income........................... 18,433 14,751
----------- -----------
INTEREST EXPENSE:
Interest on deposits............................ 7,936 6,551
Interest on borrowings.......................... 1,466 554
Interest on Corporation--Obligated mandatory
redeemable capital securities of
subsidiary trust.............................. 499 --
----------- -----------
Total interest expense.......................... 9,901 7,105
----------- -----------
NET INTEREST INCOME............................. 8,532 7,646
Provision for loan losses....................... 510 600
----------- -----------
Net interest income after provision
for loan losses............................... 8,022 7,046
----------- -----------
NON-INTEREST INCOME:
Gain on securities transactions--net............ 236 --
Gain on loans held for sale..................... 8 10
Service charges and fees........................ 550 593
Other income.................................... 326 251
----------- -----------
Total non-interest income....................... 1,120 854
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits.................. 2,875 2,610
Occupancy and equipment expense................. 1,008 837
Advertising and business development............ 269 273
Professional fees............................... 317 260
Communications.................................. 173 145
Stationery and printing......................... 96 92
FDIC insurance.................................. 22 1
Other expenses.................................. 615 351
----------- -----------
Total non-interest expense...................... 5,375 4,569
----------- -----------
Income before income taxes...................... 3,767 3,331
Provision for income taxes...................... 1,075 1,156
----------- -----------
NET INCOME...................................... $ 2,692 $ 2,175
----------- -----------
----------- -----------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE.............................. $ .40 $ .32
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................ 6,777,768 6,496,494
----------- -----------
See notes to consolidated financial statements.
2
<PAGE>
NINE MONTHS ENDED
U.S.B. HOLDING CO., INC. SEPTEMBER 30, SEPTEMBER 30,
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) 1997 1996
- --------------------------------------------- ------------- -------------
(000'S, EXCEPT SHARE DATA)
INTEREST INCOME:
Interest and fees on loans...................... $ 35,430 $ 29,424
Interest on federal funds sold.................. 446 490
Interest and dividends on securities:
Mortgage-backed securities.................... 6,563 5,194
U.S. Treasury and government.................. 6,924 3,540
Obligations of states and political
subdivisions.................................. 2,413 2,373
Corporate and other........................... 36 470
Interest on deposits in other banks............. -- 37
Dividends on Federal Home Loan Bank stock....... 341 115
----------- -----------
Total interest income........................... 52,153 41,643
----------- -----------
----------- -----------
INTEREST EXPENSE:
Interest on deposits............................ 22,219 18,885
Interest on borrowings.......................... 3,656 1,031
Interest on Corporation--Obligated mandatory
redeemable capital securities of
subsidiary trust.............................. 1,275 --
----------- -----------
Total interest expense.......................... 27,150 19,916
----------- -----------
----------- -----------
NET INTEREST INCOME............................. 25,003 21,727
Provision for loan losses....................... 1,970 1,675
----------- -----------
Net interest income after provision for loan
losses........................................ 23,033 20,052
----------- -----------
----------- -----------
NON-INTEREST INCOME:
Gain on securities transactions--net............ 740 592
Gain (loss) on loans held for sale.............. 17 (68)
Service charges and fees........................ 1,685 1,807
Other income.................................... 933 731
----------- -----------
Total non-interest income....................... 3,375 3,062
----------- -----------
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits.................. 8,356 7,462
Occupancy and equipment expense................. 2,920 2,514
Advertising and business development............ 725 711
Professional fees............................... 1,004 753
Communications.................................. 542 454
Stationery and printing......................... 331 284
FDIC insurance.................................. 65 2
Other expenses.................................. 1,755 947
----------- -----------
Total non-interest expense...................... 15,698 13,127
----------- -----------
----------- -----------
Income before income taxes...................... 10,710 9,987
Provision for income taxes...................... 3,186 3,437
----------- -----------
NET INCOME...................................... $ 7,524 $ 6,550
----------- -----------
----------- -----------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE.............................. $ 1.12 $ .98
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................ 6,702,701 6,484,468
----------- -----------
----------- -----------
See notes to consolidated financial statements.
3
<PAGE>
NINE MONTHS ENDED
U.S.B. HOLDING CO., INC. SEPTEMBER 30, SEPTEMBER 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 1997 1996
- ------------------------------------------------- ------------- -------------
(000'S)
OPERATING ACTIVITIES:
Net income...................................... $ 7,524 $ 6,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses..................... 1,970 1,675
Depreciation and amortization................. 1,111 975
Amortization/accretion of premiums/discounts
on securities--net.......................... 196 187
Deferred taxes................................ (1,082) (901)
Gain on securities transactions--net.......... (740) (592)
(Gain) loss on loans held for sale--net....... (17) 68
Origination of loans held for sale.............. (914) (1,628)
Proceeds from sales of loans held for sale...... 1,040 --
Increase in accrued interest receivable......... (2,875) (881)
Other--net...................................... (24) (1,765)
----------- -----------
Net cash provided by operating activities....... 6,189 3,688
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale...................................... 72,346 47,113
Proceeds from principal paydowns and maturities
of securities available for sale.............. 22,539 13,619
Proceeds from maturities of securities held
to maturity................................... 5,696 5,515
Purchases of securities available for sale...... (153,823) (67,104)
Purchases of securities held to maturity........ (47,629) (27,378)
Net decrease in interest bearing deposits
in other banks................................ 99 1,970
Loans originated, net of principal collections.. (44,200) (99,739)
Purchases of premises and equipment--net........ (1,003) (1,316)
Proceeds from sales of OREO..................... 1,390 1,346
Purchase of FHLB stock.......................... (5,816) (1,016)
----------- -----------
Net cash used for investing activities.......... (150,401) (126,990)
----------- -----------
----------- -----------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts........ 39,071 44,236
Increase in time deposits, net of withdrawals
and maturities................................ 76,748 49,721
Net increase in Federal Home Loan Bank
advances-short-term........................... 5,000 --
Proceeds from Federal Home Loan Bank
advances-long-term............................ -- 10,797
Repayment of Federal Home Loan Bank
advances-long-term............................ (824) (263)
Net increase in securities sold under
agreements to repurchase--short-term.......... 19,852 20,020
Proceeds from securities sold under
agreements to repurchase--long-term........... 9,780 --
Net proceeds from issuance of Corporation-
Obligated mandatory redeemable capital
securities of subsidiary trust................ 18,812 --
Redemption of preferred stock................... (3,250) (500)
Cash dividends paid............................. (1,770) (1,571)
Proceeds from sale of junior preferred stock
of consolidated subsidiary.................... 137 --
Proceeds from issuance of common stock.......... 41 15
Proceeds from sale of treasury stock............ 370 250
Purchase of treasury stock...................... (105) --
----------- -----------
Net cash provided by financing activities....... 163,862 122,705
----------- -----------
----------- -----------
-Continued-
4
<PAGE>
U.S.B. HOLDING CO., INC. NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED)(cont'd) 1997 1996
- ------------------------------------------------- ------------- -------------
(000'S)
Increase (Decrease) in Cash and Cash
Equivalents................................... $ 19,650 $ (597)
Cash and Cash Equivalents, Beginning
of Period..................................... 29,621 37,269
----------- -----------
----------- -----------
Cash and Cash Equivalents, End of Period........ $ 49,271 $ 36,672
----------- -----------
----------- -----------
Supplemental Disclosures:
Interest paid................................. $ 26,066 $ 19,870
----------- -----------
Income tax payments........................... $ 4,094 $ 5,755
----------- -----------
Transfer of assets to OREO.................... $ 1,756 $ 781
----------- -----------
Transfer of loans held for sale to loans held
to maturity at lower of cost or fair value.. $ 58 $ 1,962
----------- -----------
Change in unrealized gain/loss on securities
available for sale--net of tax.............. $ 824 $ (2,533)
----------- -----------
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, 1997
(000's, Except Share Data)
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED COMMON STOCK GAIN (LOSS)
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, 1997............... $ 3,250 6,183,036 $ 31,634 $ 10,783 $ 12,664 $ (895) $ (570)
Net income............................... 7,524
Cash dividends:
Common ($.28 per share)................ (1,736)
Preferred.............................. (34)
Common Stock Issued:
Incentive stock options exercised
($2.86 to $10.64 per share)............ 10,292 52 (11)
Purchase of treasury stock............... (5,000) (105)
Sale of treasury stock................... 16,250 266 104
Redemption of preferred stock............ (3,250)
Change in unrealized gain (loss) on
available for sale securities, net of
tax.................................... 824
----------- ----------- --------- ----------- --------- ----- -----
Balance at September 30, 1997............ $ -- 6,204,578 $ 31,686 $ 11,038 $ 18,418 $ (896) $ 254
----------- ----------- --------- ----------- --------- ----- -----
----------- ----------- --------- ----------- --------- ----- -----
</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, including its wholly-owned
subsidiary, U.S.B. Realty Corp. (the "Bank"), the Company's non-bank
subsidiary, Ad Con, Inc.
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, 1997, operations for the three and nine month
periods ended September 30, 1997 and 1996, cash flows for the nine month
periods then ended, and changes in stockholders' equity for the nine months
ended September 30, 1997. 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 1996 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. FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to September 30, 1997. The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements relating to
subsequent periods increasingly are subject to greater uncertainty because of
the increased likelihood of changes in underlying factors and assumptions.
7
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
Actual results could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements;
competitive pressures on loan and deposit product pricing; other actions of
competitors; changes in economic conditions; the extent and timing of actions
of the Federal Reserve Board; customer deposit disintermediation; changes in
customers' acceptance of the Company's products and services; and the extent
and timing of legislative and regulatory actions and reform.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changing or
unanticipated events or circumstances.
5. TRANSFERS AND SERVICING OF FINANCIAL ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," specifies accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and for
distinguishing whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, except for certain provisions (relating to
the accounting for secured borrowings and collateral and the accounting for
transfers and servicing of repurchase agreements, dollar rolls, securities
lending and similar transactions) which have been deferred until January 1,
1998 in accordance with SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." The adoption of these
standards currently effective did not have a material impact on the Company's
consolidated financial statements, nor is it anticipated that the adoption of
those provisions effective January 1, 1998 will have a material impact on the
Company's consolidated financial statements.
6. EARNINGS PER SHARE
On March 3, 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Earlier application is not permitted. Restatement of all prior-period
earnings per share ("EPS") data presented is required when SFAS No. 128 is
implemented.
SFAS No. 128 establishes standards for computing and presenting "Basic" and
"Diluted" EPS. SFAS No. 128 states that "Basic EPS" excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. "Diluted
EPS" reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that would then share in
8
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U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
- -----------------------------------------------------------------
the earnings of the entity. "Diluted EPS" is computed similarly to "Fully
Diluted EPS" pursuant to Accounting Principles Board ("APB") Opinion No. 15.
On a pro forma basis, the effect of this statement will be to report earnings
per share as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Earnings per share as currently reported
(per APB Opinion No. 15):
Primary earnings per share...................... $ 0.40 $ 0.32
Fully diluted earnings per share................ $ 0.40 $ 0.32
Pro forma earnings per share in accordance
with SFAS No. 128:
Basic earnings per share........................ $ 0.43 $ 0.34
Diluted earnings per share...................... $ 0.40 $ 0.32
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Earnings per share as currently reported
(per APB Opinion No. 15):
Primary earnings per share...................... $ 1.12 $ 0.98
Fully diluted earnings per share................ $ 1.12 $ 0.98
Pro forma earnings per share in accordance
with SFAS No. 128:
Basic earnings per share........................ $ 1.21 $ 1.03
Diluted earnings per share...................... $ 1.12 $ 0.98
</TABLE>
7. Reporting Comprehensive Income and Disclosures About Segments of an
Enterprise and Related Information
In September 1997, the Financial Accounting Standards Board issued two new
accounting standards, Statement of Financial Standards No. 130,'Reporting
Comprehensive Income" ("SFAS No. 130") and Statement of Financial Accounting
Standards No. 131,'Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131").
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as are the financial statements. Comprehensive income is defined
as "the change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period, except those
resulting from investments by owners and distributions to owners."
9
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
This statement is effective for financial statements for periods beginning
after December 15, 1997.
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosure about products and
services, geographic areas, and major customers. The statement requires that
a public business enterprise report financial and descriptive information
about its reportable operating segments. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The statement requires that public
business enterprises report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires that
information be reported about revenues derived from the enterprises' products
or services, or about the countries in which the enterprises earn revenues
and holds assets, and about major customers, regardless of whether that
information is used in making operating decisions. This statement is
effective for financial statements for periods beginning after December 15,
1997.
Both of these statements require disclosures that the Company must make in
its financial statements or notes thereto to the extent applicable.
Accordingly, implementation of these statements will not have any effect on
the Company's results of operation or financial condition. However,
additional information will be provided to users of these financial
statements as to the operations and financial condition of the Company.
8. LOANS
Nonaccrual loans were $7.6 million at September 30, 1997 and $8.1 million at
December 31, 1996. Restructured loans were $1.0 million and $2.1 million at
September 30, 1997 and December 31, 1996, respectively.
Substantially, all of the nonaccruing loans are collateralized by real
estate, except for certain loans made by the Bank to Bennett Funding Group,
which are collateralized by cash and lease receivables. At September 30,
1997, the Company has no commitments to lend additional funds to any
customers with nonaccrual or restructured loan balances.
At September 30, 1997, there are loans aggregating approximately $.5 million,
which are not on nonaccrual status, that were potential problem loans which
may result in their being placed on nonaccrual status in the future.
At September 30, 1997 and December 31, 1996, the recorded investment in loans
that are considered to be impaired under SFAS No. 114 "Accounting for
Impairment of a Loan" ("SFAS No. 114") approximated $6.6 million and $7.8
million, respectively, ($6.2 million and $7.2 million, respectively, of which
were in nonaccrual status). Included in these loan balances were loans to
Bennett Funding Group. Each impaired loan has a related allowance for loan
losses determined in accordance with SFAS No. 114.
10
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
Restructured loans in the amounts of $.4 million and $.6 million at September
30, 1997 and December 31, 1996, respectively, that are considered to be
impaired due to a reduction in the contractual interest rate are on accrual
status since the collateral securing the loans are 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, 1997 is immaterial. The
total allowance for loan losses related to impaired loans was $2.1 million
and $1.3 million as of September 30, 1997 and December 31, 1996,
respectively. The average recorded investment in impaired loans for the nine
months ended September 30, 1997 and year ended December 31, 1996 was
approximately $6.8 million and $7.4 million, respectively. For the nine
months ended September 30, 1997 and year ended December 31, 1996, interest
income recognized by the Company on impaired loans was not material.
The Bank has approximately $3.3 million of outstanding loans, collateralized
by cash and lease receivables, to Bennett Funding Group ("Bennett"), a lease
finance company, which filed for bankruptcy protection during the first
quarter of 1996. Collection of the Bank's loans 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 and a
specific reserve included in the allowance for loan losses of $1.6 million
has been established in accordance with SFAS No. 114 as of September 30, 1997.
9. 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.
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, 1997, the effect of SFAS No. 115 resulted in an increase of
securities available for sale of $441,000, representing the net unrealized
gain, which, after the applicable tax effect, resulted in an increase to
stockholders' equity of $254,000. At December 31, 1996, the effect of SFAS
No. 115 resulted in a decrease of securities available for sale of $987,000
which, after the applicable tax effect, resulted in a decrease to
stockholders' equity of $570,000.
11
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
A summary of the amortized cost and fair value of securities and related
gross unrealized gains and losses at September 30, 1997 and December 31,
1996, follows:
<TABLE>
<CAPTION>
(000'S)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1997: COST GAINS LOSSES VALUE
- ------------------------------------------------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and government agencies.................. $ 121,221 $ 801 $ 178 $ 121,844
Obligations of states and political subdivisions....... 1,166 49 -- 1,215
Mortgage-backed securities............................. 106,884 289 520 106,653
Other.................................................. 114 -- -- 114
---------- ----------- --------- ----------
Total securities available for sale.................... $ 229,385 $ 1,139 $ 698 $ 229,826
---------- ----------- --------- ----------
---------- ----------- --------- ----------
Held to Maturity:
Obligations of states and political subdivisions....... $ 62,993 $ 2,576 $ 3 $ 65,566
Mortgage-backed securities............................. 29,798 27 19 29,806
U.S. government agencies............................... 30,000 169 185 29,984
---------- ----------- --------- ----------
Total securities held to maturity...................... $ 122,791 $ 2,772 $ 207 $ 125,356
---------- ----------- --------- ----------
---------- ----------- --------- ----------
</TABLE>
12
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(000'S)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996: COST GAINS LOSSES VALUE
- ------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and government agencies.................. $ 77,037 $ 20 $ 1,022 $ 76,035
Obligations of states and political subdivisions....... 1,166 29 -- 1,195
Mortgage-backed securities............................. 90,543 725 741 90,527
Corporate bonds........................................ 897 2 -- 899
Other.................................................. 100 -- -- 100
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Total securities available for sale.................... $ 169,743 $ 776 $ 1,763 $ 168,756
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Held to Maturity:
U.S. Treasury and government agencies.................. $ 10,000 $ 3 $ -- $ 10,003
Obligations of states and political subdivisions....... 61,222 2,178 23 63,377
Mortgage-backed securities............................. 9,797 10 64 9,743
---------- ----------- ----------- ----------
Total securities held to maturity...................... $ 81,019 $ 2,191 $ 87 $ 83,123
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
At September 30, 1997 and December 31, 1996, there are fixed rate residential
real estate loans and commitments to originate such loans held for sale with
a cost of $303,000 and $416,000 and fair value of $306,000 and $415,000,
respectively. During the first quarter of 1996, the Bank transferred fixed
rate residential 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.
10. BORROWINGS, STOCKHOLDERS' EQUITY AND NET INCOME PER COMMON SHARE DATA
The Company utilizes short-term and long-term borrowings primarily to meet
the funding requirements for its asset growth and to manage its interest rate
risk. Short-term borrowings include securities sold under agreements to
repurchase, federal funds purchased, and short-term Federal Home Loan Bank of
New York ("FHLB") advances.
13
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
Short-term securities sold under agreements to repurchase generally mature
between one and 365 days. The Bank may borrow up to $50 million from two
primary investment firms under master security sale and repurchase
agreements. In addition, the Bank also has the ability to borrow under a
similar master security sale and repurchase agreement with the Federal Home
Loan Bank of New York. At September 30, 1997, the Bank had $49.3 million of
such borrowings under sale and repurchase agreements outstanding, with
original terms of approximately 30 days at interest rates of between 5.60
percent and 5.65 percent. The borrowings are collateralized by securities
with an aggregate amortized cost and market value of $50.7 million and $50.0
million, respectively.
The Bank also has a long-term borrowing of $9.8 million in securities sold
under agreements to repurchase with an original term of three years at an
interest rate of 6.08%. The borrowings are collateralized by securities with
an aggregate amortized cost and market value of $10.0 million and $9.9
million, respectively.
Federal funds purchased represent overnight funds. The Bank has federal funds
purchase lines available with three financial institutions for a total of
$11.0 million. At September 30, 1997 and December 31, 1996, the Bank had no
federal funds purchased balances outstanding.
Short-term FHLB advances are borrowings with original maturities of between
one and 365 days. At September 30, 1997 and December 31, 1996, the Bank had
short-term FHLB advances of $10.0 million and $5.0 million outstanding at
weighted-average interest rates of 5.66 percent and 5.63 percent,
respectively. Short-term advances and securities sold under agreements to
repurchase with the FHLB require the purchase of capital stock in the FHLB,
which is more fully described below.
Additional information with respect to short-term borrowings for the nine
months ended September 30, 1997 and 1996 is presented in the table below. The
increase in short-term borrowings is used to fund asset growth and implement
leverage strategies.
(000'S, EXCEPT PERCENTAGES)
1997 1996
--------- ---------
Balance as of September 30.................. $ 59,277 $ 20,020
Average balance outstanding................. 52,743 5,938
Weighted-average interest rate*
As of September 30........................ 5.70% 5.44%
Paid during period........................ 5.76% 5.53%
--------- ---------
--------- ---------
* The weighted-average interest rates for 1997 have been adjusted to reflect
the effect of an interest rate swap used to convert a variable rate
borrowing to a fixed rate.
As of September 30, 1997, long-term FHLB advances totaled $24.4 million,
compared with $25.3 million as of December 31, 1996. At September 30, 1997,
long-term FHLB advances
14
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
aggregating $19.0 million are single principal payments and are not repayable
prior to maturity without penalty. Long-term FHLB advances aggregating $5.4
million are amortizing advances having scheduled payments, but may not be
repaid in full prior to maturity without penalty.
The Bank has purchased 100,536 shares of capital stock in the FHLB at a cost
of $10,054,000, which is required in order to borrow under the short and
long-term advance programs and securities sold under agreements to repurchase
from the FHLB. The Bank may borrow up to an aggregate of 30% of total assets
or $293.8 million, excluding securities sold under agreements to repurchase,
upon the prerequisite purchase of additional shares of FHLB stock. Advances
made from the FHLB are collateralized with the FHLB stock purchased and
certain other assets of the Bank.
The following table is a summary of long-term debt which includes FHLB
advances and securities sold under agreements to repurchase, distributed
based upon remaining contractual maturity at September 30, 1997 and December
31, 1996.
(000'S, EXCEPT PERCENTAGES)
AFTER 1
WITHIN BUT WITHIN AFTER
1 YEAR 5 YEARS 5 YEARS TOTAL
-------- ---------- -------- ---------
As of September 30, 1997
Fixed rate advances................ $ 5,000 $ 26,691 $ 2,532 $ 34,223
Weighted-average interest rate..... 6.20% 6.12% 6.72% 6.18%
------- -------- ------- --------
As of December 31, 1996
Fixed rate advances................ $ -- $ 22,467 $ 2,800 $ 25,267
Weighted-average interest rate..... -- 6.14% 6.72% 6.20%
------- -------- ------- --------
The dividend rate on the Company's Series "A" preferred stock issued which
was to a single investor was determined quarterly and was subject to certain
minimum and maximum per annum dividend rates as specified in the agreement.
For the nine month period ended September 30, 1997 and 1996, the weighted
average dividend rates were 8.4 percent (the minimum rate) for each period.
Net income per common and common equivalent share reflects the preferred
stock dividends declared and accrued totaling $71,000 for the three month
period ended September 30, 1996, and $34,000 and $226,000 for the nine month
periods ended September 30, 1997 and 1996, respectively. The Company redeemed
the remaining outstanding amount of $3,250,000 of preferred stock on
February 14, 1997.
The Company sold 11,250 and 5,000 shares of its treasury stock in February
1997 and September 1997, respectively. These shares were purchased by the
Company's Employee Stock Ownership Plan (With Code Section 401(k) Provisions)
and the Bank's Supplemental Employees' Investment Plan at fair value. In
addition, the Company purchased 5,000 common shares at fair value for the
treasury in March 1997.
15
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(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 September 14,
1996. In addition, the Company issued a two-for-one stock split in the form
of a 100% stock dividend on December 30, 1996. The weighted average shares
outstanding and per share amounts for the three and nine months ended
September 30, 1996 have been adjusted to reflect the stock dividends
distributed in 1996, as applicable.
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, 1997, the Bank could pay dividends to the
Company of $18.7 million without having to obtain prior regulatory approval.
Net income per common and common equivalent 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 three and
nine months ended September 30, 1996, adjusted for the common stock dividend
and stock split distributed in 1996, as applicable). 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.
11. COMMITMENTS AND CONTINGENCIES
At September 30, 1997, the Bank was committed under an employment agreement
with a key officer, director and shareholder requiring annual salary and
other payments of $430,000, increasing annually by $30,000 during the term of
the contract, annual bonus payments equal to 6% of net income of the Company,
annual stock option grants of 48,400 shares issued at fair value (110 percent
of fair value for incentive stock options 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 September 30, 1997, formal credit line and loan commitments
which are primarily loans collateralized by real estate approximated $147.3
million, and outstanding letters of credit totaled $24.3 million. Such
amounts represent the maximum risk of loss on these commitments.
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
16
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
$3.0 million at September 30, 1997. 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
London InterBank Offered Rate ("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 an adjustable rate mortgage-backed
security in which the interest rate adjusts periodically to reflect changes
in a pre-selected index rate, subject to a cap. The Bank has also entered
into an interest rate swap contract, which effectively adjusts the short-term
interest rate on a security sold under agreement to repurchase borrowing to a
long-term fixed interest rate. Under the terms of the contract, the Bank is
required to pay a fixed interest rate payment equal to 6.16% of a notional
amount of $10.0 million, and receive a payment equal to three-month LIBOR.
The agreement expires on October 2, 1998. These agreements are subject to the
counterparty's ability to perform in accordance with the terms of the
agreement. The Bank's risk of loss on the interest rate cap is equal to the
unamortized premium paid to enter into this agreement, while the risk of loss
on the interest rate swap is the fair value amount to be paid to terminate
the contract, which was $37,000 (liability) at September 30, 1997.
12. CORPORATION-OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST
On February 5, 1997, the Company completed its issuance of
Corporation-Obligated mandatory redeemable capital securities of subsidiary
trust (the "Capital Securities") that raised $20 million of capital
(approximately $18.8 million net proceeds after payment of issuance costs).
The 9.58% Capital Securities, due February 1, 2027, were issued by Union
State Capital Trust I (the "Trust"), a Delaware business trust that was
formed by the Company solely to issue the Capital Securities and related
common stock and advance the proceeds to the Company by purchasing junior
subordinated debt of the Company. The Capital Securities may not be redeemed
except under limited circumstances until February 1, 2007, and thereafter at
a premium which reduces over a ten year period. Dividends are paid
semi-annually, beginning August 1, 1997.
The Capital Securities qualify as Tier 1 or core capital for the Company
under the Federal Reserve Board's risk-based capital guidelines. The proceeds
of the sale of the Capital Securities is available for general corporate
purposes. In February 1997, the Company made an additional capital
contribution of $14.5 million to Union State Bank and also redeemed the
Company's existing outstanding preferred stock in the amount of $3,250,000
with a portion of the proceeds of the Capital Securities. Payments on the
junior subordinated debt, which are in turn passed through the Trust to the
Capital Securities holders, will be serviced through existing liquidity and
cash flow sources (primarily Bank dividends) of the Company. The Company is
permitted to deduct payments on the Capital Securities under current federal
tax law.
As long as no default has occurred and is continuing, the Company has the
right under the junior subordinated indenture to defer the payment of
interest at any time or from time to time for a period not exceeding 10
consecutive semi-annual periods for any one extension (each such period is an
"Extension Period"); provided, however, that no Extension Period
17
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- -----------------------------------------------------------------
may extend beyond the stated maturity of the junior subordinated debt
securities. During any Extension Period, the Company may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to any of the Company's capital stock (which
includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank PARI PASSU with or junior in interest to
the junior subordinated debt securities or (iii) make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks PARI PASSU with or junior
in interest to the junior subordinated debt securities, in each case subject
to certain exceptions.
Pursuant to the terms of the documents governing the Company's junior
subordinated debt and the Capital Securities of the Trust, if the Company or
its affiliate is in default under such securities, the Company is prohibited
from repurchasing or making distributions, including dividends, on or with
respect to its common or preferred stock and from making payments on any debt
or guarantees which rank PARI PASSU or junior to such securities.
In addition, under the terms of the indenture governing its junior
subordinated debt, the Company may not merge or consolidate with, or sell
substantially all of its assets to any other corporation, person or entity
unless (a) the surviving corporation is a domestic corporation which
expressly assumes the Company's obligations with respect to the junior
subordinated debt and the Capital Securities and related documents, (b) there
is no, and the merger or other transaction would not cause, default under the
junior subordinated debt, and (c) certain other conditions are met.
18
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
- -----------------------------------------------
FINANCIAL CONDITION
At September 30, 1997, the Company had total assets of $979.2 million, an
increase of 21.9 percent, or $175.7 million from December 31, 1996.
Total deposits increased $115.8 million for the nine month period ended
September 30, 1997, to $798.1 million, which represented a 17.0 percent
increase from December 31, 1996. Time deposits increased $76.7 million
accounting for the greatest component of deposit increases. Retail time
deposits under $100,000 increased by $14.3 million due primarily to time
deposit promotions, and other time deposits over $100,000 decreased by $1.2
million during the nine month period ended September 30, 1997. 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 $61.9 million
as part of the Bank's overall leveraging strategy. IRA and Keogh time deposit
accounts increased by $1.7 million due to continued promotion of this
product. Savings deposits increased by $29.4 million, as the Company's
"Golden Statement" and "Liquid Gold" accounts, which provide attractive
yields for high balance accounts, attracted additional deposits. NOW accounts
and demand deposits increased by $.4 million and $20.0 million, respectively.
Money market deposits decreased by $10.8 million, as customers generally
switched money market account balances to higher yielding deposit products.
The securities portfolio of $352.6 million and $249.8 million at September
30, 1997 and December 31, 1996, respectively, consists of securities held to
maturity at amortized cost of $122.8 million and $81.0 million, and
securities available for sale at fair value totaling $229.8 million and
$168.8 million, respectively.
During the nine months ended September 30, 1997, U.S. Treasury and government
agency obligations increased $65.8 million due primarily to purchases of $3.0
million in U.S. Treasury Notes, $57.0 million in callable bonds, $28.2
million in indexed amortizing notes, and a net increase in the market value
of available for sale securities of $1.6 million, decreased by sales and
redemptions of securities totaling $24.0 million. The purchases were funded
by proceeds received from the Company's issuance of Capital Securities and
security sales and redemptions, as well as borrowings and increases in
municipal deposits. Mortgage-backed securities increased by $36.1 million
primarily due to purchases of $105.6 million which were offset by sales
totaling $66.6 million and principal amortizations of $2.6 million. The
mortgage-backed securities sold have low-yields or expectations to prepay in
the near-term and were also sold to take advantage of favorable market
conditions. Mortgage-backed securities purchased, totaling $77.9 million, are
floating-rate obligations whereby on each scheduled adjustment date, the
coupon rate resets to a spread or margin over the then current LIBOR. These
purchases were funded by security sales and by deposits or borrowings with
rates at or similar to LIBOR in terms of cost and adjustment frequency. In
addition, the Company has purchased $27.7 million of fixed-rate
mortgage-backed securities having weighted-average lives of less than ten
years. The Company's investment in obligations of states and political
subdivisions, or municipal securities, increased by $1.8 million during the
first nine months of 1997 as purchases of $7.6 million exceeded maturities of
$5.8 million. Municipal securities are considered core investments which are
high yielding on a tax equivalent basis and have diversified maturities.
Purchases of municipal securities are dependent upon their availability in
the marketplace and the
19
<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)
comparative tax equivalent yield of such securities to other securities of
comparable credit risk and maturity. The Company currently has no outstanding
holdings in corporate bonds as all such bonds aggregating $.9 million matured
during the quarter ended March 31, 1997. Medium-term corporate debt
securities which are rated investment grade by nationally recognized credit
rating organizations will continue to be evaluated for investment in the
future.
The Company continues to exercise its conservative approach to investing by
making high quality investments and controlling interest rate risk by
purchasing both fixed and floating rate securities and through the averaging
of investments in medium-term maturities.
At September 30, 1997, loans were $545.4 million, a net increase of $41.9
million or 8.3 percent over December 31, 1996. The primary increases of
outstanding loan balances were $17.2 million in commercial mortgages, $7.6
million in land acquisitions and construction loans, $11.6 million in real
estate secured loans, and $4.7 million in residential mortgages and home
equity loans. The Bank had approximately $147.3 million in formal credit
lines and loan commitments outstanding. Management considers its liquid
resources to be adequate to fund loans in the foreseeable future, principally
by utilizing excess funds temporarily placed in federal funds sold, increases
in deposits and borrowings, loan repayments and maturing securities.
The Bank has approximately $3.3 million of loans, collateralized by cash and
lease receivables, to Bennett Funding Group ("Bennett"), a lease finance
company, which filed for bankruptcy protection during the first quarter of
1996. Collection of these loans continue 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 and other real estate owned were slightly less
than one percent of total assets at September 30, 1997.
The Bank's allowance for loan losses increased $1.5 million or 26.9 percent
to $7.3 million at September 30, 1997, from $5.7 million at December 31,
1996. The allowance for loan losses represented 1.34 percent of gross loans
outstanding at September 30, 1997, compared to 1.14 percent at December 31,
1996. The allowance reflects a provision of $1,970,000 and net charge-offs of
$427,000 recorded thus far in 1997. 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, 1997, the Bank increased the
amount of outstanding short and long term advances with the Federal Home Loan
Bank of New York by $4.2 million, while borrowings under repurchase
agreements increased by $29.6 million. As noted above, municipal time
deposits increased $61.9 million. These transactions represent funds borrowed
on a short-to-intermediate-term basis as part of the Bank's overall
leveraging strategy.
20
<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)
On February 5, 1997, the Company issued Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust (the "Capital Securities")
in an aggregate amount of $20 million. The Capital Securities quality as Tier
I Capital for regulatory purposes and the payments are deductible for tax
purposes. The net proceeds of approximately $18.8 million from the issuance of
the Capital Securities were used to redeem existing preferred stock ($3.3
million), provide additional capital to Union State Bank ($14.5 million) and
for general corporate purposes. Further information is provided in the Notes
to Consolidated Financial Statements.
Stockholders' equity increased to $60.5 million at September 30, 1997, from
the December 31, 1996 balance of $56.9 million. The increase primarily
results from net income of $7.5 million for the nine month period ended
September 30, 1997, an increase in the unrealized gain on available for sale
securities, net of tax of $.8 million, partially offset by the redemption of
$3.3 million of preferred stock, and dividends paid. During the first nine
months of 1997, the Company also sold 16,250 shares of treasury stock at fair
market value in the aggregate amount of $370,000 to its Employee Stock
Ownership Plan (with code section 401(k) Provisions) and purchased 5,000
shares of treasury stock for $105,000.
The Company's leverage ratio at September 30, 1997 was 8.27 percent, compared
to 7.06 percent at December 31, 1996. The Company's Tier I and total capital
ratios under the risk-based capital guidelines were 12.95 percent and 14.12
percent at September 30, 1997 and 10.45 percent and 11.50 percent at December
31, 1996, respectively. In addition, the Bank exceeds all current regulatory
capital requirements and was in the "well-capitalized" category at September
30, 1997 and December 31, 1996.
RESULTS OF OPERATIONS
EARNINGS
Net income for the three and nine month periods ended September 30, 1997
increased $517,000 and $974,000, respectively, or 23.8 and 14.9 percent to
$2,692,000 and $7,524,000, respectively, compared to the same periods in
1996. Net income per common and common equivalent share increased to $.40 and
$1.12 in the three and nine month periods ended September 30, 1997,
respectively, from $.32 and $.98 in the same periods in 1996, respectively.
The annualized return on average total assets was 1.11 and 1.10 percent for
the three and nine month periods ended September 30, 1997, respectively,
compared to 1.12 and 1.19 percent for the three and nine month periods ended
September 30, 1996. The annualized return on average common equity was 18.25
and 17.76 percent for the three and nine months ended September 30, 1997,
respectively, compared to 17.03 and 17.42 percent for the comparative periods
in 1996. Although the return on average total assets has declined from 1996,
return on average common equity has increased in the quarter and nine months
ended September 30, 1997, compared to the same periods last year, as net
earnings have increased due to the effective leverage strategies employed by
the Company. The overall increase in earnings in the 1997 periods primarily
reflects higher net interest income resulting from increased volume and
effective leveraging of the balance sheet, higher security gains and other
income, and a lower effective income tax rate,
21
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
- --------------------------------------------------------
offset by lower service fee income, and higher non-interest expenses to
support increased business. The nine months ended September 30, 1996 was also
negatively impacted by a loss on loans held for sale. 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 and nine month periods ended September 30, 1997, net interest
income increased 11.6 and 15.1 percent to $8.5 and $25.0 million from $7.6
and $21.7 million, respectively, in the year earlier periods. Net interest
income increased in the current year periods 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, 1997, the interest
spread (yield on earning assets less cost of interest-bearing funds) was 3.18
percent and 3.27 percent, respectively, compared to 3.58 percent and 3.57
percent, respectively, in the same periods of 1996. Yields on interest
earning assets increased during the three and nine month periods ended
September 30, 1997, while the cost of funds increased at a higher rate
compared to the same periods in 1996, resulting in the negative impact on the
net interest spread. The increase in asset yields is partially as a result of
achieving higher yields on the investment portfolio due to investing in
callable agency securities and increasing yields on other investments.
Although leverage strategies result in a higher cost of funds, they have the
effect of increasing net interest income while managing interest rate risk.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $90,000 to $510,000 and increased
$295,000 to $1,970,000 for the three and nine month periods ended September
30, 1997, respectively, compared to the same periods in 1996. Net charge-offs
in the three and nine month periods ended September 30, 1997 totaled $170,000
and $427,000, respectively, relating primarily to real estate and credit card
loans, compared to net chargeoffs (principally real estate loans) of $300,000
and $355,000, respectively, for the quarter and nine month periods ended
September 30, 1996. Nonaccrual loans were $7.6 million at both September 30,
1997 and 1996, compared to $8.1 million at December 31, 1996. The Bank has
approximately $3.3 million of loans, collateralized by cash and 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 Company since, in
addition to foregone revenue, the Company 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
22
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
- --------------------------------------------------------
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, 1997 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 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 and nine months ended September 30, 1997
increased by $266,000 to $1,120,000 from $854,000, and $313,000 to $3,375,000
from $3,062,000, respectively, compared to the same periods of 1996. The
increases are primarily related to higher net gains on securities and loan
transactions ($234,000 and $233,000, respectively), and higher other income
in both periods ($75,000 and $202,000, respectively), partially offset by
lower service charges and fees ($43,000 and $122,000, respectively). The
decrease in service charges was due to lower insufficient funds charges and
the impact of increasing competition on the level of fees charged.
Other income, which consists of ATM fees, credit card fees, loan servicing
income, wire transfer fees, safe deposit, and other fees, increased primarily
due to growth in ATM fees, credit card revenue and other income.
NON-INTEREST EXPENSES
Non-interest expenses increased $806,000 to $5,375,000 and $2,571,000 to
$15,698,000 for the three and nine month periods ended September 30, 1997,
respectively, from the comparable periods in 1996. The primary reasons for
these increases result from an increase in salaries and other operating costs
to support the growth of the Bank. The following discusses each component of
non-interest expense.
Salaries and benefits, the largest component of non-interest expense,
increased by $265,000 and $894,000, respectively, during the three and nine
month periods ended September 30, 1997 compared to the previous year, which
represented an increase of 10.1 and 12.0 percent, respectively. The increases
occurred due to additional personnel necessary for the Bank to accommodate
the increases in both deposits and loans and their related services and
annual merit increases. In addition, employee benefits increased because of
higher incentive compensation programs which are based upon the Company's net
income and overall financial performance, higher payroll taxes during 1997
due to the higher salary base and increases in the cost of 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, 1997 compared to September 30,
1996 were due to the following:
23
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
- --------------------------------------------------------
- -- Increase of $171,000 (20.4%) and $406,000 (16.1%), respectively, in
occupancy and equipment expense. This increase is due principally to
higher maintenance expenses relating to the Bank's branch and computer
related equipment due to increased business volume, additional rental
expense associated with a new branch opening, the relocation of the
Orangeburg Branch and opening of the Westchester Loan Center all of which
occurred in mid 1996, and additional rental and other expenses related to
three new branches which will be opened in 1997 and 1998.
- --Decrease of $4,000 (1.5%) and an increase of $14,000 (2.0%), respectively,
in advertising and business development. The minor increase and decrease
is reflective of the controllable nature of these expenses and
efficiencies experienced as the Bank increases in size.
- -- Increase of $57,000 (21.9%) and $251,000 (33.3%), respectively, in
professional fees. The increase relates to increased accounting and
auditing fees, and professional fees primarily associated with loan
collections, foreclosures and other litigation.
- -- Increase of $28,000 (19.3%) and $88,000 (19.4%), respectively, in
communications is due to an increase in postage and telephone expenses
that arose as a result of higher postal volume, upgrading of data lines
throughout the Bank, and relocation of the Bank's Data Center to its
Corporate Headquarters in November 1996.
- -- Increase of $4,000 (4.4%) and $47,000 (16.6%), respectively, in stationery
and printing. The increase occurred due to printing costs and supplies
necessitated by increased loan and deposit volume and growth of the credit
card operation.
- -- Increase of $21,000 and $63,000, respectively, in FDIC insurance premiums
results from new FDIC deposit premium, which became effective in January
1997.
- -- Increase of $264,000 (75.2%) and $808,000 (85.3%), respectively, in other
expenses, results from higher foreclosure related expenses and other costs
to support increased volume, higher branch charge-offs, and accruals for a
contribution to the U.S.B Foundation, Inc.
INCOME TAXES
The effective tax rates for the three and nine month periods ended September
30, 1997 and 1996 was 28.5 and 29.8, percent and 34.7 and 34.4 percent,
respectively. The decrease in the overall effective tax rate in 1997
primarily reflects lower state income taxes.
24
<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. No reports on Form 8-K were filed by the
Company during the quarter ended September 30, 1997.
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 12, 1997.
U.S.B. HOLDING CO., INC.
- ----------------------------- ------------------------------
Thomas E. Hales Steven T. Sabatini
Chairman of the Board, President Senior Executive Vice President Finance,
Chief Executive Officer and Director Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------------ ------------------------
(000'S, EXCEPT SHARE DATA) (000'S, EXCEPT SHARE DATA)
<S> <C> <C>
Weighted average number of common shares outstanding......... 6,203,586 6,196,420
Assuming exercise of options reduced by the number of shares
which could have been purchased with the proceeds from
exercise of such options................................... 574,182 506,281
---------- ----------
Weighted average common and common equivalent shares......... 6,777,768 6,702,701
---------- ----------
---------- ----------
Net income................................................... $ 2,692 $ 7,524
Less: Preferred stock dividend requirements.................. -- 34
---------- ----------
Net income available to common shareholders.................. $ 2,692 $ 7,490
---------- ----------
---------- ----------
Net income per common and common equivalent share............ $ 0.40 $ 1.12
---------- ----------
---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,471
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 229,826
<INVESTMENTS-CARRYING> 122,791
<INVESTMENTS-MARKET> 355,182
<LOANS> 545,419
<ALLOWANCE> 7,285
<TOTAL-ASSETS> 979,196
<DEPOSITS> 798,099
<SHORT-TERM> 59,277
<LIABILITIES-OTHER> 6,960
<LONG-TERM> 54,360
0
0
<COMMON> 31,686
<OTHER-SE> 28,814
<TOTAL-LIABILITIES-AND-EQUITY> 979,196
<INTEREST-LOAN> 35,430
<INTEREST-INVEST> 16,277
<INTEREST-OTHER> 446
<INTEREST-TOTAL> 52,153
<INTEREST-DEPOSIT> 22,219
<INTEREST-EXPENSE> 27,150
<INTEREST-INCOME-NET> 25,003
<LOAN-LOSSES> 1,970
<SECURITIES-GAINS> 740
<EXPENSE-OTHER> 15,698
<INCOME-PRETAX> 10,710
<INCOME-PRE-EXTRAORDINARY> 7,524
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,524
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 0
<LOANS-NON> 7,560
<LOANS-PAST> 1,551
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,742
<CHARGE-OFFS> 502
<RECOVERIES> 75
<ALLOWANCE-CLOSE> 7,285
<ALLOWANCE-DOMESTIC> 7,285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
