<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 June 30, 1997 Commission File No. 010950
U.S.B. HOLDING CO., INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3197969
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 DUTCH HILL ROAD, ORANGEBURG, NEW YORK 10962
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 4, 1997
----- -----------------------------
Common stock, par value 6,203,478
$5 per share
<PAGE>
U.S.B. HOLDING CO., INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION AS OF
JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED) 4
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 30, 1997 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
(UNAUDITED)
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
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CONDITION
- ------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS (000's, Except Share Data)
Cash and due from banks $ 27,519 $ 18,821
Federal funds sold 13,900 10,800
-------- --------
Cash and cash equivalents 41,419 29,621
Interest bearing deposits in other banks -- 99
Securities:
Available for sale (at fair value) 245,921 168,756
Held to maturity (fair value $104,126
in 1997 and $83,123 in 1996) 102,299 81,019
Loans held for sale 214 274
Loans, net of allowance for loan losses of
$6,945 in 1997 and $5,742 in 1996 530,790 497,495
Premises and equipment, net 10,237 10,104
Accrued interest receivable 6,581 5,820
Other real estate owned 2,044 651
Federal Home Loan Bank stock 8,542 4,238
Other assets 9,995 5,374
-------- --------
TOTAL ASSETS $ 958,042 $803,451
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 103,404 $ 97,251
Interest bearing deposits:
NOW 50,482 44,578
Money Market 45,109 56,284
Savings 242,906 217,111
Time 337,227 267,056
-------- --------
Total deposits 779,128 682,280
Accrued interest payable 2,781 1,895
Accrued expenses and other liabilities 2,522 2,718
Securities sold under agreements to repurchase 61,459 29,425
Federal Home Loan Bank advances 34,721 30,267
-------- --------
Total liabilities 880,611 746,585
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 6,336,000 in 1997
and 6,326,808 in 1996 31,680 31,634
Additional paid-in capital 11,031 10,783
Retained earnings 16,347 12,664
Treasury stock at cost, 132,522 shares
in 1997 and 143,772 shares in 1996 (896) (895)
Unrealized loss on available for sale securities,
net of tax (868) (570)
-------- --------
Total stockholders' equity 57,294 56,866
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $958,042 $803,451
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1997 1996
---- ----
(000's, Except Share Data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 11,958 $ 9,702
Interest on federal funds sold 162 143
Interest and dividends on securities:
Mortgage-backed securities 2,265 1,713
U.S. Treasury and government 2,469 1,293
Obligations of states and political subdivisions 797 774
Corporate and other 10 149
Dividends on Federal Home Loan Bank stock 106 38
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Total interest income 17,767 13,812
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------------- -------------
INTEREST EXPENSE:
Interest on deposits 7,523 6,269
Interest on borrowings 1,288 297
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 488 --
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Total interest expense 9,299 6,566
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NET INTEREST INCOME 8,468 7,246
Provision for loan losses 830 600
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Net interest income after provision for loan losses 7,638 6,646
NON-INTEREST INCOME:
Gain on securities transactions - net 507 145
Gain on loans held for sale 2 ---
Service charges and fees 566 593
Other income 309 245
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Total non-interest income 1,384 983
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NON-INTEREST EXPENSE:
Salaries and employee benefits 2,816 2,482
Occupancy and equipment expense 968 845
Advertising and business development 266 210
Professional fees 333 270
Communications 175 151
Stationery and printing 117 101
FDIC insurance 21 ---
Other expenses 728 257
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Total non-interest expense 5,424 4,316
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Income before income taxes 3,598 3,313
Provision for income taxes 1,098 1,188
NET INCOME $ 2,500 $ 2,125
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NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .37 $ .31
WEIGHTED AVERAGE COMMON AND COMMON
------------- -------------
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EQUIVALENT SHARES OUTSTANDING 6,746,675 6,495,584
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</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1997 1996
---- ----
(000's, Except Share Data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 23,275 $18,927
Interest on federal funds sold 341 387
Interest and dividends on securities:
Mortgage-backed securities 4,011 3,476
U.S. Treasury and government 4,304 2,077
Obligations of states and political subdivisions 1,585 1,551
Corporate and other 29 370
Interest on deposits in other banks -- 36
Dividends on Federal Home Loan Bank stock 175 68
----------- -----------
Total interest income 33,720 26,892
----------- -----------
INTEREST EXPENSE:
Interest on deposits 14,283 12,334
Interest on borrowings 2,190 477
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 776 --
Total interest expense 17,249 12,811
----------- -----------
NET INTEREST INCOME 16,471 14,081
Provision for loan losses 1,460 1,075
----------- -----------
Net interest income after provision for loan losses 15,011 13,006
----------- -----------
NON-INTEREST INCOME:
Gain on securities transactions - net 504 592
Gain (loss) on loans held for sale 9 (78)
Service charges and fees 1,135 1,214
Other income 607 480
----------- -----------
Total non-interest income 2,255 2,208
----------- -----------
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,481 4,852
Occupancy and equipment expense 1,912 1,677
Advertising and business development 456 438
Professional fees 687 493
Communications 369 309
Stationery and printing 235 192
FDIC insurance 43 1
Other expenses 1,140 596
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Total non-interest expense 10,323 8,558
----------- -----------
Income before income taxes 6,943 6,656
Provision for income taxes 2,111 2,281
----------- -----------
NET INCOME $ 4,832 $ 4,375
----------- -----------
----------- -----------
$ .72 $ .65
NET INCOME PER COMMON AND ----------- -----------
COMMON EQUIVALENT SHARE ----------- -----------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,701,773 6,483,536
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
(000's)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,832 $ 4,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,460 1,075
Depreciation and amortization 739 647
Amortization/accretion of premiums/discounts on securities - net 140 114
Deferred taxes (639) (622)
Gain on securities transactions - net (504) (592)
(Gain) loss on loans held for sale - net (9) 78
Origination of loans held for sale (479) (1,227)
Proceeds from sales of loans held for sale 481 --
Increase in accrued interest receivable (761) (801)
Other - net (1,999) (2,044)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,261 1,003
---------- ----------
---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 52,138 47,109
Proceeds from principal paydowns and maturities
of securities available for sale 16,915 8,656
Proceeds from maturities of securities held to maturity 4,699 4,425
Purchases of securities available for sale (146,257) (67,097)
Purchases of securities held to maturity (26,091) (25,260)
Net decrease in interest bearing deposits in other banks 99 1,970
Loans originated, net of principal collections (36,444) (55,763)
Purchases of premises and equipment - net (863) (991)
Proceeds from sales of OREO 357 1,346
Purchase of FHLB stock (4,304) (1,016)
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (139,751) (86,621)
---------- ----------
---------- ----------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 26,677 29,342
Increase in time deposits, net of withdrawals and maturities 70,171 31,158
Net increase in Federal Home Loan Bank advances - short-term 5,000 --
Proceeds from Federal Home Loan Bank advances - long-term -- 11,000
Repayment of Federal Home Loan Bank advances - long-term (546) (203)
Net increase in securities sold under agreements to repurchase 32,034 10,170
Net proceeds from issuance of Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust 18,921 --
Redemption of preferred stock (3,250) (250)
Cash dividends paid (1,149) (1,038)
Proceeds from sale of junior preferred stock of
consolidated subsidiary 137 --
Proceeds from issuance of common stock 28 1
Proceeds from sale of treasury stock 370 250
Purchase of treasury stock (105) --
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 148,288 80,430
---------- ----------
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-Continued-
</TABLE>
4
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
---------- ----------
(000's)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 11,798 $ (5,188)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,621 37,269
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,419 $ 32,081
---------- ----------
---------- ----------
Supplemental Disclosures:
Interest paid $ 16,363 $ 12,920
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Income tax payments $ 2,894 $ 4,448
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Transfer of assets to OREO $ 1,756 $ 580
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Transfer of loans held for sale to loans held to
maturity at lower of cost or fair value $ 58 $ 1,344
---------- ----------
Change in unrealized gain/loss on securities
available for sale - net of tax $ (298) $ (2,256)
---------- ----------
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- ----------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(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, 1997 $ 3,250 6,183,036 $31,634 $10,783 $12,664 $ ( 895) $ (570)
Net income 4,832
Cash dividends:
Common
($.18 per share) (1,115)
Preferred (34)
Common Stock Issued:
Incentive stock
options exercised
($2.86 to $4.89
per share) 9,192 46 (18)
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 (298)
------- --------- ------- ------- -------- ------- -------
Balance at
June 30, 1997 $ -- 6,203,478 $31,680 $11,031 $ 16,347 $ (896) $ (868)
------- --------- ------- ------- -------- ------- -------
------- --------- ------- ------- -------- ------- -------
</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., and until December 31, 1995, its
wholly-owned subsidiary, Royal Oak Savings Bank, F.S.B. ("Royal"). On
December 31, 1995, Royal was sold to Monocacy Bancshares, Inc., parent
company of Taneytown Bank & Trust Company, Taneytown, Maryland.
2. RECLASSIFICATIONS
Certain reclassifications have been made to prior year accounts to conform
to the current year's presentation.
3. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements include all adjustments (comprising only normal
recurring accruals) necessary to present fairly the financial position of
the Company as of June 30, 1997, operations for the three and six month
periods ended June 30, 1997 and 1996, cash flows for the six month
periods then ended, and changes in stockholders' equity for the six
months ended June 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 June 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
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT'D)
- ---------------------------------------------------------------
the earnings of the entity. "Diluted EPS" is computed similarly to
"Fully Diluted EPS" pursuant to APB Opinion No. 15.
On a pro forma basis, the effect of this statement will be to report
earnings per share as follows:
THREE MONTHS ENDED
------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
EARNINGS PER SHARE AS CURRENTLY REPORTED
(PER APB OPINION NO. 15):
Primary earnings per share $0.37 $0.31
Fully diluted earnings per share $0.37 $0.31
PRO FORMA EARNINGS PER SHARE IN ACCORDANCE
WITH SFAS NO. 128:
Basic earnings per share $0.40 $0.33
Diluted earnings per share $0.37 $0.31
SIX MONTHS ENDED
------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
Earnings per share as currently reported
(per APB Opinion No. 15):
Primary earnings per share $0.72 $0.65
Fully diluted earnings per share $0.72 $0.65
Pro forma earnings per share in accordance
with SFAS No. 128:
Basic earnings per share $0.77 $0.69
Diluted earnings per share $0.72 $0.65
7. REPORTING COMPREHENSIVE INCOME AND DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION
In June 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)
- ---------------------------------------------------------------
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 and 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 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 $7.1 million at June 30, 1997 and $8.1 million at
December 31, 1996. Restructured loans were $1.2 million and $2.1 million
at June 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 June
30, 1997, the Company has no commitments to lend additional funds to any
customers with nonaccrual or restructured loan balances.
At June 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 June 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 $6.4 million and $7.8
million, respectively, ($6.0 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.
Restructured loans in the amounts of $.4 million and $.6 million at June
30, 1997 and December 31, 1996, respectively, that are considered to be
impaired due to a reduction in
10
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT'D)
- ---------------------------------------------------------------
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 June 30, 1997 is immaterial. The total allowance for
loan losses related to impaired loans was $2.1 million and $1.3 million
as of June 30, 1997 and December 31, 1996, respectively. The average
recorded investment in impaired loans for the six months ended June 30,
1997 and year ended December 31, 1996 was approximately $6.8 million and
$7.4 million, respectively. For the six months ended June 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.
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 June 30, 1997, the effect of SFAS No. 115 resulted in a reduction of
securities available for sale of $1,502,000 representing the net
unrealized loss, which, after the applicable tax effect, resulted in a
reduction to stockholders' equity of $868,000. 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 June 30, 1997 and December 31, 1996,
follows:
<TABLE>
<CAPTION>
=====================================================================================================
(000'S)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30, 1997: COST GAINS LOSSES VALUE
=====================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and government
agencies $126,215 $ 216 $ 1,045 $125,386
Obligations of states and
political subdivisions 1,166 25 -- 1,191
Mortgage-backed securities 119,942 626 1,324 119,244
Other 100 -- -- 100
- -----------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $247,423 $ 867 $ 2,369 $245,921
=====================================================================================================
HELD TO MATURITY:
Obligations of states and
political subdivisions $ 62,494 $ 1,927 $ 39 $ 64,382
Mortgage-backed securities 29,805 122 220 29,707
U.S. government agencies 10,000 37 -- 10,037
- -----------------------------------------------------------------------------------------------------
Total securities held to maturity $102,299 $ 2,086 $ 259 $104,126
=====================================================================================================
</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, 1997: 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 June 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 $599,000 and $416,000 and fair value of $603,000 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 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)
- ---------------------------------------------------------------
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 June 30, 1997, the Bank had $61.5 million of such
borrowings under sale and repurchase agreements outstanding, with
original terms of between 30 and 92 days at interest rates of between
5.61 percent and 5.76 percent. The borrowings are collateralized by
securities with an aggregate amortized cost and market value of $63.5
million and $63.2 million, respectively.
Federal funds purchased represent overnight funds. The Bank has federal
funds purchase lines available with two financial institutions for a
total of $8.0 million. At June 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 June 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 5.69 percent and 5.63
percent, respectively. Short-term advances and securities sold under
agreements to repurchase with the FHLB require the purchase of stock in
the FHLB, which is more fully described below.
Additional information with respect to short-term borrowings for the six
months ended June 30, 1997 and 1996 is presented in the table below. The
increase in short-term borrowings is used to fund asset growth and
leverage strategies.
---------------------------------------------------------------
(000's, except percentages)
1997 1996
---------------------------------------------------------------
Balance as of June 30 $ 71,459 $10,170
Average balance outstanding 45,464 397
Weighted-average interest rate*
As of June 30 5.67% 5.46%
Paid during period 5.73% 5.30%
===============================================================
*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 June 30, 1997, long-term FHLB advances totaled $24.7 million,
compared with $25.3 million as of December 31, 1996. At June 30, 1997,
long-term FHLB advances aggregating $19.0 million are single principal
payments and are not repayable prior to maturity without penalty.
Long-term FHLB advances aggregating $5.7 million are amortizing advances
having scheduled payments, but may not be repaid in full prior to
maturity without penalty.
14
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT'D)
- ---------------------------------------------------------------
The Bank has purchased stock in the FHLB 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 $286.8 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 distributed based upon
remaining contractual maturity at June 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 JUNE 30, 1997
Fixed rate advances $5,000 $17,099 $2,622 $24,721
Weighted-average
interest rate 6.20% 6.14% 6.72% 6.21%
--------------------------------------------------------------------------
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 six month period ended June 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
$76,000 for the three month period ended June 30, 1996, and $34,000 and
$79,000 for the six month periods ended June 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 June 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.
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 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 six months
ended June 30, 1996 have been adjusted to reflect the stock dividends
distributed in 1996, as applicable.
15
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Cont'd)
- ------------------------------------------------------
The Company and the Bank's ability to pay cash dividends in the future
are restricted by various regulatory requirements. The Company's ability
to pay cash dividends to its shareholders is primarily dependent upon the
receipt of dividends from the Bank. The Bank's dividends to the Company
may not exceed the sum of the Bank's net income for that year and its
undistributed net income for the preceding two years, less any required
transfers to additional paid-in capital. At June 30, 1997, the Bank
could pay dividends to the Company of $17.8 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 six months ended June 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 June 30, 1997, 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 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 June 30, 1997, formal credit line and loan
commitments which are primarily loans collateralized by real estate
approximated $142.4 million, and outstanding letters of credit totaled
$24.4 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 $3.0 million at June 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 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
16
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Cont'd)
- ------------------------------------------------------
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 $21,000 (liability) at June 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 $19 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 will be 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 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
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
17
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Cont'd)
- ------------------------------------------------------
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 June 30, 1997, the Company had total assets of $958.0 million, an increase
of 19.2 percent, or $154.6 million from December 31, 1996.
Total deposits increased $96.8 million for the six month period ended June
30, 1997, to $779.1 million, which represented a 14.2 percent increase from
December 31, 1996. Time deposits increased $70.2 million accounting for the
greatest component of deposit increases. Retail time deposits under $100,000
increased by $15.8 million due primarily to time deposit promotions, and
other time deposits over $100,000 decreased by $36,000 during the six month
period ended June 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 $51.5 million as part of the Bank's overall
leveraging strategy. IRA and Keogh time deposit accounts increased by $2.9
million due to continued promotion of this product. Savings deposits
increased by $25.8 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
$5.9 million and $6.2 million, respectively. Money market deposits decreased
by $11.2 million, as customers generally switched money market account
balances to higher yielding deposit products.
The securities portfolio of $348.2 million and $249.8 million at June 30,
1997 and December 31, 1996, respectively, consists of securities held to
maturity at amortized cost of $102.3 million and $81.0 million, and
securities available for sale at fair value totaling $245.9 million and
$168.8 million, respectively.
During the six months ended June 30, 1997, U.S. Treasury and government
agency obligations increased $49.4 million due primarily to purchases of $3.0
million in U.S. Treasury Notes, $37.0 million in callable bonds and $28.2
million in indexed amortizing notes, decreased by sales and redemptions of
securities totaling $18.9 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 $48.7 million primarily due to
purchases of $98.1 million were offset by sales totaling $47.3 million and
principal amortizations of $2.0 million. The mortgage-backed securities sold
have low-yields or expectations to prepay in the near-term and were sold to
take advantage of market conditions with the proceeds reinvested at increased
yields and shorter final maturities. 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 London interbank offered rate ("LIBOR"). These purchases
are funded by deposits or borrowings with rates at or similar to LIBOR in
terms of cost and adjustment frequency. In addition, the Company has
purchased $20.2 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 $1.3 million during the first six months of 1997 as purchases of
$6.1 million exceeded maturities of $4.8 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 comparative tax
equivalent yield of such securities to
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)
- ----------------------------
other securities of like 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 June 30, 1997, loans were $537.9 million, a net increase of $34.4 million
or 6.8 percent over December 31, 1996. The primary increases of outstanding
loan balances were $17.92 million in commercial mortgages, $5.6 million in
land acquisitions and construction loans and $12.1 million in real estate
secured loans, partially offset by reductions in time secured and unsecured
loans of $3.5 million at June 30, 1997. The Bank had approximately $142.4
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 June 30, 1997.
The Bank's allowance for loan losses increased $1.2 million or 21.0 percent
to $6.9 million at June 30, 1997, from $5.7 million at December 31, 1996.
The allowance for loan losses represented 1.29 percent of gross loans
outstanding at June 30, 1997, compared to 1.14 percent at December 31, 1996.
The allowance reflects a provision of $1,460,000 and net charge-offs of
$257,000 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 six months ended June 30, 1997, the Bank increased the amount of
outstanding short and long term advances with the Federal Home Loan Bank of
New York by $4.5 million, while borrowings under repurchase agreements
increased by $32.0 million. As noted above, municipal time deposits
increased $51.5 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 $19 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 $57.3 million at June 30, 1997, from the
December 31, 1996 balance of $56.9 million. The increase primarily results
from net income of $4.8 million for the six month period ended June 30, 1997,
partially offset by the redemption of $3.3 million of preferred stock, an
increase in the unrealized loss on available for sale securities, net of tax
of $.3 million, and dividends paid. During the first six months of 1997, the
Company also sold 16,250 shares of treasury stock at fair market value in the
aggregate amount of $370,000 and purchased 5,000 shares of treasury stock for
$105,000.
The Company's leverage ratio at June 30, 1997 was 8.28 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 12.66 percent and 13.89
percent at June 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 June 30,
1997 and December 31, 1996.
RESULTS OF OPERATIONS
- ---------------------
EARNINGS
Net income for the three and six month periods ended June 30, 1997 increased
$375,000 and $457,000, respectively, or 17.6 and 10.4 percent to $2,500,000
and $4,832,000, respectively, compared to the same periods in 1996. Net
income per common and common equivalent share increased to $.37 and $.72 in
the three and six month periods ended June 30, 1997, respectively, from $.31
and $.65 in the same periods in 1996, respectively. The annualized return on
average total assets was 1.07 and 1.09 percent for the three and six month
periods ended June 30, 1997, respectively, compared to 1.16 and 1.23 percent
for the three and six month periods ended June 30, 1996. The annualized
return on average common equity was 17.94 and 17.53 percent for the three and
six months ended June 30, 1997, respectively, compared to 17.00 and 17.58
percent for the comparative periods in 1996. Although the return on average
total assets has declined from 1996, return on average common equity is
substantially the same for the six months ended June 30, 1997 and has
increased in the quarter ended June 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, and a lower
effective income tax rate, offset by higher loan loss provisions, lower
service fee
21
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
- --------------------------------------------------------
income, and higher non-interest expenses to support increased business, while
the three months ended June 30, 1997 was also favorably impacted by higher
net gains on sales of securities. The six months ended June 30, 1996 was
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 six month periods ended June 30, 1997, net interest income
increased 16.9 and 17.0 percent to $8.5 and $16.5 million from $7.3 and $14.1
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 six months ended June 30, 1997, the interest spread (yield
on earning assets less cost of interest-bearing funds) was 3.24 percent
and 3.33 percent, respectively, compared to 3.61 percent and 3.58 percent,
respectively, in the same periods of 1996. Yields on interest earning assets
increased during the three and six month periods ended June 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, it has the effect of increasing net
interest income while managing interest rate risk.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $230,000 to $830,000 and $385,000 to
$1,460,000 for the three and six month periods ended June 30, 1997,
respectively, compared to the same periods in 1996. Net charge-offs in the
three and six month periods ended June 30, 1997 totaled $150,000 and
$257,000, respectively, relating primarily to credit card loans, compared to
net recoveries of $59,000 for the quarter ended June 30, 1996 and net
chargeoffs (principally real estate loans) of $55,000 for the six month
period ended June 30, 1996. Nonaccrual loans were $7.1 million at both June
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, it must increase the level of
provision for loan losses, and incur other costs associated with collections
of past due balances.
An evaluation of the quality of the loan portfolio is performed by management
on an ongoing basis as an integral part of the loan function, which includes
the identification of past due loans, the recognition of the current economic
environment and the review of the historical loan experience. Management has
taken a prudent and cautious position in evaluating various
22
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
- --------------------------------------------------------
business and economic uncertainties in relation to the Company's loan
portfolio and believes that the allowance for loan losses at June 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 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 and six months ended June 30, 1997
increased by $401,000 to $1,384,000 from $983,000, and $47,000 to $2,255,000
from $2,208,000, respectively, compared to the same periods of 1996. The
increases are primarily related to higher net gains on securities and loan
transactions ($364,000) in the three month period ended June 30, 1997, and
higher other income in both periods ($64,000 and $127,000, respectively),
partially offset by lower service charges and fees ($27,000 and $79,000,
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 credit card fees, loan servicing income, wire
transfer fees, safe deposit, and other fees, increased primarily due to
growth in credit card revenue and other income.
NON-INTEREST EXPENSES
Non-interest expenses increased $1,108,000 to $5,424,000 and $1,765,000 to
$10,323,000 for the three and six month periods ended June 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 $334,000 and $629,000, respectively, during the three and six
month periods ended June 30, 1997 compared to the previous year, which
represented an increase of 13.5 and 13.0 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
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 six month periods ended June 30, 1997 compared to June 30, 1996 were due
to the following:
- - Increase of $123,000 (14.6%) and $235,000 (14.0%), 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
23
<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)
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.
- - Increase of $56,000 (26.7%) and $18,000 (4.1%), respectively, in
advertising and business development. The increase reflects higher
advertising and promotion activities to support the increased volume of
business.
- - Increase of $63,000 (23.3%) and $194,000 (39.4%), 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 $24,000 (15.9%) and $60,000 (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 $16,000 (15.8%) and $43,000 (22.4%), 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 $42,000, respectively, in FDIC insurance
premiums results from new FDIC deposit premiums, which became effective
in January 1997, to finance the FICO bonds.
- - Increase of $471,000 (183.3%) and $544,000 (91.3%), 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 six month periods ended June 30, 1997
and 1996 was 30.5 and 30.4, percent and 35.9 and 34.3 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 June 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 August 12, 1997.
U.S.B. HOLDING CO., INC.
- ---------------------------------- ------------------------------------
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)
25
<PAGE>
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
(000'S, EXCEPT SHARE DATA) (000'S, EXCEPT SHARE DATA)
<S> <C> <C>
Weighted average number of common
shares outstanding 6,198,191 6,192,778
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such options 548,484 508,995
--------- ---------
Weighted average common and common
equivalent shares 6,746,675 6,701,773
--------- ---------
--------- ---------
Net income $ 2,500 $ 4,832
Less: Preferred stock dividend requirements -- 34
--------- ---------
Net income available to common shareholders $ 2,500 $ 4,798
--------- ---------
--------- ---------
Net income per common and
common equivalent share $ 0.37 $ 0.72
--------- ---------
--------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 27,519
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 245,921
<INVESTMENTS-CARRYING> 102,299
<INVESTMENTS-MARKET> 350,047
<LOANS> 537,949
<ALLOWANCE> 6,945
<TOTAL-ASSETS> 958,042
<DEPOSITS> 779,128
<SHORT-TERM> 71,459
<LIABILITIES-OTHER> 5,303
<LONG-TERM> 44,858
0
0
<COMMON> 31,680
<OTHER-SE> 25,614
<TOTAL-LIABILITIES-AND-EQUITY> 958,042
<INTEREST-LOAN> 23,275
<INTEREST-INVEST> 10,104
<INTEREST-OTHER> 341
<INTEREST-TOTAL> 33,720
<INTEREST-DEPOSIT> 14,283
<INTEREST-EXPENSE> 17,249
<INTEREST-INCOME-NET> 16,471
<LOAN-LOSSES> 1,460
<SECURITIES-GAINS> 504
<EXPENSE-OTHER> 10,323
<INCOME-PRETAX> 6,943
<INCOME-PRE-EXTRAORDINARY> 4,832
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,832
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 0
<LOANS-NON> 7,147
<LOANS-PAST> 2,529
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,742
<CHARGE-OFFS> 300
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 6,945
<ALLOWANCE-DOMESTIC> 6,945
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
