SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998 Commission File No. 1-12811
U.S.B. HOLDING CO., INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3197969
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 DUTCH HILL ROAD, ORANGEBURG, NEW YORK 10962
-----------------------------------------------
(Address of principal executive office with zip code)
914-365-4600
------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 4, 1998
----- -------------------------------
Common stock, par value
$0.01 per share 14,392,513
<PAGE>
U.S.B. HOLDING CO., INC.
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED)
CONSOLIDATED STATEMENTS OF CONDITION AS OF
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 4
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 and 1997 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 36
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 37
-i-
<PAGE>
ITEM 1. PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
U.S.B. HOLDING CO., INC. September 30, December 31,
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) 1998 1997
------------ -----------
(000's, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,707 $ 20,405
Federal funds sold 33,496 32,000
----------- -----------
Cash and cash equivalents 56,203 52,405
Interest bearing deposits in other banks 2,020 2,401
Securities:
Available for sale (at estimated fair value) 373,409 266,589
Held to maturity (estimated fair value
$70,034 in 1998 and $175,842 in 1997) 66,610 172,708
Loans held for sale -- 340
Loans, net of allowance for loan losses of
$9,002 in 1998 and $8,260 in 1997 686,758 613,392
Premises and equipment, net 11,267 10,883
Accrued interest receivable 8,141 8,034
Other real estate owned 946 2,021
Federal Home Loan Bank of New York stock 15,202 14,666
Other assets 15,487 9,304
----------- -----------
TOTAL ASSETS $ 1,236,043 $ 1,152,743
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 146,378 $ 108,348
Interest bearing deposits:
NOW accounts 57,495 50,365
Money market accounts 42,083 44,813
Savings deposits 308,091 269,311
Time deposits 411,305 429,951
----------- -----------
Total deposits 965,352 902,788
Accrued interest payable 3,640 3,665
Accrued expenses and other liabilities 10,563 6,472
Securities sold under agreements to repurchase 110,780 74,643
Federal Home Loan Bank of New York advances 29,931 59,160
----------- -----------
Total liabilities 1,120,266 1,046,728
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 16)
Stockholders' equity:
Common stock, $0.01 par value in 1998 and $5.00 par value
in 1997; authorized shares 30,000,000 in 1998, 20,000,000
in 1997; issued shares of 14,556,184 in 1998 and
14,213,313 in 1997 146 71,067
Additional paid-in capital 78,387 4,975
Retained earnings 16,327 10,619
Treasury stock at cost, 163,671 shares
in 1998 and 128,122 shares in 1997 (1,613) (866)
Common stock held by benefit plans (1,008) (1,305)
Shares held in trust for deferred compensation (675) (1,441)
Deferred compensation obligation 675 1,441
Accumulated other comprehensive income 3,401 1,388
----------- -----------
Total stockholders' equity 95,640 85,878
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,236,043 $ 1,152,743
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
----------- -----------
(000's, except share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 14,786 $ 13,412
Interest on federal funds sold 418 244
Interest and dividends on securities:
Mortgage-backed securities 5,377 3,315
U.S. Treasury and government agencies 1,392 2,772
Obligations of states and political subdivisions 767 833
Corporate and other 20 27
Dividends on Federal Home Loan Bank of New York stock 275 178
----------- -----------
Total interest income 23,035 20,781
----------- -----------
INTEREST EXPENSE:
Interest on deposits 9,655 9,137
Interest on borrowings 1,909 1,466
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 488 499
----------- -----------
Total interest expense 12,052 11,102
----------- -----------
NET INTEREST INCOME 10,983 9,679
Provision for loan losses 311 521
----------- -----------
Net interest income after provision for loan losses 10,672 9,158
----------- -----------
NON-INTEREST INCOME:
Gain on securities transactions - net 31 268
Gain on loans held for sale - net -- 8
Service charges and fees 684 584
Other income 445 339
----------- -----------
Total non-interest income 1,160 1,199
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,898 3,314
Occupancy and equipment expense 1,276 1,054
Advertising and business development 343 286
Professional fees 351 412
Communications 194 179
Stationery and printing 144 108
FDIC insurance 42 38
Other expenses 682 762
Merger related expenses 4,190 --
----------- -----------
Total non-interest expense 11,120 6,153
----------- -----------
Income before income taxes 712 4,204
Provision for income taxes 702 1,258
----------- -----------
NET INCOME $ 10 $ 2,946
=========== ===========
BASIC EARNINGS PER SHARE $ -- $ 0.21*
=========== ===========
DILUTED EARNINGS PER SHARE $ -- $ 0.19*
=========== ===========
</TABLE>
* Adjusted for two-for-one stock split in December 1997.
See notes to consolidated financial statements.
4
2
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
(000's, except share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 43,399 $ 38,968
Interest on federal funds sold 1,074 869
Interest and dividends on securities:
Mortgage-backed securities 14,322 8,772
U.S. Treasury and government agencies 5,329 7,426
Obligations of states and political subdivisions 2,390 2,430
Corporate and other 74 92
Dividends on Federal Home Loan Bank of New York stock 813 375
----------- -----------
Total interest income 67,401 58,932
----------- -----------
INTEREST EXPENSE:
Interest on deposits 29,249 25,702
Interest on borrowings 4,805 3,656
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 1,464 1,275
----------- -----------
Total interest expense 35,518 30,633
----------- -----------
NET INTEREST INCOME 31,883 28,299
Provision for loan losses 931 2,002
----------- -----------
Net interest income after provision for loan losses 30,952 26,297
----------- -----------
NON-INTEREST INCOME:
Gain on securities transactions - net 1,091 795
Gain on loans held for sale - net -- 17
Service charges and fees 2,014 2,030
Other income 950 842
----------- -----------
Total non-interest income 4,055 3,684
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 11,552 9,600
Occupancy and equipment expense 3,602 3,059
Advertising and business development 998 777
Professional fees 1,200 1,272
Communications 601 561
Stationery and printing 480 375
FDIC insurance 124 112
Other expenses 2,093 2,200
Merger related expenses 4,190 --
----------- -----------
Total non-interest expense 24,840 17,956
----------- -----------
Income before income taxes 10,167 12,025
Provision for income taxes 1,618 3,738
----------- -----------
NET INCOME $ 8,549 $ 8,287
=========== ===========
BASIC EARNINGS PER SHARE $ 0.61 $ 0.59*
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.57 $ 0.55*
=========== ===========
</TABLE>
* Adjusted for two-for-one stock split in December 1997.
See notes to consolidated financial statements.
3
<PAGE>
U.S.B. HOLDING CO., INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Month Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES (000's)
Net income $ 8,549 $ 8,287
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 921 2,002
Depreciation and amortization 1,299 1,153
Amortization/accretion of premiums (discounts)
on securities - net 481 208
Merger expenses not yet paid 1,191 --
Deferred income taxes (1,009) (1,008)
Gain on securities transactions - net (1,035) (795)
Gain on loans held for sale - net -- (17)
Tappan Zee fiscal year conversion (334) --
Origination of loans held for sale -- (914)
Proceeds from sales of loans held for sale -- 1,040
Increase in accrued interest receivable (107) (2,936)
Net increase in income taxes receivable (1,972) (155)
Other - net (1,355) (202)
----------- -----------
Net cash provided by operating activities 6,629 6,663
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 78,828 88,617
Proceeds from principal paydowns, redemptions and maturities
of securities available for sale 79,948 29,806
Proceeds from principal paydowns, redemptions and maturities
of securities held to maturity 76,742 8,056
Purchases of securities available for sale (221,063) (167,791)
Purchases of securities held to maturity (11,211) (61,650)
Net decrease in interest bearing deposits in other banks 381 51
Loans originated, net of principal collections (73,947) (47,321)
Purchases of premises and equipment - net (1,675) (1,007)
Proceeds from sales of other real estate owned 1,059 1,514
Purchase of Federal Home Loan Bank of New York stock (536) (5,816)
----------- -----------
Net cash used for investing activities (71,474) (155,541)
----------- -----------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 81,210 37,796
(Decrease) increase in time deposits, net (18,646) 82,936
Net (decrease) increase in securities sold under
agreements to repurchase - short-term (33,863) 19,852
Net (decrease) increase in Federal Home Loan Bank of New York
advances - short-term (35,000) 5,000
Proceeds from securities sold under agreements to
repurchase - long-term 70,000 9,780
Proceeds from Federal Home Loan Bank of New York
advances - long-term 11,935 --
Repayment of Federal Home Loan Bank of New York
advances - long-term (6,164) (824)
Net proceeds from issuance of Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust -- 18,812
Redemption of preferred stock -- (3,250)
Cash dividends paid (2,507) (2,065)
Proceeds from sale of junior preferred stock of
consolidated subsidiary -- 137
Proceeds from issuance of common stock and tax benefit
of stock options 2,425 41
Proceeds from sale of treasury stock 1 370
Purchase of treasury stock (748) (105)
Net purchase and retirement of Tappan Zee treasury stock -- (990)
----------- -----------
</TABLE>
4
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------- --------
(000's)
<S> <C> <C>
Net cash provided by financing activities $ 68,643 $167,490
-------- --------
Increase in Cash and Cash Equivalents $ 3,798 $ 18,612
Cash and Cash Equivalents, Beginning of Period 52,405 36,433
-------- --------
Cash and Cash Equivalents, End of Period $ 56,203 $ 55,045
======== ========
Supplemental Disclosures:
Interest paid $ 34,234 $ 29,494
-------- --------
Income tax payments $ 4,599 $ 4,811
-------- --------
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 $ -- $ 58
-------- --------
Change in shares held in trust for deferred compensation $ 766 $ --
-------- --------
Change in deferred compensation obligation $ (766) $ --
-------- --------
Transfer of Tappan Zee securities held to maturity to
available for sale $ 39,462 $ --
-------- --------
Change in net unrealized gain (loss) on securities
available for sale - net of tax $ 2,013 $ 1,322
-------- --------
</TABLE>
See notes to consolidated financial statements.
Note: The cash flow information for the nine month period ended September 30,
1998 includes Tappan Zee fiscal year conversion adjustments. These
adjustments are necessary to eliminate the duplication of recording Tappan
Zee income and expense components for the three month period ended March
31, 1998 as the December 31, 1997 consolidated statement of condition
contains Tappan Zee information as of March 31, 1998.
5
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(000's, except share data)
<TABLE>
<CAPTION>
Common
Stock
COMMON STOCK Additional Held By
Shares Par Paid-in Retained Treasury Benefit
Outstanding Value Capital Earnings Stock Plans
----------- ----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998, as previously
reported and reclassified (See Note 13) 12,429,900 $ 62,790 $ 212 $ 645 $ (866) $ --
Pooling of interest with Tappan Zee
Financial, Inc. 1,655,291 8,277 4,763 9,974 -- (1,305)
---------- ---------- ---------- ---------- ---------- ----------
Balance at January 1, 1998, as restated 14,085,191 71,067 4,975 10,619 (866) (1,305)
Net income 8,549
Cash dividends:
Common ($0.177 per share) (2,496)
Junior preferred stock of consolidated
subsidiary (8.0 percent per share) (11)
Common Stock Issued:
Employee stock options exercised
($2.12 to $16.69 per share) 314,154 110 1,562
Director stock options exercised
($2.25 to $2.33 per share) 28,717 44 15
Tax benefit of exercised stock options 694
Reduction of par value of common
stock from $5.00 per share to
$0.01 per share (71,075) 71,075
Purchase of treasury stock (35,649) (748)
Sale of treasury stock 100 1
Change in shares held in trust for
deferred compensation
Change in deferred compensation
obligation
Amortization and acceleration of RRP awards 224
ESOP shares committed to be released 66 73
Change in net unrealized gain on
securities available for sale,
net of tax
Adjustment for pooling of company
with different fiscal year end (334)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 14,392,513 $ 146 $ 78,387 $ 16,327 $ (1,613) $ (1,008)
========== ========== ========== ========== ========== ==========
<CAPTION>
Shares Held Accumulated
in Trust for Deferred Other
Deferred Compensation Comprehensive
Compensation Obligation Income
------------ ---------- ------
<S> <C> <C> <C>
Balance at January 1, 1998, as previously
reported and reclassified (See Note 13) $ (1,441) $ 1,441 $ 1,299
Pooling of interest with Tappan Zee
Financial, Inc. -- -- 89
---------- ---------- ----------
Balance at January 1, 1998, as restated (1,441) 1,441 1,388
Net income
Cash dividends:
Common ($0.177 per share)
Junior preferred stock of consolidated
subsidiary (8.0 percent per share)
Common Stock Issued:
Employee stock options exercised
($2.12 to $16.69 per share)
Director stock options exercised
($2.25 to $2.33 per share)
Tax benefit of exercised stock options
Reduction of par value of common
stock from $5.00 per share to
$0.01 per share
Purchase of treasury stock
Sale of treasury stock
Change in shares held in trust for
deferred compensation 766
Change in deferred compensation
obligation (766)
Amortization and acceleration of RRP awards
ESOP shares committed to be released
Change in net unrealized gain on
securities available for sale,
net of tax 2,013
Adjustment for pooling of company
with different fiscal year end
---------- ---------- ----------
Balance at September 30, 1998 $ (675) $ 675 $ 3,401
========== ========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1997
(000's, except share data)
<TABLE>
<CAPTION>
Preferred
Stock COMMON STOCK Additional
No Par Shares Par Paid-in Retained Treasury
Value Outstanding Value Capital Earnings Stock
----- ----------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997, as previously reported $ 3,250 6,183,036 $ 31,634 $ 10,783 $ 12,664 $ (895)
Pooling of interest with Tappan Zee Financial, Inc. -- 1,718,011 8,590 5,296 9,269 --
--------- --------- --------- --------- --------- ---------
Balance at January 1, 1997, as restated 3,250 7,901,047 40,224 16,079 21,933 (895)
Net income 8,287
Cash dividends:
Common ($0.133* per share) (2,031)
Preferred (34)
Common Stock Issued:
Employee stock options exercised
($1.43* to $5.32* per share) 10,292 51 (10)
Purchase and retirement of Tappan Zee
treasury stock (62,720) (313) (677)
Purchase of treasury stock (5,000) (105)
Sale of treasury stock 16,250 266 104
Amortization of RRP awards
Deferred tax benefit related to RRP awards 22
ESOP shares committed to be released 89
Redemption of preferred stock (3,250)
Change in net unrealized gain on securities
available for sale, net of tax
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 $ -- 7,859,869 $ 39,962 $ 15,769 $ 28,155 $ (896)
========= ========= ========= ========= ========= =========
<CAPTION>
Common
Stock Accumulated
Held By Other
Benefit Comprehensive
Plans Income
----- ------
<S> <C> <C>
Balance at January 1, 1997, as previously reported $ -- $ (570)
Pooling of interest with Tappan Zee Financial, Inc. (1,580) (349)
--------- ---------
Balance at January 1, 1997, as restated (1,580) (919)
Net income
Cash dividends:
Common ($0.133* per share)
Preferred
Common Stock Issued:
Employee stock options exercised
($1.43* to $5.32* per share)
Purchase and retirement of Tappan Zee
treasury stock
Purchase of treasury stock
Sale of treasury stock
Amortization of RRP awards 92
Deferred tax benefit related to RRP awards
ESOP shares committed to be released 115
Redemption of preferred stock
Change in net unrealized gain on securities
available for sale, net of tax 1,322
--------- ---------
Balance at September 30, 1997 $ (1,373) $ 403
========= =========
</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"), 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 Tarrytowns Bank, FSB ("Tarrytowns"), and the Company's non-bank
subsidiaries, Ad Con, Inc., Union State Capital Trust I and TPNZ Preferred
Funding Corporation.
2. Acquisition of Tappan Zee Financial, Inc.
On August 31, 1998, the Company completed its acquisition of Tappan Zee
Financial, Inc. ("Tappan Zee"), the parent company of Tarrytowns and TPNZ
Preferred Funding Corporation, pursuant to a definitive agreement signed
on March 6, 1998. The transaction was structured as a tax free exchange of
common shares and has been accounted for as a pooling-of-interests.
Accordingly, prior year financial statements have been restated to reflect
the Company and Tappan Zee on a combined basis as of the earliest period
presented. Tappan Zee was merged into the Company, and Tarrytowns and TPNZ
Preferred Funding Corporation are operating as wholly-owned subsidiaries
of the Company.
Under the terms of the acquisition, each Tappan Zee shareholder received
Company common stock that had a value of $22.00 per share for each share
of Tappan Zee common stock. The Exchange Ratio, which was determined based
on the average of the last reported sale prices for a share of Company
stock for the 20 consecutive full trading days on the American Stock
Exchange ended on the date on which the last of the regulatory approvals
required for consummation of the acquisition was obtained, was 1.12
Company shares for each Tappan Zee share. The total value of the
transaction based on the average Company stock price as calculated for
purposes of determining the Exchange Ratio was approximately $32.5
million, which represented 1.47 times Tappan Zee's book value as of June
30, 1998.
The Company and Tappan Zee had different fiscal periods for financial
reporting purposes. The consolidated financial information for the periods
presented reflects U.S.B. Holding Co., Inc. and its wholly-owned
subsidiaries, Union State Bank, Ad Con, Inc., and Union State Capital
Trust I ("Company Information"), as of and for the three months and nine
months ended September 30, 1998, combined with Tappan Zee's income
statement and cash flow information for the same periods. For the three
months and nine months ended September 30, 1997, Company Information is
included for those periods, while Tappan Zee information is included for
the three months and nine months ended December 31, 1997. The December 31,
1997 consolidated statement of condition information includes Tappan Zee
information as of March 31, 1998. An adjustment of $334,000 is recorded to
combined retained earnings to eliminate the duplication of recording
Tappan Zee net income for the three month period ended March 31, 1998,
that would otherwise have occurred as a result of preparing the
consolidated financial information in this manner. Other results of
operations for such three month period of
8
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Tappan Zee include net interest income of $1,244,000, provision for loan
losses of $10,000, income before taxes of $573,000, and an income tax
provision of $239,000. This process is customary when fiscal year ends of
merged companies are within 93 days of each other.
Separate and combined results of operations for the periods prior to the
acquisition of Tappan Zee are as follows:
Six Months Year Ended
Ended December 31,
June 30, 1998 1997 1996
------------- ---- ----
(000's)
Net Interest Income
Company $18,460 $33,806 $29,615
Tappan Zee 2,440 4,672 4,485
------- ------- -------
$20,900 $38,478 $34,100
------- ------- -------
Provision for Loan Losses
Company $ 600 $ 2,320 $ 2,275
Tappan Zee 20 42 69
------- ------- -------
$ 620 $ 2,362 $ 2,344
------- ------- -------
Net Income
Company $ 7,903 $10,402 $ 9,414
Tappan Zee 636 1,097 855
------- ------- -------
$ 8,539 $11,499 $10,269
------- ------- -------
As of August 31, 1998, Tappan Zee had approximately $140 million in
assets. Tarrytowns currently operates banking facilities in the Village of
Tarrytown and City of White Plains, Westchester County, New York. TPNZ
Preferred Funding Corporation is a Real Estate Investment Trust with
approximately $3.8 million in assets.
Merger related expenses of approximately $4.2 million ($3.2 million net of
tax) were recorded in the third quarter 1998 and consisted of: payments in
connection with existing employment contracts - $0.8 million; expenses
incurred in connection with acceleration of benefits under various
employee and director benefit plans - $0.7 million; professional fees -
$1.0 million; investment banking fees - $0.7 million; and other expenses -
$1.0 million. The transaction is expected to be accretive to earnings per
share in 1999.
3. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (comprising only normal
recurring accruals) necessary to present fairly the financial position of
the Company as of September 30, 1998, and December 31, 1997, operations
for the three and nine month periods ended September 30, 1998 and 1997,
and cash flows and changes in stockholders' equity for the nine month
periods ended September 30, 1998 and 1997. A summary of the Company's
significant accounting
9
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. Reclassifications
Certain reclassifications have been made to prior period accounts to
conform to the current period's presentation.
5. Pending Accounting Pronouncements
Disclosures about Segments of an Enterprise and Related Information
In September 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131
"Disclosures About Segments of an Enterprise and Related Information."
This statement is effective for the Company's annual consolidated
financial statements for the year ending December 31, 1998.
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in subsequent interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and assess
performance. The statement requires that public business enterprises
report a measure of segment profit or loss, certain specific revenue and
expense items and segment assets. It also requires that information be
reported about revenues derived from the enterprises' products or
services, or about the countries in which the enterprises earn revenues
and holds assets, and about major customers, regardless of whether that
information is used in making operating decisions.
10
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
Employers' Disclosure About Pensions and Other Post Retirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits," effective for fiscal
years beginning after December 15, 1997. SFAS No. 132 amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," and SFAS No. 106, "Employers' Accounting for Retirement
Benefits Other Than Pensions." SFAS No. 132 standardizes the disclosure
requirements of SFAS Nos. 87 and 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and
other retirement benefits.
The Company will adopt these disclosure requirements in its financial
statements for the year ended December 31, 1998. Management does not
anticipate that these standards will have a material impact on the
Company's financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
It requires that all derivatives be recognized in the statement of
condition, either as assets or as liabilities, and measured at their fair
value. This statement requires that changes in a derivative's fair value
be recognized in current earnings unless specific hedge accounting
criteria are met. Hedge accounting for qualifying hedges permits a
derivative's gains and losses to offset the related results on the hedged
item in the income statement. However, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective
aspect of the hedge. Those methods must be consistent with the entity's
approach to managing risk.
For the Company, SFAS No. 133 is effective January 1, 2000. A company may
also implement the statement as of the beginning of any fiscal quarter
after issuance but cannot apply the statement retroactively. The Company
does not anticipate that the statement will have a material impact on its
financial position or results of operations.
11
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise
On October 19, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." This statement
amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities,"
to require that after the securitization of mortgage loans held for sale,
an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interest based on its ability
and intent to sell or hold those investments. This statement conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent
accounting for securities retained after the securitization of other types
of assets by a non-mortgage banking enterprise. The statement is effective
for the first fiscal quarter beginning after December 15, 1998.
Application of this statement will not have a material effect on the
results of operations or financial condition of the Company.
6. Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial
and business matters for periods subsequent to September 30, 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. 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, estimates of merger related costs, and
other assumptions related to the acquisition of Tappan Zee; degree of
expected compliance with the Year 2000 issues that are 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.
12
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
7. Earnings Per Share
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods and requires
restatement of all prior period earnings per share ("EPS") data presented.
The Company adopted SFAS No. 128 for the year ended December 31, 1997 and
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 (excluding restricted stock
not yet vested) 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, "Earnings Per
Share." 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 and restricted stock issued under the Company's
Recognition and Retention Stock Plan but not yet vested are considered
common stock equivalents for Diluted EPS calculations.
13
<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>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
(000's, except share data)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 10 $ 2,946 $ 8,549 $ 8,287
Less preferred stock dividends 11 -- 11 34
------------ ------------ ------------ ------------
Numerator for Basic and Diluted
earnings per share - net income (loss)
available to common stockholders $ (1) $ 2,946 $ 8,538 $ 8,253
============ ============ ============ ============
Denominator:
Denominator for Basic earnings
per share - weighted
average shares 14,115,965 13,911,977 14,013,969 13,908,103
Effects of dilutive securities:
Director and employee
stock options 1,002,019 1,197,736 1,084,919 1,056,941
Restricted stock not vested 7,352 15,104 7,847 14,162
------------ ------------ ------------ ------------
Total effects of dilutive securities 1,009,371 1,212,840 1,092,766 1,071,103
------------ ------------ ------------ ------------
Denominator for Diluted earnings
per share - adjusted weighted
average shares 15,125,336 15,124,817 15,106,735 14,979,206
============ ============ ============ ============
Basic earnings per share $ -- $ 0.21* $ 0.61 $ 0.59*
============ ============ ============ ============
Diluted earnings per share $ -- $ 0.19* $ 0.57 $ 0.55*
============ ============ ============ ============
</TABLE>
*Adjusted for two-for-one stock split in December 1997.
8. 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. For interim financial reporting periods, the Company has
elected to provide this disclosure in the notes to the 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.
14
<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 nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Description 1998 1997 1998 1997
-------- -------- -------- --------
(000's)
<S> <C> <C> <C> <C>
Net Income $ 10 $ 2,946 $ 8,549 $ 8,287
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available for sale arising
during the periods 1,731 1,187 2,052 1,475
Unrealized holding gain as a result of
reclassification of Tappan Zee held to
maturity securities to available for sale 506 -- 506 --
Reclassification adjustment, net of tax,
for net gains realized in the periods
that were held at the beginning of the
periods (6) 6 (545) (153)
-------- -------- -------- --------
Net gain recognized in other
comprehensive income 2,231 1,193 2,013 1,322
-------- -------- -------- --------
Comprehensive Income $ 2,241 $ 4,139 $ 10,562 $ 9,609
======== ======== ======== ========
</TABLE>
These unrealized holding gains, net of tax, represents an increase in the
unrealized appreciation of securities available for sale, net of tax,
during the periods reported. The cumulative balance of this unrealized
gain, net of tax, at September 30, 1998 and December 31, 1997 was
$3,401,000 and $1,388,000, respectively.
9. Securities
In accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," the Bank's and Tarrytowns' investment
policies include 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 accumulated other comprehensive income.
15
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
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.
As a result of the acquisition of Tappan Zee and its wholly-owned
subsidiaries, Tarrytowns and TPNZ Preferred Funding Corporation,
approximately $39.5 million of Tarrytowns' and TPNZ Preferred Funding
Corporation's held-to-maturity securities were reclassified to available
for sale. Such a reclassification was made pursuant to SFAS No. 115 to
maintain the combined entities interest rate risk profile. Classification
of these and other securities as available for sale will allow management
to continue to have the ability to react to changes in interest rates. As
a result of this reclassification, available for sale securities were
increased by the unrealized gain on the reclassified securities of $843
thousand, and accumulated other comprehensive income was increased by such
unrealized gain, net of tax, of $506 thousand.
At September 30, 1998 and December 31, 1997, application of SFAS No. 115
resulted in an increase of securities available for sale of $5,808,000 and
$2,399,000, representing the net unrealized gain, which, after the
applicable tax effect, resulted in an increase to accumulated other
comprehensive income of $3,401,000 and $1,388,000, respectively.
From the results on sales of securities for the nine months ended
September 30, 1998 and September 30, 1997, gross gains were 1,104,000 and
976,000, respectively, and gross losses were 13,000 and 181,000,
respectively.
A summary of the amortized cost and estimated fair values of securities
and related gross unrealized gains and losses at September 30, 1998 and
December 31, 1997, follows:
16
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
================================================================================
<TABLE>
<CAPTION>
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 1998: Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and
government agencies $ 58,499 $ 1,909 $ -- $ 60,408
Mortgage-backed securities 307,177 4,215 419 310,973
Obligations of states and
political subdivisions 1,539 102 -- 1,641
Corporate securities 272 1 -- 273
Other 114 -- -- 114
-------- -------- -------- --------
Total securities available for sale $367,601 $ 6,227 $ 419 $373,409
======== ======== ======== ========
Held to Maturity:
Mortgage-backed securities $ 9,781 $ 53 $ 5 $ 9,829
Obligations of states and
political subdivisions 56,829 3,376 -- 60,205
-------- -------- -------- --------
Total securities held to maturity $ 66,610 $ 3,429 $ 5 $ 70,034
======== ======== ======== ========
<CAPTION>
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997: Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and
government agencies $117,494 $ 1,067 $ 43 $118,518
Mortgage-backed securities 142,541 1,393 83 143,851
Obligations of states and
political subdivisions 1,241 65 -- 1,306
Corporate Securities 2,800 -- -- 2,800
Other 114 -- -- 114
-------- -------- -------- --------
Total securities available for sale $264,190 $ 2,525 $ 126 $266,589
======== ======== ======== ========
Held to Maturity:
U.S. Treasury and
government agencies $ 46,988 $ 16 $ 236 $ 46,768
Mortgage-backed securities 62,924 661 183 63,402
Obligations of states and
political subdivisions 62,696 2,875 -- 65,571
Corporate Securities 100 1 -- 101
-------- -------- -------- --------
Total securities held to maturity $172,708 $ 3,553 $ 419 $175,842
======== ======== ======== ========
</TABLE>
17
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
10. Loans
Nonaccrual loans were $4.9 million at September 30, 1998 and $7.3 million
at December 31, 1997. Restructured loans were $0.5 million and $0.6
million at September 30, 1998 and December 31, 1997, respectively.
Substantially all of the nonaccruing and restructured 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 September 30, 1998, the Company has no commitments
to lend additional funds to any customers with nonaccrual or restructured
loan balances.
At September 30, 1998, there are loans aggregating approximately $1.0
million, which are not on nonaccrual status, that were potential problem
loans which may result in their being placed on nonaccrual status in the
future.
At September 30, 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 $3.5 million and $4.6 million at
September 30, 1998 and December 31, 1997, of which $3.1 million and $4.2
million at September 30, 1998 and December 31, 1997 were in nonaccrual
status, respectively. 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
September 30, 1998 and December 31, 1997, respectively. The average
recorded investment in impaired loans for the nine months ended September
30, 1998 and year ended December 31, 1997 was approximately $3.7 million
and $6.2 million, respectively. For the three and nine months ended
September 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 September 30,
1998 and December 31, 1997, that are considered to be impaired due to a
reduction in the contractual interest rate, are on accrual status because
the collateral securing 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 yet collected as of September 30, 1998 is immaterial.
At September 30, 1998, the Bank had approximately $1.9 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 in the second quarter of 1998 by the Bankruptcy Court
with jurisdiction over Bennett, the Bank collected an initial payment of
$1.4 million, reducing the original balance of $3.3 million to $1.9
million. Additional collections of $0.8 million were received on November
2, 1998, reducing the balance of the loans to $1.1 million. Further
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
18
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
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 $0.9 million has been established in
accordance with SFAS No. 114 as of September 30, 1998.
11. 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 and Tarrytowns also have the ability to
borrow under similar master security sale and repurchase agreements from
the FHLB and, to a lesser extent, its customers. At September 30, 1998 and
December 31, 1997, the Company had $1.0 million and $34.9 million,
respectively, of such short-term borrowings outstanding with terms between
21 and 365 days, at interest rates between 5.75 percent and 6.00 percent.
At September 30, 1998 and December 31, 1997, the borrowings were
collateralized by securities with an aggregate amortized cost of $1.0
million and $35.5 million and estimated fair value of $1.0 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 September 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 September 30, 1998, the Bank had no such
borrowings outstanding. At December 31, 1997, the Bank had short-term FHLB
advances of $35.0 million outstanding at interest rates ranging from 6.00
percent to 6.13 percent.
Additional information with respect to short-term borrowings as of and for
the nine months ended September 30, 1998 and 1997 is presented in the
table below.
- --------------------------------------------------------------------------------
(000's, except percentages)
Short-Term Borrowings 1998 1997
- --------------------------------------------------------------------------------
Balance at September 30 $1,000 $59,277
Average balance outstanding $12,602 $52,743
Weighted-average interest rate*
As of September 30 5.75% 5.70%
Paid during period 6.07% 5.76%
- --------------------------------------------------------------------------------
* 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 September 30, 1998 and December 31, 1997, long-term FHLB advances
totaled $29.9
19
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
million and $24.2 million, respectively. At September 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 $15.9 million are amortizing advances having
scheduled payments, but may not be repaid in full prior to maturity
without penalty.
The Bank and Tarrytowns also have long-term borrowings of $109.8 million
and $39.8 million in securities sold under agreements to repurchase as of
September 30, 1998 and December 31, 1997, respectively. At September 30,
1998, these borrowings include $9.8 million having an original term of
three years at an interest rate of 6.08 percent, and $100.0 million having
original terms of between five and ten years at interest rates between
5.08 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 $114.4 million and estimated fair value of
$116.4 million.
At September 30, 1998 and December 31, 1997, the Bank and Tarrytowns own
152,016 and 146,664 shares of capital stock in the FHLB with a carrying
value of $15.2 million and $14.7 million, respectively, 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.
The following table is a summary of long-term debt, all of which are fixed
rate, distributed based upon remaining contractual maturity at September
30, 1998, with a comparative total for December 31, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(000's, except percentages)
After 1
Within But Within After 1998 1997
1 Year 5 Years 5 Years Total Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total long-term debt $9,000 $29,066 $101,645 $139,711 $63,940
Weighted-average interest rate 6.31% 5.84% 5.55% 5.66% 5.92%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The dividend rate on the Company's Series "A" preferred stock issued to a
single investor was determined quarterly and was subject to certain
minimum and maximum per annum dividend rates as specified in the
agreement. For the nine month period ended September 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 nine month period ended
September 30, 1997. The Company redeemed the remaining outstanding amount
of preferred stock of $3,250,000 on February 14, 1997.
20
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
During the third quarter of 1998 and fourth quarter of 1997, U.S.B. Realty
Corp. declared and paid an 8.0 percent dividend totaling $11,000 in each
period to its non-affiliate minority-interest junior preferred
shareholders.
The Company effected 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 nine months ended September 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 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.
In accordance with regulatory requirements, Tarrytowns established a
liquidation account at the time of its conversion to a stock company
("Conversion") in the amount of $7.8 million, equal to its equity at March
31, 1995. The liquidation account is maintained for the benefit of
eligible account holders who continue to maintain their accounts at
Tarrytowns after the Conversion. The liquidation account is reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases do
not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of Tarrytowns, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held.
The ability of the Company, the Bank and Tarrytowns to pay cash dividends
in the future is 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 and Tarrytowns. The
Bank's dividends to the Company may not exceed the sum of the Bank's net
income for that year and its undistributed net income for the preceding
two years, less any required transfers to additional paid-in capital. At
September 30, 1998, the Bank could pay dividends to the Company of $26.0
million without having to obtain prior regulatory approval. Tarrytowns may
not declare or pay cash dividends on its common stock if the effect
thereof would cause equity to be reduced below applicable regulatory
capital requirements or the amount required to be maintained for the
liquidation account. The Office of Thrift Supervision ("OTS") capital
distribution regulations applicable to savings institutions (such as
Tarrytowns) that meet their regulatory capital requirements, generally
limit dividend payments in any year to the greater of (i) 100% of
year-to-date net income plus an amount that would reduce surplus capital
by one-half or (ii) 75% of net income for the most recent four quarters.
Surplus capital is the excess of actual capital at the beginning of the
year over the institution's minimum regulatory capital requirement. At
September 30, 1998, Tarrytowns could pay, pursuant to the above
regulations, dividends to the Company of $5.2 million.
21
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
12. Income Taxes
Tarrytowns, as a thrift institution, is subject to special provisions in
the federal and New York State tax laws regarding its allowable tax bad
debt deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience
or a percentage of taxable income. Tax bad debt reserves represent the
excess of allowable deductions over actual bad debt losses and other
reserve reductions. These reserves consist of a defined base-year amount,
plus additional amounts ("excess reserves") accumulated after the base
year.
At September 30, 1998, Tarrytowns' federal and state bad debt reserves
were $1.2 million and $5.2 million, respectively, which equaled the
base-year amounts. Deferred tax liabilities have not been recognized with
respect to these reserves since the Company does not expect that such
amounts will become taxable in the foreseeable future. Under the tax laws
as amended, events that would result in taxation of these reserves include
(i) redemptions of Tarrytowns' stock or certain excess distributions, and
(ii) failure of Tarrytowns to maintain a specified qualifying assets ratio
or meet other thrift definition tests for New York State tax purposes. At
September 30, 1998, Tarrytowns' unrecognized deferred tax liabilities with
respect to the federal and state base-year reserves were approximately
$0.4 million and $0.5 million, respectively.
13. Key Employees' Supplemental Investment Plan
Effective September 1, 1998, the Bank amended its Key Employees'
Supplemental Investment Plan ("KESIP" or the "Plan"). Such amendment was
made as a result of changes in accounting required by Emerging Issues Task
Force Consensus No. 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested"
("EITF Consensus No. 97-14"), which prescribed accounting for deferred
compensation plans in which investments are made in Company stock. The
amendment made to the KESIP revises the Plan so that all compensation
deferred into the Plan is immediately invested in whole shares of Company
stock. In addition, distributions from the Plan will now only be made in
Company stock. As a result of the amendment to the KESIP and application
of EITF Consensus No. 97-14, the accounting for the Plan resulted in a
revaluation of the deferred compensation obligation and the shares held in
trust for deferred compensation to reflect such obligation and shares held
in trust to historical cost as of September 30, 1998. In addition, in
accordance with EITF Consensus No. 97-14, the deferred compensation
obligation is included as a component of stockholders equity.
14. Tarrytowns Employee Benefits Plans
Pension Plans and Deferred Compensation Plan
All of Tarrytowns' eligible employees are included in a non-contributory,
multiple-employer defined benefit pension plan (the "Plan"). The annual
contributions to the Pension Plan are based on actuarially determined
funding requirements. On September 1, 1998, Tarrytowns elected to
terminate the Plan and benefits under the Plan were frozen as
22
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U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
of October 1, 1998. At September 30, 1998, the estimated accumulated
benefit obligation is $1.3 million and Plan assets totaled $1.0 million.
An accrual of $0.3 million was made during the quarter ended September 30,
1998 to provide for additional contributions that will be required to
fully fund the Plan for purposes of its termination and planned
distributions of vested amounts to participants. The actuarial present
values of the accumulated benefit obligation is based on a discount rate
of 5.01%. Plan expense for the three and nine months ended September 30,
1998 was $0.2 million and $0.3 million, respectively, of which $0.3
million is included in merger related expenses.
Tarrytowns also has a non-qualified Deferred Compensation Plan for
Directors. Under the Deferred Compensation Plan, directors may defer all
or part of their compensation (including compensation paid to an
officer-director for service as an officer). Deferred amounts are applied
to either the purchase of (i) a life insurance policy, in which case the
amount of deferred benefits payable is based on the value to Tarrytowns of
expected death benefit proceeds, or (ii) Company common stock and other
investments, in which case the amount of deferred benefits payable is
based on the investment performance of the investments made. Deferred
benefits are paid in installments over a ten-year period beginning upon
termination of service as a director. In the event of a change in control
of Tappan Zee or Tarrytowns, which occurred upon the acquisition of Tappan
Zee by the Company, the plan required full funding of any
previously-purchased life insurance contracts. However, the Board of
Directors of Tarrytowns waived this requirement. The Company has
established a Trust fund with an independent fiduciary for the purpose of
accumulating funds to be used to satisfy its obligations under the plan.
The accumulated projected benefit obligation of the Deferred Compensation
Plan aggregated $1.2 million at September 30, 1998. An accrual of $0.4
million was recorded during the three months ended September 30, 1998,
substantially all of which is included in merger related expenses, to
provide for the full present value obligation of this Plan. The present
value of the accumulated projected benefit obligation is based on a
discount rate of 6.0%.
For financial reporting purposes, the cash surrender value of the life
insurance contracts are not considered plan assets but, instead, are
included in the Company's consolidated balance sheet. At September 30,
1998, the cash surrender values of purchased life insurance policies were
approximately $0.3 million. The total death benefits payable under the
insurance policies amounted to approximately $1.0 million at September 30,
1998. Although the Company may be obligated for certain cash payments
prior to the receipt of proceeds from the purchased life insurance
policies, the Company should ultimately be reimbursed in whole from such
life insurance proceeds.
Tarrytowns also has a retirement plan for directors, which is a
non-qualified plan that became effective upon the Conversion. Outside
directors are participants in this unfunded plan only if they have elected
not to participate in the Deferred Compensation Plan described above.
Participants in the directors' retirement plan who have attained age 65
and completed ten or more years of service (including past service as a
director of Tarrytowns) will receive an annual retirement benefit equal to
the aggregate director compensation received (excluding stock
compensation) for the final year of board service.
23
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U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
Reduced benefits apply for shorter service periods and for early
retirement. Pension expense is not significant. The actuarial present
value of the accumulated and projected benefit obligations, all of which
is accrued, was approximately $73,000 at September 30, 1998. This plan was
terminated effective August 31, 1998, and benefits were frozen at that
date.
Postretirement Health Care Benefits
Substantially all Tarrytowns employees were eligible for postretirement
health care (medical and dental) benefits if they met certain age and
length of service requirements. This plan was terminated on September 1,
1998, and only vested employees on that date will continue to receive
benefits under this plan.
A liability of $0.2 million has been recorded to provide for the present
value of future obligations under this plan.
Employee Stock Ownership Plan
Tarrytowns established an Employee Stock Ownership Plan (the "ESOP") for
eligible Tarrytowns employees. The ESOP borrowed approximately $1.3
million from Tarrytowns and used the funds to purchase 129,600 shares of
Tappan Zee's common stock (145,152 shares of Company common stock, as
adjusted for the Exchange Ratio, upon consummation of the acquisition of
Tappan Zee by the Company). Tarrytowns makes monthly contributions to the
ESOP sufficient to fund the debt service requirements over the ten-year
term of the loan.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee for allocation to participants as the loan is repaid. Shares
released from the suspense account are allocated to participants on the
basis of their relative compensation. Participants become vested in the
shares allocated to their respective accounts over a period not to exceed
five years. Any forfeited shares are allocated to other participants in
the same proportion as contributions. Shares allocated to participants or
committed for release to participants (adjusted for the Exchange Ratio)
totaled 52,146 and 35,566 at September 30, 1998 and 1997, respectively.
Expense recognized with respect to such shares amounted to $65,000 and
$66,000, and $209,000 and $185,000 for the three and nine months ended
September 30, 1998 and 1997, respectively, based on the average fair value
of the Company's common stock for each period. The cost of the 93,006
shares which have not yet been committed to be released to participant
accounts at September 30, 1998 is reflected as a reduction of
stockholders' equity in the amount of $0.8 million. The fair value of
these shares was approximately $1.4 million at that date.
Stock Option Plans
Under the Tappan Zee Stock Option Plan, which was assumed by the Company,
90,720 shares (as adjusted for the Exchange Ratio) of authorized but
unissued Company stock are reserved for issuance upon option exercises.
Options under this plan may be either non-qualified stock options or
incentive stock options. Each option entitles the holder to
24
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
purchase one share of Company common stock at an exercise price equal to
the fair market value on the date of grant. Options expire no later than
ten years following the date of grant.
Under the Tappan Zee Directors' Stock Option Plan, 45,360 shares (as
adjusted for the Exchange Ratio) of authorized but unissued Company stock
are reserved for issuance to outside directors upon option exercises.
Options granted under this plan are non-qualified options. Other option
terms and conditions are similar to those under the Tappan Zee Stock
Option Plan.
Effective July 10, 1996, initial option grants were made under the Stock
Option Plan and the Tappan Zee Directors' Stock Option Plan for 90,720
shares and 45,360 shares, respectively, at an exercise price of $10.38 per
share (as adjusted for the Exchange Ratio). These options have a ten-year
term and vest ratably over five years from the date of grant. Each option,
however, becomes fully exercisable upon a change in control of Tappan Zee
or Tarrytowns, or upon the death, disability or retirement of the option
holder. Upon the acquisition of Tappan Zee by the Company, all options
became exercisable, except for 54,432 unvested options held by the
Executive Vice President and former President pursuant to the terms of a
certain employment agreement and a consulting agreement. These options
will vest according to their original terms. No options were granted
subsequent to July 10, 1996. All options granted in July 1996 were
outstanding at September 30, 1998. At September 30, 1998, shares available
(as adjusted for the Exchange Ratio) for future grants totaled 36,188 for
the Tappan Zee Stock Option Plan and 9,072 for the Tappan Zee Directors'
Stock Option Plan.
Recognition and Retention Plans
On July 10, 1996, the shareholders of Tappan Zee approved the Tappan Zee
Financial, Inc. Recognition and Retention Plan for Officers and Employees
("Employees' Plan") and the Tappan Zee Financial, Inc. Recognition and
Retention Plan for Outside Directors ("Directors' Plan"), both of which
have been assumed by the Company. The purpose of these plans is to provide
officers and non-employee directors of Tarrytowns with a proprietary
interest in the Company in a manner designed to encourage their retention.
Total shares authorized are 50,803 for the Employees' Plan and 21,773 for
the Directors' Plan (each as adjusted for the Exchange Ratio).
Effective July 10, 1996, initial stock awards were made under the
Employees' Plan and the Directors' Plan for 36,288 shares and 21,773
shares, respectively. An additional grant of 1,120 shares was made under
the Employees' Plan later in fiscal 1997. These awards vest ratably over
five years from the date of grant; however, immediate vesting occurs upon
a change in control of Tappan Zee or Tarrytowns, or upon the death,
disability or retirement of the participant. Upon acquisition of Tappan
Zee by the Company, 13,736 shares were immediately vested. Shares awarded
to the Executive Vice President and former President aggregating 21,773
shares were not vested pursuant to the terms of a certain employment
agreement and a consulting agreement. These shares will vest over the
original five year vesting period. The fair value of the shares awarded
under the plans, totaled $616,000 at the grant dates. The remaining
recorded value of the shares not yet vested of $0.3 million
25
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
is being amortized to compensation expense on a straight-line basis over
the five-year vesting period. Compensation expense of $193,000 and
$31,000, and $254,000 and $95,000 was recognized during the three and nine
month periods ended September 30, 1998 and 1997, respectively, of which
$166,000 is included in merger related expense as a result of acceleration
of vesting attributable to the Tappan Zee acquisition for the three and
nine month periods ended September 30, 1998. Unearned compensation cost of
$177,000 included as common stock held by benefit plans and is reflected
as a reduction of shareholders' equity at September 30, 1998.
15. Dissolution of U.S.B. Realty Corp.
On April 16, 1998, the Company announced that it intended to dissolve the
Bank's 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. The dissolution of Realty Corp. was completed on
October 29, 1998.
Dissolution of Realty Corp. has decreased the effective tax rate for the
Company's 1998 tax provision, but may increase the effective tax rate in
future years. For the nine month period ended September 30, 1998, net
income includes a reduction of tax expense, net of associated expenses, of
$1.9 million resulting from liquidating distributions of earnings from
Realty Corp.
16. Commitments and Contingencies
At September 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.
At September 30, 1998, Tarrytowns is also committed under an employment
agreement and consulting agreement with an Executive Vice President of
Tarrytowns and the former President of Tarrytowns, respectively. Under the
employment agreement, Tarrytowns made an initial payment of $336,000 to
satisfy a previous employment agreement and has agreed to make payments of
$165,000 per year for services to be performed for a period of three
years. Under the consulting agreement, an initial payment was made of
$472,000 to satisfy an obligation under a previous employment agreement,
and future payments of $77,000 per year for services to be performed will
be made for a period of three years. Both agreements were effective as of
August 31, 1998.
26
<PAGE>
U.S.B. HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Cont'd)
In the normal course of business, various commitments to extend credit are
made which are not reflected in the accompanying consolidated financial
statements. At September 30, 1998, formal credit line and loan commitments
which are primarily loans collateralized by real estate and credit card
lines approximated $184.1 million and outstanding letters of credit
totaled $29.1 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 September 30, 1998. The
premium paid in the amount of $85,000 was 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 Company 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
expired on October 2, 1998. This agreement was 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 was equal to the
unamortized premium paid to enter into this agreement, while the risk of
loss on the interest rate swap was the fair value amount to be paid to
terminate the contract, which was $11,000 (liability) at September 30,
1998.
The Company 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 Company's potential inability to generate loans to fulfill the
contracts. To control the risk associated with changes in interest rates,
the Company may also use options to hedge loans closed and expected to
close. No such contracts were outstanding at September 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.
27
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FINANCIAL CONDITION
At September 30, 1998 the Company had total assets of $1,236.0 million, an
increase of $83.3 million or 7.2 percent from December 31, 1997.
Total deposits increased $62.6 million for the nine month period ended September
30, 1998 to $965.4 million, which represents a 6.9 percent increase from
December 31, 1997. Demand, NOW, and savings accounts increased $83.9 million,
offset by a decrease in money market accounts of $2.7 million and time deposits
of $18.6 million. Demand accounts and NOW deposits increased by $38.0 million
and $7.1 million, respectively. Savings deposits increased by $38.8 million, as
the Bank's "Golden Statement" and "Liquid Gold" accounts, which provide
attractive yields for high balance accounts, continued to attract additional
deposits. Money market accounts decreased as customers favored higher yielding
savings accounts. Personal time deposits over $100,000 increased by $12.4
million during the nine month period ended September 30, 1998, which were offset
by decreases of time deposits greater than $100,000 from local municipalities,
which are obtained on a bidding basis with maturities of 30 to 180 days, of
$28.7 million and retail time deposits under $100,000 of $0.8 million. IRA and
Keogh time deposit accounts also decreased by $1.5 million due to significant
competition for this product. The Bank replaced time deposit funds with borrowed
funds from wholesale sources at lower rates and for longer terms.
The securities portfolio, including investment in FHLB stock, of $455.2 million
and $454.0 million at September 30, 1998 and December 31, 1997, respectively,
consists of securities held to maturity at amortized cost of $66.6 million and
$172.7 million, securities available for sale at estimated fair value totaling
$373.4 million and $266.6 million, respectively, and FHLB stock of $15.2 million
and $14.7 million at September 30, 1998 and December 31, 1997, respectively.
During the nine months ended September 30, 1998, U.S. Treasury and government
agency obligations decreased $105.1 million due primarily to sales and
redemptions of securities totaling $127.0 million, partially offset by purchases
of $1.0 million in U.S. Treasury Notes and $20.0 million in callable bonds and a
net increase in the market value of available for sale securities of $0.9
million. Mortgage-backed securities increased by $114.0 million primarily due to
purchases of $210.2 million and a net increase in the market value of available
for sale securities of $2.5 million, which were offset by sales and redemptions
totaling $67.7 million, principal amortizations of $30.5 million, and net
premium amortization and discount accretion of $0.5 million. Mortgage-backed
securities purchased 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 $5.5 million principally due to maturities of $6.5
million that were offset by purchases of $1.1 million during the first nine
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
$273 thousand of holdings in corporate securities. Medium-term
28
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
corporate debt securities which are rated investment grade by nationally
recognized credit rating organizations will continue to be evaluated for
investment in the future. The Company continues to exercise its conservative
approach to investing by making high quality investments and controlling
interest rate risk by purchasing both fixed and floating rate securities and
through the averaging of investments in medium-term maturities.
At September 30, 1998, loans outstanding were $695.8 million, a net increase of
$73.8 million or 11.9 percent over December 31, 1997. The primary increases of
outstanding loan balances were $15.9 million in time secured loans, $28.9
million in commercial mortgages, $6.6 million in commercial installment loans,
$17.2 million in residential mortgages, and $9.9 million in all other loan
categories, except for a reduction in land acquisition and construction loans of
$4.7 million. The Company had approximately $184.1 million in formal credit
lines and loan commitments outstanding. Management considers its liquid
resources to be adequate to fund loans in the foreseeable future, principally by
utilizing excess funds temporarily placed in federal funds sold, increases in
deposits and borrowings, loan repayments and maturing securities.
The Bank has approximately $1.9 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 in the second quarter of 1998 by the
Bankruptcy Court with jurisdiction over Bennett, the Bank collected an initial
payment of $1.4 million, reducing the original balance of $3.3 million to $1.9
million. Additional collections of $0.8 million were received on November 2,
1998, reducing the balance of the loan to $1.1 million. Further 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
Company's nonaccrual loans and other real estate owned were approximately 0.5
percent of total assets at September 30, 1998.
The Company's allowance for loan losses increased $0.7 million or 9.0 percent to
$9.0 million at September 30, 1998, from $8.3 million at December 31, 1997. The
allowance for loan losses represents 1.29 percent of gross loans outstanding at
September 30, 1998, compared to 1.33 percent at December 31, 1997. The allowance
reflects a provision of $931,000 and net charge-offs of $189,000 recorded thus
far in 1998. Management takes a prudent and cautious position in evaluating
various business and economic uncertainties in relation to the Company's loan
portfolio. In management's judgment, the allowance is considered adequate to
absorb potential losses inherent in the loan portfolio.
During the nine months ended September 30, 1998, the Company decreased the
amount of outstanding short- and long-term advances with the Federal Home Loan
Bank of New York by $29.2 million, while borrowings under repurchase agreements
increased by $36.1 million. Overall, borrowings increased, as such funding was
used to replace municipal time deposits and other time deposits which were at a
higher cost and shorter term. As noted above, time deposits decreased by $18.6
million.
29
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
Stockholders' equity increased to $95.6 million at September 30, 1998 from the
December 31, 1997 balance of $85.9 million. The increase primarily results from:
net income of $8.5 million for the nine month period ended September 30, 1998;
stock options exercised ($1.7 million), and a tax benefit from exercise of
non-qualified stock options of $0.7 million; an increase in the net unrealized
gain on securities available for sale, net of tax, of $2.0 million; and a
decrease in common stock held by benefit plans ($0.3 million); partially offset
by dividends paid of $2.5 million and the acquisition of 35,649 shares of
treasury stock at market value for $0.7 million, in connection with the exercise
of 88,103 stock options.
The Company's leverage ratio at September 30, 1998 was 9.06 percent, compared to
9.24 percent at December 31, 1997. The Company's Tier I and total capital ratios
under the risk-based capital guidelines were 15.13 percent and 16.35 percent at
September 30, 1998 and 15.05 percent and 16.23 percent at December 31, 1997,
respectively. In addition, the Bank and Tarrytowns exceed all current regulatory
capital requirements and were in the "well-capitalized" category at September
30, 1998 and December 31, 1997.
RESULTS OF OPERATIONS
Earnings
Net income for the three month period ended September 30, 1998 was $10,000
compared to $2.9 million for the three month period ended September 30, 1997.
Basic and diluted earnings per share were negligible for the three month period
ended September 30, 1998, compared to $0.21 and $0.19 for basic and diluted
earnings per share, respectively, for the three month period ended September 30,
1997. Net income for the three months ended September 30, 1998 includes expenses
related to the acquisition of Tappan Zee including benefit payments required
under employment contracts and benefit plans, investment banking fees, printing
costs, and professional fees incurred in connection with the acquisition. Such
expenses approximated $3.2 million after tax. Before merger related expenses,
net income for the three month period ended September 30, 1998 was $3.2 million,
an increase of 8.5% over the prior year period. Excluding merger related
expenses, basic and diluted earnings per share were $0.23 and $0.21, reflecting
increases of 9.5% and 10.5%, respectively.
For the nine month period ended September 30, 1998, net income was $8.5 million
compared to $8.3 million in the prior year period, an increase of 3.2%. Basic
earnings per share and diluted per share were $0.61 and $0.57 in the current
year period compared to $0.59 and $0.55 in the prior year, increases of 3.4% and
3.6%, respectively. Before merger related expenses, net income for the nine
month period ended September 30, 1998 was $11.7 million, an increase of 41.6%.
Excluding merger related expenses, basic and diluted earnings per share was
$0.84 and $0.78, respectively, reflecting increases of 42.4% and 41.8%,
respectively. The nine month 1998 period also includes a reduction of tax
expense, net of associated expenses, of approximately $1.9 million resulting
from tax free liquidating distributions of earnings from the Bank's Real Estate
Investment Trust subsidiary, U.S.B. Realty Corp. Excluding this tax benefit and
merger related expenses, net income for the nine months ended September 30, 1998
was $9.8 million, or $0.65 per diluted share, 18.5% and 18.2% higher than the
comparable 1997 period, respectively.
30
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
Income before merger related expenses and income taxes, for the three month
period ended September 30, 1998 increased to $4.9 million from $4.2 million in
the prior year, a 16.6% increase. For the nine months ended September 30, 1998,
income before merger related expenses and income taxes increased to $14.4
million compared to $12.0 million in the prior year, an increase of 19.4%. These
increases reflect higher net interest income as a result of increases in earning
assets, offset by a decline in the net interest spread, higher non interest
income and security gains (for the nine month period) and a lower provision for
loan losses as a result of improvement in the credit quality of the loan
portfolio compared to the prior year, offset by lower security gains (for the
three month period) and an increase in non interest expense to support increased
volume and professional fees incurred in connection with the liquidation of
U.S.B. Realty Corp.
A discussion of the factors impacting the changes in the various components of
net income follows.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three and nine month periods ended September 30, 1998, net interest income
increased 13.5 percent to $11.0 million from $9.7 million, and 12.7 percent to
$31.9 million from $28.3 million, respectively, compared to the prior year
periods. Net interest income increased in the current year periods due to volume
increases of average earning assets, partially offset by a decrease in the net
interest spread. For the three and nine months ended September 30, 1998, the
interest spread (yield on earning assets less cost of funds) was 3.51 and 3.55
percent compared to 3.57 and 3.73 percent in the same periods of 1997,
respectively. Yields on interest earning assets decreased during the three and
nine month periods ended September 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 other deposit products generally remained stable to slightly lower 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 $210,000 to $311,000 and $1,071,000 to
$931,000 for the three and nine month periods ended September 30, 1998,
respectively, compared to the same periods in 1997. Net charge-offs in the three
and nine month periods ended September 30, 1998 totaled $109,000 and $189,000,
compared to net charge-offs of $170,000 and $427,000 for the three and nine
month periods ended September 30, 1997, respectively. The net charge-offs in all
periods primarily relate to real estate and credit card loans. Nonaccrual loans
were $4.9 million
31
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
and $9.1 million, respectively, at September 30, 1998 and 1997, compared to $7.3
million at December 31, 1997. After collections received on November 2, 1998,
the Bank has approximately $1.1 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 (see notes to Consolidated Financial
Statements (Unaudited)). 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. 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 September 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.
Non-Interest Income
Non-interest income for the three and nine months ended September 30, 1998
decreased by $39,000 to $1,160,000 and increased $371,000 to $4,055,000,
respectively, compared to the same periods of 1997. The decrease for the three
month period ended September 30, 1998 reflects lower security gains and gains on
loans held for sale ($245,000), partially offset by increases in other fee based
income. The increase for the nine month period ended September 30, 1998
primarily relates to higher net gains on securities transactions and loans held
for sale ($279,000) and other income ($108,000), partially offset by a minor
decrease in service charges and fees. 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, excluding merger related expenses of $4,190,000,
increased $777,000 to $6,930,000 and $2,694,000 to $20,650,000 for the three and
nine month periods ended September 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 Tarrytowns and expenses of $513,000 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 $584,000, or
32
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
17.6 percent and $1,952,000 or 20.3 percent during the three and nine month
periods ended September 30, 1998, respectively, compared to the prior year
periods. The increases occurred due to additional personnel employed by the
Company 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 retirement and stock plans, medical coverage, and tuition reimbursement.
The changes in the other components of non-interest expenses for the three and
nine month periods ended September 30, 1998 compared to September 30, 1997, were
due to the following:
o Increase of $222,000 (21.1%) and $543,000 (17.8%), respectively, in
occupancy and equipment expense. This increase is due principally to
higher maintenance expenses relating to the Company's branch and computer
related equipment due to increased business volume, and additional rental
and depreciation expense associated with three new branch openings, as
well as additional space for corporate and administrative offices.
o Increase of $57,000 (19.9%) and $221,000 (28.4%), 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.
o Decrease of $61,000 (14.8%) and $72,000 (5.7%), respectively, in
professional fees. The decrease relates to lower professional fees
primarily associated with loan collections, foreclosures and other
litigation, partially offset by professional fees of $100,000 and $366,000
associated with the liquidation of U.S.B. Realty Corp. for the three and
nine month periods, respectively.
o Increase of $15,000 (8.4%) and $40,000 (7.1%), respectively, in
communications is due to an increase in postage expenses as a result of
higher volume related to the growth in business and new branches.
o Increase of $36,000 (33.3%) and $105,000 (28.0%), 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 of the Bank, and Tarrytowns'
White Plains branch.
o Increase of $4,000 and $12,000, respectively, in FDIC insurance premiums
results from higher deposit balances.
o Decrease of $80,000 (10.5%) and $107,000 (4.9%), respectively, in other
expenses, primarily results from lower foreclosure related expenses and
branch charge-offs.
33
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
Income Taxes
The effective tax rates for the three and nine month periods ended September 30,
1998 and 1997 were 98.6% and 15.9%, and 29.9% and 31.1%, respectively. Due to
the unusual non-recurring nature of the tax benefit associated with the U.S.B.
Realty Corp. liquidation and merger related expenses incurred in connection with
the acquisition of Tappan Zee, the tax provisions for the 1998 periods are
computed based on the actual provision that would be incurred as of periods
reported. The higher effective tax rate for the three month period ended
September 30, 1998 reflects a significant portion of merger related expenses
that are not anticipated to be deductible for federal and state income tax
purposes. The lower effective tax rate for the nine month period ended September
30, 1998 reflects lower federal and state taxes as a result of tax benefits
associated with the liquidation of U.S.B. Realty Corp., partially offset by the
effects of non-deductible merger related expenses.
Year 2000 Issue
The Company continues to monitor the Year 2000 ("Y2K") issue. The Company has
identified all information technology ("IT") systems and non-IT systems
(primarily telephone, vault and security systems that include micro-processes)
and evaluated their status as to Y2K readiness.
All significant IT and non-IT systems are vendor supported. Vendors have
represented to the Company that all significant systems are or will be Y2K
compliant. In particular, the Company's major core system software vendor has
certified that its software is Y2K compliant. For those systems not yet
compliant, software vendors are in the process of providing updates to ensure
such systems are compliant. The Company has further determined which systems are
mission critical, i.e., those systems that are critical to the Company's ability
to operate and provide service to its customers without any interruption to the
Company's normal business operations. Each of these systems have been certified
or represented by its vendor that they are or will be Y2K compliant. These
systems include the IBM AS-400 computer, Kirchman D-3000 (core banking) system,
ATM systems, Automated Clearing House (ACH) system, and CR (communications)
system. The Company is in the process of testing each system and an overall Y2K
testing plan is being developed. An additional IBM AS-400 computer has been
leased to facilitate and complete testing in a controlled production
environment. All testing of mission critical systems is anticipated to be
completed by December 31, 1998, except for the ATM network testing which should
be completed in the first quarter of 1999.
Upon completion of testing of all mission critical systems, systems identified
as significant but not mission critical, i.e. systems for which alternative
processes are available but provide a significant level of efficiency, will be
tested. Testing of these systems is expected to be completed during the first
quarter of 1999.
The Company is also evaluating significant customers' Y2K readiness and/or
progress toward Y2K compliance to evaluate the potential impact on the Company
for their failure to remediate their Y2K issues. In this connection, the Company
has designed a Y2K risk assessment process. Customers with potential Y2K issues
have been identified and the Company has taken steps to
34
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
mitigate the impact of such issues to the Company. In addition, the Company has
implemented a loan policy which requires an evaluation of the Y2K status for
each loan customer prior to approving a new loan or renewal of an existing loan.
The Company is also in the process of evaluating the impact of loan customers'
Y2K status on the allowance for loan losses. Any such impact is not expected to
be material to the consolidated financial condition of the Company.
The Company is also evaluating the potential impact of the Y2K readiness of
other significant vendors, particularly utility companies. To the Company's
knowledge, the major utility companies serving the Company have made
representations in their public documents that they believe the possibility of
significant Y2K problems will be significantly reduced with the implementation
of their Y2K plans.
The worst case Y2K scenario would involve no utility service, mission critical
system failure and Federal Reserve, Clearing House and ACH failure. In this
circumstance, the Company would be required to significantly curtail its
operations. Preparation of paper reports prior to year end 1999 will allow the
Company to monitor limited business activity. However, processing of accruals,
customer statements and the like would not be practical. The Company has not yet
developed a Y2K contingency plan. It is expected that mission critical systems
will be compliant based on their original design (i.e. designed to include a
four digit year or are not date sensitive), planned or completed Y2K
remediation, the vendors' certification and representations regarding Y2K
compliance, testing completed to date and testing to be completed by year end
1998. A contingency plan will be prepared for the event that a mission critical
system is not Y2K compliant in the Company's operating environment and cannot be
immediately remediated or for Federal Reserve, Clearing House, ACH and major
vendor and/or utility service failure. For other significant systems, an
alternative process exists and such process will be utilized as a contingent
process if a significant system fails to be Y2K compliant.
The Company's Y2K Committee reports progress to the Company's and Bank's Board
of Directors on a quarterly basis. 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.
The Company's Y2K project costs have been less than $50,000 to date. The
estimates to complete the Y2K project is $250,000. Such costs are being expensed
as incurred. Y2K project costs will be funded through normal operating cash flow
and include approximately $75,000 of costs that are part of the Company's IT
Capital budget. The cost of the project and the date on which the Company plans
to complete the Y2K 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. No major
IT projects have been deferred due to the Company's Y2K efforts.
The Company will continue to evaluate all issues with respect to the Y2K problem
to minimize the impact on its operations and financial condition.
35
<PAGE>
U.S.B. HOLDING CO., INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk at December 31, 1997
were reported in the Company's 1997 Annual Report on Form 10-K. There have been
no material changes in the Company's market risk exposures at September 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 were
in place as of September 30, 1998 to manage the Company's interest rate
exposure. The Company has not entered into any new derivative financial
instruments during the nine months ended September 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 September 30, 1998 as compared to
December 31, 1997. As a result of certain asset/liability management strategies
and increases in cash flow from the security portfolio due to lower interest
rates, the Company's "Static Gap" at September 30, 1998 has decreased to a
negative $65.5 million in the one year time frame from a negative $111.9 million
at December 31, 1997 (as adjusted for inclusion of the Tappan Zee acquisition).
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.
36
<PAGE>
PART II - OTHER INFORMATION
U.S.B. HOLDING CO., INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 19, 1998, the shareholders of Tappan Zee Financial, Inc. approved the
adoption of the Agreement and Plan of Merger between U.S.B. Holding Co., Inc.
and Tappan Zee Financial, Inc. dated as of March 6, 1998. At the record date
(July 2, 1998), there were 1,478,062 shares outstanding and entitled to vote. A
majority of the outstanding shares was required for approval. Votes for were
1,018,872 shares, votes against were 15,243 shares, and votes abstained were
2,660 shares.
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 (incorporated herein by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, Exhibit (3)(a)).
(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)).
(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, 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)).
37
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Exhibit
- ----------- -------
(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 herein 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)).
(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)).
(10) (n) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers
and Employees ("Employee Option Plan") (incorporated herein by
reference to Exhibit A to Tappan Zee Financial, Inc.'s Proxy
Statement for use in connection with its 1996 Annual Meeting
of Shareholders (the "Tappan Zee 1996 Proxy Statement").
38
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Exhibit
- ----------- -------
(10) (o) Amendment No. 1 to the Employee Option Plan (incorporated
herein by reference to Tappan Zee Financial, Inc.'s Annual
Report on Form 10-K for the fiscal year ended March 31, 1997
(the "Tappan Zee 1997 10-K"), Exhibit 10.1.1).
(10) (p) Amendment No. 2 to the Employee Option Plan (incorporated
herein by reference to Exhibit A to Tappan Zee Financial,
Inc.'s Proxy Statement for use in connection with its 1997
Annual Meeting of Shareholders (the " Tappan Zee 1997 Proxy
Statement").
(10) (q) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside
Directors ("Outside Director Option Plan") (incorporated
herein by reference to Exhibit B to the Tappan Zee 1996 Proxy
Statement).
(10) (r) Amendment No. 1 to the Outside Director Option Plan
(incorporated herein by reference to the Tappan Zee 1997 10-K,
Exhibit 10.2.1).
(10) (s) Amendment No. 2 to the Outside Director Option Plan
(incorporated herein by reference to Exhibit B to the Tappan
Zee 1997 Proxy Statement).
(10) (t) Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan
for Officers and Employees ("Employee RRP") (incorporated
herein by reference to Exhibit C to the Tappan Zee 1996 Proxy
Statement).
(10) (u) Amendment No. 1 to the Employee RRP (incorporated herein by
reference to the Tappan Zee 1997 10-K, Exhibit 10.3.1 ).
(10) (v) Amendment No. 2 to the Employee RRP (incorporated herein by
reference to Exhibit C to the Tappan Zee 1997 Proxy
Statement).
(10) (w) Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan
for Outside Directors ("Outside Director RRP") (incorporated
herein by reference to Exhibit D to the Tappan Zee 1996 Proxy
Statement).
(10) (x) Amendment No. 1 to the Outside Director RRP (incorporated
herein by reference to the Tappan Zee 1997 10-K, Exhibit
10.4.1).
(10) (y) Amendment No. 2 to the Outside Director RRP (incorporated
herein by reference to Exhibit D to the Tappan Zee 1997 Proxy
Statement).
(10) (z) Employee Stock Ownership Plan of Tappan Zee Financial, Inc.
and Certain Affiliates, as amended (incorporated herein by
reference to Tappan Zee Financial Inc.'s Annual Report on Form
10-K for the fiscal year ended March 31, 1996 (the "Tappan Zee
1996 10-K"), Exhibit 10.6).
39
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Exhibit
- ----------- -------
(10) (aa) Loan Agreement to the Employee Stock Ownership Plan Trust of
Tappan Zee Financial, Inc. and Certain Affiliates
(incorporated herein by reference to the Tappan Zee 1996 10-K,
Exhibit 10.7).
(10) (bb) Tarrytowns Bank Deferred Compensation Plan for Directors of
Tarrytowns Bank, FSB (Incorporated herein by reference to the
Registration Statement on Form S-1, No. 33-94128, filed on
June 30, 1995, as amended (the "Tappan Zee Registration
Statement"), Exhibit 10.7).
(10) (cc) Retirement Plan for Board Members of Tappan Zee Financial,
Inc. and Certain Affiliates, adopted effective as of October
5, 1995 (incorporated herein by reference to the 1996 10-K,
Exhibit 10.9).
(10) (dd) Consulting Agreement by and between Tarrytowns Bank, FSB and
Stephen C. Byelick, dated effective as of August 31, 1998.*
(10) (ee) Employment Agreement by and between Tarrytowns Bank, FSB and
Harry G. Murphy, dated effective as of August 31, 1998.*
(10) (ff) Employee Retention Agreement by and among Tappan Zee
Financial, Inc. Tarrytowns Bank, FSB and Christina Vidal,
effective as of October 5, 1995 (incorporated herein by
reference to the 1996 10-K, Exhibit 10.15).
(10) (gg) Employee Retention Agreement by and among Tappan Zee
Financial, Inc., Tarrytowns Bank, FSB and Margaret E. Sampson,
effective as of October 5, 1995 (incorporated herein by
reference to the Tappan Zee 1996 10-K, Exhibit 10.16).
(10) (hh) Employee Retention Agreement by and among Tappan Zee
Financial, Inc., Tarrytowns Bank, FSB and Valerie Wilson,
effective as of October 5, 1995 (incorporated herein by
reference to the Tappan Zee 1996 10-K, Exhibit 10.17).
(10) (ii) Forms of Stock Option Agreement by and between Tappan Zee
Financial, Inc. and recipients of stock options granted
pursuant to the Employee Option Plan and the Outside Director
Option Plan (incorporated herein by reference to the Tappan
Zee 199710-K, Exhibit 10.16).
(10) (jj) Forms of Restricted Stock Award Notices to award recipients,
pursuant to the Employee RRP and the Outside Director RRP
(incorporated herein by reference to the Tappan Zee 1997 10-K,
Exhibit 10.17).
40
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Exhibit
- ----------- -------
(11) Computation of earnings per share.*
(27) Financial Data Schedule.*
*Filed Herewith.
(B) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
September 30, 1998:
o Current report on Form 8-K dated as of July 16, 1998 reported under
item 5, "Other Events," that the Company issued a press release
reporting certain operating results for the Company for the quarter
ended June 30, 1998.
o Current reports on Form 8-K dated as of August 19 and 20, 1998
reported under item 5, "Other Events," that the Company issued a
press release on August 19, 1998 reporting that it had received
approval for its acquisition of Tappan Zee Financial, Inc. from the
Board of Governors of the Federal Reserve Bank, and issued a press
release on August 20, 1998 reporting that it received approval for
the acquisition by the Office of Thrift Supervision and by the
shareholders of Tappan Zee.
o Current report on Form 8-K dated as of August 31, 1998 reported
under Item 5, "Other Events," that a press release was issued
announcing that the Company had completed its acquisition of Tappan
Zee Financial, Inc.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on November 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,
Chief Executive Officer and Director Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
41
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated this 31st day of August 1998, between
Tarrytowns Bank, FSB (the "Bank), and Stephen C. Byelick (the "Consultant").
WITNESSETH
WHEREAS, the Consultant previously entered into an agreement with Tappan
Zee Financial, Inc. ("Tappan Zee") dated June 23, 1997 (the "1997 Tappan Zee
Agreement") and a separate agreement with the Bank dated June 23, 1997 (the
"1997 Bank Agreement") (collectively, the "1997 Agreements");
WHEREAS, as of the date of this Agreement, Tappan Zee has merged with and
into U.S.B. Holding Co., Inc. (the "Corporation") and the Bank has become a
wholly owned subsidiary of the Corporation;
WHEREAS, the Bank desires to be ensured of the Consultant's active
participation and support in the business of the Bank; and
WHEREAS, in order to induce the Consultant to serve as a consultant and a
director emeritus of the Bank and in consideration of the Consultant's agreeing
to serve as a consultant and a director emeritus, the Bank and the Consultant
desire to enter into this Agreement regarding, among other things, the
consulting services to be provided by the Consultant to the Bank and,
concurrently therewith, to terminate the 1997 Agreements, all as hereinafter set
forth.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings set
forth below for the purposes of this Agreement:
(a) Cause. Termination of the Consultant's services for "Cause" shall mean
termination because of dishonest conduct in connection with his performance of
services for the Bank resulting in his conviction of a felony, conviction of, or
plea of guilty or nolo contendere to, a felony or any crime involving moral
turpitude; willful failure or refusal to perform his duties under this Agreement
and failure to cure such breach within fifteen (15) days following written
notice thereof; breach of fiduciary duties to the Bank for personal profit; or
willful breach or violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease and desist order in connection
with his performance of services for the Bank, in each case as measured against
standards generally
<PAGE>
2
prevailing at the relevant time in the savings and community banking industry;
provided, however, that the Consultant shall not be deemed to have been
discharged for cause unless and until he shall have received a written notice of
termination from the Board, accompanied by a resolution duly adopted by
affirmative vote of a majority of the entire Board at a meeting called and held
for such purpose (after reasonable notice to the Consultant and a reasonable
opportunity for the Consultant to make oral and written presentations to the
members of the Board, on his own behalf, or through a representative, who may be
his legal counsel, to refute the grounds for the proposed determination) finding
that in the good faith opinion of the Board grounds exist for discharging the
Consultant for cause. For purposes of this paragraph, no act or failure to act
on the Consultant's part shall be considered "willful" unless done, or omitted
to be done, by the Consultant not in good faith and without reasonable belief
that the Consultant's action or omission was in the best interest of the Bank.
(b) Change in Control of the Corporation. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (I) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act, but excluding persons who
are directors or officers of the Corporation as of the date of this Agreement)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(c) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) Consulting Fee. "Consulting Fee" shall have the meaning set forth in
Section 3(a) hereof.
(e) Date of Termination. "Date of Termination" shall mean the date
specified in the Notice of Termination.
(f) Disability. Termination by the Bank of the Consultant's services based
on "Disability" shall mean termination because of any physical or mental
impairment which would qualify the Consultant for disability benefits under the
applicable long-term disability plan maintained by the Bank if he was an
employee or, if no such plan applies, which would qualify the Consultant for
disability benefits under the Federal Social Security System.
<PAGE>
3
(g) Good Reason. Termination by the Consultant of the Consultant's
services for "Good Reason" shall mean termination by the Consultant following a
Change in Control of the Corporation based on:
(i) Without the Consultant's express written consent, a reduction
by the Bank in the Consultant's Consulting Fee as the same may
be increased from time to time;
(ii) Any purported termination of the Consultant's services for
Cause, Disability or Retirement which is not effected pursuant
to a Notice of Termination satisfying the requirements of
paragraph (i) below; or
(iii) The failure by the Bank to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 11 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Consultant's
services by the Bank for any reason, including without limitation for Cause,
Disability or Retirement, or by the Consultant for any reason, including without
limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Consultant's services under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than twenty (20) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Bank's termination of the Consultant's services for Cause, which
shall be effective immediately; and (iv) is given in the manner specified in
Section 12 hereof.
(j) Retirement. "Retirement" shall mean any voluntary termination by the
Consultant of his consulting services or his services as a director emeritus
following the one-year anniversary of the date of this Agreement that would
result in the Consultant being entitled to (i) accelerated vesting under his
Incentive Stock Option Agreement with Tappan Zee dated July 11, 1996, his
Restricted Stock Award Notice with Tappan Zee dated July 11, 1996, or any other
benefit plan of Tappan Zee or the Bank which is not a qualified plan under
Section 401(a) of the Code, or (ii) the payment of any benefits under any other
benefit plan of Tappan Zee or the Bank which is not a qualified plan under
Section 40 1(a) of the Code, in each case for purposes of clauses (i) and (ii)
as such plans have been assumed by the Corporation and/or the Bank as of the
date of this Agreement.
<PAGE>
4
2. Term of Consulting Services.
(a) The Bank hereby engages the Consultant, and the Consultant hereby
accepts said engagement, for the Consultant to serve as a director emeritus of
the Bank and to provide his personal advice and counsel to the Bank and its
affiliates in connection with the business of banking and financial services.
Specifically, the Consultant agrees to provide his advice and counsel to the
Bank in connection with the on-going operations of the Bank and its affiliates.
The Consultant further agrees to perform certain duties in respect to the
transition of the Bank becoming an affiliate of the Corporation. Such duties may
include, without limitation, counsel and advice in connection with business
development and government relations in the market areas served by the Bank. The
term under this Agreement shall be for three years, commencing on the date of
this Agreement.
(b) During the term of this Agreement, the Consultant's services shall be
rendered at such times as shall be mutually agreeable to the Bank and the
Consultant, and as shall be reasonably convenient to both the Bank and the
Consultant. Such services shall be in the nature of customer and community
relations, business development, employee relations and general advice and
assistance relating to the business of the Bank and its employees. The
Consultant shall work a minimum of 10 hours per week, but shall not be required
to work in accordance with any fixed schedule.
(c) Subject to the reasonable requirements and convenience of the Bank, in
the performance of the services required of the Consultant hereunder, the
Consultant shall have exclusive control over the manner of the performance of
such services, including without limitation: (i) the selection of methods,
practices, procedures and strategies to be employed in the performance of such
services; and (ii) the determination of the places and dates at which such
services will be performed.
(d) The Consultant agrees not to elect Retirement during the first 12
months following the date of this Agreement.
3. Compensation and Benefits.
(a) The Bank shall compensate and pay the Consultant for his services
during the term of this Agreement at a minimum fee of $77,000 per year
("Consulting Fee"), which may be increased from time to time in such amounts as
may be determined by the Board of Directors of the Bank and may not be decreased
without the Consultant's express written consent.
(b) In consideration for the Consultant entering into this Agreement and
waiving all of his rights under the 1997 Agreements, which 1997 Agreements are
hereby superseded pursuant to Section 22 hereof, the Bank agrees to pay to the
Consultant a signing bonus in a lump sum cash amount equal to $472,000
concurrently with the election and delivery of this Agreement.
<PAGE>
5
(c) The Consultant shall be entitled to participate in the Bank's
post-retirement health care and life insurance plans in accordance with the
terms of such plans.
4. Termination.
(a) The Bank shall have the right, at any time upon prior Notice of
Termination, to terminate the Consultant's services hereunder for any reason,
including without limitation termination for Cause or Disability, and the
Consultant shall have the right, upon prior Notice of Termination, to terminate
his services hereunder for any reason.
(b) In the event that (i) the Consultant's services are terminated by the
Bank for Cause, or (ii) the Consultant terminates his services hereunder other
than for the reasons set forth in Section 4(c) below, the Consultant shall have
no right pursuant to this Agreement to consulting fees or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Consultant's services are terminated (i) by the
Bank for other than Cause, (ii) by the Consultant (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within twenty
(20) days after a written notice of non-compliance has been given by the
Consultant to the Bank, or (b) for Good Reason, or (iii) due to the Consultant's
Retirement, Disability or death, then the Bank shall, subject to the provisions
of Section 5 hereof, if applicable,
(A) pay to the Consultant (or, in the event of his death, to his
estate) cash severance amount equal to the Consultant's Consulting Fee for
the then remaining term of this Agreement, with such amount to be paid in
equal monthly installments over the remaining term of this Agreement,
commencing on the first business day of the first month following the Date
of Termination,
(B) with respect to stock options held by the Consultant as of the
date of this Agreement to purchase common stock of the Corporation and
which are outstanding and unvested as of the Date of Termination,
accelerate the vesting of such stock options as of the Date of Termination
so that they are exercisable in full for the period of time specified in
the option agreement with the Consultant, and
(C) with respect to restricted stock awards held by the Consultant
as of the date of this Agreement to acquire common stock of the
Corporation and which are outstanding and unvested as of the Date of
Termination, accelerate the vesting of such restricted awards so that they
are fully vested as of the Date of Termination.
5. Limitation of Benefits under Certain Circumstances. If the payments and
benefits pursuant to Section 4 hereof, either alone or together with other
payments and benefits which the Consultant has the right to receive from the
Bank, the Corporation or any affiliate of either of them, would constitute a
"parachute payment" under Section 280G
<PAGE>
6
of the Code, then the payments and benefits payable by the Bank pursuant to
Section 4 hereof shall be reduced, in the manner determined by the Consultant,
by the amount, if any, which is the minimum necessary to result in no portion of
the payments and benefits payable by the Bank under Section 4 being
non-deductible to the Bank pursuant to Section 280G of the Code and subject to
the excise tax imposed under Section 4999 of the Code. The parties hereto agree
that the payments and benefits payable by the Bank pursuant to this Agreement to
the Consultant upon termination shall be limited to three times the Consultant's
average annual compensation (based upon the most recent five taxable years) in
accordance with OTS Regulatory Bulletin 27a. The determination of any reduction
in the payments and benefits to be made pursuant to Section 4 shall be based
upon the opinion of independent tax counsel selected by the Bank (and reasonably
acceptable to the Consultant) and paid by the Bank. Such counsel shall promptly
prepare the foregoing opinion, but in no event later than thirty (30) days from
the Date of Termination; and may use such actuaries as such counsel deems
necessary or advisable for the purpose. Nothing contained herein shall result in
a reduction of any payments or benefits to which the Consultant may be entitled
upon termination of his consulting services under any circumstances other than
as specified in this Section 5, or a reduction in the payments and benefits
specified in Section 4 below zero.
6. Mitigation; Exclusivity of Benefits.
(a) The Consultant shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Consultant from other services after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Consultant upon a
termination of his services with the Bank pursuant to benefit plans of the Bank
or otherwise.
7. Covenant Not To Compete. The Consultant hereby covenants and agrees
that, in the event of the termination of his services with the Bank prior to the
expiration of the term of this Agreement, then for a period equal to the greater
of (i) the then remaining unexpired term of this Agreement and (ii) two (2)
years following the Date of Termination of his services, he shall not, without
the written consent of the Bank, become an officer, employee, consultant,
director or trustee of any savings bank, savings and loan association, savings
and loan holding company, bank or bank holding company, or any direct or
indirect subsidiary or affiliate of any such entity, that entails working within
one hundred (100) miles of the headquarters of the Bank, the Corporation or any
affiliate of either of them on the Date of Termination; provided, however, that
this Section 7 shall not apply if the Consultant's services are terminated for
the reasons set forth in Section 4(c) (other than for Disability); and provided,
further, that if the Consultant's services shall be terminated on account of
Disability, this Section 7 shall not prevent the Consultant from accepting any
position or performing any services if (a) he first offers, by written notice,
to accept a similar
<PAGE>
7
position with, or perform similar services for, the Bank on substantially the
same terms and conditions and (b) the Bank declines to accept such offer within
ten (10) days after such notice is given.
8. Confidentiality. Unless he obtains the prior written consent of the
Bank, the Consultant shall keep confidential and shall refrain from using for
the benefit of himself, or any person or entity other than the Bank, the
Corporation or any affiliate of either of them, any material document or
information obtained from the Bank, the Corporation or any affiliate of either
of them, in the course of his services with any of them concerning their
properties, operations or business (unless such document or information is
readily ascertainable from public or published information or trade sources or
has otherwise been made available to the public through no fault of his own)
until the same ceases to be material (or becomes so ascertainable or available);
provided, however, that nothing in this Section 8 shall prevent the Consultant,
with or without the Bank's consent, from participating in or disclosing
documents or information in connection with any judicial or administrative
investigation, inquiry or proceeding to the extent that such participation or
disclosure is required under applicable law.
9. Solicitation. The Consultant hereby covenants and agrees that, for a
period equal to the greater of (i) the then remaining unexpired term of this
Agreement and (ii) two (2) years following the termination of his services with
the Bank, he shall not, without the written consent of the Bank, either directly
or indirectly:
(a) solicit, offer employment to, or take any other action intended, or
that a reasonable person acting in like circumstances would expect, to have the
effect of causing any officer or employee of the Bank, the Corporation or any
affiliate of either of them, as of the date of this Agreement, to terminate his
or her employment and accept employment or become affiliated with, or provide
services for compensation in any capacity whatsoever to, any savings bank,
savings and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of accepting
deposits and making loans, doing business with one hundred (100) miles of the
headquarters of the Bank, the Corporation or any affiliate of either of them;
(b) provide any information, advice or recommendation with respect to any
such officer or employee of any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making loans,
doing business within one hundred (100) miles of the headquarters of the Bank,
the Corporation or any affiliate of either of them that is intended, or that a
reasonable person acting in like circumstances would expect, to have the effect
of causing any officer or employee of the Bank, the Corporation or any affiliate
of either of them to terminate his employment and accept employment or become
affiliated with, or provide services for compensation in any capacity whatsoever
to, any savings bank, savings and loan association, bank, bank holding company,
savings and loan holding company, or other institution engaged in the business
of accepting deposits and making loans, doing
<PAGE>
8
business within one hundred (100) miles of the headquarters of the Bank, the
Corporation or any affiliate of either of them; or
(c) solicit, provide any information, advice or recommendation or take any
other action intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any customer of the Bank to
terminate an existing business or commercial relationship with the Bank.
10. Withholding. All payments required to be made by the Bank hereunder to
the Consultant shall be subject to the withholding of such amounts, if any,
relating to tax and other deductions as the Bank may reasonably determine should
be withheld pursuant to any applicable law or regulation.
11. Assignability. The Bank may assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any bank or other entity
with or into which the Bank may hereafter merge or consolidate or to which the
Bank may transfer all or substantially all of its assets, if in any such case
said bank or other entity shall by operation of law or expressly in writing
assume all obligations of the Bank hereunder as fully as if it had been
originally made a party hereto, but may not otherwise assign this Agreement or
its rights and obligations hereunder. The Consultant may not assign or transfer
this Agreement or any rights or obligations hereunder.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Bank:
Chairman of the Board
Tarrytowns Bank, FSB
75 North Broadway
Tarrytown, New York 10591
To the Consultant:
Stephen C. Byelick
31 Crest Drive
Tarrytown, New York 10591
13. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Consultant and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver
<PAGE>
9
of similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New York.
15. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Consultant acquires a right to
receive benefits from the Bank hereunder, such right shall be no greater than
the right of any unsecured general creditor of the Bank.
16. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in consulting
agreements between a savings institution and its consultants pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
ss. 563.39(b), or any successor thereto, and shall be controlling in the event
of a conflict with any other provision of this Agreement, including without
limitation Section 4 hereof.
(a) If the Consultant is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. ss.ss.1818(e)(3) and 1818(g)(1), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may, in its discretion: (i) pay the Consultant all or part
of the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.
(b) If the Consultant is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. ss.ss. 1818(e)(4) and
(g)(1)), all obligations of the
<PAGE>
10
Bank under this Agreement shall terminate as of the effective date of the order,
but vested rights of the Consultant and the Bank as of the date of termination
shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. ss. 1813(x)(1)), all obligations under this Agreement shall terminate
as of the date of default, but vested rights of the Consultant and the Bank as
of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. ss. 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. ss. 1823(c)); or (ii) by the Director of
the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Consultant and the Bank as
of the date of termination shall not be affected.
20. Regulatory Prohibition. Notwithstanding any provision of this
Agreement to the contrary, any payments made to the Consultant pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. ss. 1828(k)) and any regulations
promulgated thereunder.
21. Guaranty and Payment of Additional Benefits by the Corporation Under
Certain Circumstances.
(a) By signing and adopting this Agreement, the Corporation irrevocably
and unconditionally guarantees to the Consultant the full and timely performance
by the Bank of each and every obligation of the Bank contained in this
Agreement.
(b) If at any time during or after the term of this Agreement the payments
and benefits payable by the Bank under this Agreement shall be reduced pursuant
to Section 5 hereof, then the Corporation shall pay to the Consultant an amount
equal to the sum of (i) the amount by which the payments and benefits that would
have otherwise been paid by
<PAGE>
11
the Bank to the Consultant are reduced by the provisions of Section 5 hereof,
plus (ii) an amount equal to X determined under the following formula:
X = E x P / (1 - [(F x (1 - S)) + S + E + M])
where
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 21;
F = the highest marginal rate of income tax applicable to the
Consultant under the Code for the taxable year in question;
S = the sum of the highest marginal rates of income tax applicable to
the Consultant under all applicable state and local laws for the
taxable year in question; and
M = the highest marginal rate of Medicare tax applicable to the
Consultant under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) the Consultant under the terms of this Agreement, or
otherwise, and on which an excise tax under Section 4999 of the Code will be
assessed, the payment determined under this Section 21(b) shall be made to the
Consultant on the earlier of (i) the date the Corporation, the Bank or any
direct or indirect subsidiary or affiliate of the Corporation or the Bank is
required to withhold such tax, or (ii) the date the tax is required to be paid
by the Consultant.
(c) Notwithstanding anything in this Section 21 to the contrary, in the
event that the Consultant's liability for the excise tax under Section 4999 of
the Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 21(b), then the Consultant or the Corporation, as the case
may be, shall pay to the other party at the time that the amount of such excise
tax is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 21(b), when increased by the amount of the payment
made to the Consultant under this Section 21(c) by the Corporation, or when
reduced by the amount of the payment made to the Corporation under this Section
21(c) by the Consultant, equals the amount that should have properly been paid
to the Consultant under Section 21(b). The interest paid under this Section
21(c) shall be
<PAGE>
12
determined at the rate provided under Section 1274(b)(2)(B) of the Code. To
confirm that the proper amount, if any, was paid to the Consultant under this
Section 21, the Consultant shall furnish to the Corporation a copy of each tax
return which reflects a liability for an excise tax payment made by the
Corporation, at least 20 days before thc earlier of the date on which such
return is required to be filed with the IRS or the actual filing date.
22. Entire Agreement. This Agreement embodies the entire agreement between
the Bank and the Consultant with respect to the matters agreed to herein. All
prior agreements between the Bank and the Consultant and between Tappan Zee and
the Consultant with respect to the matters agreed to herein, including without
limitation the 1997 Agreements, are hereby superseded and shall have no force or
effect.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written. Attest:
Attest: TARRYTOWNS BANK, FSB
/s/ Harry G. Murphy By: /s/ Thomas E. Hales
- --------------------------- -------------------------------
Secretary Chairman of the Board
CONSULTANT
By: /s/ Stephen C. Byelick
-------------------------------
Stephen C. Byelick
For purposes of Section 21 of the Agreement, the Corporation has executed
and adopted this Agreement as of the date first above written.
Attest: U.S.B. HOLDING CO., INC.
/s/ Michael H. Fury By: /s/ Thomas E. Hales
- --------------------------- -------------------------------
Michael H. Fury, Secretary Thomas E. Hales, President and
Chief Executive Officer
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated this 31st day of August 1998, between
Tarrytowns Bank, FSB (the "Bank" or "Employer"), and Harry G. Murphy (the
"Executive").
WITNESSETH
WHEREAS, the Exevcutive previously entered into an agreement with Tappan
Zee Financial, Inc. (`Tappan Zee") dated June 23, 1997 (the "1997 Tappan Zee
Agreement") and a separate agreement with the Bank dated June 23, 1997 (the
"1997 Bank Agreement") (collectively, the "1997 Agreements");
WHEREAS, as of the date of this Agreement, Tappan Zee has merged with and
into U.S.B. Holding Co., Inc. (the "Corporation") and the Bank has become a
wholly owned subsidiary of the Corporation;
WHEREAS, the Bank desires to be ensured of the Executive's active
participation and support in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Bank and in consideration of the Executive's agreeing to remain in its employ,
the Bank and the Executive desire to enter into this Agreement regarding, among
other things, the employment of the Executive by the Bank and, concurrently
therewith, to terminate the 1997 Agreements, all as hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings set
forth below for the purposes of this Agreement:
(a) Base Salary. "Base Salary" shall have the meaning set forth in Section
3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of dishonest conduct in connection with his performance
of services for the Bank resulting in his conviction of a felony, conviction of,
or plea of guilty or nolo contendere to, a felony or any crime involving moral
turpitude; willful failure or refusal to perform his duties under this Agreement
and failure to cure such breach within fifteen (15) days following written
notice thereof; breach of fiduciary duties to the Bank for personal profit; or
willful breach or violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease and desist order in connection
with his performance of services for the Bank, in each case as measured against
standards generally
<PAGE>
2
prevailing at the relevant time in the savings and community banking industry;
provided, however, that the Executive shall not be deemed to have been
discharged for cause unless and until he shall have received a written notice of
termination from the Board, accompanied by a resolution duly adopted by
affirmative vote of a majority of the entire Board at a meeting called and held
for such purpose (after reasonable notice to the Executive and a reasonable
opportunity for the Executive to make oral and written presentations to the
members of the Board, on his own behalf or through a representative, who may be
his legal counsel, to refute the grounds for the proposed determination) finding
that in the good faith opinion of the Board grounds exist for discharging the
Executive for cause. For purposes of this paragraph, no act or failure to act on
the Executive's part shall be considered "willful" unless done, or omitted to be
done, by the Executive not in good faith and without reasonable belief that the
Executive's action or omission was in the best interest of the Bank.
(c) Change in Control of the Corporation. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act, but excluding persons who
are directors or officers of the Corporation as of the date of this Agreement)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) Date of Termination. "Date of Termination" shall mean the date
specified in the Notice of Termination.
(f) Disability. Termination by the Bank of the Executive's employment
based on "Disability" shall mean termination because of any physical or mental
impairment which qualifies the Executive for disability benefits under the
applicable long-term disability plan maintained by the Employer or, if no such
plan applies, which would qualify the Executive for disability benefits under
the Federal Social Security System.
<PAGE>
3
(g) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following a
Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, a reduction
by the Employer in the Executive's Base Salary as the same may
be increased from time to time or, except to the extent
permitted by Section 3(b) hereof, a reduction in the package
of fringe benefits provided to the Executive, taken as a
whole;
(ii) Any purported termination of the Executive's employment for
Cause, Disability or Retirement which is not effected pursuant
to a Notice of Termination satisfying the requirements of
paragraph (i) below; or
(iii) The failure by the Bank to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 11 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's
employment by the Bank for any reason, including without limitation for Cause,
Disability or Retirement, or by the Executive for any reason, including without
limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated,
(iii) specifies a Date of Termination, which shall be not less than twenty (20)
nor more than ninety (90) days after such Notice of Termination is given, except
in the case of the Bank's termination of the Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 12 hereof.
2. Term of Employment.
(a) The Bank hereby employs the Executive as Executive Vice President and
Secretary and the Executive hereby accepts said employment and agrees to render
such services to the Bank on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for three years,
commencing on the date of this Agreement.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Bank as may be consistent with his titles and from
time to time reasonably assigned to him by the Bank's Board of Directors,
consistent with his position.
<PAGE>
4
3. Compensation and Benefits.
(a) The Employer shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum base salary of $165,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Board of Directors of the Employer and may not be decreased
without the Executives s express written consent. In addition to his Base
Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Board of Directors of
the Employer.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing plan, stock option plan, employee stock ownership
plan, or other plans, benefits and privileges given to employees and executives
of the Employer, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employer. The Bank
shall not make any changes in such plans, benefits or privileges which would
adversely affect the Executive's rights or benefits thereunder, unless such
change occurs pursuant to a program applicable to all executive officers of the
Bank and does not result in a proportionately greater adverse change in the
rights of or benefits to the Executive as compared with any other executive
officer of the Bank. Nothing paid to the Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Board of Directors of the Employer. The Executive shall not be
entitled to receive any additional compensation from the Employer for failure to
take a vacation, nor shall the Executive be able to accumulate unused vacation
time from one year to the next, except to the extent authorized by the Board of
Directors of the Employer.
(d) In consideration for the Executive entering into this Agreement and
waiving all of his rights under the 1997 Agreements, which 1997 Agreements are
hereby superseded pursuant to Section 22 hereof, the Employer agrees to pay to
the Executive a signing bonus in a lump sum cash amount equal to $336,000
concurrently with the execution and delivery of this Agreement.
4. Termination.
(a) The Bank shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause or Disability, and the
Executive shall have the right, upon prior Notice of Termination, to terminate
his employment hereunder for any reason.
<PAGE>
5
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause, or (ii) the Executive terminates his employment hereunder other
than for the reasons set forth in Section 4(c) below, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated (i) by the
Bank for other than Cause, (ii) by the Executive (a) due to a material breach of
this Agreement by the Bank, which breach has not been cured within twenty (20)
days after a written notice of non-compliance has been given by the Executive to
the Employer, or (b) for Good Reason, or (iii) due to the Executive's Disability
or death, then the Bank shall, subject to the provisions of Section 5 hereof, if
applicable,
(A) pay to the Executive (or, in the event of his death, to his
estate) a cash severance amount equal to the Executive's Base Salary for
the then remaining term of this Agreement, with such amount to be paid in
equal monthly installments over the then remaining term of this Agreement,
commencing on the first business day of the first month following the Date
of Termination,
(B) with respect to stock options held by the Executive as of the
date of this Agreement to purchase common stock of the Corporation and
which are outstanding and unvested as of the Date of Termination,
accelerate the vesting of such stock options as of the Date of Termination
so that they are exercisable in full for the period of time specified in
the option agreement with the Executive, and
(C) with respect to restricted stock awards held by the Executive as
of the date of this Agreement to acquire common stock of the Corporation
and which are outstanding and unvested as of the Date of Termination,
accelerate the vesting of such restricted awards so that they are fully
vested as of the Date of Termination.
5. Limitation of Benefits under Certain Circumstances. If the payments and
benefits pursuant to Section 4 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Bank, the Corporation or any affiliate of either of them, would constitute a
"parachute payment" under Section 280G of the Code, then the payments and
benefits payable by the Bank pursuant to Section 4 hereof shall be reduced, in
the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits payable
by the Bank under Section 4 being non-deductible to the Bank pursuant to Section
280G of the Code and subject to the excise tax imposed under Section 4999 of the
Code. The parties hereto agree that the payments and benefits payable by the
Bank pursuant to this Agreement to the Executive upon termination shall be
limited to three times the Executive' s average annual compensation (based upon
the most recent five taxable years) in accordance with OTS Regulatory Bulletin
27a. The determination of any reduction in the payments and benefits to be made
pursuant to Section 4 shall be based upon the opinion of independent
<PAGE>
6
tax counsel selected by the Bank (and reasonably acceptable to the Executive)
and paid by the Bank. Such counsel shall promptly prepare the foregoing opinion,
but in no event later than thirty (30) days from the Date of Termination; and
may use such actuaries as such counsel deems necessary or advisable for the
purpose. Nothing contained herein shall result in a reduction of any payments or
benefits to which the Executive may be entitled upon termination of employment
under any circumstances other than as specified in this Section 5, or a
reduction in the payments and benefits specified in Section 4 below zero.
6. Mitigation; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise.
7. Covenant Not To Compete. The Executive hereby covenants and agrees
that, in the event of his termination of employment with the Bank prior to the
expiration of the term of this Agreement, then for a period equal to the greater
of (i) the then remaining unexpired term of this Agreement and (ii) two (2)
years following the Date of Termination of employment, he shall not, without the
written consent of the Bank, become an officer, employee, consultant, director
or trustee of any savings bank, savings and loan association, savings and loan
holding company, bank or bank holding company, or any direct or indirect
subsidiary or affiliate of any such entity, that entails working within one
hundred (100) miles of the headquarters of the Bank, the Corporation or any
affiliate of either of them on the Date of Termination; provided, however, that
this Section 7 shall not apply if the Executive's employment is terminated for
the reasons set forth in Section 4(c) (other than for Disability); and provided,
further, that if the Executive's employment shall be terminated on account of
Disability, this Section 7 shall not prevent the Executive from accepting any
position or performing any services if (a) he first offers, by written notice,
to accept a similar position with, or perform similar services for, the Bank on
substantially the same terms and conditions and (b) the Bank declines to accept
such offer within ten (10) days after such notice is given.
8. Confidentiality. Unless he obtains the prior written consent of the
Bank, the Executive shall keep confidential and shall refrain from using for the
benefit of himself, or any person or entity other than the Bank, the Corporation
or any affiliate of either of them, any material document or information
obtained from the Bank, the Corporation or any affiliate of either of them, in
the course of his employment with any of them concerning their properties,
operations or business (unless such document or information is readily
ascertainable from public or published information or trade sources or has
otherwise been
<PAGE>
7
made available to the public through no fault of his own) until the same ceases
to be material (or becomes so ascertainable or available); provided, however,
that nothing in this Section 8 shall prevent the Executive, with or without the
Bank's consent, from participating in or disclosing documents or information in
connection with any judicial or administrative investigation, inquiry or
proceeding to the extent that such participation or disclosure is required under
applicable law.
9. Solicitation. The Executive hereby covenants and agrees that, for a
period equal to the greater of (i) the remaining unexpired term of this
Agreement and (ii) two (2) years following his termination of employment with
the Bank, he shall not, without the written consent of the Bank, either directly
or indirectly:
(a) solicit, offer employment to, or take any other action intended, or
that a reasonable person acting in like circumstances would expect, to have the
effect of causing any officer or employee of the Bank, the Corporation or any
affiliate of either of them, as of the date of this Agreement, to terminate his
or her employment and accept employment or become affiliated with, or provide
services for compensation in any capacity whatsoever to, any savings bank,
savings and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of accepting
deposits and making loans, doing business with one hundred (100) miles of the
headquarters of the Bank, the Corporation or any affiliate of either of them;
(b) provide any information, advice or recommendation with respect to any
such officer or employee of any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making loans,
doing business within one hundred (100) miles of the headquarters of the Bank,
the Corporation or any affiliate of either of them that is intended, or that a
reasonable person acting in like circumstances would expect, to have the effect
of causing any officer or employee of the Bank, the Corporation or any affiliate
of either of them to terminate his employment and accept employment or become
affiliated with, or provide services for compensation in any capacity whatsoever
to, any savings bank, savings and loan association, bank, bank holding company,
savings and loan holding company, or other institution engaged in the business
of accepting deposits and making loans, doing business within one hundred (100)
miles of the headquarters of the Bank, the Corporation or any affiliate of
either of them; or
(c) solicit, provide any information, advice or recommendation or take any
other action intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any customer of the Bank to
terminate an existing business or commercial relationship with the Bank.
10. Withholding. All payments required to be made by the Bank hereunder to
the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and
<PAGE>
8
other payroll deductions as the Bank may reasonably determine should be withheld
pursuant to any applicable law or regulation.
11. Assignability. The Bank may assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any bank or other entity
with or into which the Bank may hereafter merge or consolidate or to which the
Bank may transfer all or substantially all of its assets, if in any such case
said bank or other entity shall by operation of law or expressly in writing
assume all obligations of the Bank hereunder as fully as if it had been
originally made a party hereto, but may not otherwise assign this Agreement or
its rights and obligations hereunder. The Executive may not assign or transfer
this Agreement or any rights or obligations hereunder.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Bank:
Chairman of the Board
Tarrytowns Bank, FSB
75 North Broadway
Tarrytown, New York 10591
To the Executive:
Harry G. Murphy
40 Summit Avenue
White Plains, New York 10606
13.Amnendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New York.
15. Nature of Obligations. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Executive acquires a right to
receive benefits from the Bank
<PAGE>
9
hereunder, such right shall be no greater than the right of any unsecured
general creditor of the Bank.
16. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings institution and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
ss. 563.39(b), or any successor thereto, and shall be controlling in the event
of a conflict with any other provision of this Agreement, including without
limitation Section 4 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. ss.ss. 1818(e)(3) and 1818(g)(1), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may, in its discretion: (i) pay the Executive all or part of
the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. ss.ss. 1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the Executive and the Bank
as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. ss. 1813(x)(1)), all obligations under this Agreement shall terminate
as of the date of default, but vested rights of the Executive and the Bank as of
the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. ss.563.39(b)(5) (except to the extent that it is determined that
continuation of the
<PAGE>
10
Agreement for the continued operation of the Employer is necessary): (i) by the
Director of the OTS, or his/her designee, at the time the Federal Deposit
Insurance Corporation ("FDIC") enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA (12 U.S.C. ss. 1823(c)); or (ii) by the Director of the OTS, or his/her
designee, at the time the Director or his/her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition,
but vested rights of the Executive and the Bank as of the date of termination
shall not be affected.
20. Regulatory Prohibition. Notwithstanding any provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. ss. 1828(k)) and any regulations
promulgated thereunder.
21. Guaranty and Payment of Additional Benefits by the Corporation Under
Certain Circumstances.
(a) By signing and adopting this Agreement, the Corporation irrevocably
and unconditionally guarantees to the Executive the full and timely performance
by the Bank of each and every obligation of the Bank contained in this
Agreement.
(b) If at any time during or after the term of this Agreement the payments
and benefits payable by the Bank under this Agreement shall be reduced pursuant
to Section 5 hereof, then the Corporation shall pay to the Executive an amount
equal to the sum of (i) the amount by which the payments and benefits that would
have otherwise been paid by the Bank to the Executive are reduced by the
provisions of Section 5 hereof, plus (ii) an amount equal to X determined under
the following formula:
X = E x P / (1 - [(F x (1 - S)) + S + E + M])
where
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 21;
F = the highest marginal rate of income tax applicable to the
Executive under the Code for the taxable year in question;
<PAGE>
11
S = the sum of the highest marginal rates of income tax applicable to
the Executive under all applicable state and local laws for the
taxable year in question; and
M = the highest marginal rate of Medicare tax applicable to the
Executive under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) the Executive under the terms of this Agreement, or
otherwise, and on which an excise tax under Section 4999 of the Code will be
assessed, the payment determined under this Section 21(b) shall be made to the
Executive on the earlier of (i) the date the Corporation, the Bank or any direct
or indirect subsidiary or affiliate of the Corporation or the Bank is required
to withhold such tax, or (ii) the date the tax is required to be paid by the
Executive.
(c) Notwithstanding anything in this Section 21 to the contrary, in the
event that the Executive's liability for the excise tax under Section 4999 of
the Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 21(b), then the Executive or the Corporation, as the case
may be, shall pay to the other party at the time that the amount of such excise
tax is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 21(b), when increased by the amount of the payment
made to the Executive under this Section 21(c) by the Corporation, or when
reduced by the amount of the payment made to the Corporation under this Section
21(c) by the Executive, equals the amount that should have properly been paid
to the Executive under Section 21(b). The interest paid under this Section 21(c)
shall be determined at the rate provided under Section 1274(b)(2)(B) of the
Code. To confirm that the proper amount, if any, was paid to the Executive under
this Section 21, the Executive shall furnish to the Corporation a copy of each
tax return which reflects a liability for an excise tax payment made by the
Corporation, at least 20 days before the earlier of the date on which such
return is required to be filed with the IRS or the actual filing date.
22. Entire Agreement. This Agreement embodies the entire agreement between
the Bank and the Executive with respect to the matters agreed to herein. All
prior agreements between the Bank and the Executive and between Tappan Zee and
the Executive with respect to the matters agreed to herein, including without
limitation the 1997 Agreements, are hereby superseded and shall have no force or
effect.
<PAGE>
12
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: TARRYTOWNS BANK, FSB
/s/ Steven T. Sabatini By: /s/ Thomas E. Hales
- --------------------------- -------------------------------
Asst. Secretary Chairman of the Board
EXECUTIVE
By: /s/ Harry G. Murphy
-------------------------------
Harry G. Murphy
For purposes of Section 21 of the Agreement, the Corporation has executed
and adopted this Agreement as of the date first above written.
Attest: U.S.B. HOLDING CO., INC.
/s/ Michael H. Fury By: /s/ Thomas E. Hales
- --------------------------- -------------------------------
Michael H. Fury, Secretary Thomas E. Hales, President and
Chief Executive Officer
EXHIBIT XI
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
(000's, except share data)
<S> <C> <C>
Weighted average number of shares outstanding 14,115,965 14,013,969
Assuming exercise of options and vesting of
restricted stock not vested, reduced by
the number of shares which could have been
purchased with the proceeds from exercise of
such options and assumed proceeds from
vesting of such restricted stock 1,009,371 1,092,766
------------ ------------
Adjusted weighted average shares 15,125,336 15,106,735
------------ ------------
Net income (loss) available to common shareholders $ (1) $ 8,538
============ ============
Basic earnings per share $ -- $ 0.61
============ ============
Diluted earnings per share $ -- $ 0.57
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000707805
<NAME> U.S.B. HOLDING CO., INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,707
<INT-BEARING-DEPOSITS> 2,020
<FED-FUNDS-SOLD> 33,496
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 373,409
<INVESTMENTS-CARRYING> 66,610
<INVESTMENTS-MARKET> 70,034
<LOANS> 695,760
<ALLOWANCE> 9,002
<TOTAL-ASSETS> 1,236,043
<DEPOSITS> 965,352
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 14,203
<LONG-TERM> 130,711
0
0
<COMMON> 146
<OTHER-SE> 94,494
<TOTAL-LIABILITIES-AND-EQUITY> 1,236,043
<INTEREST-LOAN> 43,399
<INTEREST-INVEST> 22,928
<INTEREST-OTHER> 1,074
<INTEREST-TOTAL> 67,401
<INTEREST-DEPOSIT> 29,249
<INTEREST-EXPENSE> 35,518
<INTEREST-INCOME-NET> 31,883
<LOAN-LOSSES> 931
<SECURITIES-GAINS> 1,091
<EXPENSE-OTHER> 24,840
<INCOME-PRETAX> 10,167
<INCOME-PRE-EXTRAORDINARY> 10,167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,549
<EPS-PRIMARY> .61
<EPS-DILUTED> .57
<YIELD-ACTUAL> 0
<LOANS-NON> 4,941
<LOANS-PAST> 279
<LOANS-TROUBLED> 494
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,260
<CHARGE-OFFS> 262
<RECOVERIES> 73
<ALLOWANCE-CLOSE> 9,002
<ALLOWANCE-DOMESTIC> 9,002
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
