UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2003, or
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/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
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Commission file Number 1-12811
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U.S.B. HOLDING CO., INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-3197969
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(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 Offices) (Zip Code)
845-365-4600
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(Registrant's Telephone Number (including area code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES / X / NO / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES / X / NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 4, 2003
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Common stock, par value 19,420,367
$0.01 per share
U.S.B. HOLDING CO., INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF
CONDITION AS OF SEPTEMBER 30, 2003 AND
DECEMBER 31, 2002. 1
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002. 2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002. 3
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOW FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002. 4
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK. 29
ITEM 4. CONTROLS AND PROCEDURES. 30
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 31
SIGNATURES 36
- i -
ITEM 1. PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
- ----------------------------------------------------------
(000'S, EXCEPT SHARE DATA) SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
ASSETS
------
Cash and due from banks $ 116,237 $ 66,301
Federal funds sold 36,000 24,500
----------- -----------
Cash and cash equivalents 152,237 90,801
Interest bearing deposits in other banks 32 20
Securities:
Available for sale (at estimated fair value) 1,098,293 775,509
Held to maturity (estimated fair value of
$235,368 in 2003 and $281,424 in 2002) 233,428 274,894
Loans, net of allowance for loan losses of
$14,379 in 2003 and $14,168 in 2002 1,422,683 1,336,273
Premises and equipment, net 15,694 11,299
Accrued interest receivable 13,244 12,412
Federal Home Loan Bank of New York stock 35,669 25,144
Other assets 17,703 16,514
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TOTAL ASSETS $ 2,988,983 $ 2,542,866
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Non-interest bearing deposits $ 352,296 $ 260,012
Interest bearing deposits:
NOW accounts 228,451 105,015
Money market accounts 180,463 89,258
Savings deposits 422,928 453,976
Time deposits 704,419 643,526
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TOTAL DEPOSITS 1,888,557 1,551,787
Accrued interest payable 5,706 5,738
Accrued expenses and other liabilities 11,343 12,017
Securities transactions not yet settled 102,431 263,090
Securities sold under agreements to repurchase 657,480 393,205
Federal Home Loan Bank of New York advances 108,386 110,889
Corporation-Obligated mandatory redeemable capital
securities of subsidiary trusts 50,000 50,000
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TOTAL 2,823,903 2,386,726
Minority interest-junior preferred stock of consolidated subsidiary 128 129
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value
Authorized shares: 10,000,000; no shares outstanding -- --
Common stock, $0.01 par value; authorized shares 50,000,000;
Issued shares of 20,901,616 in 2003 and 19,802,296 in 2002 209 198
Additional paid-in capital 159,077 140,054
Retained earnings 26,912 28,648
Treasury stock, at cost; common shares 1,481,749 in 2003 and
1,300,716 in 2002 (18,425) (15,777)
Common stock held for benefit plans (2,019) (1,691)
Deferred compensation obligation 1,823 1,398
Accumulated other comprehensive (loss) income (2,625) 3,181
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TOTAL STOCKHOLDERS' EQUITY 164,952 156,011
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,988,983 $ 2,542,866
=========== ===========
See notes to condensed consolidated financial statements.
1
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
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(000'S, EXCEPT SHARE DATA)
INTEREST INCOME:
Interest and fees on loans $21,708 $21,561
Interest on federal funds sold 247 266
Interest and dividends on securities:
Mortgage-backed securities 2,761 4,269
U.S. Treasury and government agencies 6,950 4,576
Obligations of states and political subdivisions 813 907
Corporate and other 4 216
Interest on deposits in other banks -- 4
Dividends on Federal Home Loan Bank of New York stock 388 190
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TOTAL INTEREST INCOME 32,871 31,989
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INTEREST EXPENSE:
Interest on deposits 5,928 6,995
Interest on borrowings 6,856 5,566
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 857 909
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TOTAL INTEREST EXPENSE 13,641 13,470
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NET INTEREST INCOME 19,230 18,519
Provision for credit losses 391 590
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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 18,839 17,929
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NON-INTEREST INCOME:
Service charges and fees 1,047 838
Other income 1,091 819
Gain on securities transactions -- 335
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TOTAL NON-INTEREST INCOME 2,138 1,992
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NON-INTEREST EXPENSES:
Salaries and employee benefits 6,774 6,097
Occupancy and equipment 1,707 1,560
Advertising and business development 590 527
Professional fees 364 350
Communications 300 267
Stationery and printing 217 196
FDIC insurance 67 65
Amortization of intangibles 253 227
Other expense 855 811
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TOTAL NON-INTEREST EXPENSES 11,127 10,100
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Income before income taxes 9,850 9,821
Provision for income taxes 3,564 3,312
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NET INCOME $ 6,286 $ 6,509
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.34
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.31 $ 0.33
======= =======
See notes to condensed consolidated financial statements.
2
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
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(000'S, EXCEPT SHARE DATA)
INTEREST INCOME:
Interest and fees on loans $64,832 $63,153
Interest on federal funds sold 605 640
Interest and dividends on securities:
Mortgage-backed securities 12,015 13,643
U.S. Treasury and government agencies 15,727 12,610
Obligations of states and political subdivisions 2,482 2,702
Corporate and other 7 643
Interest on deposits in other banks 1 9
Dividends on Federal Home Loan Bank of New York stock 1,106 636
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TOTAL INTEREST INCOME 96,775 94,036
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INTEREST EXPENSE:
Interest on deposits 17,922 21,155
Interest on borrowings 19,749 16,141
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 2,586 2,464
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TOTAL INTEREST EXPENSE 40,257 39,760
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NET INTEREST INCOME 56,518 54,276
Provision for credit losses 2,063 3,187
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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 54,455 51,089
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NON-INTEREST INCOME:
Service charges and fees 2,887 2,465
Other income 2,812 2,364
Gains on securities transactions 8,383 1,703
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TOTAL NON-INTEREST INCOME 14,082 6,532
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NON-INTEREST EXPENSES:
Salaries and employee benefits 20,097 17,607
Occupancy and equipment 5,117 4,713
Advertising and business development 1,924 1,436
Professional fees 1,079 872
Communications 909 790
Stationery and printing 601 597
FDIC insurance 208 205
Amortization of intangibles 761 678
Other expense 2,819 2,422
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TOTAL NON-INTEREST EXPENSES 33,515 29,320
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Income before income taxes 35,022 28,301
Provision for income taxes 12,426 9,677
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NET INCOME $22,596 $18,624
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BASIC EARNINGS PER COMMON SHARE $ 1.16 $ 0.96
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DILUTED EARNINGS PER COMMON SHARE $ 1.13 $ 0.93
======= =======
See notes to condensed consolidated financial statements.
3
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
- ----------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
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(000'S)
OPERATING ACTIVITIES:
Net income $ 22,596 $ 18,624
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 2,063 3,187
Depreciation and amortization 2,319 2,029
Amortization of premiums on securities - net 891 1,103
Deferred income tax benefit - net (2,685) (2,345)
Gains on securities transactions - net (8,383) (1,703)
Noncash benefit plan expense 313 207
Increase in accrued interest receivable (832) (3,555)
Decrease in accrued interest payable (32) (2,006)
Other - net 1,712 6,228
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NET CASH PROVIDED BY OPERATING ACTIVITIES 17,962 21,769
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 423,073 44,342
Proceeds from principal paydowns, redemptions and maturities of:
Securities available for sale 373,271 148,896
Securities held to maturity 178,599 147,242
Purchases of securities available for sale (1,328,955) (204,311)
Purchases of securities held to maturity (89,950) (188,731)
Net purchases of Federal Home Loan Bank of New York stock (10,525) (1,887)
Net (increase) decrease in interest bearing deposits in other banks (12) 243
Net increase in loans outstanding (88,473) (125,350)
Purchases of premises and equipment - net (3,570) (995)
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NET CASH USED FOR INVESTING ACTIVITIES (546,542) (180,551)
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FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 275,877 192,125
Increase in time deposits, net of withdrawals and maturities 60,893 32,968
Increase in securities sold under agreements
to repurchase - short-term 149,275 726
Proceeds from securities sold under agreements to
repurchase - long-term 115,000 40,000
Repayment of Federal Home Loan Bank of New York
advances - long-term (2,503) (2,533)
Net proceeds from issuance of Corporation-Obligated mandatory
redeemable capital securities of subsidiary trust -- 9,673
Redemption of junior preferred stock of consolidated subsidiary (1) (1)
Cash dividends paid (5,684) (4,983)
Proceeds from exercise of common stock options 1,382 238
Purchases of treasury stock (4,223) (953)
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 590,016 $ 267,260
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(Continued)
4
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (CONT'D)
- ---------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
----------------------
(000'S)
INCREASE IN CASH AND CASH EQUIVALENTS $ 61,436 $ 108,478
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 90,801 69,821
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 152,237 $ 178,299
========= =========
Supplemental Disclosures:
Interest paid $ 40,289 $ 41,766
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Income tax payments $ 15,016 $ 8,477
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Change in shares held in trust for deferred compensation $ (425) $ (238)
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Change in deferred compensation obligation $ 425 $ 238
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Change in accumulated other comprehensive (loss) income $ (5,806) $ 1,264
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Purchases of treasury stock related to exercise of stock options $ (873) $ (1,493)
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Non-cash exercise of stock options and related tax benefit $ 1,333 $ 1,798
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Issuance of treasury stock related to the exercise of stock options $ 2,448 $ 179
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Purchases of available for sale securities, including interest receivable,
not yet settled $ 102,431 $ 55,264
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Payment for available for sale securities not yet settled at beginning
of period, including interest receivable $ 263,090 $ --
--------- ---------
Transfer of available for sale securities to held to maturity securities $ 46,941 $ --
--------- ---------
Exchange of Tappan Zee Financial, Inc. common
shares to treasury stock $ -- $ (97)
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See notes to condensed consolidated financial statements.
5
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(000'S, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL COMMON STOCK
SHARES PAR PAID-IN RETAINED TREASURY HELD FOR
OUTSTANDING VALUE CAPITAL EARNINGS STOCK BENEFIT PLANS
------------ ------------ ------------- ------------- ------------ -------------
Balance at January 1, 2003 18,501,580 $ 198 $ 140,054 $ 28,648 $ (15,777) $ (1,691)
Net income 22,596
Other comprehensive loss:
Net unrealized securities
loss arising during the
period, net of taxes of $2,177
Reclassification adjustment
of net gains for securities
sold, net of taxes of $1,835
Other comprehensive loss
Total comprehensive income
Five percent common stock
dividend 994,545 10 18,638 (18,663)
Five percent common stock
dividend on treasury stock (70,401)
Cash dividends:
Common ($0.29 per share) (5,659)
Junior Preferred stock (10)
Common stock options exercised
and related tax benefit 304,934 1 266 2,448
Purchases of treasury stock (310,791) (5,096)
ESOP shares committed to
be released 119 97
Deferred compensation obligation (425)
---------- ---------- ----------- ------------- ------------ ------------
BALANCE AT SEPT. 30, 2003 19,419,867 $ 209 $ 159,077 $ 26,912 $ (18,425) $ (2,019)
========== ========== =========== ============= ============ ============
ACCUMULATED
DEFERRED OTHER TOTAL
COMPENSATION COMPREHENSIVE STOCKHOLDERS'
OBLIGATION INCOME EQUITY
------------ ------------- -------------
Balance at January 1, 2003 $ 1,398 $ 3,181 $ 156,011
Net income 22,596
Other comprehensive loss:
Net unrealized securities
loss arising during the
period, net of taxes of $2,177 (3,150) (3,150)
Reclassification adjustment
of net gains for securities
sold, net of taxes of $1,835 (2,656) (2,656)
------------ ------------
Other comprehensive loss (5,806) (5,806)
------------
Total comprehensive income 16,790
Five percent common stock
dividend (15)
Five percent common stock
dividend on treasury stock
Cash dividends:
Common ($0.29 per share)
(5,659)
Junior Preferred stock
(10)
Common stock options exercised
and related tax benefit 2,715
Purchases of treasury stock (5,096)
ESOP shares committed to
be released 216
Deferred compensation obligation 425 --
-------------- ------------ ------------
BALANCE AT SEPT. 30, 2003 $ 1,823 $ (2,625) $ 164,952
============== ============ ============
See notes to condensed consolidated financial statements.
6
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(000'S, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL COMMON STOCK
SHARES PAR PAID-IN RETAINED TREASURY HELD FOR
OUTSTANDING VALUE CAPITAL EARNINGS STOCK BENEFIT PLANS
------------ ------------ ------------- ------------- ------------ -------------
Balance at January 1, 2002 18,379,346 $ 195 $ 137,627 $ 8,457 $ (13,381) $ (1,601)
Net income 18,624
Other comprehensive income:
Net unrealized securities
gains arising during the
period, net of taxes of $1,495
Reclassification adjustment
of net gains for securities
sold, net of taxes of $611
Other comprehensive income
Total comprehensive income
Cash dividends:
Common ($0.26 per share) (4,973)
Junior Preferred stock (10)
Common stock options exercised
and related tax benefit 260,092 3 1,854 179
Purchases of treasury stock (162,351) (2,543)
ESOP shares committed to
be released 110 97
Deferred compensation obligation (238)
---------- ---------- ------------- ------------- ------------ ------------
BALANCE AT
SEPTEMBER 30, 2002 18,477,087 $ 198 $ 139,591 $ 22,098 $ (15,745) $ (1,742)
========== ========== ============= ============= ============ ============
ACCUMULATED
DEFERRED OTHER TOTAL
COMPENSATION COMPREHENSIVE STOCKHOLDERS'
OBLIGATION INCOME EQUITY
------------ ------------- -------------
Balance at January 1, 2002 $ 1,178 $ 2,725 $ 135,200
Net income 18,624
Other comprehensive income:
Net unrealized securities
gains arising during the
period, net of taxes of $1,495 2,136 2,136
Reclassification adjustment
of net gains for securities
sold, net of taxes of $611 (872) (872)
------------ --------------
Other comprehensive income 1,264 1,264
--------------
Total comprehensive income 19,888
Cash dividends:
Common ($0.26 per share) (4,973)
Junior Preferred stock (10)
Common stock options exercised
and related tax benefit 2,036
Purchases of treasury stock (2,543)
ESOP shares committed to
be released 207
Deferred compensation obligation 238 --
----------- ------------ --------------
BALANCE AT
SEPTEMBER 30, 2002 $ 1,416 $ 3,989 $ 149,805
=========== ============ ==============
See notes to condensed consolidated financial statements.
7
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION
---------------------------
The condensed consolidated financial statements include the accounts of
U.S.B. Holding Co., Inc. and its wholly-owned subsidiaries (the "Company"),
Union State Bank (the "Bank") including its wholly-owned subsidiaries,
Dutch Hill Realty Corp., U.S.B. Financial Services, Inc, TPNZ Preferred
Funding Corporation ("TPNZ"), and USB Delaware Inc., as well as Union State
Capital Trust I, Union State Statutory Trust II, USB Statutory Trust III,
and Ad Con, Inc. All significant intercompany accounts and transactions are
eliminated in consolidation.
USB Delaware Inc., a Delaware passive investment company, was established
by the Company on September 12, 2003 for the purpose of managing the Bank's
investment in TPNZ.
2. BASIS OF PRESENTATION
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (comprised of
only normal recurring accruals) necessary to present fairly the financial
position of the Company as of September 30, 2003, and its operations for
the three and nine months ended September 30, 2003 and 2002, and its cash
flows and changes in stockholders' equity for the nine months ended
September 30, 2003 and 2002. 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 2002 Annual Report to Stockholders.
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America and predominant practices used within the banking
industry. In preparing such financial statements, management is required to
make estimates and assumptions that affect the reported amounts of actual
and contingent assets and liabilities as of the dates of the condensed
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 provision for credit
losses. In connection with the determination of the these estimates,
management obtains independent appraisals for significant properties that
secure loans collateralized with real estate.
3. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to prior period accounts to
conform to the current period's presentation.
4. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
GUARANTORS ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: In November 2002, the
8
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
Financial Accounting Standards Board ("FASB") issued Interpretation No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees Including
Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45
requires a guarantor to recognize, at the inception of the guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. It also provides additional guidance on the disclosure of
guarantees. The recognition, measurement and disclosure provisions do not
encompass commercial letters of credit and other loan commitments because
those instruments do not guarantee payment of a money obligation and do not
provide for payment in the event of default by the counterparty. The
disclosure provisions of FIN No. 45 were effective December 15, 2002, while
the recognition and measurement provisions were effective January 1, 2003.
The Company's adoption of FIN No. 45 did not have a significant impact on
its condensed consolidated financial statements.
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: April 2003, FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," ("FASB No. 149"). FASB No. 149 amends
and clarifies financial accounting and reporting for derivative
instruments, which will result in more consistent reporting of contracts as
either derivatives or hybrid instruments. In particular, FASB No. 149
clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative, clarifies when a
derivative contains a financing component, amends the definition of an
underlying to conform to the language used in FIN No. 45, and amends
certain other accounting pronouncements. FASB No. 149 is effective for
contracts entered into or modified and hedging relationships designated
after June 30, 2003. The Company's adoption of FASB No. 149 did not have
any impact on its condensed consolidated financial statements.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITIES: In May 2003, FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("FASB No. 150"). FASB No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. FASB No.
150 requires the classification in the statement of financial position of
certain financial instruments that have characteristics of both liabilities
and equity but that have been presented either entirely as equity or
between the liabilities section and the equity section of the statement of
financial position. FASB No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
The Company's adoption of FASB No. 150 required the reclassification of
Corporation-Obligated mandatory redeemable capital securities of subsidiary
trusts to the liability section of the balance sheet. Other than this
balance sheet reclassification, the Company's adoption of FASB No. 150 did
not have any other impact on its condensed consolidated financial
statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB
issued Interpretation No. 46, "Consolidation of Variable Interest Entities
- an interpretation of ARB No. 51" ("FIN No. 46"). FIN No. 46 provides
guidance on the consolidation of certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support. Such entities are
9
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
referred to as Variable Interest Entities or "VIEs." FIN No. 46 requires
the primary beneficiary of a VIE to consolidate the entity. FIN No. 46, as
it relates to existing entities, has been deferred to fiscal periods
beginning after December 15, 2003. For new entities, FIN No. 46 became
effective January 31, 2003. The Company's adoption of the provisions of
this statement effective January 31, 2003 did not have any impact on its
condensed consolidated financial statements. Upon adoption of the remaining
provisions of FIN No. 46, the Company may be required to deconsolidate its
Trusts, which have issued Trust Preferred securities. Accordingly,
subsequent financial statements may reflect Trust Preferred securities as
subordinated debt, as well as an investment in common equity of the Trusts.
As a result of this potential deconsolidation, the Federal Reserve is
reviewing the regulatory implications of any accounting changes on the
capital treatment of Trust Preferred Securities and, if necessary or
warranted, will provide further appropriate guidance.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------
SFAS No. 148, "Accounting for Stock Based Compensation - Transition and
Procedure" ("SFAS No. 148") amends SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123") to provide alternate methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of that statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, this
statement amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information.
Information on the Company's stock option plans can be found in Note 17 to
the Company's Consolidated Financial Statements for the year ended December
31, 2002, included in the 2002 Annual Report to Stockholders. The Company
has elected to continue to measure compensation expense for its stock-based
compensation plans under the recognition and measurement principles of APB
No. 25, "Accounting for Stock Issued to Employees," and to provide pro
forma disclosures of compensation expense measured by the fair value based
method as defined by SFAS No. 123. No stock-based employee compensation is
reflected in net income, as all options granted under the Company's plans
had an exercise price at least equal to the market value of the underlying
common stock on the date of grant.
The following table compares the Company's net income and basic and diluted
earnings per common share, as reported, to the pro forma results as if the
fair value method of accounting for options prescribed by SFAS No. 123 had
been applied for the three and nine months ended September 30, 2003 and
2002. The fair value of options was estimated at the date of grant using a
Black-Scholes option-pricing model and is recognized over the options'
vesting period.
10
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
THREE NINE
MONTHS ENDED MONTHS ENDED
- -------------------------------------------------------------------------------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------
(000'S, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------------------
Net income, as reported $ 6,286 $ 6,509 $ 22,596 $ 18,624
- -------------------------------------------------------------------------------------------------
Less: preferred stock dividends -- -- 10 10
- -------------------------------------------------------------------------------------------------
Less: total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects 705 890 1,291 1,443
- ------------------------------------------------------------------------------------------------
Pro forma net income available to common
stockholders $ 5,581 $ 5,619 $ 21,295 $ 17,171
================================================================================================
Earnings per common share:
- -------------------------------------------------------------------------------------------------
Basic - as reported $ 0.32 $ 0.34 $ 1.16 $ 0.96
Basic - pro forma 0.29 0.29 1.09 0.89
- -------------------------------------------------------------------------------------------------
Diluted - as reported $ 0.31 $ 0.33 $ 1.13 $ 0.93
Diluted - pro forma 0.28 0.28 1.05 0.85
================================================================================================
The following weighted average assumptions were used for Director Plan grants
for the three and nine months ended September 30, 2003 and 2002, respectively:
dividend yields of 2.52 and 2.47 percent; volatility factors of the expected
market price of the Company's common stock of 41.33 and 41.93 percent; risk free
interest rates of 2.47 and 4.55 percent; and expected lives of 7.62 and 7.91
years. The following weighted average assumptions were used for Employee Plan
grants for the three and nine months ended September 30, 2003 and 2002,
respectively: dividend yields of 2.52 and 2.47 percent; volatility factors of
the expected market price of the Company's common stock of 41.63 and 42.00
percent; risk-free interest rates of 3.08 and 4.68 percent; and expected lives
of 8.97 and 8.55 years.
6. EARNINGS PER COMMON SHARE ("EPS")
---------------------------------
The computation of basic and diluted earnings per common share for the
three and nine months ended September 30 is as follows:
11
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
2003 2002 2003 2002
------------ ----------- ---------- -----------
(000'S, EXCEPT SHARE DATA)
NUMERATOR:
Net income $ 6,286 $ 6,509 $ 22,596 $ 18,624
Less preferred stock dividends -- -- 10 10
----------- ----------- ----------- -----------
Net income for basic and diluted
earnings per common share - net
income available to common
stockholders $ 6,286 $ 6,509 $ 22,586 $ 18,614
============ ============ =========== ===========
DENOMINATOR:
Denominator for basic earnings
per common share - weighted
average shares 19,402,498 19,352,360 19,472,414 19,315,583
Effects of dilutive securities--
Director and employee
stock options 594,959 659,612 500,637 604,698
------------ ------------ ------------ ------------
Denominator for diluted earnings
per common share - adjusted
weighted average shares 19,997,457 20,011,972 19,973,051 19,920,281
============ ============ =========== ===========
Basic earnings per common share $ 0.32 $ 0.34 $ 1.16 $ 0.96
============ ============ =========== ===========
Diluted earnings per common share $ 0.31 $ 0.33 $ 1.13 $ 0.93
============ ============ =========== ===========
7. 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 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 condensed consolidated statements of
condition at estimated fair value and the resulting net unrealized gains
and losses, net of tax, are shown in 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
12
market prices, where available. If quoted market prices are not available,
estimated fair values are based on quoted market prices of comparable
instruments. Securities acquired in connection with a non-qualified benefit
plan, which are traded, are immaterial and are included in other assets.
13
During the nine month period ended September 30, 2003, the Company had
gross realized gains from sales of securities available for sale of
$8,383,000, and during the three and nine month periods ended September 30,
2002, $335,000 and $1,703,000, respectively. The Company did not have gross
gains for the three month period ended September 30, 2003, nor did it have
gross losses during both the 2003 and 2002 periods.
A summary of the amortized cost, estimated fair values, and related gross
unrealized gains and losses of securities at September 30, 2003 and
December 31, 2002 is as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(000'S)
SEPTEMBER 30, 2003:
AVAILABLE FOR SALE:
U.S. government agencies $ 637,557 $ 392 $ 6,772 $ 631,177
Mortgage-backed securities 463,621 1,873 78 465,416
Obligations of states and
political subdivisions 1,400 96 -- 1,496
Corporate securities 152 61 9 204
---------- ---------- ---------- ----------
TOTAL SECURITIES AVAILABLE FOR SALE $1,102,730 $ 2,422 $ 6,859 $1,098,293
========== ========== ========== ==========
HELD TO MATURITY:
U.S. government agencies $ 164,818 $ 1,072 $ 2,715 $ 163,175
Obligations of states and
political subdivisions 68,610 4,037 454 72,193
---------- ---------- ---------- ----------
TOTAL SECURITIES HELD TO MATURITY $ 233,428 $ 5,109 $ 3,169 $ 235,368
========== ========== ========== ==========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
(000'S)
DECEMBER 31, 2002:
AVAILABLE FOR SALE:
U.S. government agencies $269,849 $ 1,283 $ 482 $270,650
Mortgage-backed securities 498,614 4,475 2 503,087
Obligations of states and
political subdivisions 1,500 98 -- 1,598
Corporate securities 136 56 18 174
-------- -------- -------- --------
TOTAL SECURITIES AVAILABLE FOR SALE $770,099 $ 5,912 $ 502 $775,509
========= ======== ======== ========
HELD TO MATURITY:
U.S. government agencies $144,824 $ 1,891 $ -- $146,715
Mortgage-backed securities 62,005 306 -- 62,311
Obligations of states and
political subdivisions 68,065 4,351 18 72,398
--------- -------- -------- --------
TOTAL SECURITIES HELD TO MATURITY $274,894 $ 6,548 $ 18 $281,424
========= ======== ======== ========
8. LOANS
-----
Nonaccrual loans were $7.1 million at September 30, 2003 and $12.5 million
at December 31, 2002. Restructured loans were $0.1 million at both
September 30, 2003 and December 31, 2002.
Substantially all of the nonaccruing and restructured loans are
collateralized by real estate. The Company has agreed to provide additional
funding as further described below with respect to a real estate
construction loan in the amount of $7.0 million. At September 30,
14
2003, the Company had and continues to have noother commitments to lend
additional funds to any customers with nonaccrual or restructured loan
balances, except to the one non-performing real estate construction loan
referred to above for which the remaining amount to be loaned is up to
$5,000.
At September 30, 2003, there are loans aggregating approximately $0.6
million, which are not on nonaccrual status, that were potential problem
loans which may result in their being placed on nonaccrual status in the
future. Accruing loans that are contractually past due 90 days or more at
September 30, 2003 are immaterial.
At September 30, 2003 and December 31, 2002, the recorded investment in
loans that are considered to be impaired under SFAS No. 114, "Accounting
for Impairment of a Loan" ("SFAS No. 114"), approximated $7.2 million and
$12.6 million, of which $7.1 million and $12.5 million were in nonaccrual
status, respectively. The average recorded investment in impaired loans for
the nine months ended September 30, 2003 and 2002, and year ended December
31, 2002 was $9.9 million, $19.7 million and $18.3 million, respectively.
Interest income recognized by the Company on impaired loans for the
September 30, 2003 and 2002 three and nine month periods was not material.
As applicable, each impaired loan has a related allowance for loan losses
determined in accordance with SFAS No. 114. There was no allowance for loan
losses required to be specifically allocated to impaired loans at September
30, 2003 compared to $2.2 million and $1.9 million at December 31, 2002 and
September 30, 2002, respectively.
In November 2000, the Company reclassified a real estate construction loan
in the amount of $19.7 million as a non-performing asset and placed the
loan on nonaccrual status. At December 31, 2002, the recorded loan balance
was $12.4 million, and the specific allocation of the allowance for loan
losses was $2.2 million. Through an agreement with the borrower, additional
financing was provided on the non-performing real estate construction loan
to finalize construction of condominium units, which are now complete.
During the 2003 second quarter, the specific allocation of allowance for
loan losses for this loan was reduced to $1.7 million, and that amount was
charged off in the second quarter, reducing the loan balance along with
principal paydowns, partially offset by advances to complete the project,
to $7.0 million at September 30, 2003. As of November 9, 2003, the loan was
further reduced to $6.2 million, and of the original 83 units, 5 units
remain to be sold, of which two units are in contract, while the remaining
units are being actively marketed for sale. Pending sales of the units and
repayment of the loan, the Bank continues to proceed with foreclosure on
other real estate that also collateralizes the loan and to pursue its claim
against the borrower and guarantors for any deficiency. Based on valuation
of the collateral securing this loan, no reserve for this loan is
considered necessary at September 30, 2003.
9. 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.
15
Short-term securities sold under agreements to repurchase generally mature
between one and 365 days. The Bank may borrow up to $175.0 million from two
primary investment firms under master security sale and repurchase
agreements. In addition, the Bank has the ability to borrow from the FHLB
under similar master security sale and repurchase agreements and, to a
lesser extent, its customers. At September 30, 2003 and December 31, 2002,
the Bank had short-term repurchase agreements outstanding of $150.5 million
at an interest rate of 1.12 percent and $1.2 million at an interest rate of
1.18 percent, respectively. At September 30, 2003, these borrowings were
collateralized by securities with an aggregate carrying value and estimated
fair value of $196.7 million and $196.6 million, and at December 31, 2002,
of $1.2 million for both the aggregate carrying value and estimated fair
value, respectively.
Federal funds purchased represent overnight funds. The Bank has federal
funds purchase lines available with six financial institutions for a total
of $73.0 million. At September 30, 2003 and December 31, 2002, the Bank had
no federal funds purchased balances outstanding.
Short-term FHLB advances are borrowings with original maturities between
one and 365 days. At September 30, 2003 and December 31, 2002, the Bank had
no such short-term FHLB advances outstanding.
Additional information with respect to short-term borrowings as of and for
the nine months ended September 30, 2003 and 2002 is presented in the table
below.
Short-Term Borrowings 2003 2002
--------------------------------------------------------------------
(000's except percentages)
Balance at September 30 $150,480 $ 2,005
Average balance outstanding $ 29,582 $ 1,501
Weighted-average interest rate
As of September 30 1.12% 1.62%
Paid during period 1.14% 1.64%
====================================================================
The Bank had long-term borrowings, which have original maturities of over
one year, of $507.0 million and $392.0 million in securities sold under
agreements to repurchase at September 30, 2003 and December 31, 2002. At
September 30, 2003 and December 31, 2002, these borrowings have an original
term of between five and ten years at interest rates between 1.07 percent
to 6.08 percent and 1.94 percent to 6.08 percent, respectively, that are
callable on certain dates after an initial noncall period at the option of
the counterparty to the repurchase agreements. As of September 30, 2003 and
December 31, 2002, these borrowings are collateralized by securities with
an aggregate carrying value of $512.7 million and $400.6 million and an
estimated fair value of $511.7 million and $402.5 million, respectively.
16
At September 30, 2003 and December 31, 2002, long-term FHLB advances
totaled $108.4 million and $110.9 million, respectively, at interest rates
of between 3.49 percent to 6.05 percent and 3.49 percent to 6.72 percent,
respectively. At September 30, 2003, borrowings totaling $8.4 million are
amortizing advances having scheduled payments and $30.0 million are payable
only at maturity. Other borrowings totaling $70.0 million have an original
term of ten years that are callable on certain dates after an initial
noncall period at the option of the counterparty to the advance. These
borrowings may not be repaid in full prior to maturity without penalty. At
September 30, 2003 and December 31, 2002, these borrowings were
collateralized by a pledge to the FHLB of a security interest in certain
mortgage-related assets having an aggregate carrying value of $125.9
million and $128.6 million, respectively.
A summary of long-term, fixed-rate borrowings distributed based upon
remaining contractual payment date and expected option call dates at
September 30, 2003, with comparative totals for December 31, 2002, is as
follows:
AFTER 1
WITHIN BUT WITHIN AFTER 2003 2002
LONG-TERM BORROWINGS 1 YEAR 5 YEARS 5 YEARS TOTAL TOTAL
- ------------------------------------------------------------------------------------------------
Contractual Payment/Expected (000's, except percentages)
Call Date:
Total long-term borrowing $25,253 $131,360 $458,773 $615,386 $502,889
Weighted-average interest rate 4.20% 3.68% 4.35% 4.20% 4.68%
- ------------------------------------------------------------------------------------------------
At September 30, 2003 and December 31, 2002 the Bank held 356,694 shares
and 251,445 shares of capital stock of the FHLB with a carrying value of
$35.7 million and $25.1 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. On September 22, 2003, the
FHLB announced that it has suspended the dividend on its shares of capital
stock. The fourth quarter dividend based on the Company's current
investment in FHLB capital stock would approximate $400,000. The FHLB has
given no assurance as to when the dividend will resume. 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 and
certain other assets of the Bank.
The Company distributed a 5 percent common stock dividend on September 26,
2003 to stockholders of record as of September 12, 2003. The weighted
average common shares outstanding and per common share amounts have been
adjusted to reflect the 5 percent common stock dividend.
The ability of the Company and Bank to pay cash dividends in the future is
restricted by various regulatory requirements. The Company's ability to pay
cash dividends to its stockholders 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 undistributed 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, 2003, the Bank
could pay dividends of $53.8 million to the Company without having to
obtain prior regulatory approval.
17
On December 18, 2002 and May 20, 2003, the Company's Board of Directors
authorized the repurchase of up to 157,500 common shares on each date (a
total of 315,000 common shares adjusted for the 5 percent common stock
dividend), or approximately 0.8% for each repurchase authorization, of the
Company's outstanding common stock at those dates. Repurchases of common
stock are authorized to be made from time to time in open-market and
private transactions throughout 2003 as, in the opinion of management,
market conditions may warrant. The repurchased common shares are held as
treasury stock and are available for general corporate purposes. For the
nine months ended September 30, 2003 and 2002, the Company purchased
265,485 shares and 64,785 shares of common stock under stock repurchase
plans at an aggregate cost of approximately $4.2 million and $0.9 million,
respectively. Purchases of Company stock of 60,681 and 57,316 shares were
also made in connection with stock option exercises during the nine month
periods ended September 30, 2003 and 2002, respectively.
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
In the normal course of business, various commitments to extend credit are
made which are not reflected in the accompanying condensed consolidated
financial statements. At September 30, 2003, formal credit lines, and
commercial and residential loan commitments (including home equity
commitments), both of which are primarily loans collateralized by real
estate, approximated $164.5 million, $298.8 million and $60.5 million,
respectively. Outstanding letters of credit totaled $42.4 million. Such
amounts represent the maximum risk of loss on these commitments.
Other commitments are described in Note 16 to the consolidated financial
statements of the Company for the year ended December 31, 2002, which is
included in the Company's 2002 Annual Report to Stockholders. The Company,
Bank, and Chairman, President and C.E.O. entered into a new employment
contract to be effective November 16, 2003 for a five year period on
substantially the same terms as the previous employment contract, with an
increase in annual base compensation of $40,000.
In the ordinary course of business, the Company is party to various legal
proceedings arising in the ordinary course of business, including counter
claims and related litigation in connection with loan collections and
foreclosures of loan collateral. In the opinion of management, based on
advice from legal counsel, such legal proceedings will not have a material
adverse effect on the Company's consolidated financial statement.
18
11. 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 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.
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
nine months ended September 30, 2003 and 2002, there is no customer that
accounted for more than ten percent of the Company's revenue.
19
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
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, 2003. 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, including changes in interest rates and the
shape of the U.S. Treasury yield curve and the credit quality of borrowers;
wartime events or terrorist activity; 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; increase 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 are 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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's accounting policies are disclosed in Note 3 to the consolidated
financial statements included in the Company's 2002 Annual Report to
Stockholders. The more critical policies given the Company's current business
strategy and asset/liability structure are accounting for non-performing loans,
the allowance for loan losses and provision for credit losses, and the
classification of securities as either held to maturity or available for sale.
In addition to Note 3 to the 2002 consolidated financial statements, the
Company's practice on each of these accounting policies is further described in
the applicable sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations, also included in the 2002 Annual Report to
Stockholders.
FINANCIAL CONDITION
- -------------------
At September 30, 2003, the Company had total assets of $2,989.0 million, an
increase of $446.1 million or 17.5 percent from December 31, 2002.
The securities portfolio, including investments in Federal Home Loan Bank of New
York ("FHLB") stock, totaled $1,367.4 million and $1,075.5 million at September
30, 2003 and December 31, 2002, respectively, an increase of $291.8 million
during the nine months ended September 30, 2003. The securities portfolio
consists of securities held to maturity at amortized
20
cost of $233.4 million and $274.9 million, securities available for sale at
estimated fair value totaling $1,098.3 million and $775.5 million, and FHLB
stock of $35.7 million and $25.1 million, respectively. Proceeds from sales,
redemption, and monthly payments of the securities not otherwise reinvested in
securities are used to fund the loan portfolio or invested in Federal funds sold
pending evaluation of alternative investments.
During the nine months ended September 30, 2003, U.S. government agency
securities increased $380.5 million due primarily to purchases totaling $759.4
million, and accretion of discount of $0.2 million, partially offset by sales of
$84.9 million, redemptions of callable bonds of $287.0 million, and a net
decrease in the estimated fair value of available for sale securities of $7.2
million. Mortgage-backed securities decreased by $99.7 million primarily due to
sales of available for sale securities of $329.7 million, principal paydowns of
$250.3 million, net premium amortizations of $1.2 million and a decrease in the
estimated fair value of available for sale securities of $2.7 million, partially
offset by purchases totaling $484.2 million. The Bank's investment in
obligations of states and political subdivisions, or municipal securities,
increased by $0.4 million primarily due to purchases of $15.0 million that were
partially offset by maturities of $14.6 million during the nine month period
ended September 30, 2003. Municipal securities are considered core investments
having favorable tax equivalent yields and diversified maturities. Purchases of
municipal securities are dependent upon their availability in the marketplace
and the comparative tax equivalent yields of such securities compared to other
securities of similar credit risk and maturity.
The Company invests in medium-term corporate debt securities and other
securities that are rated investment grade by nationally recognized credit
rating organizations at the time of purchase and other equity securities. The
Company had outstanding balances of equity securities of $0.2 million at both
September 30, 2003 and December 31, 2002, respectively. The total investment in
FHLB stock was $35.7 million and $25.1 million at September 30, 2003 and
December 31, 2002, respectively.
The Company continues to exercise its conservative approach to investing by
purchasing high credit quality investments, and controlling interest rate risk
by purchasing both fixed and floating rate securities through the averaging of
investments in short and long-term maturities.
At September 30, 2003, loans outstanding were $1,437.1 million, a net increase
of $86.6 million or 6.4 percent compared to $1,350.4 at December 31, 2002. The
increase in outstanding loan balances reflects increases of: $37.3 million in
commercial mortgages; $21.5 million in land, acquisition and construction loans;
$12.1 million in residential mortgages; $10.6 million in time unsecured loans;
$4.4 million in time secured loans; $1.4 million in home equity loans; and $1.1
million in other loans. The increase was partially offset by decreases of $1.4
million in personal installment loans and $0.4 million in credit card loans. The
Company had approximately $164.5 million in formal credit lines, $359.3 million
in loan commitments outstanding, which are loans primarily collateralized by
real estate, and $42.4 million in standby letters of credit outstanding.
Management considers its liquid resources to be adequate to fund loans in the
foreseeable future, principally by utilizing excess funds temporarily placed in
federal funds sold, increases in deposits and borrowings, loan repayments and
maturing securities.
The Company's allowance for loan losses increased $0.2 million or 1.5 percent to
$14.4 million at September 30, 2003, from $14.2 million at December 31, 2002.
The allowance for loan losses represents 1.00 percent and 1.05 percent of gross
21
loans outstanding at September 30, 2003 and December 31, 2002, respectively. The
allowance reflects a provision for credit losses of $2.1 million and $3.2
million and net charge-offs of $1.8 million and $2.1 million recorded for the
nine months ended September 30, 2003 and 2002, respectively. In addition to the
allowance for loan losses, a reserve for credit losses related to unfunded loan
commitments of $545,000 at September 30, 2003 and $497,000 at December 31, 2002
is included in other liabilities.
Management believes the allowance for loan losses at September 30, 2003
appropriately reflects the risk elements inherent in the total loan portfolio at
that time. 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.
Total deposits increased $336.8 million for the nine month period ended
September 30, 2003 to $1,888.6 million from $1,551.8 million at December 31,
2002. The total deposit increase resulted from net increases in municipal
deposits of $192.8 million, retail and commercial deposits of $119.0 million,
and brokered deposits of $25.0 million.
As of September 30, 2003, seasonal NOW and demand municipal tax deposits
increased $108.7 million and $71.5 million, respectively, as compared to
December 31, 2002. Municipal money market deposits also increased $15.6 million,
compared to December 31, 2002, due to increased activity with municipal
relationships. The increase in municipal deposits was partially offset by
decreases in municipal time deposits over $100,000 and savings deposits of $1.7
million and $1.3 million, respectively, compared to year end 2002. Municipal
time deposits greater than $100,000 are obtained on a bidding basis with
maturities of 30 to 180 days and are used in conjunction with liquidity
management.
The increase in retail, commercial, and brokered deposits was due to increases
in money market, time, demand, and NOW deposits of $75.7 million, $62.6 million,
$20.8 million, and $14.7 million, partially offset by a decrease in savings
deposits of $29.8 million. Retail and commercial money market deposits increased
primarily from a promotional interest rate offered to increase its market share
at selected Bank branches. Retail and commercial time deposits under $100,000
and greater than $100,000 increased $21.1 million and $12.2 million,
respectively, due to customers seeking higher yields during this period of
historically low interest rates. The increase in time deposits included $25.0
million of deposits acquired through brokers and having a three year term during
this historically low interest rate environment. Retail and commercial IRA and
KEOGH deposits also contributed $4.3 million to the increase in time deposits as
the Bank continues to expand its operations in the retirement planning area. The
increase in retail and commercial demand and NOW deposits was due to deposit
growth from the Bank entering new markets, as well as expanding and adding
relationships in its existing markets. The increase in total retail and
commercial deposits was partially offset by a decrease in retail and commercial
savings deposits due to customers seeking more competitive products as a result
of lower yields offered during this period of low interest rates.
During the nine months ended September 30, 2003, the Bank increased its net
medium to long-term borrowings by $261.8 million. The low interest rate
environment also influenced the Bank's strategy to attract and acquire
longer-term time deposits, through brokered deposits, to secure low interest
rates for an extended period of time. Management will continue to evaluate the
interest rate environment in order to determine the most effective combination
of borrowings and deposits.
22
Stockholders' equity increased to $165.0 million at September 30, 2003 from the
December 31, 2002 balance of $156.0 million, an increase of 5.7 percent. The
increase primarily results from: $22.6 million of net income for the nine month
period ended September 30, 2003; $2.7 million of stock options exercised and
related tax benefit; and $0.2 million of shares committed to be released under
benefit plans; partially offset by common stock dividends paid of $5.7 million,
treasury stock purchase transactions of $5.1 million, and a $5.8 million
decrease in other comprehensive income.
The Company's leverage ratio at September 30, 2003 was 7.67 percent, compared to
8.36 percent at December 31, 2002. The Company's Tier I and Total Capital ratios
under the risk-based capital guidelines were 12.63 percent and 13.52 percent at
September 30, 2003, and 12.55 percent and 13.58 percent at December 31, 2002,
respectively. In addition, the Bank exceeds all current regulatory capital
requirements and was in the "well-capitalized" category at September 30, 2003
and December 31, 2002. As noted in Note 4 of the Notes to Condensed Consolidated
Financial Statements (Unaudited), the Federal Reserve has indicated it is
reviewing the treatment of Trust Preferred securities as a result of certain
pending changes in accounting for such securities. The Company currently has
outstanding $50 million of Trust Preferred securities that qualifies as Tier 1
Capital. If these securities were not considered to be Tier 1 Capital, the
Company's leverage, Tier 1 and total capital ratios would still exceed
regulatory minimums and be considered in the "well- capitalized" category.
RESULTS OF OPERATIONS
- ---------------------
EARNINGS
- --------
Net income for the three and nine month periods ended September 30, 2003 was
$6.3 million and $22.6 million compared to $6.5 million and $18.6 million for
the three and nine month periods ended September 30, 2002, a decrease of 3.4
percent and an increase of 21.3 percent, respectively. Diluted earnings per
common share were $0.31 and $1.13 for the three and nine month periods ended
September 30, 2003, compared to $0.33 and $0.93 for the three and nine month
periods ended September 30, 2002, a decrease of 6.1 percent and an increase of
21.5 percent, respectively.
The higher net income for the nine months ended September 30, 2003 compared to
the prior year period reflects increases in the Company's net interest income, a
lower provision for credit losses, significantly higher gains on sales of
securities available for sale and higher non-interest income, partially offset
by increases in non-interest expenses and a higher effective rate for the
provision for income taxes. The higher diluted earnings per common share for the
2003 nine month period compared to the comparable period in 2002, is primarily
the result of higher net income. The lower net income for the three months ended
September 30, 2003, compared to the three months ended September 30, 2002
reflects an increase in non-interest expenses and the effective rate for the
provision for income taxes, as well as a decrease in net security gains,
partially offset by higher net interest income and non-interest income, as well
as a lower provision for credit losses. The lower diluted earnings per common
share for the three month period ended September 30, 2003 compared to the same
period in 2002 is primarily the result of lower net income.
23
A discussion of the factors impacting the changes in the various components of
net income follows.
NET INTEREST INCOME
- -------------------
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three and nine month periods ended September 30, 2003, net interest income
increased 3.8 percent and 4.1 percent to $19.2 million and $56.5 million from
$18.5 million and $54.3 million for the three and nine month periods ended
September 30, 2002, respectively. Net interest income increased in the current
periods due to increases in the volume of earning assets, partially offset by
decreases in both the net interest spread and margin on a tax equivalent basis.
The increase in net interest income for the three and nine months ended
September 30, 2003 was primarily due to an increase in average earning assets of
26.7 percent to $2.63 billion and 22.9 percent to $2.48 billion from $2.07
billion and $2.01 billion, respectively. The growth was a result of increases in
average net loans of $147.4 million (11.7 percent) and $151.1 million (12.3
percent), and average securities of $364.4 million (48.4 percent) and $284.5
million (38.7 percent), and average federal funds sold of $42.1 million (66.6
percent), and $26.5 million (52.1 percent) for the three and nine months ended
September 30, 2003, respectively, as compared to the prior year periods. Net
interest income also benefitted from increases in average earning assets over
average interest bearing liabilities of $107.6 million (34.0 percent), and $89.8
million (29.9 percent) for the three and nine months ended September 30, 2003
compared to the September 30, 2002 periods.
The increase in net interest income was partially offset by a decrease in the
net interest margin and the net interest spread on a tax equivalent basis. The
net interest margin on a tax equivalent basis decreased to 3.01 percent and 3.13
percent for the three and nine months ended September 30, 2003, as compared to
3.70 percent and 3.72 percent for the comparable 2002 periods. The net interest
spread on a tax equivalent basis decreased to 2.90 percent and 3.01 percent for
the three and nine months ended September 30, 2003 as compared to 3.62 percent
and 3.61 percent for the comparable 2002 periods.
The decrease in net interest margin on a tax equivalent basis was primarily due
to a greater reduction in yields on average earning assets, as compared to
interest bearing liabilities, to 4.99 percent and 5.20 percent for the three and
nine months ended September 30, 2003, as compared to 6.15 percent and 6.22
percent for the comparable 2002 periods, respectively. The decrease in yields on
earning assets for the three and nine months ended September 30, 2003, as
compared to the 2002 comparable periods, primarily consisted of a decrease in
yields on net loans from 6.82 percent and 6.84 percent to 6.12 percent and 6.25
percent, and average securities from 5.40 percent and 5.49 percent to 3.91
percent and 4.10 percent, respectively.
24
The cost of interest bearing liabilities, including demand deposits, for the
three and nine months ended September 30, 2003 decreased to 2.16 percent and
2.28 percent from 2.65 percent and 2.73 percent for the 2002 comparable periods.
The decrease in the cost of interest bearing liabilities for the three and nine
months ended September 30, 2003, as compared to the 2002 comparable periods, was
primarily due to decreases in the costs of interest bearing deposits from 2.19
percent and 2.27 percent to 1.61 percent and 1.70 percent, and the costs of
borrowings from 4.97 percent and 5.07 percent to 3.90 percent and 4.17 percent,
respectively.
Net interest income has been negatively affected by the continued low interest
rate environment and the net interest spread and margin on a tax equivalent
basis will remain compressed if the current rate environment continues. The
Company's balance sheet is positioned as asset sensitive in the short-term and
will benefit in a rising interest rate environment. Net interest income will be
negatively affected in the fourth quarter of 2003 by the suspension of the FHLB
dividend. The Company's investment in FHLB stock at September 30, 2003 was $35.7
million, and it has received $0.4 million and $1.1 million of dividend income
for the three and nine month periods ended September 30, 2003, respectively. The
FHLB has given no assurance as to when the dividend will resume.
Management will continue to evaluate and manage the effect of the changing
interest rate environment on the Company's present and future operations, while
continuing to competitively price its products and services throughout the
markets it serves. Management will also continue to use its strong capital
position to prudently leverage the balance sheet. Although the leverage strategy
results in tighter net interest spreads, the strategy increases net interest
income while managing interest rate risk.
The Company has also taken advantage of opportunities during the nine months
ended September 30, 2003 to realize gains on available-for-sale securities that
most likely would have been called or prepaid at par value. Security gains of
$8.4 million were realized for the nine months ended September 30, 2003 period
as compared to $1.7 million for the 2002 period. The Company did not realize
gains during the three months ended September 30, 2003, as compared to $0.3
million during the 2002 period. The Company's investment portfolio has been
restructured and is well positioned with a combination of fixed and floating
rate securities. Although the net interest margin will remain under pressure in
the low interest rate environment, the Company has used its strong capital
position to prudently leverage the balance sheet resulting in increased levels
of net interest income. The Company believes the addition of floating rate
securities is prudent to protect against rising interest rates, while the
inclusion of fixed rate securities with reasonable periods of call protection
will mitigate the adverse effects on interest income if interest rates remain
low.
PROVISION FOR CREDIT LOSSES
- ---------------------------
The provision for credit losses decreased $199,000 to $0.4 million and $1.1
million to $2.1 million for the three and nine month periods ended September 30,
2003, respectively, compared to the same periods in 2002. The decrease in the
provision for the three and nine month 2003 periods was primarily attributable
to an improvement in credit quality of the loan portfolio as compared to the
three and nine months ended September 30, 2002. The Company's non-performing
assets to total assets decreased to 0.24 percent at September 30, 2003 from 0.67
percent at September 30, 2002. During the three and nine months ended September
30, 2003, net charge-offs totaled $0.1 million and $1.8 million as compared to
$0.1 million and $2.1 million for the prior 2002 periods, respectively. The 2003
net charge-offs primarily resulted from a $1.7 million partial charge-off of a
real estate construction loan on nonaccrual status. The net charge-offs for the
2002 period was primarily due to a $0.6 million charge-off related to the
settlement of the Bennett Funding Group loan and related litigation, and the
$1.3 million partial charge-off of the real estate construction loan.
25
Nonaccrual loans were $7.1 million and $16.0 million at September 30, 2003 and
2002, respectively, compared to $12.5 million at December 31, 2002. Total
nonaccrual loans primarily consists of a real estate construction loan that was
$12.4 million at December 31, 2002, reduced to $7.0 million at September 30,
2003 due to principal paydowns and the $1.7 million charge-off, partially offset
by advances to complete the project.
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. Regulatory requirements generally prohibit
the accrual of interest on certain loans when principal or interest is due and
remains unpaid for 90 days or more (with the exception of credit card loans for
which the criteria is 180 days past due). Net income is adversely impacted by
the level of non-performing assets caused by the deterioration of borrowers'
ability to meet scheduled interest and principal payments. In addition to
forgone revenue, the Company must increase the level of provisions for credit
losses, incur collection costs, and other costs associated with the management
and disposition of foreclosed properties.
An evaluation of the quality of the loan portfolio is performed by management on
a quarterly basis as an integral part of the credit administration function,
which includes the identification of past due loans, non-performing loans and
impaired loans, assessments of the expected effects of the current economic
environment on the banking industry, geographic and customer concentrations in
the loan portfolio, and review of historical loss experience. Management takes a
prudent and cautious position in evaluating various business and economic
uncertainties in relation to the Company's loan portfolio. In management's
judgment, the allowance is considered appropriate to absorb losses inherent in
the credit portfolio at September 30, 2003.
A substantial portion (88.7 percent at September 30, 2003) of total gross loans
of the Company is collateralized by real estate, primarily located in the New
York Metropolitan area. Accordingly, the collectibility of the loan portfolio of
the Company is subject to changes in the real estate market in which the Company
operates. The provisions for credit losses established in 2003 and 2002 and the
related allowance for loan losses reflects net charge-offs and losses incurred
with respect to real estate, time and demand, installment, credit card and other
loans, and the effect of the real estate market and general economic conditions
of the New York Metropolitan area on the 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
NON-INTEREST INCOME
- -------------------
Non-interest income increased for the three months ended September 30, 2003 by
$0.1 million to $2.1 million compared to the 2002 comparable period. The
increase was primarily attributed to an increase in loan arrangement and
prepayment fees ($275,000), service charges on deposit accounts ($209,000), and
fee income on debit cards ($29,000), partially offset by a decrease in gains on
sale of securities ($335,000) and non-traditional investment product sales
($23,000). For the nine month period ended September 30, 2003, non-interest
income increased by $7.6 million to $14.1 million from $6.5 million for the 2002
comparable period. The increase was primarily due to increases in net security
gains of $6.7 million, service charges on deposit accounts ($422,000), loan
arrangement and prepayment fees ($202,000) fees on debit cards and brokered
loans ($96,000), and fee income from nontraditional products ($38,000).
NON-INTEREST EXPENSES
- ---------------------
Non-interest expenses increased $1.0 million (10.2 percent) to $11.1 million and
$4.2 million (14.3 percent) to $33.5 million for the three and nine month
periods ended September 30, 2003 from the comparable periods in 2002,
respectively. The primary reason for these increases results from higher levels
of salaries and benefits, occupancy expenses, advertising and business
development, professional fees, communications expense, amortization of
intangibles and other expense categories related to credit cards and insurance
fees.
Salaries and employee benefits, the largest component of non-interest expense,
increased by $677,000, or 11.1 percent, and $2,490,000, or 14.1 percent, during
the three and nine month periods ended September 30, 2003 compared to the prior
year periods. The increase occurred due to additional personnel employed by the
Company primarily to support deposit and loan growth, including the
establishment of two full-service Bank branches during 2003. In addition,
salaries and employee benefits increased because of additional expenses related
to incentive compensation and bonus plans, medical plans, and payroll taxes.
Increases in salaries and employee benefits expense were partially offset by a
decrease ($168,000) in the accrual related to post-retirement medical benefits
for former Tappan Zee Financial, Inc. officers for the 2003 periods as compared
to prior year periods, as well as an increase in the deferral for loan
origination expenses for the nine month 2003 period as compared to the 2002
period.
Significant changes in the other components of non-interest expense for the
three and nine month periods ended September 30, 2003, respectively, compared to
the prior year periods, were due to the following:
o Increase of $147,000 (9.4 percent) and $404,000 (8.6 percent) in occupancy
and equipment expense. The increase in both periods is primarily due to
higher depreciation expense, real estate taxes on new branch locations, and
other occupancy related costs associated with new branch locations and
investments in technology.
o Increase of $63,000 (12.0 percent) and $488,000 (34.0 percent) in
advertising and business development. The increase reflects an increase in
marketing costs that include television advertising to support increases in
market share in existing and new markets, as well as additional costs to
expand customer relationships.
27
o Increase of $14,000 (4.0 percent) and $207,000 (23.7 percent) in
professional fees. The increase is due to higher consulting fees for both
2003 periods and higher legal fees related to a non-performing real estate
construction loan and an increase in Director fees for the 2003 nine month
and related 2002 comparable period.
o Increase of $33,000 (12.4 percent) and $119,000 (15.1 percent) in
communications expense. The increase relates to higher costs from
additional data lines to support the Bank's communications infrastructure
and new locations.
o Increase of $26,000 (11.5 percent) and $83,000 (12.2 percent) in
amortization of intangibles. The increase reflects amortization of an
additional intangible asset acquired from the acquisition of a branch in
the fourth quarter of 2002.
o Increase of $44,000 (5.4 percent) and $397,000 (16.4 percent) in other
expenses. The increases are primarily due to increases in technology
related services, credit card operational expenses, directors and officers
liability insurance premiums, and Internet fees.
INCOME TAXES
- ------------
The effective income tax rates for the three and nine month periods ended
September 30, 2003 were 36.2 percent and 35.5 percent compared to 33.7 percent
and 34.2 percent, respectively, for the prior periods in 2002. The higher
effective income tax rate for the 2003 periods, primarily reflects a decrease in
the proportion of tax exempt income to total income compared to the prior 2002
periods.
As a result of a reduction in taxable income for New York State tax purposes,
the Company has established a valuation allowance in the amount of $1.5 million
to reserve for that amount of the State net deferred tax asset totaling $1.8
million that is more likely than not, in management's judgement, not realizable.
28
U.S.B. HOLDING CO., INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ -----------------------------------------------------------
Quantitative and qualitative disclosures about market risk at December 31, 2002
were reported in the Company's 2002 Annual Report to Stockholders. There have
been no material changes in the Company's market risk exposures at September 30,
2003 compared to December 31, 2002. Interest rate risk continues to be the
Company's primary market risk exposure since all Company transactions are
denominated in U.S. dollars with no direct foreign currency exchange or changes
in commodity price exposures. Substantially, all market risk sensitive
instruments continue to be held to maturity or available for sale with no
significant financial instruments entered into for trading purposes. The Company
does not use derivative financial instruments, such as interest rate swaps and
caps extensively, and has not been party to any derivative financial instruments
during the nine months ended September 30, 2003.
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, 2003 as compared to
December 31, 2002. The Company's "Static Gap" at September 30, 2003 was a
positive cumulative $314.8 million in the one year time frame compared to a
positive cumulative $246.4 million at December 31, 2002. If interest rates were
to gradually increase 200 basis points or decrease 50 basis points (normally 200
basis points during periods of higher interest rates) from current rates, the
percentage change in estimated net interest income for the subsequent twelve
month measurement period continues to be within the Company's policy limit of
not declining by more than 5.0 percent.
29
U.S.B. HOLDING CO., INC.
ITEM 4. CONTROLS AND PROCEDURES
- ------ -----------------------
The Company has evaluated the design and operation of its disclosure controls
and procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Securities Exchange Act of 1934 and the rules and forms of the Securities and
Exchange Commission. This evaluation was made under the supervision and with the
participation of management, including the Company's chief executive officer and
chief financial officer as of September 30, 2003, prior to the filing of this
Quarterly Report on Form 10-Q. The chief executive officer and chief financial
officer have concluded, based on their review, that the Company's disclosure
controls and procedures, as defined by Exchange Act Rules 13a-15(e) and
15d-15(e), are effective to ensure that information required to be disclosed by
the Company in reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the time period specified in
Securities and Exchange Commission rules and forms. There was no change to the
Company's internal control over financial reporting that occurred during the
fiscal quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
30
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(A) EXHIBITS
Exhibit No. Exhibit
- ----------- -------
(3)(a) 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, 2002 ("2002
Second Quarter Form 10-Q"), 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)).
(4)(d) Junior Subordinated Indenture, dated July 31, 2001,
between Registrant and State Street Bank and Trust Company of
Connecticut, National Association, as trustee (incorporated
herein by reference to Registrant's Quarterly report on Form
10-Q for the quarter ended September 30, 2001 ("2001 Third
Quarter 10-Q"), Exhibit (4)(d)).
(4)(e) Guarantee Agreement, dated July 31, 2001, by and between
Registrant and State Street Bank and Trust Company of
Connecticut, National Association, as trustee for the holders
of Capital Securities of Union State Statutory Trust II
(incorporated herein by reference to Registrant's 2001 Third
Quarter 10-Q, Exhibit (4)(e)).
(4)(f) Amended and Restated Declaration of Trust of Union State
Statutory Trust II (incorporated herein by reference to
Registrant's 2001 Third Quarter 10-Q, Exhibit (4)(f)).
(4)(g) Indenture, dated June 26, 2002, between Registrant and
State Street Bank and Trust Company of Connecticut, National
Association, as Trustee, (incorporated herein by reference to
Registrant's 2002 Second Quarter Form 10-Q, Exhibit (4) (g)).
31
(4)(h) Guarantee Agreement, dated June 26, 2002, by and between
Registrant and State Street Bank and Trust Company of
Connecticut, National Association, as Trustee for the holders
of Capital Securities of USB Statutory Trust III,
(incorporated herein by reference to Registrant's 2002 Second
Quarter Form 10-Q, Exhibit (4) (h)).
(4)(i) Amended and Restated Declaration of Trust of USB Statutory
Trust III, (incorporated herein by reference to Registrant's
2002 Second Quarter Form 10-Q, Exhibit (4) (i)).
(10)(a) Agreement of Employment dated as of November 16, 1998, and
as amended November 8, 2000, between the Company and the Bank
and Thomas E. Hales (incorporated herein by reference to
Registrant's Annual Report on Form 10-Q for the quarter ended
September 30, 2000 ("2000 Third Quarter 10-Q"), Exhibit
(10)(a)).
(10)(b) Agreement of Employment dated as of November 16, 1998, and
as amended November 8, 2000, between the Company and the Bank
and Raymond J. Crotty (incorporated herein by reference to
Registrant's 2000 Third Quarter 10-Q, Exhibit (10)(b)).
(10)(c) Amendment to Employment Agreement as of October 25, 2001
between the Company and the Bank and Raymond J. Crotty
(incorporated herein by reference to Registrant's 2001 Third
Quarter 10-Q, Exhibit (10)(c)).
(10)(d) Agreement of Employment dated as of November 16, 1998, and
as amended November 8, 2000, between the Company and the Bank
and Steven T. Sabatini (incorporated herein by reference to
Registrant's 2000 Third Quarter 10-Q, Exhibit (10)(c)).
(10)(e) Amendment to Employment Agreement as of October 25, 2001
between the Company and the Bank and Steven T. Sabatini
(incorporated herein by reference to Registrant's 2001 Third
Quarter 10-Q, Exhibit (10)(e)).
(10)(f) Registrant's 1993 Incentive Stock Option Plan
(incorporated herein by reference from Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999
("1999 Third Quarter 10-Q"), Exhibit (10)(e)).
(10)(g) Registrant's U.S.B. Holding Co., Inc. Employee Stock
Ownership Plan (With Code Section 401(k) Provisions)
(incorporated herein by reference from Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001
("2001 10-K"), Exhibit (10)(g)).
(10)(h) 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)(i) Registrant's Director Stock Option Plan (incorporated
herein by reference to Registrant's 1996 10-K, Exhibit
(10)(f)).
32
(10)(j) 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)(k) 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, Exhibit (10)(j)).
(10)(l) 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, Exhibit (10)(k)).
(10)(m) Registrant's 1997 Employee Stock Option Plan (incorporated
herein by reference to Registrant's Proxy Statement filed
April 18, 1997).
(10)(n) 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 of Shareholders ("Tappan Zee 1996
Proxy Statement")).
(10)(o) Amendment No. 1 to the Employee Stock Option Plan
(incorporated herein by reference to Tappan Zee Financial,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
March 31, 1997 ("Tappan Zee 1997 10-K"), Exhibit 10.1.1).
(10)(p) Amendment No. 2 to the Employee Stock Option Plan
(incorporated herein by reference to Exhibit A to Tappan Zee
Financial, Inc.'s Proxy Statement for use in connection with
its 1997 Annual Meeting of Shareholders ("Tappan Zee 1997
Proxy Statement")).
(10)(q) Tappan Zee Financial, Inc. 1996 Stock Option Plan for
Outside Directors ("Outside Director Option Plan")
(incorporated herein by reference to Exhibit B to the Tappan
Zee 1997 Proxy Statement).
(10)(r) Amendment No. 1 to the Outside Director Option Plan
(incorporated herein by reference to the Tappan Zee 1997 10-K,
Exhibit 10.2.1).
(10)(s) Amendment No. 2 to the Outside Director Option Plan
(incorporated herein by reference to Exhibit B to the Tappan
Zee 1997 Proxy Statement).
33
(10)(t) 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 Financial,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, Exhibit 10.7).
(10)(u) Deferred Compensation Plan for Directors of Tarrytowns
Bank, FSB (Incorporated herein by reference to the
Registration Statement on Form S-1 (file No. 33-94128), filed
on June 30, 1995, as amended, Exhibit 10.7).
(10)(v) Forms of Stock Option Agreement by and between Tappan Zee
Financial, Inc. and recipients of stock options granted
pursuant to the Employee Option Plan and the Outside Director
Option Plan (incorporated herein by reference to the Tappan
Zee 1997 10-K, Exhibit 10.16).
(10)(w) 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 and as amended March 20, 2002
(incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001,
(Exhibit (10)(w)).
(10)(x) Asset Purchase and account Assumption Agreement by and
between Union State Bank and La Jolla bank dated May 25, 2000
(incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the six months ended June
30, 2000, Exhibit (10)(00)).
(10)(y) U.S.B. Holding Co., Inc. Severance Plan dated January 30,
2002 (incorporated herein by reference from Registrant's 2001
10-K, Exhibit (10)(y)).
(10)(z) Asset Purchase and Liability Assumption Agreement dated as
of June 14, 2002, by and between Union State Bank and Fourth
Federal Savings Bank, (incorporated herein by reference to
Registrant's 2002 Second Quarter Form 10-Q, Exhibit (10) (z)).
(10)(aa) U.S.B. Holding Co., Inc. Executive Incentive Bonus Plan
as amended February 24, 1999 (incorporated herein by reference
to Registrant's Proxy Statement filed April 27, 1999).
(10)(ab) Amendment No. 2 to the Key Employees' Supplemental Investment
Plan dated September 1, 2003.*
(10)(ac) Amendment No. 1 to the Key Employees' Diversified Investment
Plan dated September 1, 2003.*
(31.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
34
(31.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
(32) Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
*Filed Herewith.
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on July 22, 2003 regarding the
2003 second quarter earnings. Selected Company financial information was
included in such Form 8-K.
35
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 hereunto duly authorized, on November 13, 2003.
U.S.B. HOLDING CO., INC.
/s/ Thomas E. Hales /s/ Steven T. Sabatini
- ------------------------------------ ---------------------------
Thomas E. Hales Steven T. Sabatini
Chairman of the Board, President, Senior Executive Vice President,
Chief Executive Officer and Director Chief Financial Officer, Assistant
Secretary and Director
(Principal Financial and
Accounting Officer)
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