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, 1999 Commission File No. 010950
U.S.B. HOLDING CO., INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3197969
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 DUTCH HILL ROAD, ORANGEBURG, NEW YORK 10962
-----------------------------------------------
(Address of principal executive office with zip code)
914-365-4600
------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 8, 1999
----- -------------------------------
Common stock, par value 15,884,273
$0.01 per share
<PAGE>
U.S.B. HOLDING CO., INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION AS OF
SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998. 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED). 2
CONSOLIDATED STATEMENTS OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED). 3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED). 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED). 5
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED). 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED). 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK. 31
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 32
- i -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31,
1999 1998
----------- -----------
(000's, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks $ 34,555 $ 23,660
Federal funds sold 52,300 45,500
----------- -----------
Cash and cash equivalents 86,855 69,160
Interest bearing deposits in other banks 488 1,877
Securities:
Available for sale (at estimated fair value) 404,167 379,514
Held to maturity (estimated fair value
$191,585 in 1999 and $70,284 in 1998) 195,746 67,019
Loans held for sale -- 3,283
Loans, net of allowance for loan losses of
$10,181 in 1999 and $8,889 in 1998 875,199 719,196
Premises and equipment, net 10,673 11,210
Accrued interest receivable 10,860 7,161
Other real estate owned (OREO) 34 415
Federal Home Loan Bank of New York stock 28,038 17,849
Other assets 17,289 12,128
----------- -----------
TOTAL ASSETS $ 1,629,349 $ 1,288,812
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 210,722 $ 137,270
Interest bearing deposits:
NOW accounts 65,062 66,304
Money market accounts 46,376 44,326
Savings deposits 351,224 331,448
Time deposits 479,450 379,292
----------- -----------
Total deposits 1,152,834 958,640
Accrued interest payable 4,715 4,529
Accrued expenses and other liabilities 10,656 8,089
Securities sold under agreements to repurchase 317,135 165,780
Federal Home Loan Bank of New York advances 27,584 34,335
----------- -----------
Total 1,512,924 1,171,373
Corporation-Obligated mandatory redeemable capital
securities of subsidiary trust 20,000 20,000
Minority interest-junior preferred stock of consolidated
subsidiary 137 --
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock, $0.01 par value; authorized shares
50,000,000 in 1999 and 30,000,000 in 1998; issued
shares of 16,371,482 in 1999 and 16,165,175 in 1998 164 162
Additional paid-in capital 98,601 96,919
Retained earnings 10,195 1,513
Treasury stock at cost, 496,907 shares
in 1999 and 201,628 shares in 1998 (6,426) (2,223)
Common stock held for benefit plans (1,464) (1,628)
Deferred compensation obligation 723 675
Accumulated other comprehensive income (loss) (5,505) 2,021
----------- -----------
Total stockholders' equity 96,288 97,439
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,629,349 $ 1,288,812
=========== ===========
</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
1999 1998
------- -------
(000's, except share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $17,831 $14,786
Interest on federal funds sold 274 418
Interest and dividends on securities:
Mortgage-backed securities 6,217 5,377
U.S. Treasury and government agencies 2,792 1,392
Obligations of states and political subdivisions 734 767
Corporate and other 17 3
Interest on deposits in other banks 1 17
Dividends on Federal Home Loan Bank of New York stock 463 275
------- -------
Total interest income 28,329 23,035
------- -------
INTEREST EXPENSE:
Interest on deposits 9,268 9,655
Interest on borrowings 4,269 1,909
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 488 488
------- -------
Total interest expense 14,025 12,052
------- -------
NET INTEREST INCOME 14,304 10,983
Provision for loan losses 700 311
------- -------
Net interest income after provision for loan losses 13,604 10,672
------- -------
NON-INTEREST INCOME:
Service charges and fees 834 684
Gain on securities transactions - net -- 31
Other income 377 445
------- -------
Total non-interest income 1,211 1,160
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,633 3,898
Occupancy and equipment expense 1,348 1,276
Advertising and business development 407 343
Professional fees 284 351
Communications 217 194
Stationery and printing 159 144
FDIC insurance 44 42
Other expenses 650 682
Merger related expenses -- 4,190
------- -------
Total non-interest expense 7,742 11,120
------- -------
Income before income taxes 7,073 712
Provision for income taxes 2,645 702
------- -------
NET INCOME $ 4,428 $ 10
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.28 $ --
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ --
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
------- -------
(000's, except share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $49,826 $43,399
Interest on federal funds sold 1,002 1,074
Interest and dividends on securities:
Mortgage-backed securities 17,461 14,322
U.S. Treasury and government agencies 5,501 5,329
Obligations of states and political subdivisions 2,257 2,390
Corporate and other 51 30
Interest on deposits in other banks 30 44
Dividends on Federal Home Loan Bank of New York stock 1,122 813
------- -------
Total interest income 77,250 67,401
------- -------
INTEREST EXPENSE:
Interest on deposits 26,759 29,249
Interest on borrowings 10,422 4,805
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 1,464 1,464
------- -------
Total interest expense 38,645 35,518
------- -------
NET INTEREST INCOME 38,605 31,883
Provision for loan losses 1,610 931
------- -------
Net interest income after provision for loan losses 36,995 30,952
------- -------
NON-INTEREST INCOME:
Service charges and fees 2,385 2,014
Gain on securities transactions - net 527 1,091
Other income 1,049 950
------- -------
Total non-interest income 3,961 4,055
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 12,953 11,552
Occupancy and equipment expense 3,986 3,602
Advertising and business development 1,204 998
Professional fees 728 1,200
Communications 612 601
Stationery and printing 467 480
FDIC insurance 138 124
Other expenses 1,909 2,093
Merger related expenses -- 4,190
------- -------
Total non-interest expense 21,997 24,840
------- -------
Income before income taxes 18,959 10,167
Provision for income taxes 7,073 1,618
------- -------
NET INCOME $11,886 $ 8,549
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.75 $ 0.55
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.72 $ 0.51
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
(000's)
<S> <C> <C> <C> <C>
NET INCOME $ 4,428 $ 10 $ 11,886 $ 8,549
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Net unrealized holding gain (loss) on
securities available for sale arising
during the period (2,112) 2,976 (12,431) 3,478
Income tax effect 884 (1,245) 5,202 (1,426)
-------- -------- -------- --------
(1,228) 1,731 (7,229) 2,052
-------- -------- -------- --------
Unrealized holding gain as a result of
reclassification of Tappan Zee Financial, Inc.
held to maturity securities to available for sale -- 858 -- 858
Income tax effect -- (352) -- (352)
-------- -------- -------- --------
-- 506 -- 506
-------- -------- -------- --------
Reclassification adjustment for net gain
realized on securities available for sale
that were held at the beginning of the period -- (10) (511) (924)
Income tax effect -- 4 214 379
-------- -------- -------- --------
-- (6) (297) (545)
-------- -------- -------- --------
Other comprehensive income (loss) (1,228) 2,231 (7,526) 2,013
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 3,200 $ 2,241 $ 4,360 $ 10,562
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ---------
(000's)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,886 $ 8,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,610 921
Depreciation and amortization 1,472 1,299
Amortization/accretion of premiums (discounts) on securities - net 1,042 481
Tappan Zee Financial, Inc. fiscal year conversion -- (334)
Change in accrual for merger related expenses (247) 1,191
Noncash ESOP and RRP expense 336 363
Deferred income taxes (499) (1,009)
Gain on securities transactions - net (527) (1,035)
Origination of loans held for sale (481) --
Increase in accrued interest receivable (3,699) (107)
Net decrease (increase) in income taxes receivable/payable 437 (1,972)
Other - net 3,179 (1,718)
--------- ---------
Net cash provided by operating activities 14,509 6,629
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 40,614 78,828
Proceeds from principal paydowns and redemptions of:
Securities available for sale 81,543 79,948
Securities held to maturity 6,205 76,742
Purchases of securities available for sale (160,228) (221,063)
Purchases of securities held to maturity (134,948) (11,211)
Net decrease in interest bearing deposits in other banks 1,389 381
Loans originated, net of principal collections (154,024) (73,947)
Purchases of premises and equipment - net (905) (1,675)
Proceeds from sales of OREO 641 1,059
Purchase of Federal Home Loan Bank of New York stock (10,189) (536)
--------- ---------
Net cash used for investing activities (329,902) (71,474)
--------- ---------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 94,036 81,210
Net increase (decrease) in time deposits 100,158 (18,646)
Net increase (decrease) in securities sold under agreements
to repurchase - short-term 111,355 (33,863)
Net decrease in Federal Home Loan Bank of New York
advances - short-term -- (35,000)
Proceeds from securities sold under agreements to
repurchase - long-term 50,000 70,000
Repayment of securities sold under agreements to
repurchase - long-term (10,000) --
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 (6,751) (6,164)
Cash dividends paid (3,204) (2,507)
Proceeds from sale of junior preferred stock of
consolidated subsidiary 137 --
Proceeds from issuance of common stock and tax benefit of exercised
stock options, and amortized and accelerated RRP awards 1,560 2,425
Proceeds from sale of treasury stock -- 1
Purchase of treasury stock (4,203) (748)
--------- ---------
Net cash provided by financing activities 333,088 68,643
--------- ---------
</TABLE>
-Continued-
5
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ---------
(000's)
<S> <C> <C>
Increase in Cash and Cash Equivalents $ 17,695 $ 3,798
Cash and Cash Equivalents, Beginning of Period 69,160 52,405
--------- ---------
Cash and Cash Equivalents, End of Period $ 86,855 $ 56,203
========= =========
Supplemental Disclosures:
Interest paid $ 38,459 $ 34,234
--------- ---------
Income tax payments $ 4,556 $ 4,599
--------- ---------
Transfer of assets to OREO - net $ 175 $ --
--------- ---------
Transfer of loans held for sale to loans held to
maturity at lower of cost or fair value $ 3,764 $ --
--------- ---------
Change in deferred compensation obligation $ 48 $ (766)
--------- ---------
Transfer of Tappan Zee securities held to maturity to
available for sale $ -- $ 39,462
--------- ---------
Change in other comprehensive income (loss) $ (7,526) $ 2,013
--------- ---------
</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.
6
<PAGE>
U.S.B. HOLDING CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(000's, except share data)
<TABLE>
<CAPTION>
Common
COMMON STOCK Additional Stock
Shares Par Paid-in Retained Treasury Held For
Outstanding Value Capital Earnings Stock Benefit Plans
----------- ----- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 15,963,547 $ 162 $ 96,919 $ 1,513 $ (2,223) $ (1,628)
Net income 11,886
Cash dividends:
Common ($0.20 per share) (3,193)
Junior preferred stock of
consolidated subsidiary (11)
Common Stock Issued:
Employee stock options exercised
($2.02 to $6.20 per share) 45,311 129
Director stock options exercised
($2.22 to $6.41 per share) 160,996 2 810
Tax benefit of exercised stock options
and RRP shares 619
Purchases of treasury stock (295,279) (4,203)
ESOP shares committed to be released 124 79
Amortization and acceleration of
RRP awards 133
Change in deferred compensation
obligation (48)
Other comprehensive loss
---------- ----- ----------- --------- -------- ---------
Balance at September 30, 1999 15,874,575 $ 164 $ 98,601 $ 10,195 $ (6,426) $ (1,464)
========== ===== =========== ========= ======== =========
<CAPTION>
Accumulated
Deferred Other
Compensation Comprehensive
Obligation Income (Loss)
------------ -------------
<S> <C> <C>
Balance at January 1, 1999 $ 675 $ 2,021
Net income
Cash dividends:
Common ($0.20 per share)
Junior preferred stock of
consolidated subsidiary
Common Stock Issued:
Employee stock options exercised
($2.02 to $6.20 per share)
Director stock options exercised
($2.22 to $6.41 per share)
Tax benefit of exercised stock options
and RRP shares
Purchases of treasury stock
ESOP shares committed to be released
Amortization and acceleration of
RRP awards
Change in deferred compensation
obligation 48
Other comprehensive loss (7,526)
------ --------
Balance at September 30, 1999 $ 723 $ (5,505)
====== ========
</TABLE>
See notes to consolidated financial statements.
7
<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 For
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 14,085,191 $ 71,067 $ 4,975 $ 10,619 $ (866) $ (2,746)
Net income 8,549
Cash dividends:
Common ($0.16 per share) (2,496)
Junior preferred stock of consolidated
subsidiary (11)
Common Stock Issued:
Employee stock options exercised
($1.93 to $15.17 per share) 314,154 110 1,562
Director stock options exercised
($2.05 to $2.12 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
Purchases of treasury stock (35,649) (748)
Sale of treasury stock 100 1
Change in deferred compensation
obligation 766
Amortization and acceleration of RRP awards 224
ESOP shares committed to be released 66 73
Other comprehensive income
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) $ (1,683)
========== ======== ======== ======== ======== ========
<CAPTION>
Accumulated
Deferred Other
Compensation Comprehensive
Obligation Income (Loss)
------------ -------------
<S> <C> <C>
Balance at January 1, 1998 $ 1,441 $ 1,388
Net income
Cash dividends:
Common ($0.16 per share)
Junior preferred stock of consolidated
subsidiary
Common Stock Issued:
Employee stock options exercised
($1.93 to $15.17 per share)
Director stock options exercised
($2.05 to $2.12 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
Purchases of treasury stock
Sale of treasury stock
Change in deferred compensation
obligation (766)
Amortization and acceleration of RRP awards
ESOP shares committed to be released
Other comprehensive income 2,013
Adjustment for pooling of company
with different fiscal year end
------- -------
Balance at September 30, 1998 $ 675 $ 3,401
======= =======
</TABLE>
See notes to consolidated financial statements.
8
<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 bank subsidiaries,
Union State Bank (including its wholly-owned subsidiaries, U.S.B. Realty
Corp. through October 29, 1998, the date of its dissolution, U.S.B.
Financial Services, Inc., Dutch Hill Realty Corp. and TPNZ Preferred
Funding Corporation ("TPNZ") from April 30, 1999) (the "Bank"), and
Tarrytowns Bank, FSB, through April 30, 1999, the date of its merger with
and into the Bank (including its wholly-owned subsidiary, TPNZ, through
that date) ("Tarrytowns"), and the Company's wholly-owned non-bank
subsidiaries, Ad Con, Inc. and Union State Capital Trust I.
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,
pursuant to a definitive agreement signed on March 6, 1998. As of August
31, 1998, Tappan Zee had approximately $140 million in assets. 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 (subsequently
transferred to Tarrytowns) operated as wholly-owned subsidiaries of the
Company and Tarrytowns, respectively, until April 30, 1999, when
Tarrytowns was merged with and into the Bank.
Under the terms of the acquisition, each Tappan Zee shareholder received
Company common stock that had a value of $20.00 per share (adjusted for
the 10% stock dividend in December 1998) 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 (August 19, 1998) 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 "exchange ratio"). 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.
Prior to the acquisition, the Company and Tappan Zee had different fiscal
periods for financial reporting purposes. The consolidated financial
information as of and for the year ended December 31, 1997 and prior,
therefore, 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 year ended for the
applicable calendar year end, combined with Tappan Zee's financial
information as of and for the fiscal year ended for the subsequent March
31st. An adjustment of $334,000 is recorded to combined retained earnings
to eliminate the resulting duplication of recording Tappan
9
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
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.
As of the close of business on April 30, 1999, Tarrytowns was merged with
and into the Bank, with its offices continuing to operate and do business
following the merger. Having completed the merger, the Company currently
operates its commercial banking subsidiary, Union State Bank, at 24
locations in Rockland and Westchester Counties.
3. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
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, 1999 and December 31, 1998,
its operations and comprehensive income for the three and nine month
periods ended September 30, 1999 and 1998, and its cash flows and changes
in stockholders' equity for the nine month periods ended September 30,
1999 and 1998. These financial statements should be read in conjunction
with the audited consolidated financial statements as of and for the year
ended December 31, 1998 and notes thereto of the Company. A summary of the
Company's significant accounting policies is set forth in Note 3 to the
consolidated financial statements included in the Company's 1998 Annual
Report to Shareholders.
The results of operations for the three and nine month periods ended
September 30, 1999 may not necessarily be indicative of the results of
operations to be expected for the remainder of the year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing such financial
statements, Management is required to make estimates and assumptions that
affect the reported amounts of actual and contingent 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
OREO acquired in connection with foreclosures or in satisfaction of loan
receivables. In connection with the determination of the allowance for
loan losses and OREO, Management obtains independent appraisals for
significant properties.
10
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
4. Reclassifications
Certain reclassifications have been made to prior period accounts to
conform to the current period's presentation.
5. Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" as amended in June 1999
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133."
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 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. 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, 2001. A company may
also implement this 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
consolidated financial position or results of operations.
Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise
Effective January 1, 1999, the Company adopted SFAS No. 134, "Accounting
for Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB Statement No. 65." This statement amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," to conform the
subsequent accounting to that required (under SFAS No. 115) for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise to the accounting applicable to non-mortgage banking
enterprises. The statement allows a mortgage banking enterprise to
classify securities retained after a securitization of mortgage loans held
for sale based on its ability and intent to sell or hold those
investments. However, such securities must be classified as trading for
any securities that a company commits to sell before or during the
securitization process. The
11
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
adoption of this statement had no material impact on the Company's
financial position or results of operations.
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, 1999. 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; changes in Federal and state income taxes
and/or the Company's effective income tax rate; 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 Common Share
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(000's, except share data)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,428 $ 10 $ 11,886 $ 8,549
Less preferred stock dividends -- 11 11 11
------------ ------------ ------------ ------------
Net income (loss) available to
common stockholders for
basic and diluted earnings
per common share $ 4,428 $ (1) $ 11,875 $ 8,538
============ ============ ============ ============
Denominator:
Denominator for basic earnings
per common share - weighted
average shares 15,883,388 15,527,562 15,907,163 15,415,366
Effects of dilutive securities:
Director and employee
stock options 607,581 1,102,221 642,328 1,193,411
Restricted stock not vested 5,041 8,087 5,037 8,632
------------ ------------ ------------ ------------
Total effects of dilutive securities 612,622 1,110,308 647,365 1,202,043
------------ ------------ ------------ ------------
Denominator for diluted earnings
per common share - adjusted
weighted average shares 16,496,010 16,637,870 16,554,528 16,617,409
============ ============ ============ ============
Basic earnings per common share $ 0.28 $ -- $ 0.75 $ 0.55
============ ============ ============ ============
Diluted earnings per common share $ 0.27 $ -- $ 0.72 $ 0.51
============ ============ ============ ============
</TABLE>
8. Securities
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company's 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. Securities
that the Company has the ability and
13
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
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 (loss).
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.
A summary of the gross gains and gross losses on the sales of securities
for the three months and nine months ended September 30, 1999 and 1998
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(000's)
Gross Gains $ -- $ 31 $ 552 $ 1,104
========= ========= ========= =========
Gross Losses $ -- $ -- $ 25 $ 13
========= ========= ========= =========
14
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
A summary of the amortized cost and estimated fair values of securities
and related gross unrealized gains and losses at September 30, 1999 and
December 31, 1998, follows:
<TABLE>
<CAPTION>
===========================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
September 30, 1999: ========= ========== ========== =========
(000's)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and
government agencies $ 79,453 $ 68 $ 1,674 $ 77,847
Mortgage-backed securities 331,748 306 8,206 323,848
Obligations of states and
political subdivisions 1,539 40 -- 1,579
Corporate securities 492 -- -- 492
Other 401 -- -- 401
-------- -------- -------- --------
Total securities available for sale $413,633 $ 414 $ 9,880 $404,167
======== ======== ======== ========
Held to Maturity:
U.S. Treasury and
government agencies $ 95,736 $ 22 $ 3,788 $ 91,970
Mortgage-backed securities 45,134 187 1,999 43,322
Obligations of states and
political subdivisions 54,876 1,434 17 56,293
-------- -------- -------- --------
Total securities held to maturity $195,746 $ 1,643 $ 5,804 $191,585
======== ======== ======== ========
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1998: ========= ========== ========== =========
(000's)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and
government agencies $ 54,532 $ 1,110 $ 4 $ 55,638
Mortgage-backed securities 319,345 2,277 30 321,592
Obligations of states and
political subdivisions 1,539 101 -- 1,640
Corporate securities 472 -- -- 472
Other 172 -- -- 172
-------- -------- -------- --------
Total securities available for sale $376,060 $ 3,488 $ 34 $379,514
======== ======== ======== ========
Held to Maturity:
Mortgage-backed securities $ 9,774 $ 118 $ 7 $ 9,885
Obligations of states and
political subdivisions 57,245 3,154 -- 60,399
-------- -------- -------- --------
Total securities held to maturity $ 67,019 $ 3,272 $ 7 $ 70,284
======== ======== ======== ========
</TABLE>
15
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
9. Loans
Nonaccrual loans were $1.9 million at September 30, 1999 and $2.3 million
at December 31, 1998. Restructured loans were $0.6 million and $0.7
million at September 30, 1999 and December 31, 1998, 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, 1999, the Company has no commitments
to lend additional funds to any customers with nonaccrual or restructured
loan balances.
At September 30, 1999, there are loans aggregating approximately $0.4,
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 both the September 30, 1999 and December 31, 1998 periods, the recorded
investment in loans that are considered to be impaired under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," approximated $1.6
million of which $1.2 million were in nonaccrual status. Where warranted,
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 $0.4 million and $0.5 million as of September 30,
1999 and December 31, 1998, respectively. The average recorded investment
in impaired loans for the nine months ended September 30, 1999 and year
ended December 31, 1998 was approximately $1.3 million and $3.4 million,
respectively. For the three and nine months ended September 30, 1999 and
1998, interest income recognized by the Company on impaired loans was not
material.
Restructured loans in the amounts of $0.4 million at September 30, 1999
and December 31, 1998, 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, 1999 is immaterial.
At September 30, 1999, the Bank had $0.5 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 $1.1 million were received through September 30, 1999, and
$0.3 million was charged off during 1998, reducing the balance of the
loans to $0.5 million. Further collections are anticipated. The ruling by
the Bankruptcy Court is subject to appeal by the Trustee. In addition, the
Trustee contends that the Company received payments from Bennet under the
theory of a fraudulent conveyance. If the Trustee
16
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
is successful, the Company would be liable for loan payments received from
Bennet for a six year period from the bankruptcy filing date of March,
1996. The Company's legal counsel has advised that the Company has a
meritorious defense and should prevail on this matter.
10. Borrowings and Stockholders' Equity
The Company utilizes borrowings primarily to meet the funding requirements
for its asset growth and to manage its interest rate risk. Borrowings
include securities sold under agreements to repurchase, federal funds
purchased, and Federal Home Loan Bank of New York ("FHLB") advances.
Short-term securities sold under agreements to repurchase generally mature
between one and 365 days. The Bank may borrow up to $50.0 million from two
primary investment firms under master security sale and repurchase
agreements (of which $9.8 million was long term and outstanding at
September 30, 1999). In addition, the Bank also has the ability to borrow
under similar master security sale and repurchase agreements from the FHLB
and, to a lesser extent, its customers. At September 30, 1999 and December
31, 1998, the Company had $112.4 million and $1.0 million of such
short-term borrowings outstanding with terms of between 30 days and 365
days, and at interest rates of between 5.31 percent and 5.88 percent,
respectively. At September 30, 1999 and December 31, 1998, the borrowings
were collateralized by securities with an aggregate amortized cost of
$127.4 million and $1.0 million and estimated fair value of $124.2 million
and $1.0 million, respectively.
Federal funds purchased represent overnight funds. The Bank has federal
funds purchase lines available with six financial institutions totaling
$46.0 million. At September 30, 1999 and December 31, 1998, 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, 1999 and at December 31, 1998,
the Company had no such borrowings outstanding.
Additional information with respect to short-term borrowings as of and for
the nine months ended September 30, 1999 and 1998 is presented in the
table below.
--------------------------------------------------------------------------
Short-Term Borrowings 1999 1998
--------------------------------------------------------------------------
(000's except percentages)
Balance at September 30 $112,355 $ 1,000
Average balance outstanding $ 40,239 $ 12,602
Weighted-average interest rate
As of September 30 5.38% 5.75%*
Paid during period 5.26% 6.07%*
==========================================================================
*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.
17
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
At September 30, 1999 and December 31, 1998, long-term FHLB advances
totaled $27.6 million and $34.3 million, respectively. At September 30,
1999, long-term FHLB advances aggregating $5.0 million were single
principal payments and are not repayable prior to maturity without
penalty. Long-term FHLB advances aggregating $22.6 million were amortizing
advances having scheduled payments, but may not be repaid in full prior to
maturity without penalty.
The Bank also had long-term borrowings of $204.8 million and $164.8
million in securities sold under agreements to repurchase as of September
30, 1999 and December 31, 1998, respectively. At September 30, 1999, these
borrowings included $9.8 million having an original term of three years at
an interest rate of 6.08 percent, and $195.0 million having original terms
of between five and ten years at interest rates between 4.13 percent and
5.67 percent that are callable on certain dates after an initial non-call
period at the option of the counterparty to the repurchase agreement. As
of September 30, 1999 and December 31, 1998, these borrowings were
collateralized by securities with an aggregate amortized cost of $199.1
million and $147.9 million and estimated fair value of $192.6 million and
$149.5 million, and certain mortgage related assets having an outstanding
balance of $27.5 million and $24.4 million and an estimated fair value of
$24.8 million and $22.0 million, respectively.
At September 30, 1999 and December 31, 1998, the Company held 280,377
shares and 178,485 shares of capital stock in the FHLB with a carrying
value of $28.0 million and $17.8 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 tables are a summary of long-term debt, all of which are
fixed rate, distributed based upon remaining contractual maturity and
estimated expected option call date at September 30, 1999, with a
comparative total for December 31, 1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
After 1
Within But Within After 1999 1998
Long Term Debt 1 Year 5 Years 5 Years Total Total
----------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
<S> <C> <C> <C> <C> <C>
Contractual Maturity:
Total long-term debt $ 18,635 $ 25,595 $ 188,134 $ 232,364 $ 199,115
Weighted-average interest rate 6.05% 5.49% 5.13% 5.24% 5.30%
Estimated Call Date:
Total long-term debt $ 88,635 $ 140,595 $ 3,134 $ 232,364 $ 199,115
Weighted-average interest rate 5.10% 5.31% 6.01% 5.24% 5.30%
======================================================================================================================
</TABLE>
18
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
On December 21, 1998, the Company distributed a ten percent stock dividend
to shareholders of record on December 7, 1998. The weighted average shares
outstanding and per share amounts for the three and nine months ended
September 30, 1998 have been adjusted to reflect the stock dividend
declared in the fourth quarter of 1998.
At the Company's annual meeting of shareholders held on May 19, 1999, 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 30,000,000 to 50,000,000.
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 (or its successor) 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 (or its successor) 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 and the Bank 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.
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, 1999, the Bank could pay dividends of $29.8
million to the Company without having to obtain prior regulatory approval.
On April 21, 1999, the Company's Board of Directors authorized the
repurchase of up to 350,000 shares, or approximately 2.2%, of the
Company's outstanding common stock at that time. Repurchases of common
stock are authorized to be made from time to time in open-market and
private transactions throughout 1999 as, in the opinion of management,
market conditions may warrant. The Board of Directors approved the common
stock repurchase program in view of the strong capital position of the
Company and its bank subsidiary, Union State Bank, and to effectively
manage and utilize its capital. Through September 30, 1999, the Company
purchased 292,400 shares of treasury stock under the repurchase plan at an
aggregate price of approximately $4.2 million.
11. Income Taxes
Tarrytowns, as a thrift institution, was subject to special provisions in
the Federal and New York State tax laws regarding its allowable tax bad
debt deductions and related tax bad
19
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
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 accumulated after the
base year. Under the tax law, as amended, events that would result in
taxation of these reserves include (i) redemptions of Tarrytowns' stock or
certain excess distributions, (ii) failure of Tarrytowns to maintain a
specified qualifying assets ratio or meet other thrift definition tests
for New York State tax purposes, and (iii) a change in the tax law. As a
result of the merger of Tarrytowns with and into the Bank that occurred on
April 30, 1999, the reserves for New York State tax purposes are taxable.
Accordingly, a tax liability of $0.6 million was recorded during 1998 as
part of the merger related expenses.
12 Commitments and Contingencies
At September 30, 1999, the Company and Bank are committed under employment
agreements with the Chairman, President and Chief Executive Officer
("CEO"), Senior Executive Vice President and Chief Credit Officer, and
Senior Executive Vice President and Chief Financial Officer currently
requiring an annual salary of $590,000, $185,000 and $185,000,
respectively, annual bonus payments equal to six, one and one percent of
net income (as defined) of the Company, respectively, under the Executive
Incentive Bonus Plan; and annual stock option grants of 106,480 shares,
39,930 shares and 39,930 shares, respectively, 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 terms of the respective agreements. The
CEO's employment agreement is for a five year term, expiring November 16,
2003, while the Senior Executive Vice Presidents' agreements are for three
year terms, expiring November 16, 2001.
The CEO's contract also requires minimum annual salary increases of
$30,000. All of the agreements include change in control provisions,
requiring certain payments, including three times annual salary and
average bonus payments (as defined), in the event of a voluntary or
involuntary termination connected with a change in control of the Company
or Bank.
At September 30, 1999, the Bank is committed under an employment agreement
and consulting agreement with a Senior Vice President of the Bank and
former Executive Vice President of Tarrytowns, and the former President of
Tarrytowns, respectively. Under the employment agreement, the Bank will
make payments of $165,000 per year for services to be performed for a
period of three years. Under the consulting agreement, 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. Payments
under these agreements accelerate in the event of a change in control of
the Company or Bank.
Effective May 19, 1999, the Company adopted the Retirement Plan for
Non-Employee Directors of U.S.B. Holding Co., Inc. and Certain Affiliates
(the "Plan"). A Board member who has served for a period of fifteen years
is eligible to receive benefits. The retiree shall be paid $2,000 per
month for a period not to exceed ten years. In the event of death, after
20
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
commencement of retirement payments but prior to the conclusion of the ten
year payment period, the payments shall be paid to his or her spouse at a
rate of 50% of the retirement payment over the remaining term of the
retirement payment period, or through the date of the spouse's' death if
it occurs prior to completion of his/her payment period. Alternatively,
the retiree may choose a lump sum payment equivalent to the present value
of $200,000, discounted based on an interest rate equal to the average
ten-year advance rate from the Federal Home Loan Bank, for the thirty days
prior to the said election. The Company has recorded a liability to
provide the actuarial present value of payments expected to be made under
the Plan. As of September 30, 1999, substantially all of the recorded
liability relates to unamortized prior service cost, which is being
amortized over the average remaining service period of the current
directors. Benefit cost for the Plan for the period May 19, 1999 through
September 30, 1999 was approximately $50,000.
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, 1999, formal credit line and loan
commitments, which are primarily loans collateralized by real estate and
credit card lines, approximated $275.3 million and outstanding letters of
credit totaled $27.4 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 $2.0 million at September 30, 1999. 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 October 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's risk of loss on the
interest rate cap is equal to the unamortized premium paid to enter into
this agreement.
The Company also has the ability to enter into forward commitments to sell
residential fixed 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, 1999.
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.
21
<PAGE>
U.S.B HOLDING CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(cont'd)
13. Segment Information
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of
the Bank to fund itself with retail deposits and other borrowings and to
manage interest rate and credit risk. This situation is also similar for
consumer and residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Company as one
operating segment or unit.
General information required by SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," is disclosed in the
consolidated financial statements and accompanying notes thereto. The
Company operates only in the U.S. domestic market, specifically the lower
Hudson Valley, which includes the counties of Rockland, Westchester,
Orange, Putnam and Dutchess, New York, as well as New York City and Long
Island, New York, northern New Jersey and southern Connecticut. For the
three and nine months ended September 30, 1999 and 1998, there is no
customer that accounted for more than ten percent of the Company's
revenue.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FINANCIAL CONDITION
At September 30, 1999 the Company had total assets of $1,629.3 million, an
increase of $340.5 million or 26.4% from December 31, 1998.
Total deposits increased $194.2 million for the nine month period ended
September 30, 1999 to $1,152.8 million, which represents an 20.3 percent
increase from December 31, 1998. Time deposits increased $100.2 million
accounting for the greatest component of deposit increases. Time deposits
greater than $100,000 from local municipalities, which are obtained on a bidding
basis with maturities of 30 to 180 days, increased by $94.6 million as part of
the Bank's overall leveraging strategy. Retail time deposits under $100,000
increased by $16.2 million, other time deposits over $100,000 decreased by $8.2
million and IRA and Keogh time deposit accounts decreased by $2.4 million.
Savings deposits increased by $19.8 million, as the Company's "Golden Statement"
and "Liquid Gold" accounts, which provide attractive yields for high balance
accounts, continued to attract additional deposits. Demand deposits and money
market accounts increased by $73.4 million and $2.0 million, respectively, due
to increasing commercial relationships, advertising and promotions for retail
business, and a temporary demand deposit of $35.2 million at September 30, 1999,
while NOW accounts decreased by $1.2 million as customers utilized or moved
funds into higher yielding accounts.
The securities portfolio, including investments in Federal Home Loan Bank of New
York ("FHLB") stock, of $628.0 million and $464.4 million at September 30, 1999
and December 31, 1998, respectively, consists of securities held to maturity at
amortized cost of $195.7 million and $67.0 million, securities available for
sale at estimated fair value totaling $404.2 million and $379.5 million, and
FHLB stock of $28.0 million and $17.8 million at September 30, 1999 and December
31, 1998, respectively.
During the nine months ended September 30, 1999, U.S. Treasury and government
agency obligations increased $117.9 million primarily due to purchases of U.S.
Treasury notes of $13.0 million and $132.6 million in callable bonds, partially
offset by sales and redemptions of securities totaling $25.0 million and a net
decrease in the fair value of available for sale securities of $2.7 million.
Mortgage-backed securities increased by $37.6 million primarily due to purchases
of $107.7 million in fixed-rate and $36.8 million in floating-rate securities,
which were partially offset by sales totaling $15.7 million, principal paydowns
of $80.1 million, a net decrease in fair value of available for sale securities
of $10.1 million and net premium amortization and discount accretion of $1.0
million. Mortgage-backed securities that are fixed-rate securities have expected
weighted-average lives of less than ten years at the time of purchase. The
Company's investment in obligations of states and political subdivisions, or
municipal securities, decreased by $2.4 million principally due to maturities of
$4.8 million that were partially offset by purchases of $2.4 million during the
nine month period ended September 30, 1999. 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 $0.5 million in short-term corporate money market
mutual funds and $0.4 million of equity investments mostly in financial
institutions. Short-term to medium-term corporate debt securities, which are
rated investment grade by nationally recognized credit rating organizations
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
FINANCIAL CONDITION (Cont'd)
and other equity investments have been and 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, 1999, loans were $885.4 million, a net increase of $154.0
million or 21.1 percent over December 31, 1998. The primary increases of
outstanding loan balances were $87.7 million in commercial mortgages, $21.1
million in time unsecured loans, $21.0 million in land acquisition and
construction loans, $15.5 million in residential mortgages, and $12.5 million in
time secured loans, offset by a net reduction of $3.8 million in all other loan
categories. The Bank has approximately $275.3 million in formal credit lines and
loan commitments outstanding at September 30, 1999. Management considers its
liquid resources to be currently adequate to fund loans, principally by
utilizing excess funds temporarily placed in federal funds sold, increases in
deposits and borrowings, loan repayments and participations, maturing
securities, and principle payments of mortgage-backed securities.
The Bank's allowance for loan losses increased $1.3 million or 14.5 percent to
$10.2 million at September 30, 1999, from $8.9 million at December 31, 1998. The
allowance for loan losses represents 1.15 percent of gross loans outstanding at
September 30, 1999, compared to 1.22 percent at December 31, 1998. The allowance
reflects a provision of $1,610,000 and net charge-offs of $318,000 recorded thus
far in 1999. Management takes a prudent and cautious position in evaluating
various business and economic uncertainties in relation to the Bank's loan
portfolio. In management's judgment, the allowance is considered adequate to
absorb potential losses inherent in the loan portfolio.
During the nine months ended September 30, 1999, the Bank decreased the amount
of outstanding short- and long-term advances with the Federal Home Loan Bank of
New York by $6.8 million, while borrowings under repurchase agreements increased
by $151.4 million. Overall, borrowings, as well as municipal deposits, increased
to fund loan growth in excess of retail deposit growth and to fund leveraging
strategies.
Stockholders' equity decreased to $96.3 million at September 30, 1999 from the
December 31, 1998 balance of $97.4 million. The decrease primarily results from
a reduction in accumulated other comprehensive income (loss) of $7.5 million,
treasury stock purchases of $4.2 million, and common and preferred stock cash
dividends of $3.2 million, partially offset by net income of $11.9 million for
the nine month period ended September 30, 1999, and other equity transactions of
$1.9 million. During the nine months ended September 30, 1999, the Company
repurchased 295,279 shares of treasury stock, of which 292,400 shares were
purchased under a repurchase plan authorized by the Company's Board of Directors
on April 21, 1999.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
FINANCIAL CONDITION (Cont'd)
The Company's leverage ratio at September 30, 1999 was 7.38 percent, compared to
9.13 percent at December 31, 1998. The Company's Tier I and Total Capital Ratios
under the risk-based capital guidelines were 12.61 percent and 13.66 percent at
September 30, 1999 and 14.97 percent and 16.12 percent at December 31, 1998,
respectively. In addition, the Bank exceeds all current regulatory capital
requirements and was in the "well-capitalized" category at September 30, 1999
and December 31, 1998.
RESULTS OF OPERATIONS
Earnings
Net income for the three and nine month periods ended September 30, 1999 was
$4,428,000 and $11,886,000, or $0.27 and $0.72 per diluted common share,
respectively. This compares to $10,000, or break-even per diluted common share,
and $8,549,000, or $0.51 per diluted common share, for the three and nine month
periods ended September 30, 1998, respectively. The three and nine month 1998
periods include expenses and a tax benefit, net of associated expenses, of $0.1
million and $1.9 million, respectively, as a result of the decision to liquidate
U.S.B. Realty Corp., the Bank's real estate investment trust, in the second
quarter of 1998, and merger related expenses, net of tax, of $3.2 million for
both periods ("non-recurring items"). Excluding the effects of the non-recurring
items in 1998, net income for the three and nine month periods ended September
30, 1999 increased $1.2 million or 35.5 percent and $2.1 million or 20.9
percent, respectively. On this basis, diluted earnings per common share
increased $0.07 or 35.0 percent and $0.13 or 22.0 percent, respectively. The
overall increase in earnings, excluding non-recurring items in 1998, primarily
reflects an increase in net interest income and other income, partially offset
by higher non-interest expenses, lower security gains, and a higher provision
for loan losses. A discussion of the impact in 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, 1999, net interest income
increased 30.2 percent to $14.3 million from $11.0 million, and 21.1 percent to
$38.6 million from $31.9 million, respectively, compared to the prior year
periods. Net interest income increased in the current year period due to both
volume increases of net average earning assets, and an increase in the net
interest spread (yield on earning assets less cost of funds). For the three and
nine months ended September 30, 1999, the net interest spread was 3.80 percent
and 3.61 percent, respectively, compared to 3.64 and 3.57 percent in the same
periods of 1998, respectively. On a tax equivalent basis, the net interest
spread was 3.89 percent and 3.71 percent for the three and nine month periods
ended September 30, 1999, compared to 3.75 percent and 3.70 percent for the
comparable periods in 1998, respectively. Overall yields on interest earning
assets decreased during the three and nine month periods ended September 30,
1999, as compared to the respective periods in 1998, while the cost
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
of funds decreased at a higher rate, resulting in a widening of 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 decline in interest rates through the second quarter
of 1999, before interest rates began to increase in the third quarter of 1999,
as compared to respective periods in 1998. The cost of funds decreased due to
the cost of deposits and interest rates on borrowings decreasing and
non-interest bearing deposit accounts increasing in both periods, compared to
the respective periods in 1998. The net interest margin increased to 3.88
percent from 3.75 percent and to 3.77 percent from 3.74 percent for the three
and nine month periods ended September 30, 1999 and 1998, respectively, as a
result of the widening net interest spread. On a tax equivalent basis, the net
interest margin increased to 3.97 percent from 3.86 percent and to 3.87 percent
from 3.86 percent for the three and nine months ended September 30, 1999 and
1998, respectively. The increase in the net interest margin on a tax equivalent
basis in both the three and nine months comparable periods is partially offset
by a lower proportion of tax exempt securities in the 1999 periods.
Provision for Loan Losses
The provision for loan losses increased $389,000 to $700,000 and increased
$679,000 to $1,610,000 for the three and nine month periods ended September 30,
1999, respectively, compared to the same periods in 1998. Net charge-offs in the
three and nine month periods ended September 30, 1999 totaled $152,000 and
$318,000, respectively, compared to net charge-offs of $109,000 and $189,000 for
the three and nine month periods ended September 30, 1998. The net charge-offs
in all periods primarily relate to credit card loans. Nonaccrual loans were $1.9
million and $4.9 million, respectively, at September 30, 1999 and 1998, compared
to $2.3 million at December 31, 1998. The increase in the provision for loan
losses in the three and nine months ended September 30, 1999 primarily reflects
the increasing loan portfolio, while credit quality has improved and
non-performing assets decreased from prior year periods. 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 loss 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, 1999 reflects the risk
elements inherent in the total loan portfolio at that 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.
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
Non-Interest Income
Non-interest income for the three and nine months ended September 30, 1999
increased by $51,000 to $1,211,000 and decreased $94,000 to $3,961,000,
respectively, compared to the same periods of 1998. The increase for the
comparable three month period is primarily related to higher service charges and
fees of $150,000, partially offset by a $68,000 decrease in other income and
lower security gains of $31,000. The decrease for the comparable nine month
periods is primarily related to a $564,000 decrease in security gains, partially
offset by an increase of $371,000 in service charges and fees and other income
of $99,000. Other income consists primarily of credit card fees, loan servicing
income, letter of credit fees, loan prepayment penalties, wire transfer fees,
safe deposit, and other fees.
Non-Interest Expense
Non-interest expense decreased $3,378,000 to $7,742,000 and $2,843,000 to
$21,997,000 for the three and nine month periods ended September 30, 1999,
respectively, from the comparable periods in 1998. The primary reason for the
decrease in non-interest expense results from the merger related expenses
($4,190,000 in the three and nine months ended September 30, 1998) related to
the acquisition of Tappan Zee and expenses related to the liquidation of U.S.B.
Realty Corp. ($100,000 and $513,000 in the three and nine months ended September
30, 1998, respectively) incurred in the 1998 periods. Excluding the merger
related and liquidation expenses, non-interest expense increased $912,000
(13.4%) and $1,860,000 (9.2%) due to increases in the cost of salaries and
benefits, occupancy costs and business development expense to support the Bank's
growth and expenses incurred in connection with the Company's Y2K project.
Expense increases were partially offset by savings of approximately $0.4 million
and $1.0 million for the three and nine months ended September 30, 1999,
respectively, related to the merger of Tappan Zee and Tarrytowns Bank. The
following discusses each component of non-interest expense.
Salaries and benefits, the largest component of non-interest expense, increased
by $735,000, or 18.9 percent and $1,401,000 or 12.1 percent during the three and
nine month periods ended September 30, 1999, compared to the previous year
periods. The increases are partially offset by estimated merger related savings
of $190,000 and $580,000 for the three and nine months ended September 30, 1999,
respectively. The increases occurred due to additional personnel employed by the
Bank to accommodate the increases in deposits and loans and their related
services, and annual merit increases. In addition, employee benefits increased
because of higher incentive compensation programs which are based upon the
Company's net income and overall financial performance, higher payroll taxes
during 1999 due to the higher salary base and increases in the cost of other
employee benefit programs such as medical coverage, and tuition reimbursement.
Significant changes (in excess of 5 percent) in the other components of
non-interest expense for the three and nine month periods ended September 30,
1999 compared to September 30, 1998, were due to the following:
o Increase of $72,000 (5.6%), and $384,000 (10.7%), respectively, in
occupancy and
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
equipment expense. This increase is due principally to higher maintenance
and depreciation expenses relating to the Bank's building and equipment
facilities and computer related equipment to accommodate increased
business volume, as well as additional space for corporate and
administrative offices.
o Increase of $64,000 (18.7%), and $206,000 (20.6%), respectively, in
advertising and business development. The increase reflects increased
emphasis on marketing, and the introduction of the Bank's ad campaign, "Do
business with us, do better with us," as well as increased advertising
expense for deposit and loan products and new branch promotions and other
business development efforts.
o Decrease of $67,000 (19.1%), and $472,000 (39.3%), respectively, in
professional fees. The decrease results partially from merger related
savings, lower loan related legal fees due to the improvement in credit
quality of the loan portfolio, as well as a reduction in professional fees
associated with the liquidation of U.S.B. Realty Corp. in 1998, partially
offset by an increase in examination fees.
o Increase of $23,000 (11.9%), and $11,000 (1.8%), respectively, in
communications is due to an increase in telephone expenses resulting from
increases in telephone lines and usage due to increases in office space
and postage expense due to increased business volume.
o Increase of $2,000 and $14,000, respectively, in FDIC insurance premiums
results from higher deposit balances.
o Decrease of $32,000 (4.7%) and $184,000 (8.8%), respectively, in other
expenses, primarily results from lower foreclosure related expenses and
branch charge-offs, as well as reductions due to efficiencies resulting
from merger related savings.
Income Taxes
The effective tax rates for the three and nine month periods ended September 30,
1999 and 1998 were 37.4 and 98.6 percent, and 37.3 and 15.9 percent,
respectively. Due to the 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 months 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 months 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.
28
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
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. The Company's Y2K Committee
reports progress to the Company's Board of Directors on at least a quarterly
basis.
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. 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 vendors that they are 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 has completed a successful test of each
mission critical system according to an overall Y2K testing plan. An additional
IBM AS-400 computer has been leased to facilitate testing in a controlled
production environment. As of September 30, 1999, all mission critical systems
are Y2K compliant.
Testing of systems identified as significant but not mission critical, i.e.
systems for which alternative processes are available but provide a significant
level of efficiency have also been tested successfully for Y2K compliance.
The Company has also evaluated 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 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. To the extent that
these processes identified customers with potential Year 2000 issues, the
Company estimated a range of appropriate reserves. As a result, the Company has
allocated $500,000 to $1,000,000 of the allowance for loan losses at September
30, 1999 to provide for any loan losses that may occur as a consequence of the
Y2K issue. The Company will continue to evaluate the impact of loan customers'
Y2K status on the allowance for loan losses.
The Company has also evaluated 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. To mitigate a loss of electricity in any situation at its
headquarters facility, the Company will have a generator installed, tested and
operational before year end. The generator will have sufficient capacity to
operate the entire headquarters facility at
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Cont'd)
full power.
The Company has engaged in a customer awareness program since the beginning of
its Y2K project in 1997. The Company has conducted customer awareness seminars,
provided numerous media messages and Year 2000 Readiness Disclosures through
customer mailings, newspaper ads and quotes, the Bank's web site, customer and
vendor mailings and branch distribution channels.
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. It is expected that
mission critical systems will be compliant or are not date sensitive, based on
completed Y2K remediation, Y2K testing and the vendors' certification and
representations regarding Y2K compliance. A contingency plan has been prepared
to guide operations in 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 such a
system fails to be Y2K compliant. The Company is also monitoring liquidity needs
in the event of increased deposit withdrawals or loan commitment usage and a
liquidity contingency plan has been prepared.
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.
Excluding the allocation of the allowance for loan losses at September 30, 1999
for the potential impact of Y2K related issues on the loan portfolio, the
Company's Y2K project costs expensed have been approximately $215,000 to date,
including capital expenditures of approximately $140,000. The estimate of total
expenditures for the Y2K project is approximately $0.5 million, of which $0.2
million are capital expenditures. Other than capital expenditures, costs are
expensed as incurred. Y2K project costs will be funded through normal operating
cash flow. 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.
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk at December 31, 1998
were previously reported in the Company's 1998 Annual Report and Form 10-K.
There have been no material changes in the Company's market risk exposures at
September 30, 1999 compared to December 31, 1998. Interest rate risk continues
to be the Company's primary market risk exposure since substantially all Company
transactions are denominated in U.S. dollars with no direct foreign currency
exchange or changes in commodity price exposures. All market risk sensitive
instruments continue to be held to maturity or available for sale with no
financial instruments entered into for trading purposes. The Company does not
use derivative financial instruments such as interest rate swaps and caps
extensively. However, as disclosed in the Notes to Consolidated Financial
Statements (Unaudited), an interest rate contract is in place 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,
1999.
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, 1999 as compared to
December 31, 1998. The changes in the composition of the Company's assets and
liabilities for the nine months ended September 30, 1999 as reported in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations have not materially affected the Company's overall interest rate risk
profile at September 30, 1999 as compared to December 31, 1998. The Company's
"Static Gap" at September 30, 1999 has not changed materially from December 31,
1998. 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.
31
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Exhibit
- ----------- -------
(3)(a) Amended and Restated Certificate of Incorporation 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 November 16, 1998 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, 1998 ("1998 10-K"), Exhibit (10)(a)).
(10)(b) Agreement of Employment dated as of November 16, 1998 between the
Company and the Bank and Raymond J. Crotty (incorporated herein by
reference to Registrant's 199810-K, Exhibit (10)(b)).
(10)(c) Agreement of Employment dated as of November 16, 1998 between the
Company and the Bank and Steven T. Sabatini (incorporated herein
by reference to Registrant's 1998 10-K, Exhibit (10)(c)).
(10)(d) 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)(e) Registrant's 1993 Incentive Stock Option Plan.*
(10)(f) 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 )).
32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(A) Exhibits (cont'd)
Exhibit No. Exhibit
- ----------- -------
(10)(g) 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)(h) Registrant's Director Stock Option Plan (incorporated herein by
reference to Registrant's 1996 10-K, Exhibit (10)(f)).
(10)(i) Registrant's 1998 Director Stock Option Plan (incorporated herein
by reference to Registrant's Form S-8 Registration Statement,
filed June 5, 1998, Exhibit (10)(d)).
(10)(j) Registrant's Key Employees' Supplemental Investment Plan, as
amended July 1, 1997 and September 1, 1998 (incorporated herein by
reference to the Plan's Annual Report on Form 11-K for the year
ended December 31, 1998).
(10)(k) Registrant's Key Employees' Supplemental Diversified Investment
Plan dated September 1, 1998 (incorporated herein by reference to
the Plan's Annual Report on Form 11-K for the year ended December
31, 1998).
(10)(l) Registrant's 1997 Employee Stock Option Plan (incorporated herein
by reference to Registrant's proxy statement filed April 18,
1997).
(10)(m) 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)(n) 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)(o) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and
Employees ("Employee Stock Option Plan") (incorporated herein by
reference to Exhibit B to Tappan Zee Financial, Inc.'s Proxy
Statement for use in connection with its 1996 Annual Meeting (the
"Tappan Zee 1996 Proxy Statement").
(10)(p) Amendment No. 1 to the Tappan Zee Financial, Inc. Employee Stock
Option Plan for Officers and Employees (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)(q) Amendment No. 2 to the Tappan Zee Financial, Inc. Employee Stock
Option Plan for Officers and Employees (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").
33
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(A) Exhibits (cont'd)
Exhibit No. Exhibit
- ----------- -------
(10)(r) 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 1997 Proxy Statement).
(10)(s) 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)(t) Amendment No. 2 to the Outside Director Option Plan (incorporated
herein by reference to Exhibit B to the Tappan Zee 1997 Proxy
Statement).
10)(u) Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
Officers and Employees ("Employee RRP") (incorporated herein by
reference to Exhibit B to the Tappan Zee 1996 Proxy Statement).
(10)(v) Amendment No. 1 to the Employee RRP (incorporated herein by
reference to the Tappan Zee 1997 10-K, Exhibit 10.3.1 ).
(10)(w) Amendment No. 2 to the Employee RRP (incorporated herein by
reference to Exhibit C to the Tappan Zee 1997 Proxy Statement).
(10)(x) 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 1997 Proxy Statement).
(10)(y) Amendment No. 1 to the Outside Director RRP (incorporated herein
by reference to the Tappan Zee 1997 10-K, Exhibit 10.4.1).
(10)(z) Amendment No. 2 to the Outside Director RRP (incorporated herein
by reference to Exhibit D to the Tappan Zee 1997 Proxy Statement).
(10)(aa) 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).
(10)(bb) 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)(cc) 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).
34
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(A) Exhibits (cont'd)
Exhibit No. Exhibit
- ----------- -------
(10)(dd) 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 Tappan Zee 1996 10-K,
Exhibit 10.9).
(10)(ee) Consulting Agreement by and between Tarrytowns Bank, FSB and
Stephen C. Byelick, dated effective as of August 31, 1998
(incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998 (the
"September 30, 1998 10-Q"), Exhibit (10)(dd)).
10)(ff) Employment Agreement by and between Tarrytowns Bank, FSB and Harry
G. Murphy, dated effective as of August 31, 1998 (incorporated
herein by reference to the September 30, 1998 10-Q, Exhibit
(10)(cc)).
(10)(gg) 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 Tappan
Zee 1996 10-K, Exhibit 10.15).
(10)(hh) 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)(ii) Employee Retention Agreement by and among Tappan Zee Financial,
Inc., Tarrytowns Bank, FSB and James D. Haralambie, effective as
of June 23, 1997 (incorporated herein by reference to the U.S.B.
Holding Co., Inc. 1998 10-K, Exhibit (10)(17)).
(10)(jj) Forms of Stock Option Agreement by and between Tappan Zee
Financial, Inc. and recipients of stock options granted pursuant
to the Tappan Zee Financial, Inc. Employee Option Plan for
Officers and Employees and the Tappan Zee Financial, Inc. Stock
Option Plan for Outside Directors (incorporated herein by
reference to the Tappan Zee 1997 10-K, Exhibit 10.16).
(10)(kk) 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 10.16).
(10)(ll) Registrant's Retirement Plan for Non-Employee Directors of U.S.B.
Holding Co., Inc. and Certain Affiliates dated effective as of May
19, 1999 (incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
Exhibit (10) (11)).
35
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(A) Exhibits (cont'd)
Exhibit No. Exhibit
- ----------- -------
(11) Computation of earnings per share.*
(27) Financial Data Schedule.*
*Filed Herewith.
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1999.
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 12, 1999.
U.S.B. HOLDING CO., INC.
/s/ Thomas E. Hales /s/ Steven T. Sabatini
- ------------------------------------ ----------------------------------------
Thomas E. Hales Steven T. Sabatini
Chairman of the Board, President, Senior Executive Vice President Finance,
Chief Executive Officer and Director Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)
36
EXHIBIT A
U.S.B. HOLDING CO., INC.
1993 INCENTIVE STOCK OPTION PLAN
1. Purpose. The purpose of the U.S.B. Holding Co., Inc. 1993 Incentive
Stock Option Plan is to attract and retain persons of ability as employees of
U.S.B. Holding Co., Inc., its subsidiaries and affiliates and encourage such
employees to continue to exert their best efforts on behalf of the Company, its
subsidiaries and affiliates.
2. Definitions. When used herein, the following terms shall have the
following meanings:
"Beneficiary" means the beneficiary or beneficiaries designated
pursuant to Section 6 to receive the benefit, if any, provided under the
Plan upon the death of an Employee.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as now in effect or
as hereafter amended. (All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.)
"Committee" means the Committee appointed by the Board pursuant to
Section 7.
"Company" means U.S.B. Holding Co., Inc., and its successors and
assigns.
"Employee" means a key employee of a Participating Company who, in
the judgment of the Committee, is responsible for or contributes to the
growth or profitability of the business of the Company.
"Exchange" means the New York Stock Exchange, or if the Stock is not
listed on the New York Stock Exchange, the principal exchange on which the
Stock is listed or the NASDAQ National Market System of the National
Association of Securities Dealers.
"Fair Market Value" means, as of any date, (a) if the principal
market for the Common Stock is a national securities exchange, the mean
between the highest and lowest quoted selling prices of the Common Stock
on such day (or last day of trade prior to such day if not traded on such
day) as reported by such exchange or on a consolidated tape reflecting
transactions on such exchange, or (b) if the principal market for the
Common Stock is not a national securities exchange and the Common Stock is
subject to quotation on the National Association of Securities Dealers
Automated Quotations System, the mean between the highest independent bid
and the lowest independent asked prices for the Common Stock on such day
(or the last day quoted prior to such day if not quoted on such day) on
such system, or (d) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is not subject to
quotation on the National Association of Securities Dealers Automated
Quotations System, the mean between the highest bid and lowest asked
prices for the Common Stock on such day (or the last day quoted prior to
such day if not quoted on such day) as reported by National Quotation
Bureau Incorporated or a similar organization, or (d) if none of the above
is applicable, fair market value will be determined by the Board of
Directors.
A-1
<PAGE>
"Option" means an option to purchase Stock subject to the applicable
provisions of Section 4 and awarded in accordance with the terms of the
Plan and which may be an incentive stock option qualified under Section
422 of the Code or a nonqualified stock option.
"Option Agreement" means the written agreement evidencing each
Option granted to an Employee under the Plan.
"Participating Company" means the Company or any corporation which
at the time such option is granted qualifies as a subsidiary corporation
of the Company under Section 424(f) of the Code.
"Plan" means the U.S.B. Holding Co., Inc. 1993 Incentive Stock
Option Plan, as the same may be amended, administered or interpreted from
time to time.
"Stock" means the common stock, $5.00 par value, of the Company.
"Total Disability" means the complete and permanent inability of an
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee
upon the basis of such evidence, including independent medical reports and
data, as the Committee deems appropriate or necessary.
3. Shares Subject to the Plan. The aggregate number of shares of Stock
which may issued upon the exercise of Options is 200,000 shares. Such shares
shall be made available either from authorized and unissued shares or shares
held by the Company in its treasury. If, for any reason, an Option expires or is
terminated or cancelled unexercised as to any shares of Stock covered thereby,
or any shares of Stock subject to purchase or payment by exercising an Option
under the Plan are not delivered or are reacquired by the Company, such shares
of Stock shall again become available for grant under the Plan.
4. Grant of Stock Options. (a) Subject to the provisions of the Plan, the
Committee shall (i) determine and designate from time to time those Employees to
whom Options are to be granted; (ii) determine the number of shares of Stock
subject to each Option; (iii) determine the time or times when and the manner in
which each Option shall be exercisable, the exercise price and the duration of
the exercise period; and (iv) determine and designate whether an Option granted
shall be an incentive stock option or a nonqualified stock option; provided,
however, that (A) no Option shall be granted after the expiration of ten years
from the effective date of the Plan and (B) the aggregate Fair Market Value
(determined as of the date an Option is granted) of the Stock for which
incentive stock options (including incentive stock options granted under any
other plan of the Company) are granted to any Employee under this Plan that may
first become exercisable in any calendar year shall not exceed $100,000.
(b) The exercise period for an incentive stock option shall be no more
than ten years from the date of grant, except that in the case of an incentive
stock option granted to an Employee who is a Ten Percent Shareholder as
described in Section 4(c), the exercise period shall be no more than five years.
(c) The Option exercise price per share shall be determined by the
Committee at the time the Option is granted and shall be at least equal to the
par value of one share of Stock; provided, however, that the exercise price for
an incentive stock option shall be not less than the Stock's Fair Market Value
at date of grant, or in the case of an incentive stock option granted to an
Employee who, at the time of grant, owns stock possessing more than 10 percent
of the total combined voting power of all classes of stock of the Company
A-2
<PAGE>
(a Ten Percent Shareholder), 110 percent of the Fair Market Value on the date of
grant, all as determined by the Committee.
(d) No part of any Option may be exercised by an Employee until such
Employee shall have (i) remained in the employ of one or more Participating
Companies for three months after the date on which the Option is granted, unless
employment is terminated on account of death or Total Disability, or (ii)
achieved such performance or other criteria, as the Committee may specify, if
any, of the Company or any other Participating Company, and the Committee may
further require exercisability in installments.
(e) (i) If an Employee who has been granted an Option dies while an
Employee of a Participating Company, his or her Options may be exercised, to the
extent that the Employee shall have been entitled to do so on the date of his or
her death or such termination of employment, by his or her Beneficiary
including. if applicable, his or her executors or administrators, at any time,
or from time to time, within three months after the date of the Employee's death
or within such other period, and subject to such terms and conditions as the
Committee may specify, but no later than the expiration date specified in
Section 4(b) above.
(ii) If the Employee's employment by a Participating Company terminates
because of his or her Total Disability, he or she may exercise his or her
Options, to the extent that he or she shall have been entitled to do so at the
date of the termination of his or her employment, at any time, or from time to
time, within twelve months after the date of the termination of his or her
employment or within such other period, and subject to such terms and conditions
as the Committee may specify, but not later than the expiration date specified
in Section 4(b) above.
(iii) If an Employee's employment by a Participating Company voluntarily
terminates, as determined by the Board in its sole discretion, all outstanding
Options shall be forfeited as of the date of termination.
(iv) If the Employee's employment terminates because of involuntary
termination of employment by the Participating Company without cause (as
determined by the Board in its sole discretion) he or she may exercise his or
her Options to the extent that he or she shall have been entitled to do so at
the date of the termination of his or her employment, at any time, or from time
to time, within three months after the date of the termination of his or her
employment, subject to such terms and conditions as the Committee may specify,
but not later than the expiration date specified in Section 4(b) above.
(f) No Option granted under the Plan shall be transferable other than by
will or by the laws of descent and distribution. During the lifetime of the
optionee, an Option shall be exercisable only by him or her.
(g) The Committee shall specify such terms and provisions as the Committee
may determine to be necessary or desirable in order to qualify such Option as an
incentive stock option within the meaning of Section 422 of the Code.
(h) Each Option granted under the Plan shall be evidenced by a written
Option Agreement, in a form approved by the Committee. Such agreement shall be
subject to and incorporate the express terms and conditions, if any, required
under the Plan or as required by the Committee for the form of Option granted
and such other terms and conditions as the Committee may specify. Further, each
such Option Agreement shall provide that unless at the time of exercise of the
Option there shall be, in the opinion of counsel for the Company, a valid and
effective registration statement under the Securities Act of 1933 (1933 Act) and
appropriate qualification and registration under applicable state securities
laws relating to the Stock being acquired pursuant to the Option, the Employee
shall upon exercise of the Option give a representation that
A-3
<PAGE>
he or she is acquiring such shares for his or her own account for investment and
not with a view to, or for sale in connection with, the resale or distribution
of any such shares. In the absence of such registration statement, the Employee
shall be required to execute a written affirmation, in a form reasonably
satisfactory to the Company, of such investment intent and to further agree that
he or she will not sell or transfer any Stock acquired pursuant to the Option
until he or she requests and receives an opinion of the Company's counsel to the
effect that such proposed sale or transfer will not result in a violation of the
1933 Act, or a registration statement covering the sale or transfer of the
shares has been declared effective by the Securities and Exchange Commission, or
he or she obtains a no-action letter from the Securities and Exchange Commission
with respect to the proposed transfer.
(i) Except as otherwise provided in the Plan, the purchase price of the
shares as to which an Option shall be exercised shall be paid to the Company at
the time of exercise either in cash or in Stock already owned by the optionee,
or a combination of cash and Stock, or in such other consideration acceptable to
the Committee (including, to the extent permitted by applicable law, the
relinquishment of a portion of the Option) as the Committee deems appropriate,
having a total Fair Market Value equal to the purchase price. For purposes of
this Section 4(i), the fair market value of the portion of an Option that is
relinquished shall be the excess of
(x) the Fair Market Value at the time of exercise of the number of
shares of Stock subject to the portion of the Option that is relinquished
over
(y) the aggregate exercise price specified in the Option with
respect to such shares.
(1) Unless the Committee otherwise specifies in an Option Agreement,
options granted to Employees shall become exercisable as follows:
Number of Months Exercisable
After Date of Grant Percentage
------------------- -----------
3 50%
6 100%
5. Certificates for Shares of Stock. (a) Each Employee entitled to receive
shares of Stock under the Plan shall be issued a certificate for such shares.
Such certificate shall be registered in the name designated by the Employee, and
shall bear an appropriate legend reciting the terms, conditions and
restrictions, if any, applicable to such shares and shall be subject to
appropriate stop-transfer orders.
(b) Shares of Stock shall be made available under the Plan either from
authorized and unissued shares, or shares held by the Company in its treasury.
The Company shall not be required to issue or deliver any certificates for
shares of Stock prior to (i) the listing of such shares on any stock exchange on
which the Stock may then be listed, or (ii) the completion of any registration
or qualification of such shares under any federal or state law, or any ruling or
regulation of any governmental body, which the Committee shall, in its sole
discretion, determine to be necessary or advisable.
(c) All certificates for shares of Stock delivered under the Plan also
shall be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Committee may cause a legend or legends
A-4
<PAGE>
to be placed on any such certificates to make appropriate reference to such
restrictions. The foregoing provisions of this Section 5(c) shall not be
effective if and to the extent that the shares of Stock delivered under the Plan
are covered by an effective and current registration statement under the 1933
Act, or if, and so long as, the Committee determines that application of such
provisions is no longer required or desirable. In making such determination, the
Committee may rely upon an opinion of counsel for the Company.
(d) Each Employee who receives Stock upon exercise of an Option shall have
all of the rights of a shareholder with respect to such shares, including the
right to vote the shares and receive dividends and other distributions. No
Employee awarded an Option shall have any right as a shareholder with respect to
any shares subject to such Option prior to the date of issuance to him or her of
a certificate or certificates for such shares.
6. Beneficiary. (a) Each Employee shall file with the Company a written
designation of one or more persons as the Beneficiary who shall be entitled to
receive the Option, if any, awarded under the Plan upon his or her death. An
Employee may from time to time revoke or change his or her Beneficiary
designation without the consent of any prior Beneficiary by filing a new
designation with the Company. The last such designation received by the Company
shall be controlling; provided, however, that no designation, or change or
revocation thereof, shall be effective unless received by the Company prior to
the Employee's death, and in no event shall it be effective as of a date prior
to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a
Employee's death, or if no designated Beneficiary survives the Employee or if
such designation conflicts with law, the Employee's estate shall be entitled to
receive the Option, if any, awarded under the Plan upon his or her death. If the
Company is in doubt as to the right of any person to receive such Option, the
Company may retain such Option, without liability for any income thereon, until
the Company determines the rights thereto, or the Company may transfer such
Option into any court of appropriate jurisdiction and such payment shall be a
complete discharge of the liability of the Company therefor.
7. Administration of the Plan. (a) The Plan shall be administered by the
Compensation Committee of the Board or such other committee as appointed by the
Board (the Committee). The Committee shall have at least three members and each
member shall be both a member of the Board and a disinterested person within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934 or successor
rule or regulation. No member of the Committee shall have been granted an Option
under the Plan or have been granted or awarded an option or other right with
respect to equity securities of the Company pursuant to any other plan of a
Participating Company at any time within the one-year period immediately
preceding the member's appointment to the Committee.
(b) All decisions, determinations or actions of the Committee made or
taken pursuant to grants of authority under the Plan shall be made or taken in
the sole discretion of the Committee and shall be final, conclusive and binding
on all persons for all purposes.
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be
final, conclusive and binding on all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need not
be uniform and may be made selectively among Employees, whether or not such
Employees are similarly situated.
A-5
<PAGE>
(e) The act of a majority of the members present at a meeting duly called
and held shall be the act of the Committee. Any decision or determination
reduced to writing and signed by all members of the Committee shall be fully as
effective as if made by unanimous vote at a meeting duly called and held.
(f) Notwithstanding anything else herein to the contrary, the Committee
shall not be required to direct the Company to grant any Options under this
Plan.
8.Amendment or Discontinuance. The Board may, at any time, amend or
terminate the Plan. No amendment shall, without approval by a majority of the
Company's shareholders, (i) alter the group of persons eligible to participate
in the Plan, (ii) materially increase the benefits provided under the Plan to
the extent that shareholder approval would then be required pursuant to Rule
16b-3 under the Securities Exchange Act of 1934 or successor rule or regulation,
(iii) increase the maximum number of shares of Stock which are available for
awards under the Plan or (iv) extend the period during which Options may be
granted under the Plan beyond the expiration of ten years from the effective
date of the Plan. No amendment or termination shall retroactively impair the
rights of any person with respect to an Option.
9.Adjustments in Event of Change in Common Stock. (a) Subject to Section
9(b), if the outstanding shares of Stock of the Company are increased,
decreased, or exchanged for a different number or kind of shares or other
securities, or if additional shares or new or different shares or other
securities are distributed with respect to such shares of Stock or other
securities, through merger, consolidation, sale of all or substantially all of
the property of the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other distribution with
respect to such shares of Stock or other securities, then, to the extent
permitted by the Company, an appropriate and proportionate adjustment shall be
made in (i) the maximum number and kind of shares provided in Section 3, (ii)
the number and kind of shares or other securities subject to the outstanding
Options and tandem SARs, if any, and (iii) the price for each share or other
unit of any other securities subject to outstanding Options without change in
the aggregate purchase price or value as to which such Options remain
exercisable or subject to restrictions. Any adjustment under this Section 9(a)
shall be made by the Board, whose determination as to what adjustments shall be
made and the extent thereof will be final, binding and conclusive. No fractional
interests will be issued under the Plan resulting from any such adjustment.
(b) Notwithstanding anything else herein to the contrary, the Board, in
its sole discretion at the time of grant of an Option or otherwise may, in an
Option Agreement or otherwise, provide that, with an Employee's consent, upon
the occurrence of certain events (as determined by the Board) any outstanding
Options not theretofore exercisable, shall immediately become exercisable in
their entirety and that any such Option may be purchased by the Company for cash
at a price to be determined by the Board.
(c) In the event of (1) a dissolution or liquidation of the Company; (2) a
merger or consolidation in which the Company is not the surviving corporation;
or (3) other capital reorganization in which more than fifty percent (50%) of
the shares of the Company entitled to vote are exchanged, any outstanding
options hereunder shall terminate except: (i) when another corporation shall
assume such options or substitute new options therefor; and (ii) the Committee
shall have the discretion and power in any such event to determine, and to make
effective provisions therefor, that an optionee may exercise his Option for such
number of shares not to exceed the total number specified by the Option, as the
Committee may determine and/or that any outstanding Options shall continue in
full force and effect.
A-6
<PAGE>
10. Miscellaneous. (a) Nothing in this Plan or any Option Agreement
hereunder shall confer upon any employee any right to continue in the employ of
any Participating Company or interfere in any way with the right of any
Participating Company to terminate his or her employment at any time.
(b) No Option granted under the Plan shall be deemed salary or
compensation for the purpose of computing benefits under any employee benefit
plan or other arrangement of any Participating Company for the benefit of its
employees unless any such Participating Company shall determine otherwise.
(c) No Employee shall have any claim to an Option until it is actually
granted under the Plan. To the extent that any person acquires a right to
receive payments from the Company under this Plan, such right shall be no
greater than the right of an unsecured general creditor of the Company.
(d) Absence on leave approved by a duly constituted officer of a
Participating Company shall not be considered interruption or termination of
employment for any purposes of the Plan; provided, however, that no Option may
be granted to an employee while he or she is absent on leave.
(e) If the Committee shall find that any person to whom any Option, or
portion thereof, is awarded to under the Plan is unable to care for his or her
affairs because of illness or accident, or is a minor, then any payment due him
or her (unless a prior claim therefor has been made by a duly appointed legal
representative) may, if the Committee so directs the Company, be paid to his or
her spouse, a child, a relative, an institution maintaining or having custody of
such person, or any other person deemed by the Committee to be a proper
recipient on behalf of such person otherwise entitled to payment. Any such
payment shall be a complete discharge of the liability of the Company therefor.
(f) The right of any Employee or other person to any Option or Stock under
the Plan may not be assigned, transferred, pledged or encumbered, either
voluntarily or by operation of law, except as provided in Section 6 with respect
to the designation of a Beneficiary or as may otherwise be required by law. If,
by reason of any attempted assignment, transfer, pledge, or encumbrance or any
bankruptcy or other event happening at any time, any amount payable under the
Plan would be made subject to the debts or liabilities of the Employee or his or
her Beneficiary or would otherwise devolve upon anyone else and not be enjoyed
by the Employee or his or her Beneficiary, then the Committee may terminate such
person's interest in any such payment and direct that the same be held and
applied to or for the benefit of the Employee, his or her Beneficiary or any
other persons deemed to be the natural objects of his or her bounty, taking into
account the expressed wishes of the Employee (or, in the event of his or her
death, those of his or her Beneficiary) in such manner as the Committee may deem
proper.
(g) Copies of the Plan and all amendments, administrative rules and
procedures and interpretations shall be made available to all Employees at all
reasonable times at the Company's headquarters.
(h) The Committee may cause to be made, as a condition precedent to the
grant and exercise of any Option, or otherwise, appropriate arrangements with
the Employee or his or her Beneficiary, for the withholding of any federal,
state, local or foreign taxes prior to the delivery of any certificate or
certificates for Stock.
(i) The Plan and the grant and exercise of Options shall be subject to all
applicable federal and state laws, rules, and regulations and to such approvals
by any government or regulatory agency as may be required.
A-7
<PAGE>
(j) All elections, designations, requests, notices, instructions and other
communications from an Employee, Beneficiary or other person to the Committee,
required or permitted under the Plan, shall be in such form as is prescribed
from time to time by the Committee and shall be mailed by first class mail or
delivered to such location as shall be specified by the Committee.
(k) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(i) Captions preceding the sections hereof are inserted solely as a matter
of convenience and in no way define or limit the scope or intent of any
provision hereof.
11. Effective Date and Shareholder Approval. The effective date of the
Plan shall be June 16, 1993, subject to approval by the Company's shareholders
at the 1994 Annual Meeting. Notwithstanding anything in the Plan to the
contrary, if the Plan shall have been approved by the Board prior to such
shareholder approval, Employees may be selected and options may be granted as
provided herein subject to such subsequent shareholder approval.
A-8
EXHIBIT 11
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
Three Months Nine Months
Ended Ended
Sept. 30, 1999 Sept. 30, 1999
-------------- --------------
(000's, except share data)
Numerator:
Net income $ 4,428 $ 11,886
Less preferred stock dividends -- 11
=========== ===========
Net income available to common stockholders
for basic and diluted earnings per share $ 4,428 $ 11,875
=========== ===========
Denominator:
Denominator for basic earnings per common
share - weighted average shares 15,883,388 15,907,163
Effects of dilutive securities:
Director and employee stock options 607,581 642,328
Restricted stock not vested 5,041 5,037
----------- -----------
Total effects of dilutive securities 612,622 647,365
----------- -----------
Denominator for diluted earnings per common
share - adjusted weighted average shares 16,496,010 16,554,528
=========== ===========
Basic earnings per common share $ 0.28 $ 0.75
=========== ===========
Diluted earnings per common share $ 0.27 $ 0.72
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 34,555 34,555
<INT-BEARING-DEPOSITS> 488 488
<FED-FUNDS-SOLD> 52,300 52,300
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 404,167 404,167
<INVESTMENTS-CARRYING> 195,746 195,746
<INVESTMENTS-MARKET> 191,585 191,585
<LOANS> 885,380 885,380
<ALLOWANCE> 10,181 10,181
<TOTAL-ASSETS> 1,629,349 1,629,349
<DEPOSITS> 1,152,834 1,152,834
<SHORT-TERM> 112,355 112,355
<LIABILITIES-OTHER> 15,371 15,371
<LONG-TERM> 232,364 232,364
0 0
0 0
<COMMON> 164 164
<OTHER-SE> 96,124 96,124
<TOTAL-LIABILITIES-AND-EQUITY> 1,629,349 1,629,349
<INTEREST-LOAN> 17,831 49,826
<INTEREST-INVEST> 10,224 26,422
<INTEREST-OTHER> 274 1,002
<INTEREST-TOTAL> 28,329 77,250
<INTEREST-DEPOSIT> 9,268 26,759
<INTEREST-EXPENSE> 14,025 38,645
<INTEREST-INCOME-NET> 14,304 38,605
<LOAN-LOSSES> 700 1,610
<SECURITIES-GAINS> 0 527
<EXPENSE-OTHER> 7,742 21,997
<INCOME-PRETAX> 7,073 18,959
<INCOME-PRE-EXTRAORDINARY> 7,073 18,959
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,428 11,886
<EPS-BASIC> 0.28 0.75
<EPS-DILUTED> 0.27 0.72
<YIELD-ACTUAL> 3.80 3.61
<LOANS-NON> 1,917 1,917
<LOANS-PAST> 3,639 3,639
<LOANS-TROUBLED> 596 596
<LOANS-PROBLEM> 429 429
<ALLOWANCE-OPEN> 9,633 8,889
<CHARGE-OFFS> 167 372
<RECOVERIES> 15 54
<ALLOWANCE-CLOSE> 10,181 10,181
<ALLOWANCE-DOMESTIC> 10,181 10,181
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
