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 March 31, 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 APRIL 30, 1997
----- -----------------------------
Common stock, par value 6,198,147
$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
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31,
1996 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED) 3
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 1997 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
PART II. OTHER INFORMATION AND SIGNATURES 23
- i -
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
- ------------------------------------
March 31, December 31,
1997 1996
--------- ---------
ASSETS (000'S, EXCEPT SHARE DATA)
- ------ --------------------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 23,735 $ 18,821
FEDERAL FUNDS SOLD 9,200 10,800
--------- ---------
CASH AND CASH EQUIVALENTS 32,935 29,621
INTEREST BEARING DEPOSITS IN OTHER BANKS --
99
SECURITIES:
AVAILABLE FOR SALE (AT FAIR VALUE) 206,202 168,756
HELD TO MATURITY (FAIR VALUE $100,945
IN 1997 AND $83,123 IN 1996) 99,901 81,019
LOANS HELD FOR SALE 58 274
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES OF
$6,265 IN 1997 AND $5,742 IN 1996 522,252 497,495
PREMISES AND EQUIPMENT, NET 10,515 10,104
ACCRUED INTEREST RECEIVABLE 6,829 5,820
OTHER REAL ESTATE OWNED 712 651
OTHER ASSETS 11,956 9,612
--------- ---------
TOTAL ASSETS $ 891,360 $ 803,451
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
NON-INTEREST BEARING DEPOSITS $ 93,767 $ 97,251
INTEREST BEARING DEPOSITS:
NOW 47,827 44,578
MONEY MARKET 47,271 56,284
SAVINGS 221,208 217,111
TIME 331,983 267,056
--------- ---------
TOTAL DEPOSITS 742,056 682,280
ACCRUED INTEREST PAYABLE 2,775 1,895
ACCRUED EXPENSES AND OTHER LIABILITIES 3,662 2,718
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 28,475 29,425
FEDERAL HOME LOAN BANK ADVANCES 39,996 30,267
--------- ---------
TOTAL LIABILITIES 816,964 746,585
CORPORATION-OBLIGATED MANDATORY REDEEMABLE CAPITAL
SECURITIES OF SUBSIDIARY TRUST 20,000 --
MINORITY INTEREST-JUNIOR PREFERRED STOCK OF
CONSOLIDATED SUBSIDIARY 137 --
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, NO PAR VALUE; AUTHORIZED
SHARES 100,000; OUTSTANDING SHARES: 32,500 IN 1996 -- 3,250
COMMON STOCK, $5 PAR VALUE; 7,000,000 SHARES AUTHORIZED;
ISSUED SHARES OF 6,334,338 IN 1997 AND 6,326,808 IN 1996 31,672 31,634
ADDITIONAL PAID-IN CAPITAL 10,899
10,783
RETAINED EARNINGS 14,406 12,664
TREASURY STOCK AT COST, 137,522 SHARES
IN 1997 AND 143,772 SHARES IN 1996 (930) (895)
UNREALIZED LOSS ON AVAILABLE FOR SALE SECURITIES,
NET OF TAX (1,788) (570)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 54,259 56,866
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 891,360 $ 803,451
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------
Three Months Ended
March 31, March 31,
1997 1996
----------- -----------
(000's, Except Share Data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 11,317 $ 9,225
Interest on federal funds sold 179 244
Interest and dividends on securities:
Mortgage-backed securities 1,746 1,763
U.S. Treasury and government 1,835 784
Obligations of states and political subdivisions 788 777
Corporate and other 19 223
Interest on deposits in other banks -- 34
Dividends on Federal Home Loan Bank stock 69 30
----------- -----------
Total interest income 15,953 13,080
----------- -----------
INTEREST EXPENSE:
Interest on deposits 6,760 6,065
Interest on borrowings 902 180
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 288 --
----------- -----------
Total interest expense 7,950 6,245
----------- -----------
NET INTEREST INCOME 8,003 6,835
Provision for loan losses 630 475
----------- -----------
Net interest income after provision for loan losses 7,373 6,360
----------- -----------
NON-INTEREST INCOME:
(Loss) gain on securities transactions - net (3) 447
Gain (loss) on loans held for sale 7 (78)
Service charges and fees 569 621
Other income 298 235
----------- -----------
Total non-interest income 871 1,225
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,665 2,370
Occupancy and equipment expense 944 832
Advertising and business development 190 228
Professional fees 354 223
Communications 194 158
Stationery and printing 118
91
FDIC insurance 22 1
Other expenses 412 339
----------- -----------
Total non-interest expense 4,899 4,242
----------- -----------
Income before income taxes 3,345 3,343
Provision for income taxes 1,013 1,093
----------- -----------
NET INCOME $ 2,332 $ 2,250
=========== ===========
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .35 $ .34
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,632,592 6,433,517
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------
Three Months Ended
March 31, March 31,
1997 1996
----------- -----------
(000's, Except Share Data)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,332 $ 2,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 630 475
Depreciation and amortization 361 322
Amortization/accretion of premiums/discounts on 82 56
securities - net
Loss (gain) on securities transactions - net 3 (447)
(Gain) loss on loans held for sale - net (7) 78
Origination of loans held for sale (265) (950)
Proceeds from sales of loans held for sale 481 --
Increase in accrued interest receivable (1,009) (131)
Other - net 1,145 (1,248)
----------- -----------
Net cash provided by operating activities 3,753 405
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 17,633 36,088
Proceeds from principal paydowns and maturities
of securities available for sale 3,720 6,203
Proceeds from maturities of securities held to maturity 1,160 1,318
Purchases of securities available for sale (60,940) (57,080)
Purchases of securities held to maturity (20,098) --
Net decrease in interest bearing deposits in other banks 99 1,871
Loans originated, net of principal collections (25,590) (27,984)
Purchases of premises and equipment - net (766) (713)
Proceeds from sales of OREO 147 236
----------- -----------
Net cash used for investing activities (84,635) (40,061)
----------- -----------
FINANCING ACTIVITIES:
Net (decrease) increase in non-interest bearing deposits,
NOW, money market and savings accounts (5,151) 4,297
Increase in time deposits, net of withdrawals and maturities 64,927 15,477
Increase in Federal Home Loan Bank advances - short-term 10,000 --
Proceeds from Federal Home Loan Bank advances - long-term -- 4,000
Repayment of Federal Home Loan Bank advances - long-term (271) --
Net decrease in securities sold under agreements to repurchase (950) --
Net proceeds from issuance of Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust 19,225 --
Repayment of preferred stock (3,250) --
Cash dividends paid (590) (499)
Proceeds from sale of junior preferred stock of
consolidated subsidiary 137 --
Proceeds from issuance of common stock 21 --
Proceeds from sale of treasury stock 203 250
Purchase of treasury stock (105) --
----------- -----------
Net cash provided by financing activities 84,196 23,525
----------- -----------
</TABLE>
-Continued-
3
<PAGE>
<TABLE>
<CAPTION>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------
Three Months Ended
March 31, March 31,
1997 1996
----------- -----------
(000's)
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents $ 3,314 $(16,131)
Cash and Cash Equivalents, Beginning of Period 29,621 37,269
------ ------
Cash and Cash Equivalents, End of Period $ 32,935 $ 21,138
======== ========
Supplemental Disclosures:
Interest paid $ 7,070 $ 6,124
-------- --------
Income tax payments $ 364 $ 1,728
-------- --------
Transfer of assets to OREO $ 210 $ 580
-------- --------
Transfer of loans held for sale to loans held to
maturity at lower of cost or fair value $ -- $ 1,344
-------- --------
Change in unrealized gain/loss on securities
available for sale - net of tax $ (1,218) $ (1,461)
-------- --------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- ----------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(000's, Except Share Data)
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 2,332
Cash dividends:
Common
($.09 per share) (556)
Preferred (34)
Common Stock Issued:
Incentive stock
options exercised
($2.86 per share) 7,530 38 (17)
Purchase of treasury stock (5,000) (105)
Sale of treasury stock 11,250 133 70
Repayment of preferred
stock (3,250)
Change in unrealized
gain (loss) on
available for sale
securities, net of tax (1,218)
--------- --------- ------- ------- -------- ------ -------
Balance at
March 31, 1997 $ -- 6,196,816 $31,672 $10,899 $ 14,406 $ (930) $(1,788)
========= ========= ======= ======= ======== ====== =======
</TABLE>
See notes to consolidated financial statements.
5
<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 March 31, 1997, operations for the three month periods
ended March 31, 1997 and 1996, cash flows for the three month periods then
ended, and changes in stockholders' equity for the three months ended
March 31, 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 March 31, 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.
6
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Forward-Looking Statements (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 did not 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
7
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. Earnings Per Share (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:
<TABLE>
<CAPTION>
Three months ended
------------------
March 31, 1997 March 31, 1996
-------------- --------------
Earnings per share as currently reported (per APB 15):
<S> <C> <C>
Primary earnings per share $ 0.35 $0.34
Fully diluted earnings per share $ 0.35 $0.34
Pro forma earnings per share in accordance
with SFAS No. 128:
Basic earnings per share $ 0.37 $0.35
Diluted earnings per share $ 0.35 $0.34
</TABLE>
7. Loans
Nonaccrual loans were $7.7 million at March 31, 1997 and $8.1 million at
December 31, 1996. Restructured loans were $1.9 million and $2.1 million
at March 31, 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 March
31, 1997, the Company has no commitments to lend additional funds to any
customers with nonaccrual or restructured loan balances.
At March 31, 1997, there are loans aggregating approximately $700,000,
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 March 31, 1997 and December 31, 1996, the recorded investment in loans
that are considered to be impaired under SFAS No. 114 approximated $7.3
million and $7.8 million, respectively, ($6.9 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 March
31, 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
8
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Loans (Cont'd)
not yet collected as of March 31, 1997 is immaterial. The total allowance
for loan losses related to impaired loans was $1.3 million as of both
March 31, 1997 and December 31, 1996. The average recorded investment in
impaired loans for the three months ended March 31, 1997 and year ended
December 31, 1996 was approximately $7.6 million and $7.4 million,
respectively. For the three months ended March 31, 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 $.9 million has been established in
accordance with SFAS No. 114.
8. 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
March 31, 1997, the effect of SFAS No. 115 resulted in a reduction of
securities available for sale of $3,098,000 representing the net
unrealized loss, which, after the applicable tax effect, resulted in a
reduction to stockholders' equity of $1,788,000. 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.
9
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. Securities and Loans Held for Sale (Cont'd)
A summary of the amortized cost and fair value of securities and related
gross unrealized gains and losses at March 31, 1997 and December 31, 1996,
follows:
<TABLE>
<CAPTION>
=============================================================================================
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1997: Cost Gains Losses Value
=============================================================================================
Available for Sale:
<S> <C> <C> <C> <C>
U.S. Treasury and government
agencies $116,216 $ -- $2,880 $113,336
Obligations of states and
political subdivisions 1,166 4 -- 1,170
Mortgage-backed securities 91,819 1,105 1,327 91,597
Other 99 -- -- 99
- ---------------------------------------------------------------------------------------------
Total securities available for sale $209,300 $1,109 $4,207 $206,202
- ---------------------------------------------------------------------------------------------
Held to Maturity:
Obligations of states and
political subdivisions $ 60,089 $1,390 $ 121 $ 61,358
Mortgage-backed securities 29,812 56 81 29,787
U.S. government agencies 10,000 -- 200 9,800
- ---------------------------------------------------------------------------------------------
Total securities held to maturity $ 99,901 $1,446 $ 402 $100,945
=============================================================================================
</TABLE>
10
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. Securities and Loans Held for Sale (Cont'd)
<TABLE>
<CAPTION>
=============================================================================================
(000's)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996:
=============================================================================================
<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 March 31, 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 $1,996,000 and $416,000 and fair value of $1,986,000 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.
9. 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. 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.
11
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
9. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
(Cont'd)
At March 31, 1997, the Bank had $28.5 million of such borrowings
outstanding, with terms of between 30 and 90 days at interest rates of
between 5.53 and 5.63 percent. The borrowings are collateralized by
securities with an aggregate amortized cost and market value of $30.0
million and $28.9 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 March 31, 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 March 31, 1997 and December 31,
1996, the Bank had short-term FHLB advances of $15.0 million and $5.0
million outstanding at weighted-average interest rates of 5.50 and 5.63
percent, respectively.
Additional information with respect to short-term borrowings for the three
months ended March 31, 1997 and 1996 is presented in the table below. The
increase in short-term borrowings was used primarily to fund asset growth.
- --------------------------------------------------------------------------------
(000's, except percentages)
1997 1996
- --------------------------------------------------------------------------------
Balance at March 31 $ 43,475 $ --
Average balance outstanding 37,314 123
Weighted-average interest rate*
As of March 31 5.70% --
Paid during period 5.67% 4.05%
- --------------------------------------------------------------------------------
*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 March 31, 1997, long-term FHLB advances totaled $25.0 million,
compared with $25.3 million as of December 31, 1996. At March 31, 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 $6.0 million are amortizing advances
having scheduled payments, but may not be repaid in full prior to maturity
without penalty.
The Bank has purchased stock in the FHLB which is required in order to
draw advances from the FHLB. At March 31, 1997, the Bank had the ability
to borrow an additional $2.4 million from the FHLB without having to
purchase additional FHLB stock. The Bank may borrow up to an aggregate of
30% of total assets or $266.9 million, at March 31, 1997, upon the
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.
12
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
9. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
(Cont'd)
The following table is a summary of long-term debt distributed based upon
remaining contractual maturity at March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
(000's, except percentages)
After 1
But Within After 1997 1996
5 Years 5 Years Total Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed rate advances $ 22,284 $ 2,712 $ 24,996 $ 25,267
- ----------------------------------------------------------------------------------------
Weighted-average interest rate 6.14% 6.72% 6.20% 6.20%
========================================================================================
</TABLE>
The dividend rate on the Company's Series "A" preferred stock issued to a
single investor is determined quarterly and is subject to certain minimum
and maximum per annum dividend rates as specified in the agreement. For
the three month period ended March 31, 1997 and 1996, the weighted average
dividend rates were 8.4 percent (the minimum rate) for each period. Net
income per common share reflects the preferred stock dividends declared
and accrued totaling $34,000 and $79,000 for each three month period ended
March 31, 1997 and 1996, respectively. The Company redeemed the remaining
outstanding amount of $3,250,000 of preferred stock on February 14, 1997.
On February 27, 1997, the Company sold 11,250 shares of its treasury
stock. These shares were purchased by the Company's Employee Stock
Ownership Plan (with Code Section 401(k) Provisions) ("KSOP") and
Supplemental Employees' Investment Plan ("SEIP") at fair value. In
addition, the Company purchased 5,000 common shares at fair value for the
treasury on March 12, 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 months ended March
31, 1996 have been adjusted to reflect the stock dividends distributed in
1996.
The Company and the Bank's ability to pay cash dividends in the future are
restricted by various regulatory requirements. The Company's ability to
pay cash dividends to its shareholders is primarily dependent upon the
receipt of dividends from the Bank. The Bank's dividends to the Company
may not exceed the sum of the Bank's net income for that year and its
undistributed net income for the preceding two years, less any required
transfers to additional paid-in capital. At March 31, 1997, the Bank could
pay dividends to the Company of $14.6 million without having to obtain
prior regulatory approval.
13
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
9. Borrowings, Stockholders' Equity and Net Income Per Common Share Data
(Cont'd)
Net income per common share is based on net income after preferred stock
dividend requirements, the weighted average number of common shares
outstanding and common equivalent shares (for the quarter ended March 31,
1996, adjusted for the common stock dividend and stock split distributed
in 1996). Outstanding stock options granted that are dilutive and
currently exercisable under the Company's stock option plans are
considered to be common stock equivalents for earnings per share
calculations.
10. Commitments and Contingencies
At March 31, 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 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 March 31, 1997, formal credit line and loan commitments
which are primarily loans collateralized by real estate approximated
$122.1 million, and outstanding letters of credit totaled $19.7 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 March 31, 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 a mortgage-backed
security with an interest rate adjusted annually to the one year constant
maturity Treasury rate. 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
14
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
10. Commitments and Contingencies (Cont'd)
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 counter-party'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 original 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 $18,000
(liability) at March 31, 1997.
11. 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 ($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, and a portion thereof has been used to retire the
Company's existing outstanding preferred stock in the amount of $3,250,000
on February 14, 1997. 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 will be permitted to deduct payments on the Capital
Securities under current federal tax law.
So 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 such guarantee
ranks pari passu with or junior in interest to the junior subordinated
debt securities, in each case subject to certain exceptions.
15
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
11. Corporation-Obligated Mandatory Redeemable Capital Securities of
Subsidiary Trust (Cont'd)
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.
16
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
FINANCIAL CONDITION
At March 31, 1997, the Company had total assets of $891.4 million, an increase
of 10.9 percent, or $87.9 million from December 31, 1996.
Total deposits increased $59.8 million for the three month period ended March
31, 1997, to $742.1 million, which represented an 8.8 percent increase from
December 31, 1996. Time deposits accounted for the greatest component of deposit
increases, $64.9 million. Time deposits greater than $100,000 from local
municipalities, which are obtained on a bidding basis with maturities of 30 to
180 days, increased by $46.1 million as part of the Bank's overall leveraging
strategy. IRAs/Keoghs increased by $1.7 million due to continued promotion of
this product. Retail time deposits under $100,000 increased by $13.5 million due
primarily to time deposit promotions, and other time deposits over $100,000
increased by $3.6 million during the three month period ended March 31, 1997.
Savings deposits increased by $4.1 million, as the Company's "Golden Statement"
account, which provides an attractive yield for high balance accounts, attracted
additional deposits. NOW accounts and demand deposits increased by $3.2 million
and decreased by $3.5 million, respectively. Money market deposits decreased by
$9.0 million, as customers generally switched money market account balances to
higher yielding deposit products.
The securities portfolio of $306.1 million and $249.8 million at March 31, 1997
and December 31, 1996, respectively, consists of securities held to maturity at
amortized cost of $99.9 million and $81.0 million, and securities available for
sale at fair value totaling $206.2 million and $168.8 million, respectively.
During the three months ended March 31, 1997, U.S. Treasury and government
agency obligations increased $39.2 million due primarily to purchases of $20.0
million in callable bonds and $18.3 million in indexed amortizing notes. The
purchases were funded by proceeds received from the Company's issuance of
Capital Securities and the sale of mortgage-backed securities. Mortgage-backed
securities increased by $21.3 million as purchases of $39.7 million were offset
by the sales transaction totaling $17.2 million and principal amortizations of
$1.2 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
considerably shortened final maturities. The mortgage-backed securities
purchased 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. The Company's investment in obligations of states and political
subdivisions, or municipal securities, decreased by $1.1 million during the
first quarter of 1997 due mainly to maturities. 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 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
17
<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)
will continue to be evaluated for investment in the future. The security
portfolio was further reduced due to the increase in loss on available for sale
securities of $2.1 million.
The Company continues to exercise its conservative approach to investing by
making high quality investments and controlling interest rate risk through the
averaging of investments in medium-term maturities.
At March 31, 1997, net loans were $522.3 million, a net increase of $24.5
million or 4.9 percent over December 31, 1996. The primary increases of
outstanding loan balances was $17.9 million in commercial mortgages and $6.7
million in real estate secured loans. The Bank had approximately $122.1 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, borrowings and loan repayments and maturing securities.
The Bank has approximately $3.3 million of loans, collateralized by 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 were less than one percent of total assets at March 31, 1997.
The Bank's allowance for loan losses increased $.5 million or 9.1 percent to
$6.3 million at March 31, 1997, from $5.7 million at December 31, 1996. The
allowance for loan losses represented 1.19 percent of gross loans outstanding at
March 31, 1997, compared to 1.14 percent at December 31, 1996. The allowance
reflects a provision of $630,000 and net charge-offs of $107,000 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 three months ended March 31, 1997, the Bank increased the amount of
outstanding advances with the Federal Home Loan Bank of New York by $9.7
million, while borrowings under repurchase agreements decreased slightly. As
noted above, municipal time deposits increased $46.1 million. These transactions
represent funds borrowed on a short-to-intermediate-term basis as part of the
Bank's overall leveraging strategy.
On February 5, 1997, the Company issued Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust ("Capital Securities") in an
aggregate amount of $20 million. The Capital Securities quality as Tier I
Capital for regulatory purposes and the payments are
18
<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)
deductible for tax purposes. The net proceeds of approximately $19 million from
the issuance of the Capital Securities were used to reduce 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 decreased to $54.3 million at March 31, 1997, from the
December 31, 1996 balance of $56.9 million. The decrease primarily results from
the redemption of $3.3 million of preferred stock, an increase in the unrealized
loss on available for sale securities, net of tax of $1.2 million, and dividends
paid, partially offset by net income of $2.3 million for the three month period
ended March 31, 1997. During the first quarter of 1997, the Company also sold
11,250 shares of treasury stock at fair market value in the aggregate amount of
$203,000 and purchased 5,000 shares of treasury stock for $105,000.
The Company's leverage ratio at March 31, 1997 was 9.03 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 12.86 percent and 13.93 percent at
March 31, 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 March 31, 1997 and
December 31, 1996.
RESULTS OF OPERATIONS
Earnings
Net income for the three month period ended March 31, 1997 increased $82,000 or
3.6 percent to $2,332,000 compared to the same period in 1996. Net income per
common and common equivalent share increased to $.35 in the quarter ended March
31, 1997 from $.34 in the same period in 1996. The annualized return on average
total assets was 1.11 percent for the three months ended March 31, 1997 compared
to 1.30 percent for the three months ended March 31, 1996. The overall increase
in earnings in the 1997 quarter 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 a higher loan loss provision,
lower service fee income, and higher non-interest expenses to support increased
business, while the three months ended March 31, 1996 was also favorably
impacted by net gains on sales of securities and loans. A discussion of the
factors impacting the changes in the various components of net income follows.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three month period ended March 31, 1997, net interest income increased 17.1
percent to $8.0 million from $6.8 million in the year earlier period. Net
interest income increased in the current quarter due to volume increases of
19
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Net Interest Income (Cont'd)
average earning assets, partially offset by a decrease in the net interest
spread. For the three months ended March 31, 1997 and 1996, the interest spread
(yield on earning assets less cost of funds) was 3.59 percent and 3.65 percent,
respectively. Yields on interest earning assets increased during the three month
period ended March 31, 1997, while the cost of funds increased at a higher rate
compared to the same period 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 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 $155,000 to $630,000 for the three month
period ended March 31, 1997, compared to the same period in 1996. Net
charge-offs in the first three months of 1997 totaled $107,000 relating
primarily to real estate loans, compared to $114,000 of net charge-offs
(principally real estate loans) during the same period in 1996. Nonaccrual loans
were $7.7 million at March 31, 1997, compared to $8.1 million at December 31,
1996, and $7.2 million at March 31, 1996. The Bank has approximately $3.3
million of loans, collateralized by lease receivables, to Bennett Funding Group,
a lease finance company, which filed for bankruptcy during the first quarter of
1996. The Bank does not yet know the extent of losses, if any, that will be
sustained on these loans. However, based upon Bennett's filing, the loans were
placed on nonaccrual status in March 1996. It is the Company's policy to
discontinue the accrual of interest on loans when, in the opinion of management,
a reasonable doubt exists as to the timely collectibility of the amounts due.
Net income is adversely impacted by the level of non-performing assets of the
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 business and
economic uncertainties in relation to the Company's loan portfolio and believes
that the allowance for loan losses at March 31, 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 months ended March 31, 1997 decreased by
$354,000 to $871,000 from $1,225,000 in the same period of 1996. The first
quarter decrease is related to
20
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Non-Interest Income (Cont'd)
lower net gains on securities and loan transactions ($365,000) in the three
month period ended March 31, 1997, and lower service charges and fees ($52,000)
partially offset by higher other income ($63,000).
The decrease in service charges was due to lower insufficient funds charges and
increased competition impacted the level of fees charged.
Other income, which consists of credit card fees, loan servicing income, wire
transfer fees, safe deposit, and other fees, increased slightly due to growth in
credit card revenue and other income.
Non-Interest Expenses
Non-interest expenses increased $657,000 to $4,899,000 for the three month
period ended March 31, 1997 from the comparable period in 1996. The primary
reasons for this increase result from an increase in salaries and other
operating costs to support growth of the Bank. The following section discusses
each component of non-interest expense.
Salaries and benefits, the largest component of non-interest expense, increased
by $295,000 during the three month period ended March 31, 1997 compared to the
previous year, which represented an increase of 12.4 percent. The salary
increases occurred due to additional personnel necessary for the Bank to
accommodate the increases in both deposits and loans and their related services
and annual merit increases. The increase in employee benefits occurred because
of an increase in incentive compensation programs which is 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.
o The changes in the other components of non-interest expenses for the three
month period ended March 31, 1997 compared to March 31, 1996 were due to
the following:
o Increase of $112,000 (13.5%) in occupancy and equipment expense. This
increase is due principally to higher maintenance expenses relating to the
Bank's branch and computer related equipment, and 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.
o Decrease of $38,000 (16.7%) in advertising and business development. The
decrease reflects management control of advertising and promotion
activities.
o Increase of $131,000 (58.7%) in professional fees. This increase relates
to accounting and auditing fees, and professional fees primarily
associated with loan collections, foreclosures and other litigation.
21
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Cont'd)
Non-Interest Expenses (Cont'd)
o Increase of $36,000 (22.8%) 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.
o Increase of $27,000 (29.7%) 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.
o Increase of $21,000 in FDIC insurance premiums results from new FDIC
deposit premiums, which became effective in January 1997, to finance the
FICO bonds.
o Increase of $73,000 (21.5%) in other expenses, results from higher branch
charge-offs, accruals for a contribution to the U.S.B Foundation, Inc.,
offset by lower foreclosure related expenses.
Income Taxes
The effective tax rates for the three month periods ended March 31, 1997 and
1996 was 30.3 percent and 32.7 percent, respectively. The decrease in the
overall effective tax rate in 1997 primarily reflects lower state income taxes.
22
<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. Two Form 8-K's dated January 28, 1997 and
February 6, 1997, were filed by the Company during the quarter ended
March 31, 1997. On January 28, 1997, the Company issued a press
release announcing its earnings for the year and quarter ended
December 31, 1996. A copy of the press release was filed as Exhibit
99 to the Form 8-K.
On February 6, 1997, the Company issued a press release announcing
its issuance of $20 million of Trust Preferred Securities. A copy of
the press release was filed as Exhibit 99 to the Form 8-K.
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 May 14, 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)
23
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
Three Months Ended
March 31, 1997
--------------------
(000's, Except Share Data)
Weighted average number of common shares outstanding 6,187,305
Assuming exercise of options reduced by the number
of shares which could have been purchased with the
proceeds from exercise of such options 445,287
----------
Weighted average common and common equivalent shares 6,632,592
==========
Net income $ 2,332
Less: Preferred stock dividend requirements 34
----------
Net income available to common shareholders $ 2,298
==========
Net income per common and common equivalent share $ 0.35
==========
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,735
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 206,202
<INVESTMENTS-CARRYING> 99,901
<INVESTMENTS-MARKET> 306,103
<LOANS> 522,252
<ALLOWANCE> 6,265
<TOTAL-ASSETS> 891,360
<DEPOSITS> 742,056
<SHORT-TERM> 28,475
<LIABILITIES-OTHER> 6,437
<LONG-TERM> 39,996
0
0
<COMMON> 31,672
<OTHER-SE> 11,688
<TOTAL-LIABILITIES-AND-EQUITY> 891,360
<INTEREST-LOAN> 11,317
<INTEREST-INVEST> 4,636
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,953
<INTEREST-DEPOSIT> 6,760
<INTEREST-EXPENSE> 7,950
<INTEREST-INCOME-NET> 8,003
<LOAN-LOSSES> 630
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 4,899
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<INCOME-PRE-EXTRAORDINARY> 2,332
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<CHANGES> 0
<NET-INCOME> 2,332
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 0
<LOANS-NON> 7,703
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<ALLOWANCE-OPEN> 5,742
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<ALLOWANCE-CLOSE> 6,265
<ALLOWANCE-DOMESTIC> 6,265
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
