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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 June 30, 2004, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________________ to
_____________________
Commission file Number 1-12811
-----------------
U.S.B. HOLDING CO., INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-3197969
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 DUTCH HILL ROAD, ORANGEBURG, NEW YORK 10962
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
845-365-4600
----------------------------------------------------
(Registrant's Telephone Number (including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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.
NUMBER OF SHARES
CLASS OUTSTANDING AT AUGUST 2, 2004
------ -----------------------------
Common stock, par value 19,380,187
$0.01 per share
U.S.B. HOLDING CO., INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF
CONDITION AS OF JUNE 30, 2004 AND
DECEMBER 31, 2003. 1
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE MONTHS ENDED
JUNE 30, 2004 AND 2003. 2
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE SIX MONTHS ENDED
JUNE 30, 2004 AND 2003. 3
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2004 AND 2003. 4
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY FOR
THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003. 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS,
AND ISSUER PURCHASES OF EQUITY SECURITIES 31
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 32
SIGNATURES 37
- i -
ITEM 1. PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
- ----------------------------------------------------------
(000's, except share data) June 30, December 31,
2004 2003
---------- ----------
ASSETS
Cash and due from banks $ 63,720 $ 57,451
Federal funds sold 33,000 10,000
---------- ----------
Cash and cash equivalents 96,720 67,451
Interest bearing deposits in other banks 318 25
Securities:
Available for sale (at estimated fair value) 1,045,777 1,081,380
Held to maturity (estimated fair value of
$222,130 in 2004 and $240,752 in 2003) 227,410 237,998
Loans, net of allowance for loan losses of
$15,154 in 2004 and $14,757 in 2003 1,493,283 1,433,923
Premises and equipment, net 16,121 15,353
Accrued interest receivable 17,287 15,721
Federal Home Loan Bank of New York stock 42,528 30,594
Other assets 35,994 24,017
---------- ----------
TOTAL ASSETS $2,975,438 $2,906,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 320,931 $ 296,133
Interest bearing deposits:
NOW accounts 172,277 133,382
Money market accounts 234,366 195,510
Savings deposits 415,860 436,561
Time deposits 733,819 713,463
---------- ----------
Total deposits 1,877,253 1,775,049
Accrued interest payable 6,231 6,599
Accrued expenses and other liabilities 12,820 10,416
Securities transactions not yet settled 5,000 924
Securities sold under agreements to repurchase 757,282 788,632
Federal Home Loan Bank of New York advances 93,553 104,873
Subordinated debt issued in connection with Corporation-Obligated
mandatory redeemable capital securities of subsidiary trusts 61,858 51,548
---------- ----------
Total liabilities 2,813,997 2,738,041
Minority interest-junior preferred stock of consolidated subsidiary 128 128
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, no par value
Authorized shares: 10,000,000; no shares outstanding in 2004 and 2003 -- --
Common stock, $0.01 par value; authorized shares 50,000,000;
Issued shares of 20,954,755 in 2004 and 20,924,504 in 2003 210 209
Additional paid-in capital 160,243 159,628
Retained earnings 41,756 31,655
Treasury stock, at cost; common shares 1,572,068 in 2004 and
1,436,714 in 2003 (22,566) (18,225)
Common stock held for benefit plans (2,498) (2,491)
Deferred compensation obligation 2,399 2,327
Accumulated other comprehensive loss (18,231) (4,810)
---------- ----------
Total stockholders' equity 161,313 168,293
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,975,438 $2,906,462
========== ==========
See notes to condensed consolidated financial statements.
1
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
June 30,
2004 2003
------- -------
INTEREST INCOME: (000's, except share data)
Interest and fees on loans $22,118 $21,753
Interest on federal funds sold 63 216
Interest and dividends on securities:
U.S. government agencies 9,687 5,440
Mortgage-backed securities 3,062 3,911
Obligations of states and political subdivisions 918 832
Corporate and other 31 1
Dividends on Federal Home Loan Bank of New York stock 141 396
------- -------
Total interest income 36,020 32,549
------- -------
INTEREST EXPENSE:
Interest on deposits 5,929 6,120
Interest on borrowings 7,295 6,590
Interest on subordinated debt issued in connection with/and
Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 979 845
------- -------
Total interest expense 14,203 13,555
------- -------
NET INTEREST INCOME 21,817 18,994
Provision for credit losses 343 1,333
------- -------
Net interest income after provision for credit losses 21,474 17,661
------- -------
NON-INTEREST INCOME:
Service charges and fees 1,072 922
Other income 955 942
Gains on securities transactions 85 5,351
------- -------
Total non-interest income 2,112 7,215
------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 7,733 6,856
Occupancy and equipment 1,941 1,726
Advertising and business development 808 770
Professional fees 458 377
Communications 320 298
Stationery and printing 181 207
FDIC insurance 74 68
Amortization of intangibles 279 254
Other expense 1,031 1,010
------- -------
Total non-interest expenses 12,825 11,566
------- -------
Income before income taxes 10,761 13,310
Provision for income taxes 3,724 4,620
------- -------
NET INCOME $ 7,037 $ 8,690
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.45
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.35 $ 0.43
======= =======
See notes to condensed consolidated financial statements.
2
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
Six Months Ended
June 30,
2004 2003
--------- --------
(000's, except share data)
INTEREST INCOME:
Interest and fees on loans $ 43,648 $ 43,124
Interest on federal funds sold 148 358
Interest and dividends on securities:
U.S. Treasury and government agencies 18,367 8,777
Mortgage-backed securities 6,030 9,255
Obligations of states and political subdivisions 1,771 1,669
Corporate and other 60 2
Interest on deposits in other banks -- 1
Dividends on Federal Home Loan Bank of New York stock 252 718
--------- --------
Total interest income 70,276 63,904
--------- --------
INTEREST EXPENSE:
Interest on deposits 11,976 11,994
Interest on borrowings 14,303 12,893
Interest on subordinated debt issued in connection with/and
Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 1,863 1,729
--------- --------
Total interest expense 28,142 26,616
--------- --------
NET INTEREST INCOME 42,134 37,288
Provision for credit losses 554 1,672
--------- --------
Net interest income after provision for credit losses 41,580 35,616
--------- --------
NON-INTEREST INCOME:
Service charges and fees 2,168 1,840
Other income 1,675 1,721
Gains on securities transactions 1,197 8,383
--------- --------
Total non-interest income 5,040 11,944
--------- --------
NON-INTEREST EXPENSES:
Salaries and employee benefits 15,017 13,323
Occupancy and equipment 3,814 3,410
Advertising and business development 1,479 1,334
Professional fees 864 715
Communications 680 609
Stationery and printing 384 384
FDIC insurance 150 141
Amortization of intangibles 545 508
Other expense 1,895 1,964
--------- --------
Total non-interest expenses 24,828 22,388
--------- --------
Income before income taxes 21,792 25,172
Provision for income taxes 7,398 8,862
--------- --------
NET INCOME $ 14,394 $ 16,310
========= ========
BASIC EARNINGS PER COMMON SHARE $ 0.74 $ 0.84
========= ========
DILUTED EARNINGS PER COMMON SHARE $ 0.71 $ 0.82
========= ========
See notes to condensed consolidated financial statements.
3
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
Six Months Ended
June 30,
2004 2003
-------- --------
OPERATING ACTIVITIES: (000's)
Net income $ 14,394 $ 16,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 554 1,672
Depreciation and amortization 1,672 1,528
Amortization of (discounts) premiums on securities - net (146) 673
Deferred income tax benefit - net (2,005) (2,360)
Gains on securities transactions (1,197) (8,383)
Non-cash benefit plan expense 250 206
Increase in accrued interest receivable (1,523) (948)
(Decrease) increase in accrued interest payable (388) 29
Other - net 1,375 2,183
-------- --------
Net cash provided by operating activities 12,986 10,910
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 105,418 423,073
Proceeds from principal paydowns, redemptions and maturities of:
Securities available for sale 235,427 185,838
Securities held to maturity 29,460 123,449
Purchases of securities available for sale (323,901) (780,043)
Purchases of securities held to maturity (14,707) (6,999)
Net purchases of Federal Home Loan Bank of New York stock (11,934) (5,664)
Net liabilities assumed in Reliance Bank acquisition 10,697 --
Net increase in interest bearing deposits in other banks (268) 2
Increase in loans outstanding, net (49,027) (58,369)
Purchases of premises and equipment - net (1,820) (2,485)
-------- --------
Net cash used for investing activities (20,655) (121,198)
-------- --------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 71,194 100,909
Net increase in time deposits, net of withdrawals and maturities 7,097 60,025
Net (decrease) increase in securities sold under agreements
to repurchase - short-term (56,350) 122
Repayment of Federal Home Loan Bank of New York advances - short-term (10,500) --
Proceeds from securities sold under agreements to repurchase - long-term 75,000 115,000
Repayment of securities sold under agreements to repurchase - long-term (50,000) --
Repayment of Federal Home Loan Bank of New York
advances - long-term (820) (1,732)
Net proceeds from issuance of subordinated debt issued in connection with
Corporation-Obligated mandatory redeemable capital securities
of subsidiary trusts 9,975 --
Redemption of junior preferred stock of consolidated subsidiary, net -- 1
Cash dividends paid (4,293) (3,727)
Proceeds from exercise of common stock options 477 1,178
Purchases of treasury stock (4,842) (3,650)
-------- --------
Net cash provided by financing activities $ 36,938 $268,126
-------- --------
(Continued)
4
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (cont'd)
- ----------------------------------------------------------------------
Six Months Ended
June 30,
2004 2003
-----------------------------
(000's)
Increase in Cash and Cash Equivalents $ 29,269 $ 157,838
Cash and Cash Equivalents, Beginning of Period 67,451 90,801
--------- ---------
Cash and Cash Equivalents, End of Period $ 96,720 $ 248,639
========= =========
Supplemental Disclosures:
Interest paid $ (28,530) $ (26,587)
--------- ---------
Income tax payments $ (11,011) $ (10,729)
--------- ---------
Purchases of held to maturity securities not yet settled $ 5,000 $ --
--------- ---------
Purchase of available for sale securities not yet settled,
including interest receivable $ -- $ 157,240
--------- ---------
Payment for available for sale securities not yet settled at beginning
of period, including interest receivable $ -- $(263,090)
--------- ---------
Payment for held to maturity securities not yet settled at beginning
of period, including interest receivable $ (924) $ --
--------- ---------
Transfer of available for sale securities to held to maturity securities $ -- $ 46,941
--------- ---------
Loans acquired in acquisition of Reliance Bank, including
interest receivable $ 10,869 $ --
--------- ---------
Deposits assumed in acquisition of Reliance Bank, including
interest payable $ 23,933 $ --
--------- ---------
Other assets (including intangibles) acquired in acquisition of
Reliance Bank, net of other liabilities assumed $ 2,367 $ --
--------- ---------
Change in shares held in trust for deferred compensation $ (72) $ (375)
--------- ---------
Change in deferred compensation obligation $ 72 $ 375
--------- ---------
Change in accumulated other comprehensive loss $ (13,421) $ (112)
--------- ---------
Non cash exercise of stock options and related tax benefit $ 2,119 $ 1,332
--------- ---------
Purchases of treasury stock related to the exercise of stock options $ (1,599) $ (873)
--------- ---------
Issuance of treasury stock related to the exercise of stock options $ 2,100 $ 2,442
========= =========
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 SIX MONTHS ENDED JUNE 30, 2004
(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, 2004 19,487,790 $ 209 $ 159,628 $ 31,655 $ (18,225) $ (2,491)
Net income 14,394
Other comprehensive loss:
Net unrealized securities
loss arising during the
period, net of taxes of $9,405
Reclassification adjustment
of net loss for securities
sold, net of taxes of $130
Other comprehensive loss
Total comprehensive income
Cash dividends:
Common ($0.22 per share) (4,283)
Junior preferred stock (10)
Common stock options exercised
and related tax benefit 194,668 1 497 2,100
Purchases of treasury stock (299,771) (6,441)
ESOP shares committed to
be released 118 65
Deferred compensation obligation (72)
---------- ------ -------- -------- --------- --------
Balance at June 30, 2004 19,382,687 $ 210 $160,243 $ 41,756 $ (22,566) $ (2,498)
========== ====== ======== ======== ========= ========
Accumulated
Deferred Other Total
Compensation Comprehensive Stockholders'
Obligation Loss Equity
------------ ------------- -------------
Balance at January 1, 2004 $ 2,327 $ (4,810) $168,293
Net income 14,394
Other comprehensive loss:
Net unrealized securities
loss arising during the
period, net of taxes of $9,405
Reclassification adjustment (13,608) (13,608)
of net loss for securities
sold, net of taxes of $130 187 187
Other comprehensive loss (13,421) (13,421)
Total comprehensive income 973
Cash dividends:
Common ($0.22 per share) (4,283)
Junior preferred stock (10)
Common stock options exercised
and related tax benefit 2,598
Purchases of treasury stock (6,441)
ESOP shares committed to
be released 183
Deferred compensation obligation 72 --
------- -------- --------
Balance at June 30, 2004 $ 2,399 $(18,231) $161,313
======= ======== ========
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 SIX MONTHS ENDED JUNE 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 16,310
Other comprehensive loss:
Net unrealized securities
gains arising during the
period, net of taxes of $1,729
Reclassification adjustment
of net gains for securities
sold, net of taxes of $1,807
Other comprehensive loss
Total comprehensive income
Cash dividends:
Common ($0.19 per share) (3,717)
Junior Preferred stock (10)
Common stock options exercised 287,456 1 67 2,442
and related tax benefit
Purchases of treasury stock (278,691) (4,523)
ESOP shares committed to
be released 76 65
Deferred compensation obligation (375)
---------- ----- --------- -------- --------- ---------
Balance at June 30, 2003 18,510,345 $ 199 $ 140,197 $ 41,231 $ (17,858) $ (2,001)
========== ===== ========= ======== ========= =========
Accumulated
Deferred Other Total
Compensation Comprehensive Stockholders'
Obligation Income (Loss) Equity
------------- ------------- --------------
Balance at January 1, 2003 $ 1,398 $ 3,181 $156,011
Net income 16,310
Other comprehensive loss:
Net unrealized securities
gains arising during the
period, net of taxes of $1,729 2,502 2,502
Reclassification adjustment
of net gains for securities
sold, net of taxes of $1,807 (2,614) (2,614)
------ ------
Other comprehensive loss (112) (112)
------
Total comprehensive income 16,198
Cash dividends:
Common ($0.19 per share) (3,717)
Junior Preferred stock (10)
Common stock options exercised 2,510
and related tax benefit
Purchases of treasury stock (4,523)
ESOP shares committed to
be released 141
Deferred compensation obligation 375 --
---------- ---------- --------
Balance at June 30, 2003 $ 1,773 $ 3,069 $166,610
========== ========== ========
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, and USB Delaware
Inc. (since the date of its incorporation September 12, 2003), including its
wholly-owned subsidiary, TPNZ Preferred Funding Corporation ("TPNZ"), and Ad
Con, Inc. As of and for the three and six months ended June 30, 2004, the
condensed consolidated financial statements also include the Company's
subsidiary Trusts, Union State Capital Trust I, Union State Statutory Trust
II, and USB Statutory Trust III, (collectively, including Union State
Statutory Trust IV, which issued Capital Securities in March 2004 (see Note
10), the "Trusts"). As required by the Financial Accounting Standard Board's
revision of Interpretation No. 46, "Consolidation of Variable Interest
Entities, ("FIN 46R"), the Company has deconsolidated the Trusts and
recorded subordinated debt issued to the Trusts and the Company's investment
in the common equity of the Trusts as of December 31, 2003. All significant
intercompany accounts and transactions are eliminated in consolidation.
2. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (comprised of
normal and recurring accruals) necessary to present fairly the financial
position of the Company as of June 30, 2004, and its operations for the
three and six months ended June 30, 2004 and 2003, and its cash flows and
changes in stockholders' equity for the six months ended June 30, 2004 and
2003. For purposes of presenting the condensed consolidated financial
statements of cash flows, cash and cash equivalents include cash and due
from banks and federal funds sold.
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. 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 2003 Annual Report to Stockholders. 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, provision for credit
losses, and valuation allowance for net deferred tax assets. In connection
with the determination of estimates related to real estate loans, management
obtains independent appraisals for significant properties that collateralize
loans with real estate.
8
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
3. Reclassifications
Certain reclassifications have been made to prior period accounts to conform
to the current period's presentation.
4. Pending Accounting Pronouncements
Emerging Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of
Other-Than- Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"), provides application guidance that should be used to
determine when an investment is considered impaired, whether that impairment
is other than temporary, and the measurement of an impairment loss. The
guidance also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The recognition and measurement guidance
of EITF 03-1 should be applied to other-than-temporary impairment
evaluations in reporting periods beginning after June 15, 2004. Management
does not believe that adoption of the recognition and measurement guidance
of EITF 03-1 will have an effect on the Company's consolidated financial
statements given management's positive intent and ability to hold such
investments until a forecasted recovery or maturity occurs.
5. Acquisition of Reliance Bank
As of the close of business on March 19, 2004, the Bank assumed
approximately $23.9 million in deposits and acquired approximately $10.5
million of single family residential mortgage loans, $10.7 million of cash
and cash equivalents, $2.2 million of other assets, and $0.3 million in
other loans in connection with the acquisition of Reliance Bank. The premium
paid for the deposits assumed was $2.2 million, or 9.4 percent, and $0.2
million, or 1.6 percent, for the single family residential loans acquired.
Reliance Bank was closed by the New York Superintendent of Banks, which
appointed the FDIC as Receiver. Reliance Bank, which operated as a one
branch bank at 1200 Mamaroneck Avenue, White Plains, New York became a Union
State Bank branch effective immediately after its closing.
The assumption of deposits and acquisition of certain assets of Reliance
Bank has been accounted for as a business combination in accordance with
Statement of Financial Accounting Standards (SFAS") No.141, "Accounting for
Business Combinations." Assets, time deposits, and other liabilities
acquired have been recorded at their estimated fair values as of March 19,
2004, and a core deposit intangible of $0.7 million was recorded based on a
core deposit valuation study. Goodwill of $1.5 million was also recorded.
Both the core deposit intangible and goodwill are classified in other assets
on the balance sheet. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," the core deposit intangible will be amortized over an
estimated average life of six years and the goodwill component will be
tested annually at year end. The results of Reliance Bank operations related
to the assets acquired and deposits assumed are included in the Company's
statements of income from the date of its acquisition. Pro forma information
as if the transaction occurred at the beginning of the period is not
material.
9
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
6. 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 Accounting Principles Board ("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, 2003, included in the 2003 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
Opinion 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 prescribed 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 six months ended June 30, 2004 and 2003. 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 Six
Months Ended Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------
(000's, except share data)
Net income, as reported $7,037 $8,690 $14,394 $16,310
Less: preferred stock dividends
10 10 10 10
Less: total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects 805 521 951 586
- ----------------------------------------------------------------------------------------------------
Pro forma net income available to
common stockholders $6,222 $8,159 $13,433 $15,714
====================================================================================================
Earnings per common share:
Basic - as reported $ 0.36 $ 0.45 $ 0.74 $ 0.84
Basic - pro forma 0.32 0.42 0.69 0.81
Diluted - as reported $ 0.35 $ 0.43 $ 0.71 $ 0.82
Diluted - pro forma 0.31 0.41 0.66 0.79
====================================================================================================
The following weighted average assumptions were used for Director Plan
grants for the three and six months ended June 30, 2004 and 2003,
respectively: dividend yields of 2.16 and 2.52 percent; volatility factors
of the expected market price of the Company's common stock of 40.25 and
41.33 percent; risk free interest rates of 3.34 and 2.47 percent; and
expected lives of 7.63 and 7.62 years. The following weighted average
assumptions were used for Employee Plan grants for the three and six months
ended June 30, 2004 and 2003, respectively: dividend yields of 2.00 and 2.52
percent; volatility factors of the expected market price of the Company's
common stock of 39.77 and 41.63 percent; risk-free interest rates of 3.60
and 3.08 percent; and expected lives of 8.50 and 8.97 years.
7. Earnings Per Common Share ("EPS")
The computation of basic and diluted earnings per common share for the three
and six months ended June 30 is as follows:
11
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Numerator: (000's, except share data)
Net income $ 7,037 $ 8,690 $ 14,394 $ 16,310
Less preferred stock dividends 10 10 10 10
----------- ----------- ----------- -----------
Net income for basic and diluted
earnings per common share - net
income available to common
stockholders $ 7,027 $ 8,680 $ 14,384 $ 16,300
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings
per common share - weighted
average shares 19,447,405 19,490,777 19,475,867 19,507,951
Effects of dilutive securities:
Director and employee
stock options 836,941 466,997 862,740 452,522
----------- ----------- ----------- -----------
Total effects of dilutive securities 836,941 466,997 862,740 452,522
----------- ----------- ----------- -----------
Denominator for diluted earnings
per common share - adjusted
weighted average shares 20,284,346 19,957,774 20,338,607 19,960,473
=========== =========== =========== ===========
Basic earnings per common share $ 0.36 $ 0.45 $ 0.74 $ 0.84
=========== =========== =========== ===========
Diluted earnings per common share $ 0.35 $ 0.43 $ 0.71 $ 0.82
=========== =========== =========== ===========
8. Securities
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company's investment policies include a
determination of the appropriate classification of securities at the time of
purchase. Securities that may be sold as part of the Company's
asset/liability or liquidity management, or in response to or in
anticipation of changes in interest rates and resulting prepayment risk, or
for similar factors, are classified as available for sale. Securities that
the Company has the ability and 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 loss.
The decision to sell securities available for sale is based on management's
assessment of changes in economic or financial market conditions, interest
rate risk, and the Company's financial position and liquidity. Estimated
fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, estimated fair values
are based on quoted market prices of similar instruments. Securities in an
unrealized loss position are periodically evaluated for other than temporary
impairment. Management considers the effect of interest rates, credit
ratings and other factors on the valuation of such securities, as well as
the Company's intent and ability to hold such securities until a forecasted
recovery or maturity occurs. The Company does not acquire securities for the
purpose of engaging in trading activities.
12
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
During the three and six month periods ended June 30, 2004 and 2003, the
Company had gross realized gains from sales of securities available for sale
of $85,000 and $5,351,000, and $1,197,000, and $8,383,000 respectively.
A summary of the amortized cost, estimated fair values, and related gross
unrealized gains and losses of securities at June 30, 2004 and December 31,
2003 is as follows:
- -----------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2004: Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for Sale: (000's)
U.S. government agencies $ 657,559 $ 174 $ 23,662 $ 634,071
Mortgage-backed securities 415,228 3,586 8,225 410,589
Obligations of states and
political subdivisions 920 61 -- 981
Corporate securities 116 20 -- 136
---------- ---------- ---------- ----------
Total securities available for sale $1,073,823 $ 3,841 $ 31,887 $1,045,777
========== ========== ========== ==========
Held to Maturity:
U.S. government agencies $ 144,849 $ -- $ 6,462 $ 138,387
Obligations of states and
political subdivisions 82,561 2,449 1,267 83,743
---------- ---------- ---------- ----------
Total securities held to maturity $ 227,410 $ 2,449 $ 7,729 $ 222,130
========== ========== ========== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2003: Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for Sale: (000's)
U.S. government agencies $ 637,582 $ 30 $ 6,034 $ 631,578
Mortgage-backed securities 450,381 1,000 3,295 448,086
Obligations of states and
political subdivisions 1,400 84 -- 1,484
Corporate securities 152 81 1 232
---------- ---------- ---------- ----------
Total securities available for sale $1,089,515 $ 1,195 $ 9,330 $1,081,380
========== ========== ========== ==========
Held to Maturity:
U.S. government agencies $ 164,821 $ 748 $ 1,733 $ 163,836
Obligations of states and
political subdivisions 73,177 4,118 379 76,916
---------- ---------- ---------- ----------
Total securities held to maturity $ 237,998 $ 4,866 $ 2,112 $ 240,752
========== ========== ========== ==========
As of July 16, 2004, the Company transferred at fair value available for
sale U.S. government agency securities with an amortized cost basis and fair
value of approximately $307.6 million and $298.2 million, respectively, to
held to maturity. The U.S. government agency securities had an unrealized
loss of $9.4 million, $6.2 million net of tax, which will be included as an
adjustment to other comprehensive income (loss) and accreted over the
remaining life of the securities transferred to other comprehensive income
(loss). Management does not intend to sell these securities prior to
maturity or call date.
13
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
9. Loans
Nonaccrual loans were $4.0 million at June 30, 2004 and $6.1 million at
December 31, 2003. Restructured loans were $0.1 million at both June 30,
2004 and December 31, 2003, respectively.
Substantially all of the nonaccruing and restructured loans are
collateralized by real estate. The Company has agreed to provide additional
funding of up to $0.3 million with respect to a nonaccruing real estate
construction loan in the amount of $3.7 million at June 30, 2004 (see
discussion below). The Company had and continues to have no other
commitments to lend additional funds to any customers with nonaccrual or
restructured loan balances.
At June 30, 2004, there are loans aggregating approximately $0.2 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 June 30,
2004 are immaterial.
At June 30, 2004 and December 31, 2003, the recorded investment in loans
that are considered to be impaired approximated $4.1 million and $5.6
million, of which $4.0 million and $5.5 million were in nonaccrual status,
respectively. The average recorded investment in impaired loans for the six
months ended June 30, 2004 and 2003, and for the year ended December 31,
2003 was $5.1 million, $11.2 million, and $9.1 million, respectively.
Interest income recognized by the Company on impaired loans for the June 30,
2004 and 2003 three and six month periods was not material.
As applicable, each impaired loan has a related allowance for loan losses.
The total allowance for loan losses specifically allocated to one impaired
real estate construction loan with balances of $3.7 million, $5.5 million,
and $7.5 million was $0.3 million, $0.2 million, and $1.7 million as of June
30, 2004, December 31, 2003, and June 30, 2003, respectively.
In November 2000, the Company reclassified the real estate construction loan
referred to above in the amount at that date of $19.7 million as a
non-performing asset and placed the loan on nonaccrual status. At December
31, 2003, the recorded loan balance was $5.5 million, and the specific
allocation of the allowance for loan losses was $0.2 million. At June 30,
2004, the recorded loan balance was $3.7 million with a $0.3 million
specific allocation of the allowance for loan losses. The recorded loan
balance was reduced during the six month 2004 period by principal payments
and a charge-off of $0.2 million. The loan is collateralized by a mortgage
on certain condominium units and other real estate collateral. As of July
28, 2004, of the original 83 units, one unit remains unsold and is currently
in contract for sale. The Bank continues to proceed with foreclosure of its
$2.9 million mortgage on other real estate that also collateralizes the
loan, and to pursue its claim against the borrower and guarantors for any
deficiency. The guarantors have filed counter claims in this case, which the
Bank will vigorously defend. The court proceedings of the case have
commenced as of July 12, 2004.
14
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
10. Borrowings and Stockholders' Equity
The Company utilizes short-term and long-term borrowings primarily to meet
funding requirements for its asset growth, balance sheet leverage, and to
manage its interest rate risk.
Short-term borrowings include securities sold under agreements to
repurchase, federal funds purchased, and short-term Federal Home Loan Bank
of New York ("FHLB") advances. Short-term securities sold under agreements
to repurchase generally mature between one and 365 days. The Bank has
borrowing availability under master security sale and repurchase agreements
through four primary investment firms, the FHLB, and to a lesser extent, its
customers. At June 30, 2004, the Bank had short-term repurchase agreements
outstanding with the FHLB of $225.0 million at a weighted average interest
rate of 1.20 percent. These short-term borrowings with the FHLB were
collateralized by securities with an aggregate carrying value and estimated
fair value of $247.1 million. There were no short-term repurchase agreements
with the FHLB at December 31, 2003.
There were no short-term repurchase agreements outstanding with primary
investment firms at June 30, 2004. At December 31, 2003, outstanding
short-term repurchase agreements with primary investment firms totaled
$280.0 million at a weighted average interest rate of 1.16 percent and were
collateralized by securities having an aggregate carrying value of $300.3
million and estimated fair value of $300.0 million. At both June 30, 2004
and December 31, 2003, the Bank had short-term repurchase agreements with
customers of $0.3 million and $1.6 million at a weighted average interest
rate of 1.06 percent and 1.18 percent, respectively. These short-term
customer borrowings were collateralized by securities with an aggregate
carrying value and estimated fair value of $0.3 million and $1.2 million at
June 30, 2004 and December 31, 2003, 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 June 30, 2004 and December 31, 2003, the Bank had no
federal funds purchased balances outstanding.
Short-term FHLB advances are borrowings with original maturities between one
and 365 days. There were no short-term FHLB advances outstanding at June 30,
2004. At December 31, 2003, outstanding short-term FHLB advances totaled
$10.5 million at a weighted average interest rate of 1.06 percent and were
collateralized by a pledge to the FHLB of a security interest in certain
mortgage-related assets having an aggregate book value of $12.2 million,
respectively.
Additional information with respect to short-term borrowings as of and for
the six months ended June 30, 2004 and 2003 is presented in the table below.
15
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
----------------------------------------------------------------------------
Short-Term Borrowings 2004 2003
----------------------------------------------------------------------------
(000's except percentages)
Balance at June 30 $ 225,282 $ 1,327
Average balance outstanding $ 168,502 7,562
Weighted-average interest rate
As of June 30 1.20% 0.80%
Paid during period 1.12% 1.25%
----------------------------------------------------------------------------
The Bank had long-term borrowings, which have original maturities of over
one year, of $532.0 million and $507.0 million in securities sold under
agreements to repurchase at June 30, 2004 and December 31, 2003. At both
June 30, 2004 and December 31, 2003, these borrowings have an original term
of between five and ten years at interest rates of 1.94 percent to 6.08
percent that are callable on certain dates after an initial noncall period
at the option of the counterparty to the repurchase agreements. As of June
30, 2004 and December 31, 2003, these borrowings are collateralized by
securities with an aggregate carrying value of $538.1 million and $531.6
million, and an estimated fair value of $532.3 million and $531.1 million,
respectively.
At June 30, 2004 and December 31, 2003, long-term FHLB advances totaled
$93.5 million and $94.4 million, respectively, at interest rates of between
4.27 percent to 6.05 percent. At June 30, 2004, borrowings totaling $3.5
million are amortizing advances having scheduled payments and $20.0 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.
Advances at December 31, 2003 include $4.4 million of amortizing advances
having scheduled periodic payments, $20.0 million that are payable at
maturity, and $70.0 million that are callable on certain dates after an
initial noncall period at the option of the insurer. The long-term FHLB
advances may not be repaid in full prior to maturity without penalty. At
June 30, 2004 and December 31, 2003, 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 $109.7 million and $109.9
million, respectively.
A summary of long-term, fixed-rate borrowings distributed based upon
remaining contractual payment date and expected option call date at June 30,
2004, with comparative totals for December 31, 2003, is as follows:
- -------------------------------------------------------------------------------------------------------------------------
After 1
Within But Within After 2004 2003
Long-Term Borrowings 1 Year 5 Years 5 Years Total Total
- -------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
Contractual Payment Date:
Total long-term borrowing $ 11,717 $ 145,079 $ 468,757 $ 625,553 $ 601,374
Weighted-average interest rate 4.53% 5.13% 3.99% 4.26% 4.21%
- --------------------------------------------------------------------------------------------------------------------------
16
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
After 1
Within But Within After 2004 2003
Long-Term Borrowings 1 Year 5 Years 5 Years Total Total
- -------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
Expected Call Date:
Total long-term borrowing $ 11,717 $ 321,079 $ 292,757 $ 625,553 $ 601,374
Weighted-average interest rate 4.53% 3.91% 4.65% 4.27% 4.21%
- -------------------------------------------------------------------------------------------------------------------------
At June 30, 2004 and December 31, 2003 the Bank held 425,277 shares and
305,937 shares of capital stock of the FHLB with a carrying value of $42.5
million and $30.6 million, respectively, which is required in order to
borrow under the short- and long-term advance and securities sold under
agreements to repurchase programs from the FHLB. The FHLB generally limits
borrowings up to an aggregate of 30 percent of total assets, or for
collateral pledged by TPNZ, 75 percent of net equity, 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 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 June 30, 2004, the Bank could
pay dividends of $55.4 million to the Company without having to obtain prior
regulatory approval.
The Company distributed a 5 percent common stock dividend on September 26,
2003 to stockholders of record on September 12, 2003. The weighted average
common shares outstanding and per common share amounts have been adjusted to
reflect all common stock dividends.
On December 17, 2003, the Company's Board of Directors authorized the
repurchase of up to 300,000 common shares, or approximately 1.5 percent, of
the Company's outstanding common stock at that date. Repurchases of common
stock are authorized to be made from time to time in open-market and private
transactions throughout 2004 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. The December 17,
2003 stock repurchase plan replaces the previous December 18, 2002
repurchase plan for up to 157,500 common shares. For the six months ended
June 30, 2004, the Company purchased 223,200 shares of common stock under
its repurchase plan at an aggregate cost of approximately $4.8 million. The
Company purchased 231,945 shares of common stock under its repurchase plan
at an aggregate cost of approximately $3.6 million for the six months ended
June 30, 2003. Purchases of common stock of 76,571 and 60,681 common shares
were acquired in connection with stock option exercises during the six month
period ended June 30, 2004 and 2003, respectively.
17
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
11. Subordinated Debt Issued in Connection with Corporation-Obligated Mandatory
Redeemable Capital Securities of Subsidiary Trusts
On March 25, 2004, the Company completed its fourth issuance of junior
subordinated debt in connection with the issuance of Capital Securities
totaling $10.3 million that raised $10.0 million of regulatory capital
($9,975,000 net proceeds after issuance costs).
The Capital Securities and related subordinated debt issued in the 2004
first quarter pay dividends and interest on a floating rate basis at a rate
equal to three month LIBOR plus 280 basis points (current rate as of June
30, 2004 of 4.40 percent). Dividend and interest payments, as well as the
reset of the interest rate, occurs in June, October, January, and March of
each calendar year. These Capital Securities, due March 25, 2034, were
issued by Union State Statutory Trust IV ("Trust IV"), a Delaware business
trust that was formed by the Company solely to issue the Capital Securities
and related common stock. Trust IV advanced the proceeds to the Company by
purchasing junior subordinated debt of the Company. These Capital Securities
and related subordinated debt may not be redeemed, except under limited
circumstances, until March 2009, at par.
The total amount of Capital Securities outstanding as of June 30, 2004 is
$60 million. Such Capital Securities are included in Tier I regulatory
capital in an amount not in excess of 25 percent of Tier I Capital, with the
remainder included in Tier II Capital. At June 30, 2004, Tier I Capital
totaled $232.4 million, which included $59.9 million of Capital Securities.
As a result of the changes in accounting as described in Note 1, the Federal
Reserve Bank has reevaluated the regulatory implications of this accounting
change on the capital treatment of the Capital Securities and has issued a
proposal that will retain the Tier I Capital treatment of capital securities
with certain modifications.
12. 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 June 30, 2004, formal credit lines, and commercial
and residential loan commitments (including home equity commitments), both
of which are primarily loans collateralized by real estate, approximated
$406.4 million, $82.7 million and $20.2 million, respectively. Outstanding
letters of credit totaled $37.3 million. Such amounts represent the maximum
risk of loss on these commitments.
Standby letters of credit are issued to guarantee financial performance or
obligations of the Bank's customers. Generally, standby letters of credit
are either partially or fully collateralized by cash, real estate, or other
assets, and, in some cases, are not collateralized. In most cases, personal
guarantees are obtained. Standby letters of credit are considered in the
Bank's evaluation of its reserve for unfunded loan commitments.
The Company is party to employment agreements with the Company's Chief
Executive Officer, Senior Executive Vice President and Chief Credit Officer,
and Senior Executive Vice President and Chief Financial Officer, which is
described in Note 16 to the Company's 2003 Annual Report to Stockholders.
The contracts with the two Senior Executive Vice Presidents were renewed on
July 28, 2004, with substantially the same terms as the previous contracts.
18
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
Other commitments are also described in Note 16 to the consolidated
financial statements of the Company for the year ended December 31, 2003,
which is included in the Company's 2003 Annual Report to Stockholders.
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 statements.
13. Segment Information
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of the
Bank to fund itself with 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 six
months ended June 30, 2004 and 2003, 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 DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to June 30, 2004. 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; wartime events or terrorist activity and
the related impact on the credit quality of borrowers; 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 significant accounting policies are disclosed in Note 3 to the
consolidated financial statements included in the Company's 2003 Annual Report
to Stockholders. The more critical policies given the Company's current business
strategy and asset/liability structure are the accounting for non-performing
loans, the allowance for loan losses and provision for credit losses, the
classification of securities as either held to maturity or available for sale,
and the valuation allowance for net deferred tax assets. In addition to Note 3
to the 2003 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 2003 Annual Report to Stockholders.
FINANCIAL CONDITION
At June 30, 2004, the Company had total assets of $2,975.4 million, an increase
of $69.0 million from December 31, 2003. As of June 30, 2004, statements of
condition balances include cash and cash equivalents, loans, and deposits of
$10.7 million, $10.8 million and $23.9 million, respectively, acquired or
assumed in connection with the Reliance Bank acquisition on March 19, 2004 (see
Note 4 to the condensed consolidated financial statements (unaudited)) . This
acquisition is consistent with the Company's initiatives to expand its
commercial and retail customer base and further penetrate the Westchester County
market.
The securities portfolio, including investments in Federal Home Loan Bank of New
York ("FHLB") stock, totaled $1,315.7 million and $1,350.0 million at June 30,
2004 and December 31, 2003, respectively, a decrease of $34.3 million during the
six months ended June 30, 2004. The securities portfolio consists of securities
held to maturity at amortized cost of $227.4 million and $238.0 million,
securities available for sale at estimated fair value totaling $1,045.8 million
and $1,081.4 million, and FHLB stock of $42.5 million and $30.6 million at June
30, 2004 and December 31, 2003, respectively.
20
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
During the six months ended June 30, 2004, U.S. government agency securities
decreased $17.5 million due primarily to redemptions of $170.0 million of
callable bonds and a decrease in the estimated fair value of available for sale
securities of $17.5 million, partially offset by purchases totaling $169.8
million, and discount accretion of $0.2 million. Mortgage-backed securities
decreased by $37.5 million primarily due to principal paydowns of $84.9 million,
net premium amortizations of $0.1 million, sales of $104.2 million, and a
decrease in the estimated par value of available for sale securities of $2.3
million, partially offset by purchases of $154.1 million. The Bank's investment
in obligations of states and political subdivisions, or municipal securities,
increased by $8.9 million primarily due to purchases of $18.8 million during the
six month period ended June 30, 2004, partially offset by maturities of $9.9
million. Municipal securities are considered core investments having favorable
tax equivalent yields and diversified maturities. The obligations are
principally New York State political subdivisions with diversified maturities,
and substantially all are classified as held to maturity. 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. The Company had outstanding
balances in equity securities of $0.1 million and $0.2 million at June 30, 2004
and December 31, 2003, respectively. The total investment in FHLB stock was
$42.5 million and $30.6 million at June 30, 2004 and December 31, 2003,
respectively.
The Company continues to exercise its conservative approach to investing by
primarily purchasing high credit quality investments and controlling interest
rate risk by purchasing both fixed and floating rate securities through the
averaging of investments in medium-term maturities. Emphasis has been placed on
investing in floating rate securities and mortgage- backed securities with
favorable cash flow characteristics to maintain an asset sensitive position in
anticipation of an increase in interest rates, as well as investment in fixed
rate callable securities to enhance yield. At June 30, 2004, the weighted
average yield on a tax equivalent basis and weighted average life of the
investment portfolio was 4.24 percent and 8.9 years, respectively. The Company
will continue to utilize the investment portfolio to invest excess cash flow and
leverage capital, while managing interest rate risk.
At June 30, 2004, loans outstanding were $1,508.4 million, a net increase of
$59.8 million or 4.1 percent compared to December 31, 2003. The increase in
outstanding loan balances reflects increases of: $28.8 million in land,
acquisition, and construction loans; $14.1 million in residential mortgages;
$12.8 million in time unsecured loans; $10.4 million in home equity loans; $1.4
million in time secured loans; $0.1 million in credit card loans; and $0.7
million in other loans. The increase was partially offset by decreases of $8.1
million in commercial mortgages and $0.4 million in commercial installment
loans. The net increase in residential mortgages is substantially due to
residential mortgages of $10.5 million acquired from Reliance Bank. The Company
had approximately $406.4 million in formal credit lines, $102.9 million in loan
commitments outstanding, which are loans primarily collateralized by real
estate, and $37.3 million of 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.
21
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The Company's allowance for loan losses increased $0.4 million, or 2.7 percent,
to $15.2 million at June 30, 2004, from $14.8 million at December 31, 2003. The
allowance for loan losses represents 1.00 percent and 1.02 percent of gross
loans outstanding at June 30, 2004 and December 31, 2003, respectively. The
allowance reflects a provision of $0.6 million and net charge-offs of $135,000
recorded for the six months ended June 30, 2004. In addition to the allowance
for loan losses, a reserve for credit losses related to unfunded loan
commitments of $0.6 million at June 30, 2004 and $0.5 million at December 31,
2003, is included in other liabilities.
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 judgement, the allowance for loan losses and reserve for unfunded
loan commitments appropriately reflect the risk elements in the total loan
portfolio at June 30, 2004. There is no assurance that the Company will not be
required to make future adjustments to the allowance for loan losses and reserve
for unfunded loan commitments in response to changing economic conditions or
regulatory examinations.
Total deposits increased $102.2 million, or 5.8 percent, for the six month
period ended June 30, 2004 to $1,877.3 million from $1,775.0 at December 31,
2003. The total deposit increase resulted from net increases in municipal
deposits of $36.7 million, retail and commercial deposits of $40.5 million, and
brokered deposits of $25.0 million. The retail and commercial deposit increase
includes $23.9 million assumed as part of the Reliance Bank acquisition.
As of June 30, 2004, municipal money market, NOW, demand, and savings deposits
increased $31.6 million, $20.0 million, $0.9 million, and $0.9 million,
respectively, as compared to December 31, 2003. The increases reflect higher
deposit levels and a greater number of municipal customers. The increase in
total municipal deposits was partially offset by a decrease in municipal time
deposits of $16.7 million at June 30, 2004, compared to December 31, 2003. The
decrease was due to municipalities' decision to place funds in short-term liquid
accounts at competitive rates.
The increase in retail, commercial, and brokered deposits at June 30, 2004 was
due to increases in time, demand, NOW, and money market deposits of $37.0
million, $23.9 million, $18.9 million, and $7.3 million, respectively, compared
to December 31, 2003. The increase was partially offset by a decrease in retail
and commercial savings deposits of $21.6 million, as compared to December 31,
2003. The increase in retail and commercial time deposits at June 30, 2004
includes increases in IRA and KEOGH deposits of $4.3 million, and decreases in
time deposits under and over $100,000 of $2.0 million and $3.5 million,
respectively, compared to December 31, 2003. The increase in retail and
commercial time deposits was due to $13.2 million assumed from Reliance Bank and
the acquisition of medium-term brokered deposits of $25.0 million, which was a
result of securing longer-term funds, partially offset by customers moving
deposits to short-term liquid accounts to better react to a rising interest rate
environment. Retail and commercial demand, NOW, and money market deposits also
increased from the Bank expanding and adding relationships in its existing and
contiguous markets, as well as from the assumption of $4.9 million in retail and
commercial demand deposits from Reliance Bank. Retail and commercial savings
deposits decreased due to customers seeking more competitive products as a
result of lower yields offered during this period of low interest rates,
partially offset by $5.8 million of savings deposits assumed from Reliance Bank.
22
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
During the six months ended June 30, 2004, the Bank decreased its net borrowings
$42.7 million. The borrowings were primarily used to provide funding for the
securities portfolio, including investment in FHLB stock, which decreased $34.3
million during the six months ended June 30, 2004 due to security maturities,
principal payments, and sales. Short-term borrowings provide management with the
ability to react to changes in levels of earning assets. Management will
continue to evaluate the interest rate environment in order to determine the
most effective combination of borrowings and deposits.
Stockholders' equity decreased to $161.3 million at June 30, 2004 from the
December 31, 2003 balance of $168.3 million, a decrease of 4.1 percent. The
decrease primarily results from: common stock dividends paid of $4.3 million,
treasury stock transactions of $6.4 million; and a decrease in other
comprehensive income of $13.4 million; partially offset by $14.4 million of net
income for the six month period ended June 30, 2004; $2.6 million of stock
options exercised; and $0.2 million of shares committed to be released under
benefit plans.
The Company's leverage ratio at June 30, 2004 was 7.89 percent, compared to 7.54
percent at December 31, 2003. The Company's Tier I and total capital ratios
under the risk-based capital guidelines were 13.25 percent and 14.15 percent at
June 30, 2004, and 12.80 percent and 13.70 percent at December 31, 2003,
respectively. In addition, the Bank exceeds all current regulatory capital
requirements and was in the "well-capitalized" category at June 30, 2004 and
December 31, 2003. The increase in the Company's capital ratios are due to the
increase in stockholder's equity, excluding accumulated other comprehensive
loss, for the six months ended June 30, 2004, as well as the issuance of $10
million of capital securities (see Note 10 to the condensed consolidated
financial statements (unaudited)).
RESULTS OF OPERATIONS
Earnings
Net income for the six months ended June 30, 2004 was $14.4 million compared to
$16.3 million for the six months ended June 30, 2003, a decrease of 11.7
percent. The decrease in net income results from a significant decline of $7.2
million in security gains compared to the prior year period. Diluted earnings
per common share were $0.71 for the six months ended June 30, 2004 compared to
$0.82 per common share in the prior year period, a decrease of 13.4 percent. The
Company's net income for the six months ended June 30, 2004 resulted in a 16.92
percent return on average common stockholders' equity and a 0.99 percent return
on average total assets as compared to 20.27 percent and 1.29 percent,
respectively, for the six months ended June 30, 2003.
23
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
For the three months ended June 30, 2004, net income was $7.0 million compared
to $8.7 million for the three months ended June 30, 2003, a decrease of 19.0
percent. The decrease in net income for the quarter reflects a significant
decline of $5.3 million in security gains, as compared to the prior year.
Diluted earnings per common share for the quarter ended June 30, 2004 was $0.35
compared to $0.43 in the 2003 period, a decrease of 18.6 percent. The Company's
second quarter 2004 net income resulted in a 16.70 percent return on average
common stockholders' equity and a 0.95 percent return on average total assets,
as compared to 21.30 percent and 1.36 percent, respectively, for the prior year
period.
The decrease in the net income and diluted earnings per common share for the six
months and three months ended June 30, 2004 compared to the prior year periods
is due to a significant decrease in security gains from $8.4 million and $5.4
million from sales of available for sale securities in the 2003 periods compared
to security gains of $1.2 million and $0.1 million, respectively, in the current
year periods. The security gains for the six and three months ended June 30,
2003 resulted in an increase in net income, after the effect of income taxes and
incentive compensation, of $4.6 million and $2.9 million, compared to $0.7
million and $0.1 million for the 2004 periods, respectively. Although net income
decreased in both 2004 periods as a result of these significantly lower security
gains, net interest income and non-interest income increased at a notable rate,
the provision for credit losses decreased due to improved credit quality, and
the effective rate for the provision for income taxes also decreased, while
operating expenses increased to support the Company's growth.
A discussion of the factors impacting the changes in the various components of
net income follows.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three and six month periods ended June 30, 2004, net interest income
increased 14.9 percent and 13.0 percent to $21.8 million and $42.1 million from
$19.0 million and $37.3 million for the three and six month periods ended June
30, 2003, 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 the net interest income for the three and six months ended June
30, 2004 was primarily due to an increase in average earning assets of 16.6
percent to $2.84 billion and 16.6 percent to $2.80 billion from $2.44 billion
and $2.40 billion, respectively. The growth was a result of increases primarily
in average net loans of $120.9 million (8.8 percent) and $106.0 million (7.8
percent), and average securities of $334.8 million (34.1 percent) and $325.6
million (33.6 percent) for the three and six months ended June 30, 2004,
respectively, as compared to the prior year periods. Average interest bearing
liabilities also increased $359.2 million (17.3 percent) and $382.7 million
(18.9 percent) for the three and six months ended June 30, 2004, respectively,
as compared to the prior year periods. The increase substantially funded the
growth in earning assets. The increase in average interest bearing liabilities
was primarily due to increases in average interest bearing deposits of $154.7
million (11.0 percent) and $180.1 million (13.1 percent), and borrowings of
$192.6 million (31.2 percent) and $195.5 million (32.5 percent), respectively,
for the three and six month periods ended June 30, 2004, as compared to the
prior year periods.
24
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The increase in the net interest income related to volume was partially offset
by a decrease in the net interest margin and net interest spread on a tax
equivalent basis. The net interest margin on a tax equivalent basis decreased to
3.15 percent and 3.09 percent for the three and six months ended June 30, 2004,
as compared to 3.20 percent and 3.19 percent for the comparable 2003 periods.
The net interest spread on a tax equivalent basis decreased to 3.09 percent and
3.02 percent for the three and six months ended June 30, 2004, as compared to
3.12 percent and 3.08 percent for the comparable 2003 periods.
The decrease in the net interest margin on a tax equivalent basis was primarily
due to a greater reduction in tax equivalent yields on average earning assets,
as compared to interest bearing liabilities, to 5.15 percent and 5.09 percent
for the three and six months ended June 30, 2004, as compared to 5.42 percent
and 5.41 percent for the comparable 2003 periods, respectively. The decrease in
yields on earning assets for the three and six months ended June 30, 2004, as
compared to the 2003 periods, primarily consisted of a decrease in yields on net
loans from 6.33 percent for both 2003 periods to 5.91 percent and 5.93 percent,
and average securities from 4.49 percent and 4.40 percent to 4.35 percent and
4.24 percent, respectively.
The yields on interest bearing liabilities for the three and six months ended
June 30, 2004 decreased to 2.06 percent and 2.07 percent from 2.30 percent and
2.33 percent for the 2003 comparable periods. The decrease in yields on interest
bearing liabilities for the three and six months ended, as compared to the 2003
comparable periods, was primarily due to decreases in yields on interest bearing
deposits from 1.74 percent and 1.76 percent to 1.52 percent and 1.54 percent,
and yields on borrowings from 4.22 percent and 4.31 percent to 3.60 percent to
3.59 percent, respectively.
Although the net interest margin and net interest spread on a tax equivalent
basis has narrowed in 2004 compared to 2003, the net interest margin is
positioned to increase if short-term interest rates continue to increase. This
is due to the asset sensitivity position of the Company's balance sheet,
primarily from significant investments in floating rate securities and
commercial loans, which reprice based on spreads over LIBOR and the prime rate.
If interest rates were to decline, or if prepayments of loans and securities
accelerated, the Company's net interest income would be negatively effected.
Management continues to use its strong capital position to prudently leverage
the balance sheet by purchasing government securities funded by borrowings.
Although the leverage strategy results in narrower net interest spreads, the
strategy increases net interest income without significant credit risk or
increase in operating expenses. 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 also realizes gains on available-for-sale securities when market
conditions warrant. Security gains decreased $7.2 million to $1.2 million for
the six months ended June 30, 2004 compared to $8.4 million for the similar 2003
period. During the first six months of 2004, approximately $104.2 million of
available for sale mortgage-backed investment securities were sold to
restructure and enhance the yield of the security portfolio by reinvesting sale
proceeds in a combination of fixed rate callable U.S. government agencies and
mortgage-backed securities. The gains for the 2003 period on sales of available
for sale securities were significantly higher, primarily as a result of the
larger dollar amount of securities sold ($414.7 million) at higher premiums in
that period, especially on securities that would have otherwise been prepaid at
par. Management will continue to evaluate the effect of the changing interest
rate environment on the Company's security portfolio.
25
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Provision for Credit Losses
The provision for credit losses decreased $1.0 million to $0.3 million and $1.1
million to $0.6 million for the three and six month periods ended June 30, 2004,
respectively, compared to the same periods in 2003. The decrease in the
provision for the three and six month 2004 periods was primarily attributable to
an improvement in credit quality of the loan portfolio and a significant
decrease in provisions related to one non-performing real estate construction
loan, as compared to the three and six months ended June 30, 2003. The Company's
non-performing assets to total assets decreased to 0.14 percent at June 30, 2004
from 0.28 percent at June 30, 2003. During the three and six months ended June
30, 2004, net (recoveries) charge-offs totaled ($7,000) and $135,000, as
compared to $1.7 million for both 2003 periods, respectively. The six months
ended June 30, 2004 and 2003 net charge-offs primarily resulted from the partial
charge- off of a real estate construction loan on nonaccrual status.
Nonaccrual loans were $4.0 million and $7.6 million at June 30, 2004 and 2003
compared to $6.1 million at December 31, 2003. Total nonaccrual loans at June
30, 2004 primarily consisted of a real estate construction loan that was $5.5
million at December 31, 2003, reduced to $3.7 million at June 30, 2004 due to
principal paydowns and a $0.2 million charge-off.
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 and 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 June 30, 2004.
A substantial portion (88.9 percent at June 30, 2004) 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 2004 and 2003 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
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Non-Interest Income
Non-interest income decreased for the three months ended June 30, 2004 by $5.1
million to $2.1 million compared to the 2003 comparable period. The decrease
reflects security gains of $0.1 million for the 2004 period compared to $5.4
million for 2003. The decrease was partially offset by an increase in service
charges on deposit accounts ($0.2 million). For the six month period ended June
30, 2004, non-interest income decreased by $6.9 million to $5.0 million from
$11.9 million for the 2003 comparable period. The decrease is primarily due to
decreases in security gains of $7.2 million from $8.4 million in 2003 to $1.2
million for the six months ended 2004. The decrease was partially offset by
increases in service charges on deposit accounts ($0.3 million).
Non-Interest Expenses
Non-interest expenses increased $1.3 million (10.9 percent) to $12.8 million and
$2.4 million (10.9 percent) to $24.8 million for the three and six month periods
ended June 30, 2004 from the comparable periods in 2003, 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, and amortization of intangibles.
Salaries and employee benefits, the largest component of non-interest expense,
increased by $0.9 million, or 12.8 percent, and $1.7 million, or 12.7 percent,
during the three and six month periods ended June 30, 2004 compared to the prior
year periods. The increase occurred due to additional personnel employed by the
Company primarily to accommodate the increases in deposits and loans and their
related services, including the acquisition of Reliance Bank. In addition,
salaries and employee benefits increased due to additional expenses related to
medical plans, payroll taxes, overtime, and a decrease in the deferral of loan
origination expenses. Increases in salaries and employee benefits expense were
partially offset by a decrease in expenses related to bonus plan compensation
for the 2004 periods, as compared to prior year periods.
Changes in the other components of non-interest expense for the three and six
month periods ended June 30, 2004, respectively, compared to the prior year
periods, were primarily due to the following:
o Increase of $215,000 (12.5 percent) and $404,000 (11.8 percent) in occupancy
and equipment expense. The increase in both periods is primarily due to an
increase from higher depreciation expense and other occupancy related costs
associated with new branch locations and investments in technology.
27
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
o Increase of $38,000 (4.9 percent) and $145,000 (10.9 percent) in advertising
and business development. The increase reflects an increase in marketing
expense that includes television advertising to support increases in market
share in existing and new markets, as well as additional costs to expand
customer relationships.
o Increase of $81,000 (21.5 percent) and $149,000 (20.8 percent) in
professional fees. The increase is due to higher legal fees related to a
non-performing real estate construction loan, costs related to compliance
with the Sarbanes-Oxley Act of 2002, and fees related to strategic analysis
and tax planning.
o Increase of $22,000 (7.4 percent) and $71,000 (11.7 percent) in
communications expense. The increase relates to higher costs from additional
data lines to support the Bank's communications infrastructure at branch
locations and the corporate headquarters.
o Increase of $25,000 (9.8 percent) and $37,000 (7.3 percent) in amortization
of intangibles. The increase reflects amortization of an additional
intangible asset acquired from the acquisition of Reliance Bank in the first
quarter of 2004.
o Increase of $21,000 (2.1 percent) and a decrease of $69,000 (3.5 percent) in
other expenses. The increase for the three month period was due to fees
related to the security assessment of the Bank's computer systems. The
decrease for the six month period was due to a decrease in credit card
operations expense related to a reduction in the liability for potential
redemption of scorecard award points.
Income Taxes
The effective income tax rates for the three and six month periods ended June
30, 2004 were 34.6 percent and 33.9 percent compared to 34.7 percent and 35.2
percent, respectively, for the prior periods in 2003. The lower effective income
tax rate for the 2004 periods reflects lower state income taxes.
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, 2003
were reported in the Company's 2003 Annual Report to Stockholders. There have
been no material changes in the Company's market risk exposures at June 30, 2004
compared to December 31, 2003. 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 six months ended June 30, 2004.
The Company continues to use two methods to evaluate its market risk to changes
in interest rates, a "Static Gap" evaluation and a simulation analysis of the
impact of changes in interest rates on the Company's net interest income and
cash flow. There have been no changes in the Company's policy limit of
acceptable variances to net interest income at June 30, 2004 as compared to
December 31, 2003. The Company's "Static Gap" at June 30, 2004 was a positive
cumulative $254.3 million in the one year time frame compared to a positive
cumulative $305.0 million at December 31, 2003. 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 changing 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 June 30, 2004, 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 June 30, 2004 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
The following table sets forth information with respect to purchases made by the
Company of its common stock during the six months ended June 30, 2004.
- -------------------------------------------------------------------------------------------------------------------------------
(1)Maximum
Total Number Number of
of Shares Shares that
Purchased as may yet be
Total Number Average Part of Publicly Purchased
of Shares Price Paid Announced Under the
2004 Periods Purchased Per Share Programs Programs
- ------------ ------------ ---------- ---------------- -----------
January 1 to January 31 5,186 $ 19.32 N/A 300,000
February 1 to February 29 4,112 $ 22.99 N/A 300,000
March 1 to March 31 4,097 $ 24.40 N/A 300,000
April 1 to April 30 -- -- N/A 300,000
May 1 to May 31 236,376 $ 21.51 173,200 126,800
June 1 to June 30 50,000 $ 21.21 50,000 76,800
------------ ---------- ---------------- -----------
Total 299,771 $ 21.48 223,200 76,800
============ ========== ================ ===========
Common stock purchased reflected in the above table are the result of
acquisitions of treasury stock related to treasury stock purchases under the
Company's Treasury Stock Repurchase Plan and the exercise of stock options
during the six months ended June 30, 2004.
(1) The Company announced a common stock repurchase plan of up to 300,000
shares on December 17, 2003 to expire on December 31, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 27, 2004 for
the purpose of considering and voting upon the following matters:
I. Election of two directors, Messrs. Edward T. Lutz and Howard V. Ruderman,
constituting Class I members of the Board of Directors, to a three-year term
of office.
The results of votes for each of the items above were as follows:
ITEM 1
----------------------------
Votes: For Withheld
------ --- --------
Edward T. Lutz 17,772,755 440,361
Howard V. Ruderman 17,966,716 246,400
The names of each other director whose term of office as a director continued
after the meetings are as follows: Thomas E. Hales, Kevin J. Plunkett, Raymond
J. Crotty, Steven T. Sabatini, Kenneth J. Torsoe, and Michael H. Fury.
II. The appointment of the Company's independent auditors, Deloitte & Touche,
LLP, for the audit of the Company's consolidated financial statements for
the year ending December 31, 2004 was ratified with 18,059,542 shares voting
for, 138,134 voting against, and 15,440 abstaining.
31
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)).
(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)).
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- -------------------------------------------------
(10)(a) Agreement of Employment dated as of November 16, 2003 between
the Company and the Bank and Thomas E. Hales (incorporated
herein by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003, Exhibit (10)(a)).
(10)(b) Agreement of Employment dated as of July 28, 2004, between the Company
and the Bank and Raymond J. Crotty.*
(10)(c) Agreement of Employment dated as of July 28, 2004, between the Company
and the Bank and Steven T. Sabatini.*
(10)(d) 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)(e) Registrant's U.S.B. Holding Co., Inc. Employee Stock Ownership Plan
(With 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)(f) 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)(g) Registrant's Director Stock Option Plan (incorporated herein by
reference to Registrant's 1996 10-K, Exhibit (10)(f)).
(10)(h) 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)(i) 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)(j) 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)(k) Registrant's 1997 Employee Stock Option Plan (incorporated herein by
reference to Registrant's Proxy Statement filed April 18, 1997).
(10)(l) 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)(m) 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).
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- -------------------------------------------------
(10)(n) 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)(o) 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)(p) 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)(q) Amendment No. 2 to the Outside Director Option Plan
(incorporated herein by reference to Exhibit B to the Tappan
Zee 1997 Proxy Statement).
(10)(r) 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)(s) 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)(t) 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)(u) 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)(v) 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)(w) 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)(x) 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)).
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- -------------------------------------------------
(10)(y) 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)(z) Amendment No. 2 to the Key Employees' Supplemental Investment
Plan dated September 1, 2003 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003 ("2003 Third Quarter 10-Q"), Exhibit
(10)(ab)).
(10)(aa) Amendment No. 1 to the Key Employees' Diversified Investment
Plan dated September 1, 2003 (incorporated by reference to the
Registrant's 2003 Third Quarter 10-Q, Exhibit (10)(ab)).
(10)(ab) Amended and Restated Declaration of Trust of Union State
Statutory Trust IV dated March 25, 2004 (incorporated by
reference to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2004 ("2004 First Quarter 10-Q"),
Exhibit (10)(ad)).
(10)(ac) Indenture dated March 25, 2004 between Registrant and
Wilmington Trust Company, as Trustee (incorporated by
reference to the Registrant's 2004 First Quarter 10-Q, Exhibit
(10)(ae)).
(10)(ad) Guarantee Agreement dated March 24, 2004 by and between
Registrant and Wilmington Trust Company, as Trustee for the
holders of Capital Securities of Union State Bank Statutory
Trust IV (incorporated by reference to the Registrant's 2004
First Quarter 10-Q, Exhibit (10)(af)).
(10)(ae) Purchase and Assumption Agreement among the Federal Deposit
Insurance Corporation, Receiver of Reliance Bank, White
Plains, New York and Union State Bank, Nanuet, New York dated
as of March 19, 2004 (incorporated by reference to the
Registrant's 2004 First Quarter 10-Q, Exhibit (10)(ag)).
(10)(af) Loan Sale Agreement by and between the Federal Deposit
Insurance corporation in its Receivership Capacity and Union
State Bank, Nanuet, New York (incorporated by reference to the
Registrant's 2004 First Quarter 10-Q, Exhibit (10)(ah)).
(14)(a) Business Code of Conduct (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003, Exhibit (14)(a)).
(14)(b) Code of Ethics applicable to Financial Officers and the Chief
Executive Officer (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003, Exhibit (14)(b)).
(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.*
(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.*
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- -------------------------------------------------
(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 April 30, 2004 regarding the
three months ended March 31, 2004 earnings. Selected Company financial
information was included in such Form 8-K.
36
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on August 6, 2004.
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)
37