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, 1998 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 MAY 1, 1998
----- --------------------------
Common stock, par value 12,459,025
$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, 1998 (UNAUDITED) AND DECEMBER 31, 1997 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED) 3
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED) 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 24
PART II. OTHER INFORMATION AND SIGNATURES 25
-I-
<PAGE>
PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
March 31, December 31,
1998 1997
----------- -----------
ASSETS (000's, except share data)
Cash and due from banks $ 21,114 $ 19,622
Federal funds sold 18,300 25,800
----------- -----------
Cash and cash equivalents 39,414 45,422
Securities:
Available for sale (at estimated fair value) 299,043 243,723
Held to maturity (estimated fair value
$73,657 in 1998 and $139,871 in 1997) 70,760 137,177
Loans held for sale -- 340
Loans, net of allowance for loan losses of
$7,833 in 1998 and $7,558 in 1997 580,507 555,769
Premises and equipment, net 10,687 10,387
Accrued interest receivable 7,429 7,287
Other real estate owned 1,816 2,021
Federal Home Loan Bank of New York stock 13,723 13,723
Other assets 7,901 7,551
----------- -----------
TOTAL ASSETS $ 1,031,280 $ 1,023,400
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 107,554 $ 106,038
Interest bearing deposits:
NOW accounts 57,899 46,512
Money market accounts 40,978 42,126
Savings deposits 261,349 244,224
Time deposits 385,110 358,895
----------- -----------
Total deposits 852,890 797,795
Accrued interest payable 3,643 3,665
Accrued expenses and other liabilities 6,351 5,361
Securities sold under agreements to repurchase 59,780 74,643
Federal Home Loan Bank of New York advances 23,873 59,160
----------- -----------
Total liabilities 946,537 940,624
Corporation-Obligated mandatory redeemable
capital securities of subsidiary trust 20,000 20,000
Minority interest-junior preferred stock
of consolidated subsidiary 137 137
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $5 par value; authorized shares
20,000,000; issued shares of 12,579,120 in
1998 and 12,558,022 in 1997 62,896 62,790
Additional paid-in capital 186 212
Retained earnings 2,912 645
Treasury stock at cost, 129,031 shares
in 1998 and 128,122 shares in 1997 (885) (866)
Shares held in trust for deferred compensation (1,152) (1,441)
Net unrealized gain on securities available
for sale, net of tax 649 1,299
----------- -----------
Total stockholders' equity 64,606 62,639
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,031,280 $ 1,023,400
=========== ===========
See notes to consolidated financial statements.
1
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31, March 31,
1998 1997
-------- --------
(000's, except share data)
INTEREST INCOME:
Interest and fees on loans $ 12,768 $ 11,317
Interest on federal funds sold 280 179
Interest and dividends on securities:
U.S. Treasury and government agencies 2,437 1,835
Mortgage-backed securities 2,779 1,746
Obligations of states and political
subdivisions 816 788
Corporate and other 7 19
Dividends on Federal Home Loan Bank of
New York stock 250 69
-------- --------
Total interest income 19,337 15,953
======== ========
INTEREST EXPENSE:
Interest on deposits 8,338 6,747
Interest on borrowings 1,484 902
Interest on Corporation - Obligated
mandatory redeemable capital securities
of subsidiary trust 488 288
-------- --------
Total interest expense 10,310 7,937
======== ========
NET INTEREST INCOME 9,027 8,016
Provision for loan losses 300 630
-------- --------
Net interest income after provision for
loan losses 8,727 7,386
======== ========
NON-INTEREST INCOME:
Gain (loss) on securities transactions - net 318 (3)
Gain on loans held for sale - net -- 7
Service charges and fees 622 649
Other income 252 205
-------- --------
Total non-interest income 1,192 858
======== ========
NON-INTEREST EXPENSES:
Salaries and employee benefits 3,122 2,665
Occupancy and equipment expense 1,115 944
Advertising and business development 277 190
Professional fees 282 354
Communications 202 194
Stationery and printing 161 118
FDIC insurance 26 22
Other expenses 524 412
-------- --------
Total non-interest expenses 5,709 4,899
-------- --------
Income before income taxes 4,210 3,345
Provision for income taxes 1,259 1,013
-------- --------
NET INCOME $ 2,951 $ 2,332
======== ========
BASIC EARNINGS PER SHARE $ .24 $ .19*
======== ========
DILUTED EARNINGS PER SHARE $ .22 $ .17*
======== ========
* Adjusted for two-for-one stock split in December 1997.
See notes to consolidated financial statements.
2
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31, March 31,
1998 1997
--------- ---------
(000's)
OPERATING ACTIVITIES:
Net income $ 2,951 $ 2,332
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300 630
Depreciation and amortization 401 361
Amortization/accretion of premiums (discounts)
on securities - net 106 82
Deferred taxes (248) (306)
(Gain) loss on securities transactions - net (318) 3
Gain on loans held for sale - net -- (7)
Origination of loans held for sale -- (265)
Proceeds from sales of loans held for sale -- 481
Other - net 1,477 1,090
--------- ---------
Net cash provided by operating activities 4,669 4,401
========= =========
INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale 41,394 17,633
Proceeds from principal paydowns, redemptions
and maturities of securities available for sale 36,339 3,720
Proceeds from redemptions and maturities of
securities held to maturity 66,474 1,160
Purchases of securities available for sale (133,933) (60,940)
Purchases of securities held to maturity (90) (20,098)
Loans originated, net of principal collections (24,698) (25,590)
Purchases of premises and equipment - net (698) (766)
Proceeds from sales of OREO 213 147
Purchase of Federal Home Loan Bank of
New York stock -- (549)
--------- ---------
Net cash used for investing activities (14,999) (85,283)
========= =========
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing
deposits, NOW, money market and savings accounts 28,880 (5,151)
Increase in time deposits, net of withdrawals
and maturities 26,215 64,927
Net (decrease) increase in Federal Home Loan Bank
advances - short-term (35,000) 10,000
Repayment of Federal Home Loan Bank advances
- long-term (287) (271)
Net decrease in securities sold under agreements
to repurchase - short-term (34,863) (950)
Proceeds from securities sold under agreements to
repurchase - long-term 20,000 --
Net proceeds from issuance of Corporation-Obligated
mandatory redeemable capital securities of
subsidiary trust -- 19,225
Proceeds from sale of junior preferred stock of
consolidated subsidiary -- 137
Proceeds from issuance of common stock 80 21
Proceeds from sale of treasury stock -- 203
Redemption of preferred stock -- (3,250)
Cash dividends paid (684) (590)
Purchase of treasury stock (19) (105)
--------- ---------
Net cash provided by financing activities 4,322 84,196
========= =========
-Continued-
3
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
Three Months Ended
March 31, March 31,
1998 1997
--------- ---------
(000's)
(Decrease) Increase in Cash and Cash Equivalents $ (6,008) $ 3,314
Cash and Cash Equivalents, Beginning of Period 45,422 29,621
--------- ---------
Cash and Cash Equivalents, End of Period $ 39,414 $ 32,935
========= =========
Supplemental Disclosures:
Interest paid $ 10,332 $ 7,070
--------- ---------
Income tax payments $ 227 $ 364
--------- ---------
Transfer of assets to OREO $ -- $ 210
--------- ---------
Transfer of loans held for sale to loans held to
maturity at lower of cost or fair value $ 338 $ --
--------- ---------
Change in shares held in trust for deferred
compensation $ 289 $ --
--------- ---------
Change in net unrealized gain on securities
available for sale - net of tax $ (650) $ (1,218)
--------- ---------
See notes to consolidated financial statements.
4
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(000's, except share data)
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Shares Held Gain on
------------------------ Additional in Trust Securities
Shares $5 Par Paid-in Retained Treasury for Deferred Available
Outstanding Value Capital Earnings Stock Compensation for Sale
----------- ------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 12,429,900 $62,790 $ 212 $ 645 $ (866) $ (1,441) $ 1,299
Net income 2,951
Cash dividends:
Common
($.055 per share) (684)
Common Stock Issued:
Incentive stock
options exercised 21,098 106 (26)
($2.15 to $6.82
per share)
Purchase of treasury stock (909) (19)
Change in shares held
in trust for deferred
compensation 289
Change in net unrealized
gain on securities
available for sale
net of tax (650)
---------- ------- ----------- ----------- ----------- ----------- -----------
Balance at
March 31, 1998 12,450,089 $62,896 $ 186 $ 2,912 $ (885) $ (1,152) $ 649
========== ======= =========== =========== =========== =========== ===========
</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"), and its wholly-owned subsidiaries,
Union State Bank (including its wholly-owned subsidiaries, U.S.B. Realty
Corp., U.S.B. Financial Services, Inc., and Dutch Hill Realty Corp.) (the
"Bank"), and the Company's non-bank subsidiaries, Ad Con, Inc. and Union
State Capital Trust I.
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, 1998, and operations and cash flows for the
three month periods ended March 31, 1998 and 1997, and changes in
stockholders' equity for the three month period ended March 31, 1998. 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
1997 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.
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, 1998. 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)(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. Earnings Per Share
On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. The
Company adopted SFAS No. 128 for the year ended December 31, 1997 and
Earnings Per Share ("EPS") data is presented based on the requirements of
this statement.
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 net income available to common stockholders
(net income after preferred stock dividend requirements) 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 the earnings of the entity. Diluted EPS is computed similarly to
"Fully Diluted EPS" pursuant to Accounting Principles Board ("APB")
Opinion No. 15. Diluted EPS is based on net income available to common
stockholders divided by the weighted average number of common shares
outstanding and common equivalent shares ("adjusted weighted average
shares"). Stock options granted but not yet exercised under the Company's
stock option plans are considered common stock equivalents for Diluted EPS
calculations.
7
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
The following table sets forth the computation of Basic and Diluted
earnings per share:
- --------------------------------------------------------------------------------
(000's, except share data)
March 31, March 31,
1998 1997
- --------------------------------------------------------------------------------
Numerator:
Net income $ 2,951 $ 2,332
Less preferred stock dividends -- 34
- --------------------------------------------------------------------------------
Numerator for Basic and Diluted earnings
per share - net income available to
common stockholders $ 2,951 $ 2,298
================================================================================
Denominator:
Denominator for Basic earnings per share
- weighted average shares 12,438,109 12,374,610*
Effects of dilutive securities:
Director and employee stock options 1,284,378 890,574*
- --------------------------------------------------------------------------------
Denominator for Diluted earnings per share
- adjusted weighted average shares 13,722,487 13,265,184*
================================================================================
Basic earnings per share $ .24 $ .19*
Diluted earnings per share $ .22 $ .17*
================================================================================
*Adjusted for two-for-one stock split in December 1997.
6. Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which 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, except for interim financial reporting periods where
disclosure is made in the notes to consolidated 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."
8
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
The following table details the Company's comprehensive income for the
three months ended March 31, 1998 and 1997:
--------------------------------------------------------------------------
Three months ending
March 31
Description 1998 1997
--------------------------------------------------------------------------
(000's)
Net Income $ 2,951 2,332
Other comprehensive income, net of tax:
Unrealized holding losses on
securities available for sale
arising during the period (418) (1,231)
Reclassification adjustment,
net of tax, for net gains (losses)
realized in the quarter
that were held at the beginning
of the period (232) 13
------- -------
Net loss recognized ine other
comprehensive income (650) (1,218)
------- -------
Comprehensive Income $ 2,301 $ 1,114
==========================================================================
These unrealized holding losses, net of tax benefit, represent a decrease
in unrealized appreciation of available for sale securities, net of tax,
during the three months ended March 31, 1998. The cumulative balance of
this unrealized gain net of tax, at March 31, 1998 is $649,000.
7. Disclosures About Segments of an Enterprise and Related Information
In September 1997, the FASB issued SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information." This statement is
effective for the Company's consolidated financial statements for the year
ending December 31, 1998.
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in subsequent interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and assess
performance. The statement requires that public business enterprises
report a measure of segment profit or loss, certain specific revenue and
expense items and segment assets. It also requires that information be
reported about revenues derived from the enterprises' products or
services, or about the countries in which the enterprises earn revenues
and holds assets, and about major customers, regardless of whether that
information is used in making operating decisions.
9
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
This statement requires disclosures that the Company must make in its
financial statements or notes thereto to the extent applicable.
Accordingly, implementation of this statement will not have any effect on
the Company's financial condition or results of operations. However,
additional information will be provided to users of these financial
statements as to the financial condition and operations of the Company.
8. Loans
Nonaccrual loans were $5.4 million at March 31, 1998 and $5.8 million at
December 31, 1997. Restructured loans were $0.5 million and $0.6 million
at March 31, 1998 and December 31, 1997, respectively.
Substantially, all of the nonaccruing loans are collateralized by real
estate, except for certain loans made by the Bank to Bennett Funding Group
("Bennett"), which are collateralized by cash and lease receivables. At
March 31, 1998, the Company has no commitments to lend additional funds to
any customers with nonaccrual or restructured loan balances.
At March 31, 1998, there are loans aggregating approximately $100,000,
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, 1998 and December 31, 1997, the recorded investment in loans
that are considered to be impaired under SFAS No. 114 "Accounting for
Impairment of a Loan" approximated $4.6 million in each period ($4.2
million in each period which were in nonaccrual status). Included in these
loan balances are loans to Bennett. Each impaired loan has a related
allowance for loan losses determined in accordance with SFAS No. 114. The
total allowance for loan losses related to impaired loans was $1.8 million
as of March 31, 1998 and December 31, 1997. The average recorded
investment in impaired loans for the three months ended March 31, 1998 and
year ended December 31, 1997 was approximately $4.6 million and $6.2
million, respectively. For the three months ended March 31, 1998 and year
ended December 31, 1997, interest income recognized by the Company on
impaired loans was not material.
Restructured loans in the amounts of $0.4 million at both March 31, 1998
and December 31, 1997, that are considered to be impaired due to a
reduction in the contractual interest rate are on accrual status because
the collateral securing the loans is sufficient to protect the contractual
principal and interest of the restructured loans. These loans have been
performing for a reasonable period of time. Interest accrued on these
loans not yet collected as of March 31, 1998 is immaterial.
10
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
The Bank has approximately $3.3 million of outstanding loans,
collateralized by cash and lease receivables, to Bennett, a lease finance
company, which filed for bankruptcy protection during the first quarter of
1996. Collection of the Bank's loans continues to be delayed by the
bankruptcy proceedings. The Bank has not yet determined the extent of
losses, if any, that will be sustained on these loans. However, based upon
Bennett's filing, the loans have been placed on nonaccrual status and a
specific reserve included in the allowance for loan losses of $1.6 million
has been established in accordance with SFAS No. 114 as of March 31, 1998.
9. 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 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. Realized
gains and losses on the sales of all securities, determined by using the
specific identification method, are reported in earnings. Securities
available for sale are shown in the Consolidated Statements of Condition
at estimated fair value and the resulting net unrealized gains and losses,
net of tax, are shown as a separate component of stockholders' equity.
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. Estimated fair values for securities are based on quoted market
prices, where available. If quoted market prices are not available,
estimated 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.
At March 31, 1998, the effect of SFAS No. 115 resulted in an increase of
securities available for sale of $1,125,000, representing the net
unrealized gain, which, after the applicable tax effect, resulted in an
increase to stockholders' equity of $649,000. At December 31, 1997, the
effect of SFAS No. 115 resulted in an increase of securities available for
sale of $2,250,000 which, after the applicable tax effect, resulted in an
increase to stockholders' equity of $1,299,000.
11
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
A summary of the amortized cost and estimated fair value of securities and
related gross unrealized gains and losses at March 31, 1998 and December
31, 1997, follows:
<TABLE>
<CAPTION>
========================================================================================
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
========================================================================================
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and
government agencies $ 78,987 $ 658 $ 185 $ 79,460
Mortgage-backed securities 217,651 1,052 457 218,246
Obligations of states and
political subdivisions 1,166 57 -- 1,223
Other 114 -- -- 114
----------------------------------------------------------------------------------------
Total securities available for sale $297,918 $ 1,767 $ 642 $299,043
========================================================================================
Held to Maturity:
Mortgage-backed securities $ 9,786 $ 245 $ -- $ 10,031
Obligations of states and
political subdivisions 60,974 2,652 -- 63,626
----------------------------------------------------------------------------------------
Total securities held to maturity $ 70,760 $ 2,897 $ -- $ 73,657
========================================================================================
<CAPTION>
========================================================================================
(000's)
Gross Gross Estimated
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 $117,495 $ 1,067 $ 43 $118,519
Mortgage-backed securities 122,698 1,223 58 123,863
Obligations of states and
political subdivisions 1,166 61 -- 1,227
Other 114 -- -- 114
----------------------------------------------------------------------------------------
Total securities available for sale $241,473 $ 2,351 $ 101 $243,723
========================================================================================
Held to Maturity:
U.S. Treasury and
government agencies $ 44,988 $ -- $ 236 $ 44,752
Mortgage-backed securities 29,791 212 142 29,861
Obligations of states and
political subdivisions 62,398 2,860 -- 65,258
----------------------------------------------------------------------------------------
Total securities held to maturity $137,177 $ 3,072 $ 378 $139,871
========================================================================================
</TABLE>
12
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
10. Borrowings and Stockholders' Equity
The Company utilizes borrowings primarily to meet the funding requirements
for its asset growth and to manage its interest rate risk. Borrowings
include securities sold under agreements to repurchase, federal funds
purchased, and Federal Home Loan Bank of New York ("FHLB") advances.
The Bank may borrow up to $50.0 million from two primary investment firms
under master security sale and repurchase agreements. At December 31,
1997, the Bank had $34.9 million of such short-term borrowings outstanding
with terms of between 21 and 31 days, at interest rates of between 5.86
percent and 6.00 percent. The borrowings were collateralized by securities
with an aggregate amortized cost and estimated fair value of $35.5 million
and $35.6 million, respectively. There were no short-term borrowings under
security sale and repurchase agreements at March 31, 1998.
Federal funds purchased represent overnight funds. The Bank has federal
funds purchase lines available with three financial institutions totaling
$18.0 million. At March 31, 1998 and December 31, 1997, 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 December 31, 1997, the Bank had short-term
FHLB advances of $35.0 million outstanding with terms of 14 to 365 days,
and at interest rates ranging from 5.63 percent to 6.13 percent. There
were no short-term FHLB advances outstanding at March 31, 1998.
Additional information with respect to short-term borrowings for the three
months ended March 31, 1998 and 1997 is presented in the table below.
--------------------------------------------------------------------------
(000's, except percentages)
Short-Term Borrowings 1998 1997
==========================================================================
Balance at March 31 $ -- $ 43,475
Average balance outstanding 27,479 37,314
Weighted-average interest rate*
As of March 31 -- 5.70%
Paid during period 5.84% 5.67%
==========================================================================
*The weighted-average interest rates have been adjusted to reflect the
effect of an interest rate swap used to convert a variable rate borrowing
to a fixed rate.
At March 31, 1998 and December 31, 1997, long-term FHLB advances totaled
$23.9 million and $24.2 million, respectively. At March 31, 1998,
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 $4.9 million are amortizing advances
having scheduled payments, but may not be repaid in full prior to maturity
without penalty.
13
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
The Bank also has long-term borrowings of $59.8 million and $39.7 million
in securities sold under agreements to repurchase as of March 31, 1998 and
December 31, 1997, respectively. At March 31, 1998, these borrowings
include $9.8 million having an original term of three years at an interest
rate of 6.08 percent, and $50.0 million having an original term of between
five and ten years at interest rates between 5.28 percent and 5.67 percent
that are callable after an initial noncall period at the option of the
counter party to the repurchase agreement. The borrowings are
collateralized by securities with an aggregate amortized cost of $62.2
million and estimated fair value of $62.9 million.
At March 31, 1998 and December 31, 1997, the Bank has outstanding
13,723,422 shares of capital stock in the FHLB with a carrying value of
$13.7 million, which is required in order to borrow under the short and
long-term advance and securities sold under agreements to repurchase
programs from the FHLB. The FHLB generally limits borrowings up to an
aggregate of 30 percent of total assets, excluding securities sold under
agreements to repurchase, upon the prerequisite purchase of additional
shares of FHLB stock. Any advances made from the FHLB are required to be
collateralized by the FHLB stock purchased and certain other assets of the
Bank.
The following table is a summary of long-term debt, all of which was fixed
rate, distributed based upon remaining contractual maturity at March 31,
1998, with comparative totals for December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(000's, except percentages)
After 1
Within But Within After 1998 1997
1 Year 5 Years 5 Years Total Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total long-term debt $10,000 $31,308 $42,345 $83,653 $63,940
Weighted-average interest rate 6.18% 5.85% 5.70% 5.81% 5.92%
- --------------------------------------------------------------------------------------
</TABLE>
The dividend rate on the Company's Series "A" preferred stock issued 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 three month period ended March 31, 1997, the weighted
average dividend rate was 8.4 percent (the minimum rate). Net income per
common and common equivalent share reflects the preferred stock dividend
declared and accrued totaling $34,000 for the three month period ended
March 31, 1997. The Company redeemed the remaining outstanding amount of
preferred stock of $3,250,000 on February 14, 1997.
The Company issued a two-for-one stock split in the form of a 100% stock
dividend on December 24, 1997. The weighted average shares outstanding and
per share amounts for the three months ended March 31, 1997 have been
adjusted to reflect the stock dividend distributed in 1997.
14
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 March 31, 1998, the Bank could
pay dividends to the Company of $19.2 million without having to obtain
prior regulatory approval.
11. Commitments and Contingencies
At March 31, 1998, the Company and Bank are committed under an employment
agreement (as amended by action of the Company's and Bank's Boards of
Directors on February 18, 1998), with a key officer, director and
shareholder requiring annual salary and other payments of $530,000,
increasing annually by $30,000 during the term of the contract, annual
bonus payments equal to 6 percent of net income of the Company under the
executive compensation plan, annual stock option grants of 96,800 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 March 31, 1998, formal credit line and loan commitments
which are primarily loans collateralized by real estate and credit card
lines approximated $161.7 million and outstanding letters of credit
totaled $21.8 million. Such amounts represent the maximum risk of loss on
these commitments.
In connection with its asset and liability management program, the Bank
entered into a protected rate agreement ("cap") which has a remaining
aggregate notional amount of $2.5 million at March 31, 1998. The premium
paid in the amount of $85,000 is deferred and is being amortized over the
five year life of the cap which expires in 1999. 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
percent 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 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 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 $31,000
(liability) at March 31, 1998.
15
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
The Bank enters into forward commitments to sell residential first
mortgage loans to reduce market risk associated with originating and
holding loans for sale. A risk associated with these commitments arises
from the Bank's potential inability to generate loans to fulfill the
contracts. To control the risk associated with changes in interest rates,
the Bank may also use options to hedge loans closed and expected to close.
No such contracts were outstanding at March 31, 1998.
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a
material effect on the Company's consolidated financial position or
results of operations.
12. Acquisition of Tappan Zee Financial, Inc.
On March 6, 1998, the Company and Tappan Zee Financial, Inc. ("Tappan
Zee"), the parent company of Tarrytowns Bank, FSB, jointly announced that
they have signed a definitive agreement pursuant to which they will enter
into a business combination. The transaction is intended to be a tax free
exchange of common shares and will be accounted for as a pooling of
interests. Tappan Zee will be merged into the Company and Tarrytowns Bank,
FSB will operate as a wholly-owned subsidiary of the Company.
Under the terms of the agreement, each Tappan Zee shareholder will receive
Company common stock that is anticipated to have a value of $22.00 per
share for each Tappan Zee share. The exchange ratio will be finalized
after all regulatory approvals are received. The minimum exchange ratio
will be .88 Company shares for each Tappan Zee share if the Company's
common stock has a value of $25.00 per share or higher, and, subject to
the exception below, the maximum exchange ratio will be 1.24 Company
shares for each Tappan Zee share if the Company's common stock has a value
of $17.75 or lower. If the Company's common stock has a value of between
$17.75 and $25.00 per share, the exchange ratio will be established to
provide a value to Tappan Zee shareholders of $22.00 per share. If the
Company's common stock falls below $15.00 per share, Tappan Zee will have
the right to terminate the transaction subject to the Company's right to
adjust the exchange ratio so as to assure that Tappan Zee shareholders
receive a value of $18.60 per Tappan Zee share. Based on the Company's
closing price per common share on March 6, 1998 and March 31, 1998 of
$22.25 and $20.50 per share, each Tappan Zee share would be exchanged for
0.99 and 1.07 shares, respectively, of Company common stock. The total
value of the transaction is approximately $33.8 million, which represents
1.51 time Tappan Zee's book value as of December 31, 1997.
As of March 31, 1998, Tappan Zee has approximately $129 million in assets
and operates a single banking facility in the Village of Tarrytown,
Westchester County, New York. Had the business combination occurred as of
March 31, 1998, the Company would have had approximately $1.160 billion in
assets. After an acquisition charge of approximately $3 million to $3.5
million (net of tax) in 1998, the transaction is expected to be accretive
to earnings per share in 1999.
16
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
The acquisition is contingent upon the satisfaction of necessary bank
regulatory approvals, the approval of the shareholders of Tappan Zee and
other customary conditions. The parties anticipate that the merger will be
consummated in the third quarter of 1998.
In connection with the merger agreement, Tappan Zee has granted the
Company an option, exercisable under certain circumstances, to purchase
294,134 shares, or 19.9%, of Tappan Zee's currently outstanding common
stock.
13. Subsequent Event
On April 16, 1998, the Company announced that it intended to dissolve its
Real Estate Investment Trust subsidiary, U.S.B. Realty Corp. (the "Realty
Corp"), in a tax free liquidation. A proxy statement was mailed to the
common and junior preferred shareholders of the Realty Corp. , and a
special meeting was held on April 29th, at which time the shareholders of
the Realty Corp. approved the proposal. The Company believes that
dissolution of the Realty Corp. will make the Realty Corp. assets
available for collateralization of Bank borrowings and will result in a
reduction of the cost of administration. Dissolution of the Realty Corp.,
subject to a number of conditions and factors, will also have a
significant positive impact on the Company's 1998 tax provision, but may
increase the effective tax rate slightly in future years.
17
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At March 31, 1998, the Company had total assets of $1,031.3 million, an increase
of $7.9 million from December 31, 1997.
Total deposits increased $55.1 million for the three month period ended March
31, 1998 to $852.9 million, which represented a 6.9 percent increase from
December 31, 1997. Time deposits increased $26.2 million accounting for the
greatest component of deposit increases. Retail time deposits under $100,000
increased by $4.5 million due primarily to time deposit promotions, and other
time deposits over $100,000 increased by $1.5 million during the three month
period ended March 31, 1998. 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 $20.5 million as part of the Bank's overall leveraging
strategy. IRA and Keogh time deposit accounts decreased by $0.2 million due to
significant competition for this product. Savings deposits increased by $17.1
million, as the Company's "Golden Statement" and "Liquid Gold" accounts, which
provide attractive yields for high balance accounts, continued to attract
additional deposits. NOW accounts and demand deposits increased by $11.4 million
and $1.5 million, respectively. Money market deposits decreased by $1.1 million,
as customers generally switched money market account balances to higher yielding
deposit products.
The securities portfolio, including investment in FHLB stock, of $383.5 million
and $394.6 million at March 31, 1998 and December 31, 1997, respectively,
consists of securities held to maturity at amortized cost of $70.8 million and
$137.2 million, securities available for sale at estimated fair value totaling
$299.0 million and $243.7 million, respectively, and FHLB stock of $13.7 million
in each period.
During the three months ended March 31, 1998, U.S. Treasury and government
agency obligations decreased $84.0 million due primarily to sales and
redemptions of securities totaling $104.5 million and a net decrease in the
market value of available for sale securities of $0.5 million, partially offset
by purchases of $1.0 million in U.S. Treasury Notes, $20.0 million in callable
bonds. Mortgage-backed securities increased by $74.4 million primarily due to
purchases of $112.9 million, which were offset by a net decrease in the market
value of available for sale securities of $0.6 million, sales and redemptions
totaling $31.1 million and principal amortizations of $6.8 million.
Mortgage-backed security purchases are fixed-rate securities having expected
weighted-average lives of less than ten years. The mortgage-backed securities
sold have low yields or expectations to prepay in the near-term and were also
sold to take advantage of favorable market conditions. The Company's investment
in obligations of states and political subdivisions, or municipal securities,
decreased by $1.4 million due to maturities during the first three months of
1998. 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 comparable credit risk and maturity. The Company currently has no outstanding
holdings in corporate bonds as all such bonds aggregating $0.9 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.
18
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Cont'd)
FINANCIAL CONDITION (Cont'd)
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 March 31, 1998, loans were $588.3 million, a net increase of $24.7 million or
4.4 percent over December 31, 1997. The primary increases of outstanding loan
balances were $12.5 million in time secured loans, $10.7 million in land
acquisition and construction loans, and $3.8 million in residential mortgages
and home equity loans, offset by a net reduction of $2.3 million in all other
loan categories. The Bank had approximately $161.7 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 0.70 percent of total assets
at March 31, 1998.
The Bank's allowance for loan losses increased $0.3 million or 3.6 percent to
$7.8 million at March 31, 1998, from $7.6 million at December 31, 1997. The
allowance for loan losses represents 1.33 percent of gross loans outstanding at
March 31, 1998, compared to 1.34 percent at December 31, 1997. The allowance
reflects a provision of $300,000 and net charge-offs of $25,000 recorded thus
far in 1998. 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, 1998, the Bank decreased the amount of
outstanding short- and long-term advances with the Federal Home Loan Bank of New
York by $35.3 million, while borrowings under repurchase agreements decreased by
$14.9 million. Borrowings decreased, as such funding was replaced by retail
deposits and municipal deposits on a bid basis at a lower cost. As noted above,
municipal time deposits increased $20.5 million.
Stockholders' equity increased to $64.6 million at March 31, 1998 from the
December 31, 1997 balance of $62.6 million. The increase primarily results from
net income of $3.0 million for the three month period ended March 31, 1998, and
a decrease in shares held in trust for deferred compensation of $0.3 million,
partially offset by a decrease in the net unrealized gain on securities
available for sale, net of tax of $0.7 million and dividends paid. During the
first three months of 1998, the Company also purchased 909 shares of treasury
stock at market value for $19,000.
19
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Cont'd)
FINANCIAL CONDITION (Cont'd)
The Company's leverage ratio at March 31, 1998 was 8.22 percent, compared to
8.26 percent at December 31, 1997. The Company's Tier I and total capital ratios
under the risk-based capital guidelines were 13.03 percent and 14.24 percent at
March 31, 1998 and 12.63 percent and 13.80 percent at December 31, 1997,
respectively. In addition, the Bank exceeds all current regulatory capital
requirements and was in the "well-capitalized" category at March 31, 1998 and
December 31, 1997.
RESULTS OF OPERATIONS
Earnings
Net income for the three month period ended March 31, 1998 increased $619,000 or
26.5 percent to $2,951,000 compared to the same period in 1997. Basic and
diluted earning per share increased to $0.24 and $0.22, respectively, from $0.19
and $0.17 in the same periods in 1997, respectively. The annualized return on
average total assets was 1.16 percent for the three month period ended March 31,
1998, compared to 1.11 percent for the three month period ended March 31, 1997.
The annualized return on average common equity was 18.50 percent for the three
months ended March 31, 1998 compared to 17.13 percent for the comparative period
in 1997. The overall increase in earnings in the 1998 period primarily reflects
higher net interest income resulting from increased volume and effective
leveraging of the balance sheet, higher security gains, service charges and fees
and a lower provision for loan losses, offset by higher non-interest expenses to
support increased business and lower other income. A discussion of the factors
impacting the changes in the various components of net income follows.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three month period ended March 31, 1998, net interest income increased 12.6
percent to $9.0 million from $8.0 million in the year earlier period. Net
interest income increased in the current year period due to volume increases of
average earning assets, partially offset by a decrease in the net interest
spread. For the three months ended March 31, 1998, the interest spread (yield on
earning assets less cost of interest-bearing funds) was 3.05 percent compared to
3.36 percent in the same period of 1997. Yields on interest earning assets
decreased during the three month period ended March 31, 1998, while the cost of
funds increased compared to the same period in 1997, resulting in the negative
impact on the net interest spread. The decrease in asset yields is partially as
a result of lower yields available on security investments and redemptions of
callable agency securities at higher yields, as well as declining yields on
loans due to increased competition and a general decline in intermediate term
interest rates. The cost of funds increased due to the leverage strategy
discussed below and growth of deposits in higher rate instruments, while deposit
costs generally remained stable due to the flat yield curve and tendency of
customers to favor short-term deposit products. The decrease in the spread is
also affected by the Company's leverage strategy of purchasing government
securities funded by borrowings and/or municipal deposits at tighter spreads.
Although leverage strategies
20
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Cont'd)
result in decreasing interest spreads, they have the effect of increasing net
interest income while managing interest rate risk.
Provision for Loan Losses
The provision for loan losses decreased $330,000 to $300,000 for the three month
period ended March 31, 1998, compared to the same period in 1997. Net
charge-offs in the three month period ended March 31, 1998 totaled $25,000
relating primarily to credit card loans, compared to net charge-offs
(principally real estate loans) of $107,000 for the three month period ended
March 31, 1997. Nonaccrual loans were $5.4 million and $7.7 million,
respectively, at March 31, 1998 and 1997, compared to $5.8 million at December
31, 1997. The Bank has approximately $3.3 million of loans, collateralized by
cash and lease receivables, to Bennett, a lease finance company, which filed for
bankruptcy during the first quarter of 1996. The Bank does not yet know the
extent of losses, if any, that will be sustained on these loans. However, based
upon Bennett's filing, the loans were placed on nonaccrual status in March 1996.
It is the Company's policy to discontinue the accrual of interest on loans when,
in the opinion of management, a reasonable doubt exists as to the timely
collectibility of the amounts due. Net income is adversely impacted by the level
of non-performing assets of the Company since, in addition to foregone revenue,
the Company must increase the level of provision for loan losses, and incur
other costs associated with collections of past due balances.
An evaluation of the quality of the loan portfolio is performed by management on
an ongoing basis as an integral part of the loan function, which includes the
identification of past due loans, the recognition of the current economic
environment and the review of the historical loan 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, 1998 reflects the risk elements
inherent in the total loan portfolio at this time. The changes in the provision
charged to income and the allowance for loan losses reflects such uncertainties
on an increasing loan portfolio. There is no assurance that the Company will not
be required to make future adjustments to the allowance in response to changing
economic conditions or regulatory examinations.
Non-Interest Income
Non-interest income for the three months ended March 31, 1998 increased by
$334,000 to $1,192,000, compared to the same period of 1997. The increase is
primarily related to higher net gains on securities and loan transactions
($314,000) and other income ($47,000), partially offset by lower service charges
and fees ($27,000). Other income consists of ATM fees, credit card fees, loan
servicing income, wire transfer fees, safe deposit, and other fees.
Non-Interest Expenses
Non-interest expenses increased $810,000 to $5,709,000 for the three month
period ended March 31, 1998, from the comparable period in 1997. The primary
reason for this increase results from an increase in the cost of salaries and
other operating costs to support the growth of the Bank. The following discusses
each component of non-interest expense.
21
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Cont'd)
Salaries and benefits, the largest component of non-interest expense, increased
by $457,000, or 17.1 percent, during the three month period ended March 31, 1998
compared to the previous year period. The increase occurred due to additional
personnel employed by the Bank to accommodate the increases in deposits and
loans and their related services, and increases in business development efforts,
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 1998 due
to the higher salary base and increases in the cost of other employee benefit
programs such as medical coverage, tuition reimbursement, and training.
The changes in the other components of non-interest expenses for the three month
period ended March 31, 1998 compared to March 31, 1997, were due to the
following:
o Increase of $171,000 (18.1%) in occupancy and equipment expense. This
increase is due principally to higher maintenance expenses relating to the
Bank's branch and computer related equipment due to increased business
volume, and additional rental and depreciation expense associated with two
new branch openings.
o Increase of $87,000 (45.8%) in advertising and business development. The
increase reflects increased emphasis on marketing, and the introduction of
the Bank's new ad campaign, "Do business with us, do better with us," as
well as advertising and business development expense for the new branches.
o Decrease of $72,000 (20.3%) in professional fees. The decrease relates to
lower professional fees primarily associated with loan collections,
foreclosures and other litigation.
o Increase of $8,000 (4.1%) in communications is due to an increase in
postage and telephone expenses that arose as a result of higher postal
volume related to the growth in business.
o Increase of $43,000 (36.4%) in stationery and printing. The increase
occurred due to printing costs and supplies necessitated by increased loan
and deposit volume and opening of Suffern and New Rochelle branches.
o Increase of $4,000 in FDIC insurance premiums results from higher deposit
balances.
o Increase of $112,000 (27.2%) 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., as well as higher costs associated with stockholder
relations and stock exchange fees.
Income Taxes
The effective tax rates for the three month period ended March 31, 1998 and 1997
was 29.9 and 30.3, percent, respectively. The decrease in the overall effective
tax rate in 1998 primarily reflects lower state income taxes.
22
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Cont'd)
Year 2000 Issue
The Company continues to monitor the Year 2000 issue as more fully described in
the Company's 1997 Annual Report and Form 10-K. The Company has identified all
systems that are Year 2000 compliant and received confirmation from software
vendors of such compliance. The Company's major core system software vendor has
certified that its software is Year 2000 compliant. For systems not yet
compliant, software vendors are in the process of providing updates to ensure
such systems are compliant. In addition, significant customers are being
contacted to determine their progress toward Year 2000 compliance to evaluate
the potential impact on the Company from their failure to remediate their Year
2000 issues.
The Company's Year 2000 Committee reports progress to the Company's and Bank's
Board of Directors on a quarterly basis. The Company expects to have identified
and tested all significant Year 2000 sensitive systems by December 31, 1998.
However, there can be no guarantee that the systems of other entities on which
the Bank's systems rely will be timely converted, or that a failure to convert
by another entity, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The Company's Year 2000 project cost to date and estimates to complete are not
expected to be significant. Such costs are being expensed as incurred. The cost
of the project and the date on which the Company plans to complete the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans.
The Company will continue to evaluate all issues with respect to the Year 2000
problem to minimize the impact on its operations and financial condition.
23
<PAGE>
U.S.B. HOLDING CO., INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures on market risk at December 31, 1997
were previously reported in the Company's 1997 Annual Report and Form 10-K.
There have been no material changes in the Company's market risk exposures at
March 31, 1998 compared to December 31, 1997. Interest rate risk continues to be
the Company's primary market risk exposure since all Company transactions are
denominated in U.S. dollars with no direct foreign currency exchange or changes
in commodity price exposures. All market risk sensitive instruments continue to
be held to maturity or available for sale with no financial instruments entered
into for trading purposes. The Company does not use derivative financial
instruments such as interest rate swaps and caps extensively. However, as
disclosed in the Company's 1997 Annual Report and Form 10-K, two interest rate
contracts are in place to manage the Company's interest rate exposure. The
Company has not entered into any new derivative financial instruments during the
three months ended March 31, 1998.
The Company continues to use two methods to evaluate its market risk to changes
in interest rates. A "Static Gap" evaluation and a simulation analysis of the
impact of changes in interest rates on the Company's net interest income and
cash flow. There have been no changes in the Company's policy limit of
acceptable variances to net interest income at March 31, 1998 as compared to
December 31, 1997. The changes in the composition of the Company's assets and
liabilities for the three months ended March 31, 1998 as reported in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations have not materially affected the Company's overall interest rate risk
profile at March 31, 1998 as compared to December 31, 1997. The Company's
"static gap" at March 31, 1998 has not changed materially from December 31,
1997. If interest rates were to gradually ramp up or down 200 basis points from
current rates, the percentage change in estimated net interest income for the
subsequent 12 month measurement period continues to be within the Company's
policy limit of not declining by more than 5.0%.
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. One report on Form 8-K dated as of March
6, 1998, related to a merger agreement, was filed by the
Company during the quarter ended March 31, 1998.
On March 6, 1998, the Company and Tappan Zee Financial, Inc.
("Tappan Zee") entered into an Agreement and Plan of Merger
which set forth the terms under which Tappan Zee will be
merged into the Company.
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 13, 1998.
U.S.B. HOLDING CO., INC.
/s/ Thomas E. Hales /s/ Steven T. Sabatini
- ------------------------------------ ----------------------------------------
Thomas E. Hales Steven T. Sabatini
Chairman of the Board, President, Senior Executive Vice President Finance,
Chief Executive Officer and Director Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
25
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Three Months Ended
March 31, 1998
------------------
(000's, except share data)
Weighted average number of shares outstanding 12,438,109
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such options 1,284,378
-----------
Adjusted weighted average shares 13,722,487
-----------
Net income $ 2,951
Less: Preferred stock dividend requirements --
-----------
Net income available to common shareholders $ 2,951
===========
Basic earnings per share $ .24
===========
Diluted earnings per share $ .22
===========
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