UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 NOVEMBER 2, 2004
----- -------------------------------
Common stock, par value 20,339,686
$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 SEPTEMBER 30, 2004 AND
DECEMBER 31, 2003. 1
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003. 2
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003. 3
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003. 4
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK. 29
ITEM 4. CONTROLS AND PROCEDURES 30
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 32
SIGNATURES 36
- i -
ITEM 1. PART I - FINANCIAL INFORMATION
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
================================================================================
(000's, except share data)
September 30, December 31,
ASSETS 2004 2003
- -------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 127,286 $ 57,451
Federal funds sold 29,000 10,000
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 156,286 67,451
Interest bearing deposits in other banks 349 25
Securities:
Available for sale (at estimated fair value) 901,619 1,081,380
Held to maturity (estimated fair value of $513,179 in 2004
and $240,752 in 2003) 503,612 237,998
Loans, net of allowance for loan losses of $15,134 in 2004 and $14,757 in 2003 1,472,465 1,433,923
Premises and equipment, net 15,933 15,353
Accrued interest receivable 13,281 15,721
Federal Home Loan Bank of New York stock 46,757 30,594
Other assets 28,630 24,017
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,138,932 $ 2,906,462
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------
Liabilities:
Non-interest bearing deposits $ 403,713 $ 296,133
Interest bearing deposits:
NOW accounts 234,446 133,382
Money market accounts 216,884 195,510
Savings deposits 416,567 436,561
Time deposits 724,827 713,463
- -------------------------------------------------------------------------------------------------------------
Total deposits 1,996,437 1,775,049
Accrued interest payable 5,898 6,599
Accrued expenses and other liabilities 14,755 11,340
Securities sold under agreements to repurchase 797,651 788,632
Federal Home Loan Bank of New York advances 83,134 104,873
Subordinated debt issued in connection with Corporation-Obligated
mandatory redeemable capital securities of subsidiary trusts 61,858 51,548
- -------------------------------------------------------------------------------------------------------------
Total liabilities 2,959,733 2,738,041
- -------------------------------------------------------------------------------------------------------------
Minority-interest junior preferred stock of consolidated subsidiary 128 128
Commitments and contingencies (Note 13)
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 22,004,107 in 2004, and 20,924,504 in 2003 220 209
Additional paid-in capital 184,049 159,628
Retained earnings 22,828 31,655
Treasury stock at cost, common shares 1,679,646 in 2004 and 1,436,714 in 2003 (23,155) (18,225)
Common stock held for benefit plans (2,515) (2,491)
Deferred compensation obligation 2,448 2,327
Accumulated other comprehensive loss (4,804) (4,810)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 179,071 168,293
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,138,932 $ 2,906,462
=============================================================================================================
See notes to condensed consolidated financial statements.
1
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
================================================================================
(000's, except share data)
Three Months Ended
September 30,
- ---------------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $22,334 $21,708
Interest on federal funds sold 89 247
Interest and dividends on securities:
U.S. government agencies 9,632 6,950
Mortgage-backed securities 3,579 2,761
Obligations of states and political subdivisions 872 813
Corporate and other 31 4
Dividends on Federal Home Loan Bank of New York stock 213 388
- ---------------------------------------------------------------------------------
Total interest income 36,750 32,871
- ---------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 5,928 5,928
Interest on borrowings 7,301 6,856
Interest on subordinated debt issued in connection with/and
Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 1,029 857
- ---------------------------------------------------------------------------------
Total interest expense 14,258 13,641
- ---------------------------------------------------------------------------------
NET INTEREST INCOME 22,492 19,230
Provision for credit losses 110 391
- ---------------------------------------------------------------------------------
Net interest income after provision for credit losses 22,382 18,839
- ---------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges and fees 1,038 1,047
Other income 970 1,091
- ---------------------------------------------------------------------------------
Total non-interest income 2,008 2,138
- ---------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 7,554 6,774
Occupancy and equipment 2,049 1,707
Advertising and business development 620 590
Professional fees 875 364
Communications 424 300
Stationery and printing 148 217
FDIC insurance 70 67
Amortization of intangibles 290 253
Other expense 1,005 855
- ---------------------------------------------------------------------------------
Total non-interest expenses 13,035 11,127
- ---------------------------------------------------------------------------------
Income before income taxes 11,355 9,850
Provision for income taxes 3,836 3,564
- ---------------------------------------------------------------------------------
NET INCOME $ 7,519 $ 6,286
=================================================================================
BASIC EARNINGS PER COMMON SHARE $ 0.37 $ 0.31
=================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 0.35 $ 0.30
=================================================================================
See notes to condensed consolidated financial statements.
2
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
================================================================================
(000's, except share data)
Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 65,982 $ 64,832
Interest on federal funds sold 237 605
Interest and dividends on securities:
U.S. government agencies 27,999 15,727
Mortgage-backed securities 9,609 12,015
Obligations of states and political subdivisions 2,643 2,482
Corporate and other 91 8
Dividends on Federal Home Loan Bank of New York stock 465 1,106
- -------------------------------------------------------------------------------------------------------------------
Total interest income 107,026 96,775
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 17,904 17,922
Interest on borrowings 21,604 19,749
Interest on subordinated debt issued in connection with/and
Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 2,892 2,586
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 42,400 40,257
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 64,626 56,518
Provision for credit losses 664 2,063
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 63,962 54,455
- -------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges and fees 3,206 2,887
Other income 2,645 2,812
Gains on securities transactions 1,197 8,383
- -------------------------------------------------------------------------------------------------------------------
Total non-interest income 7,048 14,082
- -------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 22,571 20,097
Occupancy and equipment 5,863 5,117
Advertising and business development 2,099 1,924
Professional fees 1,739 1,079
Communications 1,104 909
Stationery and printing 532 601
FDIC insurance 220 208
Amortization of intangibles 835 761
Other expense 2,900 2,819
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 37,863 33,515
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,147 35,022
Provision for income taxes 11,234 12,426
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 21,913 $ 22,596
===================================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 1.07 $ 1.10
===================================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 1.03 $ 1.08
===================================================================================================================
See notes to condensed consolidated financial statements.
3
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
================================================================================
(000's)
Nine Months Ended
September 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 21,913 $ 22,596
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 664 2,063
Depreciation and amortization 2,567 2,319
Amortization of (discounts) premiums on securities - net (519) 891
Deferred income tax benefit, net (2,581) (2,685)
Gains on securities transactions (1,197) (8,383)
Non-cash benefit plan expense 377 313
Decrease (increase) in accrued interest receivable 2,483 (832)
Decrease in accrued interest payable (721) (32)
Other - net 2,754 1,712
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,740 17,962
- -------------------------------------------------------------------------------------------------------------------------------
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 505,846 373,271
Securities held to maturity 84,533 178,599
Purchases of securities available for sale (726,635) (1,328,955)
Purchases of securities held to maturity (52,598) (89,950)
Net purchases of Federal Home Loan Bank of New York stock (16,163) (10,525)
Net liabilities assumed in Reliance Bank acquisition 10,697 --
Net increase in interest bearing deposits in other banks (299) (12)
Net increase in loans outstanding (28,319) (88,473)
Purchases of premises and equipment - net (2,237) (3,570)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (119,757) (546,542)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits, NOW, money market and savings accounts 199,370 275,877
Net (decrease) increase in time deposits, net of withdrawals and maturities (1,895) 60,893
Net (decrease) increase in securities sold under agreements to repurchase - short-term (15,981) 149,275
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 (11,239) (2,503)
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 (6,935) (5,684)
Proceeds from exercise of common stock options 523 1,382
Purchases of treasury stock (5,466) (4,223)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 182,852 $ 590,016
- -------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents $ 88,835 $ 61,436
Cash and Cash Equivalents, Beginning of Period 67,451 90,801
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 156,286 $ 152,237
===============================================================================================================================
Supplemental Disclosures:
- -------------------------------------------------------------------------------------------------------------------------------
Interest paid $ (43,121) $ (40,289)
- -------------------------------------------------------------------------------------------------------------------------------
Income tax payments $ (15,058) $ (15,016)
- -------------------------------------------------------------------------------------------------------------------------------
Purchase of available for sale securities not yet settled, including interest receivable $ 884 $ 102,431
- -------------------------------------------------------------------------------------------------------------------------------
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 at market value $ 298,312 $ 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 $ (121) $ (425)
- -------------------------------------------------------------------------------------------------------------------------------
Change in deferred compensation obligation $ 121 $ 425
- -------------------------------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive loss $ 6 $ (5,806)
- -------------------------------------------------------------------------------------------------------------------------------
Non cash exercise of stock options and related tax benefit $ 2,061 $ 1,333
- -------------------------------------------------------------------------------------------------------------------------------
Non cash purchases of treasury stock related to the exercise of stock options $ (1,600) $ (873)
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of treasury stock related to the exercise of stock options $ 2,136 $ 2,448
===============================================================================================================================
See notes to condensed consolidated financial statements.
4
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(000's except share data)
FOR THE NINE MONTHS ENDED SEPTEMER 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Common Common Common Accumulated
Stock Stock Additional Stock Deferred Other
Shares Par Paid-In Retained Treasury Held for Compensation Comprehensive
Outstanding Value Capital Earnings Stock Benefit Plans Obligation Loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 19,487,790 $ 209 $159,628 $31,655 $(18,225) $(2,491) $ 2,327 $(4,810)
Net Income 21,913
Other comprehensive income:
Net unrealized securities
loss arising during the
period, net of tax benefit
of $98
(181)
Reclassification adjustment
of net loss for securities
sold, net of tax benefit
of $130 187
Other comprehensive income 6
Total comprehensive income
Five percent common stock
Dividend 1,055,985 10 23,795 (23,805)
Five percent common stock
dividend on treasury stock (88,325)
Cash dividends:
Common ($0.34 per share) (6,925)
Junior preferred stock (10)
Common stock options exercised
and related tax benefit 198,782 1 447 2,136
Purchases of treasury stock (329,771) (7,066)
ESOP shares committed to
be released 179 97
Deferred compensation
obligation (121) 121
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 20,324,461 $ 220 $184,049 $ 22,828 $(23,155) $(2,515) $ 2,448 $(4,804)
====================================================================================================================================
- ------------------------------------------------
Total
Stockholders'
Equity
- ------------------------------------------------
Balance at January 1, 2004 $ 168,293
Net Income 21,913
Other comprehensive income:
Net unrealized securities
loss arising during the
period, net of tax benefit
of $98
(181)
Reclassification adjustment
of net loss for securities
sold, net of tax benefit
of $130 187
Other comprehensive income 6
Total comprehensive income 21,919
Five percent common stock
Dividend --
Five percent common stock
dividend on treasury stock --
Cash dividends:
Common ($0.34 per share) (6,925)
Junior preferred stock (10)
Common stock options exercised
and related tax benefit 2,584
Purchases of treasury stock (7,066)
ESOP shares committed to
be released 276
Deferred compensation
obligation --
- ------------------------------------------------
Balance at September 30, 2004 $ 179,071
================================================
See notes to condensed consolidated financial statements.
5
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(000's, except share data)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- -----------------------------------------------------------------------------------------------------------------------
Common Common Common
Stock Stock Additional Stock Deferred
Shares Par Paid-In Retained Treasury Held for Compensation
Outstanding Value Capital Earnings Stock Benefit Plans Obligation
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 18,501,580 $198 $ 140,054 $28,648 $(15,777) $(1,691) $1,398
Net Income 22,596
Other comprehensive loss:
Net unrealized securities
loss arising during the
period, net of tax benefit
of $2,177
Reclassification adjustment
of net gains for securities
sold, net of taxes of $1,835
Other comprehensive loss
Total comprehensive income
Five percent common stock
dividend 994,545 10 18,638 (18,663)
Five percent common stock
dividend on treasury stock (70,401)
Cash dividends:
Common ($0.28 per share) (5,659)
Junior preferred stock (10)
Common stock options exercised
and related tax benefit 304,934 1 266 2,448
Purchases of treasury stock (310,791) (5,096)
ESOP shares committed to
be released 119 97
Deferred compensation
obligation (425) 425
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 19,419,867 $209 $159,077 $26,912 $(18,425) $(2,019) $1,823
=======================================================================================================================
- ---------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
- ---------------------------------------------------------------------
Balance at January 1, 2003 $ 3,181 $ 156,011
Net Income 22,596
Other comprehensive loss:
Net unrealized securities
loss arising during the
period, net of tax benefit
of $2,177 (3,150) (3,150)
Reclassification adjustment
of net gains for securities
sold, net of taxes of $1,835
(2,656) (2,656)
------ -------
Other comprehensive loss (5,806) (5,806)
-------
Total comprehensive income 16,790
Five percent common stock
dividend (15)
Five percent common stock
dividend on treasury stock --
Cash dividends:
Common ($0.28 per share) (5,659)
Junior preferred stock (10)
Common stock options exercised
and related tax benefit 2,715
Purchases of treasury stock (5,096)
ESOP shares committed to
be released 216
Deferred compensation
obligation --
- ---------------------------------------------------------------------
Balance at September 30, 2003 $ (2,625) $ 164,952
=====================================================================
See notes to condensed consolidated financial statements.
6
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 nine
months ended September 30, 2004, the condensed consolidated financial
statements also include the Company's subsidiary Trusts, Union State
Capital Trust I, Union State Statutory Trust II, USB Statutory Trust III,
and Union State Statutory Trust IV (collectively, the "Trusts"). As
required by the Financial Accounting Standards Board's revision of
Interpretation No. 46, "Consolidation of Variable Interest Entities, ("FIN
46R"), the Company has not consolidated 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 September 30, 2004, and its operations for
the three and nine months ended September 30, 2004 and 2003, and its cash
flows and changes in stockholders' equity for the nine months ended
September 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 Company distributed a five percent common stock dividend on September
24, 2004 to stockholders of record on September 10, 2004. The weighted
average common shares outstanding and per common share amounts have been
adjusted to reflect all common stock dividends.
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 are the
determination of the allowance for loan losses, the related 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.
7
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 has been deferred pending issuance of a final Financial
Accounting Standards Board ("FASB") Staff Position. 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 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 for impairment 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.
8
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
6. Intangible Assets
As of September 30, 2004 and December 31, 2003, the gross carrying amount
and accumulated amortization of intangible assets acquired in connection
with branch acquisitions were $9.0 million and $3.9 million, and $8.4
million and $3.1 million, respectively. The intangible amortization
expense for the three month periods ended September 30, 2004 and 2003 were
$0.3 million, and for the nine month periods ended September 30, 2004 and
2003 were $0.8 million, respectively. The annual amortization expense for
the five succeeding fiscal years will be approximately $1.1 million.
7. 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 nine months ended September 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.
9
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
=====================================================================================================
(000's, except share data)
Three Nine
Months Ended Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
Net income, as reported $7,519 $6,286 $21,913 $22,596
Less: preferred stock dividends - - 10 10
Less: total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects 1,183 705 2,133 1,291
- -----------------------------------------------------------------------------------------------------
Pro forma net income available to common
stockholders $6,336 $5,581 $19,770 $21,295
=====================================================================================================
Earnings per common share:
Basic - as reported $0.37 $ 0.31 $ 1.07 $ 1.10
Basic - pro forma 0.31 0.27 0.97 1.04
Diluted - as reported $0.35 $ 0.30 $ 1.03 $1.08
Diluted - pro forma 0.30 0.27 0.93 1.02
=====================================================================================================
The following weighted average assumptions were used for Director Plan
grants for the three months ended September 30, 2004 and 2003,
respectively: dividend yields of 1.93 and 2.52 percent; volatility factors
of the expected market price of the Company's common stock of 39.57 and
41.33 percent; risk free interest rates of 3.89 and 2.47 percent; and
expected lives of 7.63 and 7.62 years. The following weighted average
assumptions were used for Director Plan grants for the nine months ended
September 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 months ended September 30, 2004 and 2003,
respectively: dividend yields of 1.93 and 2.52 percent; volatility factors
of the expected market price of the Company's common stock of 39.59 and
41.63 percent; risk free interest rates of 3.58 and 3.08 percent; and
expected lives of 8.52 and 8.97 years. The following weighted average
assumptions were used for Employee Plan grants for the nine months ended
September 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.
8. Earnings Per Common Share ("EPS")
The computation of basic and diluted earnings per common share for the
three and nine months ended September 30 is as follows:
10
U.S.B. HOLDING CO., INC.
NOTES TO CODENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
===========================================================================================================
(000's except share data)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 7,519 $ 6,286 $ 21,913 $ 22,596
Less preferred stock dividends -- -- 10 10
- -----------------------------------------------------------------------------------------------------------
Net income for basic and diluted
earnings per common share - net income
available to common stockholders $ 7,519 $ 6,286 $ 21,903 $ 22,586
===========================================================================================================
Denominator:
Denominator for basic earnings per
common share - weighted average shares 20,324,406 20,372,623 20,407,604 20,446,035
Effects of dilutive securities:
Director and employee - stock options 893,290 624,707 900,503 525,669
- -----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
common share - adjusted weighted
average shares 21,217,696 20,997,330 21,308,107 20,971,704
===========================================================================================================
Basic earnings per common share $ 0.37 $ 0.31 $ 1.07 $ 1.10
Diluted earnings per common share $ 0.35 $ 0.30 $ 1.03 $ 1.08
===========================================================================================================
9. Securities
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company's investment policies include a
determination of the appropriate classification of securities at the time
of purchase. Securities that may be sold as part of the Company's
asset/liability or liquidity management, or in response to or in
anticipation of changes in interest rates and resulting prepayment risk,
or for similar factors, are classified as available for sale. Securities
that the Company has the ability and positive intent to hold to maturity
are classified as held to maturity and carried at amortized cost. Realized
gains and losses on the sales of all securities, determined by using the
specific identification method, are reported in earnings. Securities
available for sale are shown in the condensed consolidated statements of
condition at estimated fair value and the resulting net unrealized gains
and losses, net of tax, are shown in accumulated other comprehensive
income (loss).
The decision to sell 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.
11
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
During the nine-month periods ended September 30, 2004 and 2003, the
Company had gross realized gains from sales of securities available for
sale of $1,197,000, and $8,383,000, respectively. The Company did not have
gross realized gains or losses during both the three month periods ended
September 30, 2004 and 2003.
A summary of the amortized cost, estimated fair values, and related gross
unrealized gains and losses of securities at September 30, 2004 and
December 31, 2003 is as follows:
=======================================================================================================
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 2004: Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. government agencies $515,139 $ 241 $ 163 $515,217
Mortgage-backed securities 383,511 3,274 1,504 385,281
Obligations of states and political subdivisions 920 61 -- 981
Corporate securities 116 24 -- 140
- -------------------------------------------------------------------------------------------------------
Total securities available for sale $899,686 $ 3,600 $ 1,667 $901,619
=======================================================================================================
Held to Maturity:
U.S. government agencies $418,193 $ 6,892 $ 1,026 $424,059
Obligations of states and political subdivisions 85,419 3,977 276 89,120
- -------------------------------------------------------------------------------------------------------
Total securities held to maturity $503,612 $ 10,869 $ 1,302 $513,179
=======================================================================================================
==============================================================================================================
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2003: Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
Available for Sale:
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 is
included in other comprehensive income (loss) and will be accreted over
the remaining life of the securities.
12
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
10. Loans
Nonaccrual loans were $4.3 million at September 30, 2004 and $6.1 million
at December 31, 2003. Restructured loans were $0.1 million at both
September 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 $3.6 million at September
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. Accruing loans that are
contractually past due 90 days or more at September 30, 2004 are
immaterial.
At September 30, 2004 and December 31, 2003, the recorded investment in
loans that are considered to be impaired approximated $3.6 million and
$5.6 million, of which $3.6 million and $5.5 million were in nonaccrual
status, respectively. The average recorded investment in impaired loans
for the nine months ended September 30, 2004 and 2003, and for the year
ended December 31, 2003 was $4.9 million, $9.9 million, and $9.1 million,
respectively. Interest income recognized by the Company on impaired loans
for the September 30, 2004 and 2003 three and nine 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 $3.6 million and $5.5
million was $0.3 million and $0.2 million as of September 30, 2004 and
December 31, 2003, respectively. No valuation allowance for this loan with
a balance of $7.0 million was considered necessary at September 30, 2003.
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 September
30, 2004, the recorded loan balance was $3.6 million with a $0.3 million
specific allocation of the allowance for loan losses. The recorded loan
balance was reduced during the nine month 2004 period by principal
payments and charge-offs totaling $0.3 million. The loan is collateralized
by a mortgage on certain condominium units and other real estate
collateral. As of October 22, 2004, of the original 83 units, one unit
remains unsold and is currently under 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 is
vigorously defending. A trial commenced on July 12, 2004 and concluded on
August 3, 2004. A decision by the court is expected by the end of the
calendar year. The guarantees on this loan have not been considered in
determining the amounts of the allowance for loan losses required.
13
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
11. 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 September 30, 2004, the Bank had
short-term repurchase agreements outstanding with the FHLB of $265.0
million at a weighted average interest rate of 1.88 percent. These
short-term borrowings with the FHLB were collateralized by securities with
an aggregate carrying value and estimated fair value of $292.2 million and
$293.4 million, respectively. 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 September 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
September 30, 2004 and December 31, 2003, the Bank had short-term
repurchase agreements with customers of $0.7 million and $1.6 million at a
weighted average interest rate of 1.53 percent and 0.84 percent,
respectively. These short-term customer borrowings were collateralized by
securities with an aggregate carrying value and estimated fair value of
$0.7 million and $1.7 million at September 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 September 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
September 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 nine months ended September 30, 2004 and 2003 is presented in the
following table.
14
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
================================================================================
(000's except percentages)
Short-Term Borrowings 2004 2003
- --------------------------------------------------------------------------------
Balance at September 30 $ 265,651 $ 150,480
Average balance outstanding $ 153,040 $ 29,582
Weighted-average interest rate:
As of September 30 1.88% 1.12%
Paid during period 1.23% 1.14%
================================================================================
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 September 30, 2004 and December 31, 2003. At
both September 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 September 30, 2004 and December 31, 2003, these
borrowings are collateralized by securities with an aggregate carrying
value of $532.2 million and $531.6 million, and an estimated fair value of
$536.9 million and $531.1 million, respectively.
At September 30, 2004 and December 31, 2003, long-term FHLB advances
totaled $83.1 million and $94.4 million, respectively, at interest rates
of between 4.55 percent to 6.05 percent. At September 30, 2004, borrowings
totaling $3.1 million are amortizing advances having scheduled payments
and $10.0 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 September 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 $96.9 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
September 30, 2004, with comparative totals for December 31, 2003, is as
follows:
- -----------------------------------------------------------------------------------------------------
(000's except percentages)
After 1
Within But Within After 2004 2003
Long-Term Borrowings 1 Year 5 Years 5 Years Total Total
- -----------------------------------------------------------------------------------------------------
Contractual Payment Date:
Total long-term borrowing $ 11,301 $135,081 $468,752 $615,134 $601,374
Weighted-average interest rate 4.99% 5.15% 3.99% 4.26% 4.21%
- -----------------------------------------------------------------------------------------------------
15
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
- ------------------------------------------------------------------------------------------------------
(000's except percentages)
After 1
Within But Within After 2004 2003
Long-Term Borrowings 1 Year 5 Years 5 Years Total Total
- ------------------------------------------------------------------------------------------------------
Expected Call Date:
Total long-term borrowing $ 28,301 $250,081 $336,752 $615,134 $601,374
Weighted-average interest rate 3.15% 4.02% 4.54% 4.26% 4.21%
- ------------------------------------------------------------------------------------------------------
At September 30, 2004 and December 31, 2003 the Bank held 467,567 shares
and 305,937 shares of capital stock of the FHLB with a carrying value of
$46.8 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. All FHLB borrowings require
prerequisite purchase of 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 September 30,
2004, the Bank could pay dividends of $63.9 million to the Company without
having to obtain prior regulatory approval.
On December 17, 2003, the Company's Board of Directors authorized the
repurchase of up to 315,000 (adjusted for the five percent common stock
dividend) 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 165,375 common shares (adjusted for the five
percent common stock dividend). For the nine months ended September 30,
2004, the Company purchased 265,860 shares of common stock (adjusted for
the five percent common stock dividend) under its repurchase plan at an
aggregate cost of approximately $5.5 million. The Company purchased
278,759 shares of common stock (adjusted for the five percent common stock
dividend) under its repurchase plan at an aggregate cost of approximately
$4.2 million for the nine months ended September 30, 2003. Purchases of
common stock of 80,400 and 63,715 common shares (adjusted for the five
percent common stock dividend) were acquired in connection with stock
option exercises during the nine-month period ended September 30, 2004 and
2003, respectively.
16
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
12. 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
September 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 September 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 September 30,
2004, Tier I Capital totaled $237.2 million, which included $60.0 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.
13. Commitments and Contingencies
In the normal course of business, various commitments to extend credit are
made which are not reflected in the accompanying condensed consolidated
financial statements. At September 30, 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 $412.7 million, $73.2 million and $22.9 million,
respectively. Outstanding letters of credit totaled $42.5 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.
17
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.
14. Segment Information
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of
the Bank to fund itself with deposits and other borrowings and to manage
interest rate and credit risk. This situation is also similar for consumer
and residential mortgage lending. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment
or unit.
The Company operates only in the U.S. domestic market, specifically the
lower Hudson Valley, which includes the counties of Rockland, Westchester,
Orange, Putnam and Dutchess, New York, as well as New York City and Long
Island, New York, Northern New Jersey and Southern Connecticut. For the
nine months ended September 30, 2004 and 2003, there is no customer that
accounted for more than ten percent of the Company's revenue.
18
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 September 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.
OVERVIEW
The Company's primary business is obtaining deposits through its retail branch
system, and commercial and municipal relationships, and lending to both a retail
and commercial customer base. A substantial amount of loans are secured by real
estate, including construction projects. The Company also acquires triple-A
credit rated securities to invest deposits in excess of loan production and
borrows on a wholesale basis to leverage capital and manage interest rate risk.
The Company operates through its 29 full service branches and its four loan
centers in Rockland, Westchester, and Orange counties in New York, New York City
and Stamford, Connecticut.
The Company's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest bearing liabilities. The Company also derives income from non-interest
income sources such as service charges on deposit accounts, gains on sales of
securities and other forms of income. Net interest income and non-interest
income support the Company's operating expenses and provision for credit losses.
As the Company's primary source of income is net interest income, the interest
rate environment has a significant effect on revenue. The market for and credit
quality of loans is also impacted by interest rates, as well as the local
economy. Deposits are also sensitive to interest rates, local economic
conditions, and the attractiveness of alternative investments, such as stocks,
bonds, mutual funds, and annuities.
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 the related 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.
19
FINANCIAL CONDITION
At September 30, 2004, the Company had total assets of $3,138.9 million, an
increase of $232.5 million from December 31, 2003. Cash equivalents, loans, and
deposits of $10.7 million, $10.8 million and $23.9 million, respectively, were
acquired or assumed in connection with the Reliance Bank acquisition on March
19, 2004 (see Note 5 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 $1,452.0 million and $1,350.0 million at September
30, 2004 and December 31, 2003, respectively, an increase of $102.0 million
during the nine months ended September 30, 2004. The securities portfolio
consists of securities held to maturity at amortized cost of $503.6 million and
$238.0 million, securities available for sale at estimated fair value totaling
$901.6 million and $1,081.4 million, and FHLB stock of $46.8 million and $30.6
million at September 30, 2004 and December 31, 2003, respectively.
During the nine months ended September 30, 2004, U.S. government agency
securities increased $137.0 million due primarily to purchases totaling $594.7
million, an increase in the estimated fair value of $6.1 million, and discount
accretion of $0.6 million, partially offset by redemptions of $455.0 million of
callable bonds, and a decrease as a result of a write down to market value at
the time of a transfer from available for sale to held to maturity of $9.4
million. Mortgage-backed securities decreased by $62.8 million primarily due to
principal paydowns of $120.4 million, net premium amortizations of $0.1 million,
sales of $104.2 million, partially offset by purchases of $157.8 million, and an
increase in the estimated fair value of available for sale securities of $4.1
million. The Bank's investment in obligations of states and political
subdivisions, or municipal securities, increased by $11.7 million primarily due
to purchases of $26.7 million during the nine month period ended September 30,
2004, partially offset by maturities of $15.0 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 September 30,
2004 and December 31, 2003, respectively.
20
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 September 30, 2004, the weighted
average yield on a tax equivalent basis and weighted average life of the
investment portfolio was 4.39 percent and 6.7 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 September 30, 2004, loans outstanding were $1,487.6 million, a net increase
of $38.9 million or 2.7 percent compared to December 31, 2003. The increase in
outstanding loan balances reflects increases of: $13.0 million in home equity
loans; $11.6 million in residential mortgages; $9.5 million in land,
acquisition, and construction loans; $9.1 million in time secured loans; $8.8
million in time unsecured loans; $0.5 million in credit card loans; and $1.9
million in other loans. The increase was partially offset by decreases of $14.6
million in commercial mortgages, $0.6 million in commercial installment loans;
and $0.3 million in personal 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 $412.7 million in
formal credit lines, $96.1 million in loan commitments outstanding, which are
loans primarily collateralized by real estate, and $42.5 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.
The Company's allowance for loan losses increased $0.4 million, or 2.6 percent,
to $15.1 million at September 30, 2004, from $14.8 million at December 31, 2003.
The allowance for loan losses represents 1.02 percent of gross loans outstanding
at both September 30, 2004 and December 31, 2003, respectively. The allowance
reflects a provision of $0.7 million and net charge-offs of $265,000 recorded
for the nine months ended September 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 September 30, 2004 and $0.5 million at December 31, 2003, is
included in other liabilities. At September 30, 2004, there are loans
aggregating approximately $0.4 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.
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 for loan losses and reserve for unfunded
loan commitments appropriately reflect the risk elements in the total loan
portfolio at September 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 $221.4 million, or 12.5 percent, for the nine-month
period ended September 30, 2004 to $1,996.4 million from $1,775.0 at December
31, 2003. The total deposit increase resulted from net increases in municipal
deposits of $184.8 million, retail and commercial deposits of $11.7 million, and
brokered deposits of $24.9 million. The retail and commercial deposit increase
includes $23.9 million assumed as part of the Reliance Bank acquisition.
21
As of September 30, 2004, municipal demand, NOW, money market, and savings
deposits increased $93.0 million, $90.1 million, $19.9 million, and $0.4
million, respectively, as compared to December 31, 2003. The increases in
municipal demand and NOW accounts were primarily related to the receipt of
temporary seasonal tax deposits. The increase in municipal money market deposits
reflects 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 $18.6 million at September 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 September 30, 2004
was due to increases in demand, NOW, time, and money market deposits of $14.5
million, $11.0 million, $30.0 million, and $1.5 million, respectively, as
compared to December 31, 2003. The increase was partially offset by a decrease
in retail and commercial savings deposits of $20.4 million, as compared to
December 31, 2003. The increase in retail, commercial, and brokered time
deposits at September 30, 2004 includes $13.2 million assumed from Reliance
Bank, the acquisition of medium-term brokered deposits of $24.9 million, which
was a result of securing longer-term funds, and increases in IRA and KEOGH
deposits of $3.6 million, partially offset by decreases in time deposits under
and over $100,000 of $6.2 million and $5.5 million, respectively, compared to
December 31, 2003. The decrease in retail and commercial time deposits under and
over $100,000 was partially due to 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.
During the nine months ended September 30, 2004, the Bank decreased its net
borrowings $12.7 million. Borrowings, combined with the seasonal municipal tax
deposits of approximately $170.0 million, are primarily used to provide funding
for the securities portfolio, including investment in FHLB stock, which
increased $102.0 million during the nine months ended September 30, 2004. As the
temporary municipal tax deposits decrease, the Bank will replace the funding for
the securities portfolio with short-term borrowings. 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 increased to $179.1 million at September 30, 2004 from the
December 31, 2003 balance of $168.3 million, an increase of 6.4 percent. The
increase primarily results from: $21.9 million of net income for the nine month
period ended September 30, 2004; $2.6 million of stock options exercised; and
$0.3 million of shares committed to be released under benefit plans; partially
offset by treasury stock transactions of $7.1 million and common stock dividends
paid of $6.9 million.
22
The Company's leverage ratio at September 30, 2004 was 8.07 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 13.62 percent and 14.52 percent at
September 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 September 30, 2004
and December 31, 2003. The increase in the Company's capital ratios are due to
the increase in stockholders' equity, excluding accumulated other comprehensive
loss, for the nine months ended September 30, 2004, as well as the issuance of
$10 million of capital securities (see Note 12 to the condensed consolidated
financial statements (unaudited)).
RESULTS OF OPERATIONS
Earnings
Net income for the nine months ended September 30, 2004 was $21.9 million
compared to $22.6 million for the nine months ended September 30, 2003, a
decrease of 3.0 percent. Diluted earnings per common share were $1.03 for the
nine months ended September 30, 2004 compared to $1.08 per common share in the
prior year period, a decrease of 4.6 percent. The Company's net income for the
nine months ended September 30, 2004 resulted in a 17.00 percent return on
average common stockholders' equity and a 1.00 percent return on average total
assets, as compared to 18.70 percent and 1.16 percent, respectively, for the
nine months ended September 30, 2003.
The decrease in the net income and diluted earnings per common share for the
nine months ended September 30, 2004 compared to the prior year periods is due
to a significant decrease in security gains from sales of available for sale
securities of $8.4 million in the 2003 period compared to security gains of $1.2
million in the current year period. The security gains for the nine months ended
September 30, 2003 resulted in an increase in net income, after the effect of
income taxes and incentive compensation, of approximately $4.6 million, compared
to approximately $0.7 million for the 2004 period. Although net income decreased
for the nine months ended September 30, 2004 period, primarily as a result of
significantly lower security gains, net interest income significantly increased,
non-interest income increased, the provision for credit losses decreased, and
the effective income tax rate also decreased, while operating expenses increased
as compared to the prior year period.
For the three months ended September 30, 2004, net income was $7.5 million
compared to $6.3 million for the three months ended September 30, 2003, an
increase of 19.6 percent. The increase in net income for the quarter reflects a
significant increase in net interest income, a decrease in the provision for
credit losses, and a lower effective income tax rate as compared to the prior
year. Diluted earnings per common share for the quarter ended September 30, 2004
was $0.35 compared to $0.30 in the 2003 period, an increase of 16.7 percent. The
Company's third quarter 2004 net income resulted in a 17.47 percent return on
average common stockholders' equity and a 1.02 percent return on average total
assets, as compared to 15.45 percent and 0.91 percent, respectively, for the
prior year period.
A discussion of the factors impacting the changes in the various components of
net income follows.
23
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three and nine month periods ended September 30, 2004, net interest income
increased 17.0 percent and 14.3 percent to $22.5 million and $64.6 million from
$19.2 million and $56.5 million for the three and nine month periods ended
September 30, 2003, respectively. Net interest income increased in the current
periods due to increases in the volume of earning assets, combined with
increases in both the net interest spread and margin on a tax equivalent basis.
The increase in the net interest income for the three and nine months ended
September 30, 2004 was partially due to an increase in average earning assets of
5.4 percent to $2.77 billion and 12.6 percent to $2.79 billion from $2.63
billion and $2.48 billion, respectively. The growth was a result of increases
primarily in average net loans of $78.6 million (5.6 percent) and $96.8 million
(7.0 percent), and average securities of $143.2 million (12.8 percent) and
$264.4 million (25.9 percent) for the three and nine months ended September 30,
2004, respectively, as compared to the prior year periods.
Average interest bearing liabilities also increased $157.2 million (7.1 percent)
and $306.8 million (14.7 percent) for the three and nine months ended September
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 $87.9 million (6.0 percent) and $149.1 million (10.6
percent), and borrowings of $57.4 million (8.3 percent) and $149.1 million (23.6
percent), respectively, for the three and nine month periods ended September 30,
2004, as compared to the prior year periods.
The increase in the net interest income was also due to an increase in the net
interest margin and net interest spread on a tax equivalent basis. The net
interest margin on a tax equivalent basis increased to 3.33 percent and 3.17
percent for the three and nine months ended September 30, 2004, as compared to
3.01 percent and 3.13 percent for the comparable 2003 periods. The net interest
spread on a tax equivalent basis increased to 3.27 percent and 3.10 percent for
the three and nine months ended September 30, 2004, as compared to 2.90 percent
and 3.01 percent for the comparable 2003 periods.
The increase in the net interest margin on a tax equivalent basis for the three
months ended September 30, 2004 was due to an increase in tax equivalent yields
on average earning assets and a decrease in yields on interest bearing
liabilities. For the three months ended September 30, 2004, tax equivalent
yields on interest earning assets increased to 5.37 percent from 5.06 percent,
and yields on interest bearing liabilities decreased to 2.10 percent from 2.16
percent, as compared to the 2003 period, respectively. The increase in tax
equivalent yields on earning assets for the three months ended September 30,
2004 was primarily due to an increase in yields on average securities to 4.70
percent from 4.07 percent, as compared to the 2003 period, respectively. For the
three months ended September 30, 2004, the decrease in yields on interest
bearing liabilities was primarily due to a decrease in yields on interest
bearing deposits to 1.51 percent from 1.61 percent, as compared to the 2003
third quarter, respectively.
24
The increase in the net interest margin on a tax equivalent basis for the nine
months ended September 30, 2004 was due to a reduction in yields on interest
bearing liabilities at a faster rate than tax equivalent yields on average
earning assets. For the nine months ended September 30, 2004, yields on interest
bearing liabilities decreased to 2.08 percent from 2.28 percent, and tax
equivalent yields on interest earning assets decreased to 5.18 percent from 5.29
percent. The decrease in yields on interest bearing liabilities for the nine
months ended September 30, 2004 was primarily due to a decrease in yields on
borrowings from 4.17 percent to 3.68 percent, and yields on interest bearing
deposits from 1.70 percent to 1.53 percent, as compared to the 2003 period,
respectively. For the nine months ended September 30, 2004, the decrease in tax
equivalent yields on earning assets was primarily due to a decrease in yields on
average loans from 6.27 percent to 5.95 percent, as compared to the 2003 period,
respectively.
The net interest margin is positioned to continue to widen 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 nine months ended September 30, 2004 compared to $8.4 million for the
similar 2003 period. During the first nine 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.
Provision for Credit Losses
The provision for credit losses decreased $0.3 million to $0.1 million and $1.4
million to $0.7 million for the three and nine month periods ended September 30,
2004, respectively, compared to the same periods in 2003. The decrease in the
provision for the three and nine month 2004 periods was primarily attributable
to an improvement in credit quality of the loan portfolio, and for the nine
months ended September 30, 2004, a significant decrease in provisions related to
one non-performing real estate construction loan, as compared to the prior year
periods. The Company's non-performing assets to total assets decreased to 0.14
percent at September 30, 2004 from 0.24 percent at September 30, 2003. During
the three and nine months ended September 30, 2004, net charge-offs totaled
$130,000 and $265,000, as compared to $82,000 and $1.8 million for the 2003
periods, respectively. Net charge-offs primarily resulted from the partial
charge-off of a real estate construction loan on nonaccrual status for the three
and nine months ended September 30, 2004, and for the nine months ended
September 30, 2003.
Nonaccrual loans were $4.3 million and $7.1 million at September 30, 2004 and
2003, respectively, compared to $6.1 million at December 31, 2003. Total
nonaccrual loans at September 30, 2004 primarily consisted of a real estate
construction loan that was $5.5 million at December 31, 2003, reduced to $3.6
million at September 30, 2004 due to principal paydowns and a $0.3 million
charge-off.
25
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 September 30, 2004.
A substantial portion (88.4 percent at September 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. In addition to the
allowance for loan losses, a reserve for credit losses related to unfunded loan
commitments is included in other liabilities. There is no assurance that the
Company will not be required to make future adjustments to the allowance in
response to changing economic conditions or regulatory examinations.
Non-Interest Income
Non-interest income decreased for the three months ended September 30, 2004 to
$2.0 million from $2.1 million for the 2003 comparable period. The decrease was
primarily due to a reduction in loan prepayment fees ($0.2 million), partially
offset by an increase in letter of credit fees ($0.1 million). For the nine
month period ended September 30, 2004, non-interest income decreased by $7.0
million to $7.1 million from $14.1 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 nine 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 $1.9 million (17.1 percent) to $13.0 million and
$4.3 million (13.0 percent) to $37.9 million for the three and nine-month
periods ended September 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 $0.8 million, or 11.5 percent, and $2.5 million, or 12.3 percent,
during the three and nine month periods ended September 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, deferred compensation plans, and expenses related
to bonus plan compensation. Increases in salaries and employee benefits expense
were partially offset by an increase in the deferral of loan origination
expenses, as compared to prior year periods.
Changes in the other components of non-interest expense for the three and nine
month periods ended September 30, 2004, respectively, compared to the prior year
periods, were primarily due to the following:
o Increase of $342,000 (20.0 percent) and $746,000 (14.6 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.
o Increase of $30,000 (5.1 percent) and $175,000 (9.1 percent) in
advertising and business development. The increase reflects an increase in
marketing expense that includes television advertising to support
increases in market share, as well as additional costs to expand customer
relationships.
o Increase of $511,000 (140.4 percent) and $660,000 (61.2 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 $124,000 (41.3 percent) and $195,000 (21.5 percent) in
communications expense. The increase relates to higher costs from an
upgrade in data lines to support the Bank's communications infrastructure
at branch locations and corporate headquarters.
o Increase of $37,000 (14.6 percent) and $74,000 (9.7 percent) in
amortization of intangibles. The increase reflects amortization of an
additional intangible asset related to the acquisition of Reliance Bank in
the first quarter of 2004.
o Increase of $150,000 (17.5 percent) and $81,000 (2.9 percent) in other
expenses. The increase was primarily due to fees related to the security
assessment of the Bank's computer systems, as well as software conversion
costs related to the Reliance Bank acquisition.
26
Income Taxes
The effective income tax rates for the three and nine month periods ended
September 30, 2004 were 33.8 percent and 33.9 percent compared to 36.2 percent
and 35.5 percent, respectively, for the prior periods in 2003. The lower
effective income tax rate for the 2004 periods reflects lower state income
taxes.
27
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 September 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 nine months ended September 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 September 30, 2004 as compared to
December 31, 2003. The Company's "Static Gap" at September 30, 2004 was a
positive cumulative $224.5 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.
28
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 (the "Exchange Act") and the rules and forms of
the Securities and Exchange Commission. This evaluation was made under the
supervision and with the participation of management, including the Company's
chief executive officer and chief financial officer as of September 30, 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 September 30, 2004 that has materially affected
or is reasonably likely to materially affect the Company's internal control over
financial reporting.
29
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information with respect to purchases made by the
Company of its common stock during the nine months ended September 30, 2004.
===================================================================================================================
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(2) Per Share(2) Programs Programs(1)&(2)
- -------------------------------------------------------------------------------------------------------------------
January 1 to January 31 5,445 $18.40 N/A 315,000
February 1 to February 29 4,318 21.90 N/A 315,000
March 1 to March 31 4,302 23.24 N/A 315,000
April 1 to April 30 -- -- N/A 315,000
May 1 to May 31 248,195 20.49 181,860 133,140
June 1 to June 30 52,500 20.20 52,500 80,640
July 1 to July 31 -- -- N/A 80,640
August 1 to August 31 27,930 19.65 27,930 52,710
September 1 to September 30 3,570 20.95 3,570 49,140
- -------------------------------------------------------------------------------------------------------------------
Total 346,260 $20.40 265,860 49,140
===================================================================================================================
Common stock purchased reflected in the above table are the result of purchases
of common stock under the Company's Treasury Stock Purchase Plan and the
purchase of common stock in connection with the exercise of stock options during
the nine months ended September 30, 2004.
(1) The Company announced a common stock repurchase plan of up to 315,000
shares (adjusted for the five percent common stock dividend distributed in
September 2004) on December 17, 2003 to expire on December 31, 2004.
(2) Share amounts and price paid per share are adjusted for the five percent
common stock dividend distributed in September 2004.
30
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)).
(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)).
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(10)(b) Agreement of Employment dated as of July 28, 2004, between the
Company and the Bank and Raymond J. Crotty (incorporated herein by
reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 ("2004 Second Quarter Form 10-Q"),
Exhibit (3)(a)).
(10)(c) Agreement of Employment dated as of July 28, 2004, between the
Company and the Bank and Steven T. Sabatini (incorporated herein by
reference to Registrant's 2004 Second Quarter Form 10-Q), Exhibit
(3)(b)).
(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).
(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")).
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(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)).
(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)).
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
(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.*
(32) Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
*Filed Herewith.
(B) Reports on Form 8-K
The Company filed a report on Form 8-K on July 30, 2004 regarding the
three and six months ended June 30, 2004 earnings. Selected Company
financial information was included in such Form 8-K. The Company also
filed reports on Form 8K on August 26, 2004 and September 24, 2004
regarding the declaration of a five percent common stock dividend and
increase in the quarterly cash dividend, and the Company engaging Keefe,
Bruyette, & Woods, Inc. to evaluate strategic opportunities, respectively.
34
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on November 9, 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)
35