SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 AUGUST 4, 1998
----- -----------------------------
Common stock, par value
$0.01 per share 12,521,584
<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
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) 4
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 30, 1998 and 1997 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 27
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
- i -
<PAGE>
PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
----------- -----------
ASSETS (000's, except share data)
<S> <C> <C>
Cash and due from banks $ 24,370 $ 19,622
Federal funds sold -- 25,800
----------- -----------
Cash and cash equivalents 24,370 45,422
Securities:
Available for sale (at estimated fair value) 333,362 243,723
Held to maturity (estimated fair value
$70,315 in 1998 and $139,871 in 1997) 67,482 137,177
Loans held for sale -- 340
Loans, net of allowance for loan losses of
$8,092 in 1998 and $7,558 in 1997 606,692 555,769
Premises and equipment, net 10,569 10,387
Accrued interest receivable 6,928 7,287
Other real estate owned 1,743 2,021
Federal Home Loan Bank of New York stock 13,723 13,723
Due from brokers 22,100 --
Other assets 13,809 7,551
----------- -----------
TOTAL ASSETS $ 1,100,778 $ 1,023,400
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 127,175 $ 106,038
Interest bearing deposits:
NOW accounts 54,708 46,512
Money market accounts 40,870 42,126
Savings deposits 276,134 244,224
Time deposits 401,884 358,895
----------- -----------
Total deposits 900,771 797,795
Accrued interest payable 4,084 3,665
Accrued expenses and other liabilities 4,788 5,361
Securities sold under agreements to repurchase 81,780 74,643
Federal Home Loan Bank of New York advances 19,582 59,160
----------- -----------
Total liabilities 1,011,005 940,624
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, $0.01 par value in 1998 and $5.00 par
value in 1997; authorized shares 30,000,000; issued
shares of 12,672,011 in 1998 and 12,558,022 in 1997 127 62,790
Additional paid-in capital 64,288 212
Retained earnings 7,113 645
Treasury stock at cost, 163,671 shares
in 1998 and 128,122 shares in 1997 (1,613) (866)
Shares held in trust for deferred compensation (1,336) (1,441)
Accumulated other comprehensive income 1,057 1,299
----------- -----------
Total stockholders' equity 69,636 62,639
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,100,778 $ 1,023,400
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
June 30, June 30,
1998 1997
-------- --------
(000's, except share
data)
INTEREST INCOME:
Interest and fees on loans $ 13,304 $ 11,813
Interest on federal funds sold 220 162
Interest and dividends on securities:
Mortgage-backed securities 4,458 2,176
U.S. Treasury and government agencies 1,062 2,558
Obligations of states and political subdivisions 795 797
Corporate and other 5 10
Dividends on Federal Home Loan Bank of New York stock 255 106
-------- --------
Total interest income 20,099 17,622
======== ========
INTEREST EXPENSE:
Interest on deposits 8,835 7,515
Interest on borrowings 1,343 1,288
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 488 488
-------- --------
Total interest expense 10,666 9,291
-------- --------
NET INTEREST INCOME 9,433 8,331
Provision for loan losses 300 830
-------- --------
Net interest income after provision for loan losses 9,133 7,501
-------- --------
NON-INTEREST INCOME:
Gain on securities transactions - net 686 507
Gain on loans held for sale - net -- 2
Service charges and fees 642 646
Other income 242 366
-------- --------
Total non-interest income 1,570 1,521
======== ========
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,634 2,796
Occupancy and equipment expense 1,125 968
Advertising and business development 345 266
Professional fees 424 333
Communications 192 175
Stationery and printing 165 117
FDIC insurance 24 21
Other expenses 621 748
-------- --------
Total non-interest expense 6,530 5,424
======== ========
Income before income taxes 4,173 3,598
Provision (benefit) for income taxes (779) 1,098
-------- --------
NET INCOME $ 4,952 $ 2,500
======== ========
BASIC EARNINGS PER SHARE $ 0.40 $ 0.20*
======== ========
DILUTED EARNINGS PER SHARE $ 0.36 $ 0.19*
======== ========
* 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 INCOME (UNAUDITED)
Six Months Ended
June 30, June 30,
1998 1997
-------- --------
(000's, except share
data)
INTEREST INCOME:
Interest and fees on loans $ 26,072 $ 23,130
Interest on federal funds sold 500 341
Interest and dividends on securities:
Mortgage-backed securities 6,895 4,011
U.S. Treasury and government agencies 3,841 4,304
Obligations of states and political subdivisions 1,611 1,585
Corporate and other 12 29
Dividends on Federal Home Loan Bank of New York stock 505 175
-------- --------
Total interest income 39,436 33,575
======== ========
INTEREST EXPENSE:
Interest on deposits 17,173 14,262
Interest on borrowings 2,827 2,190
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 976 776
-------- --------
Total interest expense 20,976 17,228
======== ========
NET INTEREST INCOME 18,460 16,347
Provision for loan losses 600 1,460
-------- --------
Net interest income after provision for loan losses 17,860 14,887
-------- --------
NON-INTEREST INCOME:
Gain on securities transactions - net 1,004 504
Gain on loans held for sale - net -- 9
Service charges and fees 1,264 1,295
Other income 494 571
-------- --------
Total non-interest income 2,762 2,379
======== ========
NON-INTEREST EXPENSE:
Salaries and employee benefits 6,756 5,461
Occupancy and equipment expense 2,240 1,912
Advertising and business development 622 456
Professional fees 706 687
Communications 394 369
Stationery and printing 326 235
FDIC insurance 50 43
Other expenses 1,145 1,160
-------- --------
Total non-interest expense 12,239 10,323
======== ========
Income before income taxes 8,383 6,943
Provision for income taxes 480 2,111
-------- --------
NET INCOME $ 7,903 $ 4,832
======== ========
BASIC EARNINGS PER SHARE $ 0.63 $ 0.39*
======== ========
DILUTED EARNINGS PER SHARE $ 0.58 $ 0.36*
======== ========
* Adjusted for two-for-one stock split in December 1997.
See notes to consolidated financial statements.
3
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1997
--------- ---------
(000's)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,903 $ 4,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 1,460
Depreciation and amortization 823 739
Amortization/accretion of premiums (discounts)
on securities - net 293 140
Deferred income taxes (389) (639)
Gain on securities transactions - net (1,004) (504)
Gain on loans held for sale - net -- (9)
Origination of loans held for sale -- (479)
Proceeds from sales of loans held for sale -- 481
Decrease (increase) in accrued interest receivable 359 (761)
Net increase in income taxes receivable (3,242) (144)
Other - net (2,494) (1,855)
--------- ---------
Net cash provided by operating activities 2,849 3,261
========= =========
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 51,869 52,138
Proceeds from principal paydowns, redemptions and maturities
of securities available for sale 44,903 16,915
Proceeds from redemptions and maturities of securities held to
maturity 70,489 4,699
Purchases of securities available for sale (208,148) (146,257)
Purchases of securities held to maturity (865) (26,091)
Net decrease in interest bearing deposits in other banks -- 99
Loans originated, net of principal collections (51,183) (36,444)
Purchases of premises and equipment - net (999) (863)
Proceeds from sales of OREO 267 357
Purchase of Federal Home Loan Bank of New York stock -- (4,304)
--------- ---------
Net cash used for investing activities (93,667) (139,751)
--------- ---------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 59,987 26,677
Increase in time deposits, net of withdrawals and maturities 42,989 70,171
Net (decrease) increase in securities sold under agreements
to repurchase - short-term (12,863) 32,034
Net (decrease) increase in Federal Home Loan Bank of New York
advances - short-term (34,000) 5,000
Proceeds from securities sold under agreements to
repurchase - long-term 20,000 --
Repayment of Federal Home Loan Bank of New York
advances - long-term (5,578) (546)
Net proceeds from issuance of Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust -- 18,921
Redemption of preferred stock -- (3,250)
Cash dividends paid (1,435) (1,149)
Proceeds from sale of junior preferred stock of
consolidated subsidiary -- 137
Proceeds from issuance of common stock and tax benefit of
stock options 1,413 28
Proceeds from sale of treasury stock 1 370
Purchase of treasury stock (748) (105)
--------- ---------
Net cash provided by financing activities 69,766 148,288
========= =========
-Continued-
</TABLE>
4
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1997
--------- ---------
(000's)
<S> <C> <C>
(Decrease) Increase in Cash and Cash Equivalents $ (21,052) $ 11,798
Cash and Cash Equivalents, Beginning of Period 45,422 29,621
--------- ---------
Cash and Cash Equivalents, End of Period $ 24,370 $ 41,419
========= =========
Supplemental Disclosures:
Interest paid $ 20,557 $ 16,363
--------- ---------
Income tax payments $ 3,562 $ 2,894
--------- ---------
Transfer of assets to OREO - net $ -- $ 1,756
--------- ---------
Transfer of loans held for sale to loans held to
maturity at lower of cost or fair value $ 338 $ 58
--------- ---------
Change in shares held in trust for deferred compensation $ 105 $ --
--------- ---------
Change in net unrealized gain (loss) on securities
available for sale - net of tax $ (242) $ (298)
--------- ---------
Increase in due from brokers due to unsettled sale
of securities available for sale $ 22,100 $ --
--------- ---------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(000's, except share data)
<TABLE>
<CAPTION>
Shares Held Accumulated
COMMON STOCK Additional in Trust for Other
Shares Par Paid-in Retained Treasury Deferred Comprehensive
Outstanding Value Capital Earnings Stock Compensation Income
----------- ----- ------- -------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 12,429,900 $ 62,790 $ 212 $ 645 $ (866) $(1,441) $1,299
Net income 7,903
Cash dividends:
Common
($.115 per share) (1,435)
Common Stock Issued:
Employee stock
options exercised
($2.15 to $16.688
per share) 105,153 107 713
Director stock
options exercised
($2.25 per share) 8,836 44 (24)
Tax benefit of stock
options 573
Reduction of par value
of common stock
from $5.00 per share
to $0.01 per share (62,814) 62,814
Purchase of treasury
stock (35,649) (748)
Sale of treasury stock 100 1
Change in shares held
in trust for deferred
compensation 105
Change in net unrealized
gain on securities
available for sale,
net of tax (242)
---------- --------- --------- -------- ------- ------- ------
Balance at
June 30, 1998 12,508,340 $ 127 $ 64,288 $ 7,113 $(1,613) $(1,336) $1,057
========== ========= ========= ======== ======= ======= ======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(000's, except share data)
<TABLE>
<CAPTION>
Preferred Accumulated
Stock COMMON STOCK Additional Other
No Par Shares Par Paid-in Retained Treasury Comprehensive
Value Outstanding Value Capital Earnings Stock Income
----- ----------- ----- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $ 3,250 6,183,036 $31,634 $10,783 $12,664 $ ( 895) $ (570)
Net income 4,832
Cash dividends:
Common
($0.09* per share) (1,115)
Preferred (34)
Common Stock Issued:
Incentive stock
options exercised
($1.43* to $2.45*
per share) 9,192 46 (18)
Purchase of treasury stock (5,000) (105)
Sale of treasury stock 16,250 266 104
Redemption of preferred
stock (3,250)
Change in net
unrealized gain on
securities available for
sale, net of tax (298)
-------- --------- ------- ------- ------- -------- ----
Balance at
June 30, 1997 $ -- 6,203,478 $31,680 $11,031 $16,347 $ (896) (868)
======== ========= ======= ======= ======= ======== ====
</TABLE>
*Adjusted for two-for-one stock split in December 1997.
See notes to consolidated financial statements.
7
<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 June 30, 1998, operations for the three and six month
periods ended June 30, 1998 and 1997, and cash flows and changes in
stockholders' equity for the six month periods ended June 30, 1998 and
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 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 June 30, 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.
8
<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;
ability to achieve cost savings, acquisition charge estimates, and other
assumptions related to the acquisition of Tappan Zee Financial, Inc.;
achievement of compliance with the Year 2000 issues more fully discussed
in Management's Discussions and Analysis of Financial Condition and
Results of Operations; 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.
9
<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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's, except share data)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,952 $ 2,500 $ 7,903 $ 4,832
Less preferred stock dividends -- -- -- 34
----------- ----------- ----------- -----------
Numerator for Basic and Diluted
earnings per share - net income
available to common stockholders $ 4,952 $ 2,500 $ 7,903 $ 4,798
----------- ----------- ----------- -----------
Denominator:
Denominator for Basic earnings
per share - weighted
average shares 12,467,786 12,396,382 12,456,024 12,385,556
Effects of dilutive securities:
Director and employee
stock options 1,229,868 1,096,968 1,241,399 1,017,990
----------- ----------- ----------- -----------
Denominator for Diluted earnings
per share - adjusted weighted
average shares 13,697,654 13,493,350 13,697,423 13,403,546
=========== =========== =========== ===========
Basic earnings per share $ 0.40 $ 0.20* $ 0.63 $ 0.39*
Diluted earnings per share $ 0.36 $ 0.19* $ 0.58 $ 0.36*
=========== =========== =========== ===========
</TABLE>
* 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.
10
<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 and six months ended June 30, 1998 and 1997:
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
Description 1998 1997 1998 1997
- ----------- ---- ---- ---- ----
(000's)
Net Income $ 4,952 $ 2,500 $ 7,903 $ 4,832
Other comprehensive income,
net of tax:
Unrealized holding gains
(losses) on securities
available for sale arising
during the periods 716 1,087 297 (144)
Reclassification adjustment,
net of tax, for net gains
realized in the periods
that were held at the
beginning of the periods (308) (167) (539) (154)
------- ------- ------- -------
Net gain (loss) recognized in
other comprehensive income 408 920 (242) (298)
------- ------- ------- -------
Comprehensive Income $ 5,360 $ 3,420 $ 7,661 $ 4,534
======= ======= ======= =======
These unrealized holding gains (losses), net of tax benefit, represent an
increase (decrease) in unrealized appreciation of available for sale
securities, net of tax, during the periods reported. The cumulative
balance of this unrealized gain, net of tax, at June 30, 1998 is
$1,057,000.
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
11
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
performance. The statement requires that public business enterprises
report a measure of segment profit or loss, certain specific revenue and
expense items and segment assets. It also requires that information be
reported about revenues derived from the enterprises' products or
services, or about the countries in which the enterprises earn revenues
and holds assets, and about major customers, regardless of whether that
information is used in making operating decisions.
This statement 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 $3.9 million at June 30, 1998 and $5.8 million at
December 31, 1997. Restructured loans were $0.5 million and $0.6 million
at June 30, 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
June 30, 1998, the Company has no commitments to lend additional funds to
any customers with nonaccrual or restructured loan balances.
At June 30, 1998, there are loans aggregating approximately $0.5 million,
which are not on nonaccrual status, that were potential problem loans
which may result in their being placed on nonaccrual status in the future.
At June 30, 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 $3.2 million and $4.6 million at June
30, 1998 and December 31, 1997, respectively ($2.8 million and $4.2
million at June 30, 1998 and December 31, 1997, respectively, 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 $1.1 million and $1.8 million as of
June 30, 1998 and December 31, 1997, respectively. The average recorded
investment in impaired loans for the six months ended June 30, 1998 and
year ended December 31, 1997 was approximately $3.9 million and $6.2
million, respectively. For the three and six months ended June 30, 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 June 30, 1998
and December 31, 1997, respectively, that are considered to be impaired
due to a reduction in the contractual interest rate are on accrual status
because the collateral securing these 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 and not
12
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
yet collected as of June 30, 1998 is immaterial.
The Bank has approximately $2.0 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. However, as a result of a favorable ruling by the
Bankruptcy Court with jurisdiction over Bennett, the Bank collected an
initial payment of $1.3 million, reducing the original balance of $3.3
million to $2.0 million. Substantial additional collections are
anticipated. The ruling by the Bankruptcy Court is subject to appeal by
the Trustee. The Bank has not yet determined the extent of losses that
will be sustained on these loans, if any. 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 $1.0 million has been
established in accordance with SFAS No. 114 as of June 30, 1998.
9. Securities
In accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," the Bank's investment policy includes a
determination of the appropriate classification of securities at the time
of purchase. 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 June 30, 1998, the effect of SFAS No. 115 resulted in an increase of
securities available for sale of $1,831,000, representing the net
unrealized gain, which, after the applicable tax effect, resulted in an
increase to stockholders' equity of $1,057,000. 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.
A summary of the amortized cost and estimated fair value of securities and
related gross unrealized gains and losses at June 30, 1998 and December
31, 1997, follows:
13
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
- --------------------------------------------------------------------------------
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
June 30, 1998: ========= ========== ========== =========
Available for Sale:
U.S. Treasury and
government agencies $ 78,993 $ 873 $ 9 $ 79,857
Mortgage-backed securities 251,258 1,253 341 252,170
Obligations of states and
political subdivisions 1,166 55 -- 1,221
Other 114 -- -- 114
-------- -------- -------- --------
Total securities available for sale $331,531 $ 2,181 $ 350 $333,362
======== ======== ======== ========
Held to Maturity:
Mortgage-backed securities $ 9,784 $ 281 $ -- $ 10,065
Obligations of states and
political subdivisions 57,698 2,552 -- 60,250
-------- -------- -------- --------
Total securities held to maturity $ 67,482 $ 2,833 $ -- $ 70,315
======== ======== ======== ========
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997: ========= ========== ========== =========
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
======== ======== ======== ========
14
<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.
Short-term securities sold under agreements to repurchase generally mature
between one and 365 days. The Bank may borrow up to $50.0 million from two
primary investment firms under master security sale and repurchase
agreements. In addition, the Bank also has the ability to borrow under
similar master security sale and repurchase agreements from the FHLB and,
to a lesser extent, its customers. At June 30, 1998 and December 31, 1997,
the Bank had $22.0 million and $34.9 million, respectively, of such
short-term borrowings outstanding with terms between 30 and 365 days, at
interest rates between 5.60 percent and 6.00 percent. At June 30, 1998 and
December 31, 1997, the borrowings were collateralized by securities with
an aggregate amortized cost of $22.8 million and $35.5 million and
estimated fair value of $22.7 million and $35.6 million, respectively.
Federal funds purchased represent overnight funds. The Bank has federal
funds purchase lines available with four financial institutions totaling
$28.0 million. At June 30, 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 June 30, 1998 and December 31, 1997, the Bank
had short-term FHLB advances of $1.0 million and $35.0 million
outstanding, respectively, at interest rates ranging from 5.63 percent to
6.13 percent.
Additional information with respect to short-term borrowings for the six
months ended June 30, 1998 and 1997 is presented in the table below.
--------------------------------------------------------------------------
(000's, except percentages)
Short-Term Borrowings 1998 1997
--------------------------------------------------------------------------
Balance at June 30 $ 23,000 $ 71,459
Average balance outstanding 17,698 45,464
Weighted-average interest rate*
As of June 30 5.64% 5.67%
Paid during period 5.92% 5.73%
==========================================================================
*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 June 30, 1998 and December 31, 1997, long-term FHLB advances totaled
$18.6 million and $24.2 million, respectively. At June 30, 1998, long-term
FHLB advances aggregating $14.0 million are single principal payments and
are not repayable prior to maturity without penalty. Long-term FHLB
advances aggregating $4.6 million are amortizing advances having scheduled
payments, but may not be repaid in full prior to maturity without penalty.
15
<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 June 30, 1998 and
December 31, 1997, respectively. At June 30, 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 original terms of between
five and ten years at interest rates between 5.28 percent and 5.67 percent
that are callable on certain dates 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 $62.0
million and estimated fair value of $63.0 million.
At June 30, 1998 and December 31, 1997, the Bank owns 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 June 30,
1998, with a comparative total for December 31, 1997:
- --------------------------------------------------------------------------------
(000's, except percentages)
After 1
Within But Within After 1998 1997
1 Year 5 Years 5 Years Total Total
- --------------------------------------------------------------------------------
Total long-term debt $ 9,000 $29,362 $ 40,000 $78,362 $63,940
Weighted-average interest rate 6.31% 5.84% 5.64% 5.79% 5.92%
- --------------------------------------------------------------------------------
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 six month period ended June 30, 1997, the weighted
average dividend rate was 8.4 percent (the minimum rate). Basic and
diluted earnings per share reflect the preferred stock dividend declared
and accrued totaling $34,000 for the six month period ended June 30, 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 and six months ended June 30, 1997 have
been adjusted to reflect the stock dividend distributed in 1997.
At the Company's annual meeting of shareholders held on May 20, 1998, an
amendment to the Company's Certificate of Incorporation was approved by
the shareholders of the Company. This amendment increased the authorized
number of shares of Common Stock from
16
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Cont'd)
20,000,000 to 30,000,000, and reduced the par value of the Common Stock
from $5.00 per share to $0.01 per share.
The Company and the Bank's ability to pay cash dividends in the future are
restricted by various regulatory requirements. The Company's ability to
pay cash dividends to its shareholders is primarily dependent upon the
receipt of dividends from the Bank. The Bank's dividends to the Company
may not exceed the sum of the Bank's net income for that year and its
undistributed net income for the preceding two years, less any required
transfers to additional paid-in capital. At June 30, 1998, the Bank could
pay dividends to the Company of $24.7 million without having to obtain
prior regulatory approval.
11. Commitments and Contingencies
At June 30, 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 June 30, 1998, formal credit line and loan commitments
which are primarily loans collateralized by real estate and credit card
lines approximated $189.6 million and outstanding letters of credit
totaled $22.3 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 June 30, 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 on
floating rate mortgage-backed securities that have maximum lifetime
interest rate caps. The Bank has also entered into an interest rate swap
contract which effectively adjusts the short-term interest rate on certain
fundings 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 on a notional amount of $10.0 million, and receive a
payment equal to three-month LIBOR. The agreement expires on October 2,
1998. This agreement is 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
$22,000 (liability) at June 30, 1998.
17
<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 June 30, 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 June 30, 1998 of
$22.25 and $19.75 per share, each Tappan Zee share would be exchanged for
0.99 and 1.11 shares, respectively, of Company common stock. The total
value of the transaction is approximately $33.8 million, which represents
1.51 times Tappan Zee's book value as of December 31, 1997.
As of June 30, 1998, Tappan Zee has approximately $140 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
June 30, 1998, the Company would have had approximately $1.240 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.
18
<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. Dissolution of U.S.B. Realty Corp.
On April 16, 1998, the Company announced that it intended to dissolve its
Real Estate Investment Trust subsidiary, U.S.B. Realty Corp. ("Realty
Corp"), in a tax free liquidation. A proxy statement was mailed to the
common and junior preferred shareholders of Realty Corp., and a special
meeting was held on April 29th, at which time the shareholders of Realty
Corp. approved the proposal. The Company believes that dissolution of
Realty Corp. will make Realty Corp. assets available for collateralization
of Bank borrowings and will result in a reduction of the cost of
administration.
Dissolution of Realty Corp., subject to a number of conditions and
factors, will have a significant positive impact on the Company's 1998 tax
provision, but may increase the effective tax rate slightly in future
years. For the three and six month periods ended June 30, 1998, net income
includes a reduction of tax expense, net of associated expenses, of $2.0
million resulting from liquidating distributions of earnings from Realty
Corp.
19
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
FINANCIAL CONDITION
At June 30, 1998 the Company had total assets of $1,100.8 million, an increase
of $77.4 million from December 31, 1997.
Total deposits increased $103.0 million for the six month period ended June 30,
1998 to $900.8 million, which represents a 12.9 percent increase from December
31, 1997. Time deposits increased $43.0 million accounting for the greatest
component of deposit increases. Retail time deposits under $100,000 increased by
$5.4 million due primarily to time deposit promotions, and other time deposits
over $100,000 decreased by $0.8 million during the six month period ended June
30, 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
$38.8 million as part of the Bank's overall leveraging strategy. IRA and Keogh
time deposit accounts decreased by $0.4 million due to significant competition
for this product. Savings deposits increased by $31.9 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 $8.2 million and $21.1 million,
respectively. Money market deposits decreased by $1.3 million, as customers
generally switched money market account balances to higher yielding deposit
products.
The securities portfolio, including investment in FHLB stock, of $414.6 million
and $394.6 million at June 30, 1998 and December 31, 1997, respectively,
consists of securities held to maturity at amortized cost of $67.5 million and
$137.2 million, securities available for sale at estimated fair value totaling
$333.4 million and $243.7 million, respectively, and FHLB stock of $13.7 million
in each period.
During the six months ended June 30, 1998, U.S. Treasury and government agency
obligations decreased $83.7 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 $0.2 million, partially offset by purchases of
$1.0 million in U.S. Treasury Notes and $20.0 million in callable bonds.
Mortgage-backed securities increased by $108.3 million primarily due to
purchases of $187.2 million, which were offset by a net decrease in the market
value of available for sale securities of $0.3 million, sales and redemptions
totaling $63.0 million and principal amortizations of $15.4 million.
Mortgage-backed security purchases are fixed-rate securities having expected
weighted-average lives of less than ten years at the time of purchase. 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 $4.7 million principally due to maturities of
$5.5 million that were offset by purchases of $0.9 million during the first six
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. 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.
20
<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 June 30, 1998, loans were $614.8 million, a net increase of $51.5 million or
9.1 percent over December 31, 1997. The primary increases of outstanding loan
balances were $6.4 million in time secured loans, $19.4 million in land
acquisition and construction loans, $8.3 million in commercial mortgages, $7.5
million in commercial installment loans, and $13.0 million in residential
mortgages, offset by a net reduction of $3.1 million in all other loan
categories. The Bank had approximately $189.6 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 $2.0 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.
However, as a result of a favorable ruling by the Bankruptcy Court with
jurisdiction over Bennett, the Bank collected an initial payment of $1.3
million, reducing the original balance of $3.3 million to $2.0 million.
Substantial additional collections are anticipated. The Bank has not yet
determined the extent of losses that will be sustained on these loans, if any.
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 approximately 0.5 percent of total assets at June 30, 1998.
The Bank's allowance for loan losses increased $0.5 million or 7.1 percent to
$8.1 million at June 30, 1998, from $7.6 million at December 31, 1997. The
allowance for loan losses represents 1.32 percent of gross loans outstanding at
June 30, 1998, compared to 1.34 percent at December 31, 1997. The allowance
reflects a provision of $600,000 and net charge-offs of $66,000 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 six months ended June 30, 1998, the Bank decreased the amount of
outstanding short- and long-term advances with the Federal Home Loan Bank of New
York by $39.6 million, while borrowings under repurchase agreements increased by
$7.1 million. Overall, 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 $38.8 million.
Stockholders' equity increased to $69.6 million at June 30, 1998 from the
December 31, 1997 balance of $62.6 million. The increase primarily results from
net income of $7.9 million for the six month period ended June 30, 1998, stock
options exercised ($0.8 million), a tax benefit from exercise of non qualified
of stock options of $0.6 million, and a decrease in shares held in trust for
21
<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)
deferred compensation of $0.1 million, partially offset by a decrease in the net
unrealized gain on securities available for sale, net of tax, of $0.2 million,
and dividends paid of $1.4 million. During the first six months of 1998, the
Company also purchased 35,649 shares of treasury stock at market value for
$748,000, in connection with the exercise of stock options.
The Company's leverage ratio at June 30, 1998 was 8.34 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 12.71 percent and 13.87 percent at
June 30, 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 June 30, 1998 and
December 31, 1997.
RESULTS OF OPERATIONS
Earnings
Net income for the three and six month periods ended June 30, 1998 increased
$2.5 million or 98.1 percent to $4,952,000 and $3.1 million or 63.6 percent to
$7,903,000, respectively, compared to the same periods in 1997. Basic earning
per share increased to $0.40 and $0.63 from $0.20 and $0.39 in the same periods
in 1997, respectively. Diluted earnings per share increased to $0.36 and $0.58
from $0.19 and $0.36 in the same period in 1997, respectively. The annualized
return on average total assets was 1.87 and 1.52 percent for the three and six
month periods ended June 30, 1998, compared to 1.07 and 1.09 percent for the
three and six month periods ended June 30, 1997. The annualized return on
average common equity was 29.69 and 24.19 percent for the three and six months
ended June 30, 1998, compared to 17.94 and 17.54 percent, respectively, for the
comparative period in 1997. The overall increase in earnings in the 1998 periods
primarily reflects a reduction in tax expense as a result of the liquidation of
U.S.B. Realty Corp., net of associated expenses, of $2.0 million, as well as
higher net interest income resulting from increased volume and effective
leveraging of the balance sheet, higher security gains, and a lower provision
for loan losses, offset by higher non-interest expenses to support increased
business and lower service charges and fees and 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 and six month periods ended June 30, 1998, net interest income
increased 13.2 percent to $9.4 million from $8.3 million, and 12.9 percent to
$18.5 million from $16.3 million, respectively, compared to the year earlier
periods. 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 and six months ended June 30, 1998, the interest
spread (yield on earning assets less cost of interest-bearing funds) was 3.00
and 3.03 percent compared to 3.24 and 3.33 percent in the same period of 1997,
respectively.
22
<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)
Yields on interest earning assets decreased during the three and six month
periods ended June 30, 1998, while the cost of funds increased compared to the
same periods 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 and other
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 costs of deposit products
generally remained stable due to the flat yield curve. The decrease in the
spread is affected by the Company's leverage strategy of purchasing government
securities funded by borrowings and/or municipal deposits at tighter spreads.
Although leverage strategies 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 $530,000 to $300,000 and $860,000 to
$600,000 for the three and six month periods ended June 30, 1998, respectively,
compared to the same period in 1997. Net charge-offs in the three and six month
periods ended June 30, 1998 totaled $25,000 and $66,000, respectively, compared
to net charge-offs of $150,000 and $257,000 for the three and six month periods
ended June 30, 1997. The net charge-offs in all periods primarily relate to
credit card loans. Nonaccrual loans were $3.9 million and $7.1 million,
respectively, at June 30, 1998 and 1997, compared to $5.8 million at December
31, 1997. The Bank has approximately $2.0 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 that will be sustained on these loans, if any. However, based
upon Bennett's filing, the loans were placed on nonaccrual status in March 1996.
During the quarter ended June 30, 1998, the Company collected $1.3 million of
amounts due from Bennett (see notes to Consolidated Financial Statements
(Unaudited)). 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 June 30, 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.
23
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
Non-Interest Income
Non-interest income for the three and six months ended June 30, 1998 increased
by $49,000 to $1,570,000 and $383,000 to $2,762,000, respectively, compared to
the same periods of 1997. The increases are primarily related to higher net
gains on securities transactions ($179,000 and $500,000, respectively), offset
by decreases in service charges and fees ($4,000 and $31,000, respectively), and
lower other income ($124,000 and $77,000, respectively). Other income consists
of ATM fees, credit card fees, loan servicing income, letter of credit fees,
loan prepayments, wire transfer fees, safe deposit, and other fees.
Non-Interest Expenses
Non-interest expenses increased $1,106,000 to $6,530,000 and $1,916,000 to
$12,239,000 for the three and six month periods ended June 30, 1998,
respectively, from the comparable periods 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 and expenses of $413,000 associated with
the liquidation of U.S.B. Realty Corp. The following discusses each component of
non-interest expense.
Salaries and benefits, the largest component of non-interest expense, increased
by $838,000, or 30.0 percent and $1,295,000 or 23.7 percent during the three and
six month periods ended June 30, 1998 compared to the previous year periods. The
increases occurred due to additional personnel employed by the Bank to
accommodate the increases in deposits and loans and their related services,
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 (approximately $225,000 which is attributable to the liquidation of
U.S.B. Realty Corp.), 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 and
six month periods ended June 30, 1998 compared to June 30, 1997, were due to the
following:
o Increase of $157,000 (16.2%) and $328,000 (17.2%), respectively, in
occupancy and equipment expense. This increase is due principally to
higher maintenance expenses relating to the Bank's branch and computer
related equipment due to increased business volume, and additional rental
and depreciation expense associated with two new branch openings, as well
as additional space for corporate and administrative offices.
o Increase of $79,000 (29.7%) and $166,000 (36.4%), respectively, 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 expense
for the new branches and other business development efforts.
24
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
o Increase of $91,000 (27.3%) and $19,000 (2.8%), respectively, in
professional fees. The increase relates to professional fees of $166,000
associated with the liquidation of U.S.B. Realty Corp. for both periods,
while professional fees primarily associated with loan collections,
foreclosures and other litigation decreased.
o Increase of $17,000 (9.7%) and $25,000 (6.8%), respectively, in
communications is due to an increase in postage expenses that arose as a
result of higher volume related to the growth in business.
o Increase of $48,000 (41.0%) and $91,000 (38.7%), respectively, in
stationery and printing. The increase occurred due to printing costs and
supplies necessitated by increased loan and deposit volume and the opening
of the Suffern and New Rochelle branches.
o Increase of $3,000 and $7,000, respectively, in FDIC insurance premiums
results from higher deposit balances.
o Decrease of $127,000 (17.0%) and $15,000 (1.3%), respectively, in other
expenses, primarily results from lower foreclosure related expenses and
branch charge-offs.
Income Taxes
The effective tax rates for the three and six month periods ended June 30, 1998
and 1997 were (18.7) and 5.7 percent, and 30.5 and 30.4 percent, respectively.
The decrease in the overall effective tax rate in 1998 primarily reflects the
tax benefit associated with the liquidation of U.S.B. Realty Corp.
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 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 Company'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.
25
<PAGE>
U.S.B. HOLDING CO., INC.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
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.
26
<PAGE>
U.S.B. HOLDING CO., INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about 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
June 30, 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 Notes to Consolidated Financial Statements (Unaudited), 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 six months ended June 30, 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 June 30, 1998 as compared to
December 31, 1997. The changes in the composition of the Company's assets and
liabilities for the six months ended June 30, 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 June 30, 1998 as compared to December 31, 1997. The Company's "Static
Gap" at June 30, 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 percent.
27
<PAGE>
PART II - OTHER INFORMATION
U.S.B. HOLDING CO., INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 20, 1998 for
the purpose of considering and voting upon the following matters:
I. Election of two directors, Messrs. Herbert Peckman and Howard V. Ruderman,
constituting Class I members of the Board of Directors, to a three-year
term of office.
II. Amendment to the Certificate of Incorporation to increase the authorized
number of shares of Common Stock, $5 par value per share, from 20,000,000
to 30,000,000, and to reduce the par value of the Common Stock to $0.01
per share.
III. Approval of the 1998 Director Stock Option Plan.
IV. Any other business which may be properly brought before the meeting or any
adjournment thereof.
The results of votes for each of the items described above were as follows:
ITEM I ITEM II ITEM III
-------------------------- ---------- ----------
H. Peckman H.V. Ruderman
---------- -------------
Votes:
- ------
For 10,680,305 10,717,305 10,071,203 10,528,284
Against or Withheld 195,578 158,578 680,350 286,106
Abstentions -- -- 124,330 61,493
Broker No Votes -- -- -- --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Exhibit
- ----------- -------
(3)(a) Amended and restated Certificate of Incorporation, as amended, of
Registrant.*
(3)(b) Bylaws of Registrant (incorporated herein by reference from
Registrant's Registration Statement on Form S-14 (file no.
2-79734), Exhibit 3(b)).
(4)(a) Junior Subordinated Indenture, dated February 5, 1997, between
Registrant and The Chase Manhattan Bank, as trustee (incorporated
herein by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 ("1996 10-K"), Exhibit
(4)(a)).
28
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
Exhibit No. Exhibit
- ----------- -------
(4)(b) Guarantee Agreement, dated February 5, 1997, by and between
Registrant and The Chase Manhattan Bank, as trustee for the
holders of 9.58% Capital Securities of Union State Capital Trust
I (incorporated herein by reference to Registrant's 1996 10-K,
Exhibit (4)(b)).
(4)(c) Amended and Restated Declaration of Trust of Union State Capital
Trust I (incorporated herein by reference to Registrant's 1996,
10-K, Exhibit (4)(c)).
(10)(a) Agreement of Employment dated as of July 1, 1994 between the
Company and the Bank and Thomas E. Hales (incorporated herein by
reference to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 ("1994 10-K"), Exhibit (10)(a)).
(10)(b) Registrant's 1984 Incentive Stock Option Plan (incorporated
herein by reference from Form S-8 Registration Statement, file
No. 2-90674, Exhibit 28 (b)).
(10)(c) Registrant's 1993 Incentive Stock Option Plan (incorporated
herein by reference from Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 ("1993 10-K"), Exhibit
(10)(c)).
(10)(d) Registrant's Employee Stock Ownership Plan (With Code Section
401(k) Provisions) (incorporated herein by reference from
Registrant's 1993 10-K, Exhibit (10)(d)).
(10)(e) Registrant's Dividend Reinvestment and Stock Purchase Plan
(incorporated herein by reference from Registrant's Form S-3
Registration Statement, file No. 33-72788).
(10)(f) Registrant's Director Stock Option Plan (incorporated herein by
reference to Registrant's 1996 10-K, Exhibit (10)(f)).
(10)(g) Registrant's Key Employees' Supplemental Investment Plan, as
amended July 1, 1997 (incorporated by reference to Registrant's
Form 11-K for the year ended December 31, 1996).
(10)(h) Purchase Agreement, dated January 31, 1997, by and among
Registrant, Union State Capital Trust I and Keefe, Bruyette &
Woods, Inc. (incorporated herein by reference to Registrant's
1996 10-K, Exhibit (10)(h)).
(10)(i) Registration Rights Agreement, dated February 5, 1997, by and
among Registrant, Union State Capital Trust I and Keefe, Bruyette
& Woods, Inc. (incorporated herein by reference to Registrant's
1996 10-K, Exhibit (10)(i)).
29
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
Exhibit No. Exhibit
- ----------- -------
(10)(j) Registrant's 1997 Employee Stock Option Plan (incorporated herein
by reference to Registrant's proxy statement filed April 18,
1997).
(10)(k) Agreement and Plan of Merger, dated as of March 6, 1998, between
U.S.B. Holding Co., Inc. and Tappan Zee Financial, Inc.
(incorporated herein by reference to Registrant's Current Report
on Form 8-K dated as of March 6, 1998).
(10)(l) Stock Option Agreement, dated as of March 6, 1998, between U.S.B.
Holding Co., Inc. and Tappan Zee Financial, Inc. (incorporated
herein by reference to Registrant's Current Report on Form 8-K
dated as of March 6, 1998).
(10)(m) Registrant's 1998 Director Stock Option Plan (incorporated herein
by reference from Registrant's Registration Statement on Form S-8
filed June 5, 1998. Exhibit (10)(d)).
(11) Computation of earnings per share.*
(27) Financial Data Schedule.
* Filed Herewith.
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June
30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on August 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)
30
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
U.S.B. HOLDING CO., INC.
(as amended May 20, 1998)
-------------------------
1. Name. The name of the corporation is U.S.B. Holding Co., Inc.
(hereinafter called the "Corporation").
2. Address; Registered Agent. The address, including street, number, city
and country, of the Corporation's registered office in this State is 1209 Orange
Street, Wilmington, County of New Castle, Delaware, and its registered agent at
such address is The Corporation Trust Company.
3. Purpose. The nature of the business and purposes to be conducted or
promoted by the Corporation are to engage in, carry on and conduct any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
4. Number of Shares. The total number of shares of stock which the
Corporation shall have authority to issue is 30,100,000 shares, consisting of
30,000,000 shares of Common Stock having a par value of $.01 per share and
100,000 shares of Preferred Stock without par value.
The Board of Directors is authorized, by resolution or resolutions,
subject to limitations prescribed by law and the provisions of this Article 4,
to provide for the issuance of the Preferred Stock in one or more series, to
establish the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, of the shares of each such series. The
authority of the Board with respect to each series shall include, but not be
limited to, determination of the following:
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<PAGE>
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate of the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares
of that series;
(c) Whether that series shall have voting rights, and, if so, the
terms of such voting rights;
(d) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the
date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(e) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and if so, the terms and amount of
such sinking fund;
(f) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(g) Any other powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of that series.
Dividends on outstanding Preferred Stock shall be declared and paid, or
set apart for payment, before any dividends shall be declared and paid, or
set apart for payment, on the Common Stock with respect to the same
dividend period. No shares of Preferred Stock
-3-
<PAGE>
shall be convertible into shares of Common Stock or other securities of
the Corporation.
5. Board of Directors
Section 1. Number, election and terms. The Board of Directors of the
Corporation shall consist of that number of directors, to be fixed by, or
in the manner provided in, the Bylaws, and such number of directors so
fixed in such Bylaws may be changed only by receiving the affirmative vote
of (i) the holders of at least 75% of all the shares of the Corporation
then entitled to vote on such change or (ii) a majority of the directors
in office at the time of vote. In the election of directors at the 1985
Annual Meeting of Shareholders, the directors shall be divided into three
classes, as nearly equal in number as possible, with the term of office of
the first class to expire at the 1986 Annual Meeting of Shareholders, the
term of office of the second class to expire at the 1987 Annual Meeting of
Shareholders, and the term of office of the third class to expire at the
1988 Annual Meeting of Shareholders. At each Annual Meeting of
Shareholders following such initial classification and election, the
number of directors equal to the number of the class whose term expires at
the time of such meeting shall be elected to hold office until the third
succeeding Annual Meeting of Shareholders. Each director shall hold office
until his successor is elected and qualified, or until his earlier
resignation or removal.
Section 2. Newly created directorships and vacancies. Newly created
directorships resulting from any increase in the authorized number of
directors and any vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or
other cause may be filled by a majority vote of the directors then in
office, and directors so chosen shall hold office for a term expiring at
the
-4-
<PAGE>
Annual Meeting of Shareholders at which the term of the class to which
they have been elected expires.
Section 3. Removal At a meeting of shareholders called expressly for
that purpose, any director, or the entire Board of Directors, may be
removed from office at any time without cause, but only by the affirmative
vote of the holders of at least 8O% of the shares of the Corporation then
entitled to vote in an election of directors. At a meeting of stockholders
called expressly for that purpose, a director may be removed by the
stockholders for cause by the affirmative vote of the holders of a
majority of the shares then entitled to vote in an election of directors.
Section 4. Amendment, repeal, etc. Notwithstanding anything
contained in Delaware corporate law or these Articles of Incorporation to
the contrary, the affirmative vote of the holders of at least 80% of the
shares of the Corporation then entitled to vote in an election of
directors shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article 5.
6. Adoption Amendment and/or Repeal of By-Laws. The Board of Directors may
from time to time (after adoption by the undersigned of the original by-laws of
the Corporation) adopt, amend or appeal the by-laws of the Corporation;
provided, that any by-laws adopted, amended or repealed by the Board of
Directors may be amended repealed, and any by-laws may be adopted, amended or
repealed by the stockholders of the Corporation.
7. Compromise and Arrangements. Whenever a compromise or arrangement is
proposed between this Corporation and its creditors or any class of them and/or
between this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within
-5-
<PAGE>
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receives appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
8. Approval of Certain Business Combinations. The approval of any Business
Combination shall, in addition to any affirmative vote required by law, require
the affirmative vote of the holders of not less than eighty percent (80%) of the
common shares of the Corporation then entitled to vote generally in the election
of directors of the Corporation; provided; however, that any such Business
Combination may be approved on the affirmative vote required by law if such
Business Combination is approved by not less than sixty-six and two-thirds
percent (66-2/3%) of the entire Board of Directors of the Corporation. As used
herein the term "Business Combination" shall mean:
-6-
<PAGE>
(i) any merger or consolidation of the Corporation or any subsidiary
of the Corporation with (a) any Substantial Shareholder or (b) any other
corporation which after such merger or consolidation, would be a
Substantial Shareholder regardless of which entity survives;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with
any Substantial Shareholder of all or substantially all of the assets of
the Corporation or any subsidiary of the Corporation, or both;
(iii) the adoption of any plan or proposal for the liquidation of
the Corporation proposed by or on behalf of a Substantial Shareholder; or
(iv) any transaction involving the Corporation or any of its
subsidiaries, including the issuance or transfer of any securities of, any
reclassification of securities of, or any recapitalization of the
Corporation or any of its subsidiaries, or any merger or consolidation of
the Corporation with any of its subsidiaries (whether or not involving a
Substantial Shareholder), if the transaction would have the effect,
directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Corporation or any subsidiary, of which a Substantial Shareholder is the
Beneficial Owner.
As used herein, the term "Substantial Shareholder" shall mean and include
any individual, corporation, partnership or other person or entity which,
together with its "Affiliates" and "Associates" (as such terms were defined as
of May 22, 1984, in Rule 12b-2 under the Securities Exchange Act of 1934), is
the "Beneficial Owner" (as determined in accordance with the criteria set forth
as of May 22, 1984 under Rule 13d-3 under the Securities Exchange Act of 1934)
in the
-7-
<PAGE>
aggregate of more than five percent (5%) of the outstanding shares of the
Corporation entitled to vote generally in an election of directors; and any
Affiliate or Associate of any such individual, corporation, partnership or other
person or entity. Notwithstanding anything contained in Delaware corporate law
or these Articles of Incorporation to the contrary, the affirmative vote of the
holders of at least 80% of the shares of the Corporation then entitled to vote
in an election of directors shall be required to amend or repeal, or to adopt
any provision inconsistent with this Article 8.
9. Limitation of Director's Personal Liability. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, as the same exists or
hereafter may be amended, or (iv) for any transaction from which the director
derived an improper personal benefit. This Article shall not eliminate or limit
the liability of a director for or with respect to any act or omission occurring
prior to the effective date of the Amendment adding this Article to the
Certificate of Incorporation. If the Delaware General Corporation Law hereafter
is amended to authorize the further elimination or limitation of the liability
of directors, then the liability of a director of the Corporation, in addition
to the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended Delaware General Corporation Law. Any
repeal or modification of this paragraph by the stockholders of the Corporation
shall be prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the time of such
repeal or modification.
-8-
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate has been signed on this 26th
day of March, 1997, and the signature of the undersigned shall constitute the
affirmation and acknowledgement of the undersigned, under penalties of perjury,
that the Restated Certificate is the act and deed of the Corporation and that
the facts stated herein are true.
/s/ Michael H. Fury
---------------------------
Michael H. Fury
Secretary
-9-
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
(000's, except share data)
Weighted average number of shares outstanding 12,467,786 12,456,024
----------- -----------
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such options 1,229,868 1,241,399
----------- -----------
Adjusted weighted average shares 13,697,654 13,697,423
=========== ===========
Net income available to common shareholders $ 4,952 $ 7,903
=========== ===========
Basic earnings per share $ 0.40 $ 0.63
----------- -----------
Diluted earnings per share $ 0.36 $ 0.58
=========== ===========
31
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