SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002 Commission File No. 1-12811
------------------
U.S.B. HOLDING CO., INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3197969
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 DUTCH HILL ROAD, ORANGEBURG, NEW YORK
--------------------------------------------
10962 (Address of principal executive office
with zip code)
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 4, 2002
----- -------------------------------
Common stock, par value 18,477,642
$0.01 per share
U.S.B. HOLDING CO., INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF
CONDITION AS OF SEPTEMBER 30, 2002 AND
DECEMBER 31, 2001. 1
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001. 2
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001. 3
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001. 4
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK. 28
ITEM 4. CONTROLS AND PROCEDURES 29
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 30
SIGNATURES 34
CERTIFICATIONS 35
- 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,
2002 2001
------------ -----------
ASSETS
- ------
Cash and due from banks $ 93,499 $ 48,721
Federal funds sold 84,800 21,100
----------- -----------
Cash and cash equivalents 178,299 69,821
Interest bearing deposits in other banks 47 290
Securities:
Available for sale (at estimated fair value) 522,996 454,001
Held to maturity (estimated fair value of
$345,890 in 2002 and $298,429 in 2001) 340,436 298,883
Loans, net of allowance for loan losses of
$13,330 in 2002 and $12,412 in 2001 1,280,697 1,158,534
Premises and equipment, net 10,987 11,343
Accrued interest receivable 13,642 10,087
Other real estate owned (OREO) 34 34
Federal Home Loan Bank of New York stock 22,702 20,815
Other assets 13,565 16,318
----------- -----------
TOTAL ASSETS $ 2,383,405 $ 2,040,126
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Non-interest bearing deposits $ 327,196 $ 210,811
Interest bearing deposits:
NOW accounts 168,580 84,136
Money market accounts 88,040 82,381
Savings deposits 417,530 431,893
Time deposits 649,705 616,737
----------- -----------
TOTAL DEPOSITS 1,651,051 1,425,958
Accrued interest payable 5,238 7,244
Accrued expenses and other liabilities 16,155 14,024
Securities transactions not yet settled 55,264 --
Securities sold under agreements to repurchase 344,005 303,279
Federal Home Loan Bank of New York advances 111,758 114,291
----------- -----------
TOTAL 2,183,471 1,864,796
Corporation-Obligated mandatory redeemable capital
securities of subsidiary trusts 50,000 40,000
Minority interest-junior preferred stock of consolidated subsidiary 129 130
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value
Authorized shares: 10,000,000 in 2002 and 100,000 in
2001; no shares outstanding -- --
Common stock, $0.01 par value; authorized shares - 50,000,000;
issued shares - 19,775,903 in 2002 and 19,531,188 in 2001 198 195
Additional paid-in capital 139,591 137,627
Retained earnings 22,098 8,457
Treasury stock, at cost; common shares 1,298,816 in 2002 and
1,151,842 in 2001 (15,745) (13,381)
Common stock held for benefit plans (1,742) (1,601)
Deferred compensation obligation 1,416 1,178
Accumulated other comprehensive income 3,989 2,725
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 149,805 135,200
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,383,405 $ 2,040,126
=========== ===========
See notes to condensed consolidated financial statements.
1
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------- -------
(000'S, EXCEPT SHARE DATA)
INTEREST INCOME:
Interest and fees on loans $21,561 $21,179
Interest on federal funds sold 266 428
Interest and dividends on securities:
Mortgage-backed securities 4,269 6,001
U.S. Treasury and government agencies 4,576 4,068
Obligations of states and political subdivisions 907 863
Corporate and other 216 11
Interest on deposits in other banks 4 2
Dividends on Federal Home Loan Bank of New York stock 190 497
------- -------
TOTAL INTEREST INCOME 31,989 33,049
------- -------
INTEREST EXPENSE:
Interest on deposits 6,995 11,890
Interest on borrowings 5,566 4,630
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 909 739
------- -------
TOTAL INTEREST EXPENSE 13,470 17,259
------- -------
NET INTEREST INCOME 18,519 15,790
Provision for credit losses 590 418
------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 17,929 15,372
------- -------
NON-INTEREST INCOME:
Service charges and fees 838 883
Other 819 688
Gains on securities transactions - net 335 --
------- -------
TOTAL NON-INTEREST INCOME 1,992 1,571
------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 6,097 5,360
Occupancy and equipment 1,560 1,533
Advertising and business development 527 523
Professional fees 350 255
Communications 267 228
Stationery and printing 196 222
FDIC insurance 65 70
Amortization of intangibles 227 225
Other 811 654
------- -------
TOTAL NON-INTEREST EXPENSES 10,100 9,070
------- -------
Income before income taxes 9,821 7,873
Provision for income taxes 3,312 2,717
------- -------
NET INCOME $ 6,509 $ 5,156
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.28
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.34 $ 0.27
======= =======
See notes to condensed consolidated financial statements.
2
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
-------- --------
(000'S, EXCEPT SHARE DATA)
INTEREST INCOME:
Interest and fees on loans $ 63,153 $ 65,112
Interest on federal funds sold 640 1,532
Interest and dividends on securities:
Mortgage-backed securities 13,643 18,715
U.S. Treasury and government agencies 12,610 11,180
Obligations of states and political subdivisions 2,702 2,495
Corporate and other 643 32
Interest on deposits in other banks 9 7
Dividends on Federal Home Loan Bank of New York stock 636 1,696
-------- --------
TOTAL INTEREST INCOME 94,036 100,769
-------- --------
INTEREST EXPENSE:
Interest on deposits 21,155 41,529
Interest on borrowings 16,141 12,442
Interest on Corporation - Obligated mandatory redeemable
capital securities of subsidiary trusts 2,464 1,715
-------- --------
TOTAL INTEREST EXPENSE 39,760 55,686
-------- --------
NET INTEREST INCOME 54,276 45,083
Provision for credit losses 3,187 838
-------- --------
Net interest income after provision for credit losses 51,089 44,245
-------- --------
NON-INTEREST INCOME:
Service charges and fees 2,465 2,599
Other 2,364 1,659
Gains on securities transactions - net 1,703 1,533
-------- --------
TOTAL NON-INTEREST INCOME 6,532 5,791
-------- --------
NON-INTEREST EXPENSES:
Salaries and employee benefits 17,607 15,561
Occupancy and equipment 4,713 4,673
Advertising and business development 1,436 1,351
Professional fees 872 674
Communications 790 737
Stationery and printing 597 644
FDIC insurance 205 211
Amortization of intangibles 678 677
Other 2,422 1,970
-------- --------
TOTAL NON-INTEREST EXPENSES 29,320 26,498
-------- --------
Income before income taxes 28,301 23,538
Provision for income taxes 9,677 8,144
-------- --------
NET INCOME $ 18,624 $ 15,394
======== ========
BASIC EARNINGS PER COMMON SHARE $ 1.01 $ 0.84
======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.98 $ 0.82
======== ========
See notes to condensed consolidated financial statements.
3
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
- ----------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
--------- ---------
(000's)
OPERATING ACTIVITIES
Net income $ 18,624 $ 15,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 3,187 838
Depreciation and amortization 2,029 2,132
Amortization of premiums on securities - net 1,103 937
Non-cash benefit plan expense 207 200
Deferred income tax (benefit) provision - net (2,345) 5,955
Gains on securities transactions - net (1,703) (1,533)
(Increase) decrease in accrued interest receivable (3,555) 146
Decrease in accrued interest payable (2,006) (1,447)
Other - net 6,228 3,793
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,769 26,415
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 44,342 162,380
Proceeds from principal paydowns, redemptions and maturities of:
Securities available for sale 148,896 90,355
Securities held to maturity 147,242 133,325
Purchases of securities available for sale (204,311) (323,411)
Purchases of securities held to maturity (188,731) (105,935)
Net (purchases) redemptions of Federal Home Loan Bank
of New York stock (1,887) 16,370
Net decrease (increase) in interest bearing deposits in other banks 243 (5)
Increase in loans outstanding - net (125,350) (41,601)
Purchases of premises and equipment - net (995) (1,152)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (180,551) (69,674)
--------- ---------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits,
NOW, money market and savings accounts 192,125 131,130
Net increase (decrease) in time deposits, net of
withdrawals and maturities 32,968 (146,116)
Net increase (decrease) in securities sold under agreements
to repurchase - short-term 726 (248)
Proceeds from securities sold under agreements to
repurchase - long-term 40,000 55,000
Proceeds from Federal Home Loan Bank of New York
advances - long-term -- 70,000
Repayment of securities sold under agreements to
repurchase - long-term -- (10,000)
Repayment of Federal Home Loan Bank of New York
advances - long-term (2,533) (2,618)
Net proceeds from issuance of Corporation-Obligated mandatory
redeemable capital securities of subsidiary trusts 9,673 19,364
Cash dividends paid (4,983) (4,193)
Redemption of junior preferred stock of consolidated subsidiary, net (1) --
Proceeds from issuance of common stock 238 235
Purchases of treasury stock (953) (820)
--------- ---------
Net cash provided by financing activities 267,260 111,734
--------- ---------
-Continued-
4
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (cont'd)
- ---------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------- --------------
(000's)
INCREASE IN CASH AND CASH EQUIVALENTS $ 108,478 $ 68,475
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,821 74,891
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 178,299 $ 143,366
========= =========
Supplemental Disclosures:
Interest paid $ 41,766 $ 57,133
--------- ---------
Income tax payments $ 8,447 $ 129
--------- ---------
Transfer of held to maturity securities to available for sale securities $ -- $ 9,592
--------- ---------
Change in shares held in trust for deferred compensation $ (238) $ (268)
--------- ---------
Change in deferred compensation obligation $ 238 $ 268
--------- ---------
Change in accumulated other comprehensive income $ 1,264 $ 6,630
--------- ---------
Purchases of treasury stock related to exercise of stock options $ (1,493) $ (1,341)
--------- ---------
Non-cash exercise of stock options and related tax benefit $ 1,619 $ 1,615
--------- ---------
Issuance of treasury stock related to the exercise of stock options $ 179 $ 187
--------- ---------
Purchase of securities not yet settled:
Available for sale $ 55,264 $ 19,981
--------- ---------
Held to maturity $ -- $ 39,969
--------- ---------
Exchange of Tappan Zee Financial, Inc. common shares to
treasury stock $ (97) $ --
--------- ---------
See notes to condensed consolidated financial statements.
5
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(000's, except share data)
COMMON STOCK ADDITIONAL COMMON STOCK
SHARES PAR PAID-IN RETAINED TREASURY HELD FOR
OUTSTANDING VALUE CAPITAL EARNINGS STOCK BENEFIT PLANS
----------- ----- ------- -------- -------- -------------
Balance at January 1, 2002 18,379,346 $ 195 $ 137,627 $8,457 $ (13,381) $(1,601)
Net income 18,624
Other comprehensive income:
Net unrealized securities
gains arising during the
period, net of taxes of $1,495
Reclassification adjustment
of net gains for securities
sold net of taxes of $611
Other comprehensive income
Total comprehensive income
Cash dividends:
Common ($0.27 per share) (4,973)
Junior Preferred stock (10)
Common stock options exercised
and related tax benefit 260,092 3 1,854 179
Purchases of treasury stock (162,351) (2,543)
ESOP shares committed to
be released 110 97
Deferred compensation obligation (238)
---------- ----- --------- -------- -------- ---------
BALANCE AT
SEPTEMBER 30, 2002 18,477,087 $ 198 $ 139,591 $ 22,098 $(15,745) $ (1,742)
========== ===== ========= ======== ======== =========
ACCUMULATED
DEFERRED OTHER TOTAL
COMPENSATION COMPREHENSIVE STOCKHOLDERS'
OBLIGATION INCOME EQUITY
---------- ------ ------
Balance at January 1, 2002 $1,178 $ 2,725 $135,200
Net income 18,624
Other comprehensive income:
Net unrealized securities
gains arising during the
period, net of taxes of $1,495 2,136 2,136
Reclassification adjustment
of net gains for securities
sold net of taxes of $611 (872) (872)
---------- --------
Other comprehensive income 1,264 1,264
--------
Total comprehensive income 19,888
Cash dividends:
Common ($0.27 per share) (4,973)
Junior Preferred stock (10)
Common stock options exercised
and related tax benefit 2,036
Purchases of treasury stock (2,543)
ESOP shares committed to
be released 207
Deferred compensation obligation 238 --
-------- -------- --------
BALANCE AT
SEPTEMBER 30, 2002 $ 1,416 $ 3,989 $149,805
======== ======== ========
See notes to condensed consolidated financial statements.
6
U.S.B. HOLDING CO., INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(000'S, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL COMMON STOCK
SHARES PAR PAID-IN RETAINED TREASURY HELD FOR
OUTSTANDING VALUE CAPITAL EARNINGS STOCK BENEFIT PLANS
----------- ----- ------- -------- -------- -------------
Balance at January 1, 2001 16,591,111 $ 175 $ 111,942 $ 17,116 $ (11,158) $(1,431)
Net income 15,394
Other comprehensive income:
Net unrealized securities
gains arising during the
period, net of taxes of $5,243
Reclassification adjustment
of net gains for securities
sold, net of taxes of $536
Other comprehensive income
Total comprehensive income
Cash dividends:
Common $0.23 per share (4,182)
Junior preferred stock (11)
Common stock options exercised
and related tax benefit 306,023 3 1,908 187
Purchases of treasury stock (170,485) (2,161)
Amortization of RRP awards 10 21
ESOP shares committed to
be released 70 99
Deferred compensation obligation (268)
---------- ------- --------- ---------- -------- ----------
BALANCE AT
SEPTEMBER 30, 2001 16,726,649 $ 178 $ 113,930 $ 28,317 $ (13,132) $ (1,579)
========== ======= ========= ========== ========= =========
ACCUMULATED
DEFERRED OTHER TOTAL
COMPENSATION COMPREHENSIVE STOCKHOLDERS'
OBLIGATION INCOME EQUITY
----------- ------------- ------------
Balance at January 1, 2001 $ 856 $ 377 $ 117,877
Net income 15,394
Other comprehensive income:
Net unrealized securities
gains arising during the
period, net of taxes of $5,243 7,384 7,384
Reclassification adjustment
of net gains for securities
sold, net of taxes of $536 (754) (754)
----------- ----------
Other comprehensive income 6,630 6,630
-----------
Total comprehensive income 22,024
Cash dividends:
Common $0.23 per share (4,182)
Junior preferred stock (11)
Common stock options exercised
and related tax benefit 2,098
Purchases of treasury stock (2,161)
Amortization of RRP awards 31
ESOP shares committed to
be released 169
Deferred compensation obligation 268 --
------- -------- ----------
BALANCE AT
SEPTEMBER 30, 2001 $ 1,124 $ 7,007 $ 135,845
======= ======== =========
See notes to condensed consolidated financial statements.
7
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. PRINCIPLES OF CONSOLIDATION
---------------------------
The condensed consolidated financial statements include the accounts of
U.S.B. Holding Co., Inc. and its wholly-owned subsidiaries (the
"Company"), Union State Bank (the "Bank"), including its wholly-owned
subsidiaries, Dutch Hill Realty Corp., U.S.B. Financial Services, Inc,
and TPNZ Preferred Funding Corporation ("TPNZ"), as well as Union State
Capital Trust I, Union State Statutory Trust II, USB Statutory Trust
III, and Ad Con, Inc. All significant intercompany accounts and
transactions are eliminated in consolidation.
2. BASIS OF PRESENTATION
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (comprised of
only normal recurring accruals) necessary to present fairly the
financial position of the Company as of September 30, 2002, and its
results of operations for the three and nine months ended September 30,
2002 and 2001, and its cash flow and changes in stockholders' equity for
the nine months ended September 30, 2002 and 2001. 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 2001 Annual
Report to Stockholders.
The Company's Board of Directors declared a ten percent common stock
dividend, which was distributed on January 22, 2002 to stockholders of
record on January 8, 2002. The weighted average common shares
outstanding and per common share amounts for the three and nine months
ended September 30, 2001 have been adjusted to reflect the ten percent
common stock dividend.
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America and predominant practices used within the banking
industry. In preparing such financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
actual and contingent assets and liabilities as of the dates of the
condensed consolidated statements of condition and the revenues and
expenses for the periods reported. Actual results could differ
significantly from those estimates.
Estimates that are particularly susceptible to significant change relate
to the determination of the allowance for loan losses and the related
provision for credit losses, and the valuation of other real estate
acquired in connection with foreclosures or in satisfaction of loan
receivables ("OREO"). In connection with the determination of the
allowance for loan losses and the related provision for credit losses
and OREO, management obtains independent appraisals for significant
properties.
8
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
3. CORPORATION-OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES OF
----------------------------------------------------------------
SUBSIDIARY TRUSTS
-----------------
On June 26, 2002, the Company completed its third issuance of Trust
Preferred Capital Securities (the "Capital Securities") that raised
$10.0 million of regulatory capital (approximately $9.7 million net
proceeds after issuance costs), of which approximately $6.7 million is
included in Tier I regulatory capital and the remaining amount is
included in total regulatory capital under regulatory guidelines as of
September 30, 2002. The previous issuances of Capital Securities include
$20.0 million of fixed rate Capital Securities issued in February 1997
at 9.58 percent and $20.0 million of floating rate Capital Securities
issued in July 2001 (current rate as of September 30, 2002, 5.39
percent). The aggregate amount of Capital Securities issued by the
Company totaled $50.0 million at September 30, 2002, of which $46.7
million is included in Tier I regulatory capital.
The Capital Securities issued on June 26, 2002 pay interest on a
floating rate basis, based on three month LIBOR plus 345 basis points
(current rate as of September 30, 2002 is 5.24 percent), which resets
September, December, March and June of each calendar year. The Capital
Securities, which are due June 26, 2032 were issued by USB Statutory
Trust III, a Connecticut business trust, that was formed by the Company
solely to issue the Capital Securities and related common stock. The
Capital Securities may not be redeemed, except under limited
circumstances, until 2007 at par. The Company may also reduce
outstanding Capital Securities through open market purchases. Dividends
are paid quarterly in March, June, September, and December.
Detailed discussion of the Capital Securities issued in February 1997
and July 2001 is included in Note 10 to the Company's Consolidated
Financial Statements for the year ended December 31, 2001, included in
the 2001 Annual Report to Stockholders.
4. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to prior period accounts to
conform to the current period's presentation.
5. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission
of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical
Corrections. This statement clarifies guidance related to the reporting
of gains and losses from extinguishment of debt and resolves
inconsistencies related to the required accounting treatment of certain
lease modifications. The provisions of this statement relating to
extinguishment of debt become effective for financial statements issued
for fiscal years beginning after May 15, 2002. The provisions of this
statement relating to lease modification are effective for transactions
occurring after May 15, 2002. The adoption of the effective provisions
of this statement did not have any impact on the Company's condensed
consolidated financial statements. In addition, the Company does not
expect that the provisions effective for the year beginning January 1,
2003 will have any impact on its consolidated financial statements.
9
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions and Amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9." Except for transactions between two or
more mutual enterprises, this statement removes acquisitions of
financial institutions from the scope of SFAS No. 72 and FASB
Interpretation 9 and requires that those transactions be accounted for
in accordance with SFAS No. 141, "Business Combinations," and SFAS No.
142 "Goodwill and Other Intangible Assets." Thus, the requirement in
paragraph 5 of SFAS No. 72 to recognize (and subsequently amortize) any
excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within
the scope of this statement. In addition, this statement amends SFAS No.
144, "Accounting for the Impairment or Disposal of Long Lived Assets,"
to include in its scope long-term customer relationship intangible
assets of financial institutions such as depositor and borrower
relationship intangible assets and credit card holder intangible assets.
Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and apparent loss recognition
and measurement provisions that SFAS No. 144 requires along with assets
that are held and used. The provisions of SFAS No. 147, which relate to
the application of the purchase method of accounting and the accounting
for the impairment or disposal of certain long-term customer
relationship intangible assets, are effective on October 1, 2002.
Transitional provisions for previously recognized unidentifiable
intangible assets are effective on October 1, 2002, with earlier
application permitted. There was no effect on the Company's condensed
consolidated financial statements as a result of adopting the provisions
of this statement on October 1, 2002.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which became effective January 1,
2002. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization, the reclassification of certain existing
recognized intangibles as goodwill, the reassessment of useful lives of
existing recognized intangibles and the identification of reporting
units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 also requires a transitional goodwill impairment
test six months from the date of adoption. The Company's adoption of
SFAS No. 142 on January 1, 2002 did not have any impact on its condensed
consolidated financial statements.
7. 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
NUMERATOR: (000'S, EXCEPT SHARE DATA)
Net income $ 6,509 $ 5,156 $ 18,624 $ 15,394
Less preferred stock dividends -- -- 10 11
----------- ----------- ----------- -----------
Net income for basic and diluted
earnings per common share - net
income available to common
stockholders $ 6,509 $ 5,156 $ 18,614 $ 15,383
----------- ----------- ----------- -----------
DENOMINATOR:
Denominator for basic earnings
per common share - weighted
average shares 18,430,819 18,383,382 18,395,793 18,299,856
Effects of dilutive securities:
Director and employee
stock options 628,202 443,310 575,903 423,062
Restricted stock not vested -- 425 -- 2,774
----------- ----------- ----------- -----------
Total effects of dilutive securities 628,202 443,735 575,903 425,836
----------- ----------- ----------- -----------
Denominator for diluted earnings
per common share - adjusted
weighted average shares 19,059,021 18,827,117 18,971,696 18,725,692
=========== =========== =========== ===========
Basic earnings per common share $ 0.35 $ 0.28 $ 1.01 $ 0.84
=========== =========== =========== ===========
Diluted earnings per common share $ 0.34 $ 0.27 $ 0.98 $ 0.82
=========== =========== =========== ===========
8. SECURITIES
----------
During the three and nine month periods ended September 30, 2002, the
Company had gross realized gains from sales of securities available for
sale of $335,000 and $1,703,000, respectively. The Company did not have
gross losses during the 2002 periods. During the nine months ended
September 30, 2001, gross gains were $1,536,000 and gross losses were
$3,000. There were no gross gains or losses for the three months ended
September 30, 2001.
A summary of the amortized cost, estimated fair values, and related
gross unrealized gains and losses of securities at September 30, 2002
and December 31, 2001 is as follows:
11
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 2002: COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
AVAILABLE FOR SALE: (000'S)
U.S. government agencies $104,927 $ 1,043 $ 239 $105,731
Mortgage-backed securities 394,620 5,517 28 400,109
Obligations of states and
political subdivisions 1,530 101 -- 1,631
Corporate securities 15,136 409 20 15,525
-------- -------- -------- --------
TOTAL SECURITIES AVAILABLE FOR SALE $516,213 $ 7,070 $ 287 $522,996
======== ======== ======== ========
Held to Maturity:
U.S. government agencies $184,791 $ 1,075 $ 307 $185,559
Mortgage-backed securities 83,840 117 75 83,882
Obligations of states and
political subdivisions 71,805 4,644 -- 76,449
-------- -------- -------- --------
TOTAL SECURITIES HELD TO MATURITY $340,436 $ 5,836 $ 382 $345,890
======== ======== ======== ========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001: COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
AVAILABLE FOR SALE: (000'S)
U.S. government agencies $106,953 $ 1,884 $ 513 $108,324
Mortgage-backed securities 325,753 3,947 517 329,183
Obligations of states and
political subdivisions 1,532 74 -- 1,606
Corporate securities 15,102 36 250 14,888
-------- -------- -------- --------
TOTAL SECURITIES AVAILABLE FOR SALE $449,340 $ 5,941 $ 1,280 $454,001
======== ======== ======== ========
Held to Maturity:
U.S. government agencies $124,926 $ 149 $ 2,035 $123,040
Mortgage-backed securities 104,306 435 453 104,288
Obligations of states and
political subdivisions 69,651 1,976 526 71,101
-------- -------- -------- --------
TOTAL SECURITIES HELD TO MATURITY $298,883 $ 2,560 $ 3,014 $298,429
======== ======== ======== ========
9. LOANS
-----
Nonaccrual loans were $16.0 million at September 30, 2002 and $20.7
million at December 31, 2001. Restructured loans were $0.1 million and
$0.2 million at September 30, 2002 and December 31, 2001, respectively.
Substantially all of the nonaccruing and restructured loans are
collateralized by real estate. At September 30, 2002, the Company had
and continues to have no commitments to lend additional funds to any
customers with nonaccrual or restructured loan balances, except as
further described below with respect to a real estate construction loan
in the amount of $15.8 million.
12
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
At September 30, 2002, there were approximately $100,000 of loans not on
nonaccrual status, that were potential problem loans which may result in
their being placed on nonaccrual status in the future. Accruing loans
that are contractually past due 90 days or more at September 30, 2002
are immaterial.
At September 30, 2002 and December 31, 2001, the recorded investment in
loans that are considered to be impaired under SFAS No. 114, "Accounting
for Impairment of a Loan" ("SFAS No. 114"), approximated $16.1 million
and $20.6 million, of which $16.0 million and $20.4 million were in
nonaccrual status, respectively. The average recorded investment in
impaired loans for the nine months ended September 30, 2002 and 2001,
and year ended December 31, 2001 was $19.7 million, $19.4 million and
$20.0 million, respectively. Interest income recognized by the Company
on impaired loans for the September 30, 2002 and 2001 three and nine
month periods was not material. As applicable, each impaired loan at
September 30, 2002 and December 31, 2001 has a related allowance for
loan losses determined in accordance with SFAS No. 114. The total
allowance for loan losses specifically allocated to impaired loans was
$1.9 million and $1.6 million as of September 30, 2002 and December 31,
2001, respectively.
A restructured loan in the amount of $0.1 million and $0.2 million at
September 30, 2002 and December 31, 2001, respectively, that is
considered to be impaired due to a reduction in the contractual interest
rate, is on accrual status because the collateral securing this loan is
sufficient to protect the contractual principal and interest. The loan
has been performing for a reasonable period of time. Interest accrued on
the restructured loan as of September 30, 2002 is immaterial.
At December 31, 2001, the Bank had $0.3 million of outstanding loans,
collateralized by cash and lease receivables, to Bennett Funding Group
("Bennett"), which filed for bankruptcy protection during the first
quarter of 1996. As a result of a favorable ruling in the second quarter
of 1998 by the Bankruptcy Court, the Bank has collected payments of $2.6
million, reducing the original balance of $3.3 million to $0.7 million.
A total of $0.4 million was charged-off in 1999 and 1998, further
reducing the recorded balance of the loans to $0.3 million. During the
2002 first quarter, the Bank reached a settlement agreement with the
Bankruptcy Trustee for the Bennett loan, which settled all claims
against the Bankruptcy Estate and the Bank, including dismissal of the
remaining fraudulent conveyance claims against the Bank. As a result,
the Bank charged off the remaining $0.3 million of the Bennett loan
during the 2002 first quarter, and in addition, agreed to make a
settlement payment of $0.3 million to the Bankruptcy Estate.
In November 2000, the Company reclassified a real estate construction
loan with 35 remaining unsold condominium units, of the original 83
total units, in the amount of $19.7 million as a non-performing asset
and placed the loan on nonaccrual status. As a result of the impairment
of this loan, $2.2 million was charged-off in 2000 reducing the loan
balance to $17.5 million. During the year ended December 31, 2001,
"protective advances" of $0.6 million were made in connection with
payments of real estate taxes and common charges, which increased the
recorded loan balance to $18.1 million. During
13
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
2001 and the nine month period ended September 30, 2002, through an
agreement with the borrower, the Bank also advanced $1.8 million and
$3.4 million, respectively, to be used for completion of the project. As
of November 12, 2002, the Bank has loan commitments of approximately
$250,000 to fund real estate taxes, common charges, and other
miscellaneous expenses. Proceeds from sales of units are being used to
reduce the Bank's loan.
During the 2002 first quarter, the specific allocation of the allowance
for loan losses for this non-performing real estate loan was increased
to $2.3 million, and during the second quarter of 2002, $1.3 million of
the loan balance was charged off reducing the reserve to $1.0 million.
During the 2002 third quarter, the specific allocation of the allowance
for loan losses was increased to $1.9 million. As of September 30, 2002
and December 31, 2001, the balance of the non-performing real estate
loan, net of paydowns and charge-offs, was $15.8 million and $19.5
million, respectively.
As of September 30, 2002, there were 20 remaining units, of which four
were sold and closed as of November 12, 2002. Construction of the
remaining 16 units is substantially complete, with two units under
contract of sale as of November 12, 2002. Pending sales of all units and
repayment of the loan from the primary collateral, the Bank continues to
proceed with foreclosure action on other real estate, which also
collateralizes the loan. The loan is also personally guaranteed by the
principals, and such guarantees will be pursued to recover losses
incurred in connection with the loan. The personal guarantees have not
been considered in determining the amount of the charge-offs or
allowance for loan losses applicable to this loan.
10. BORROWINGS AND STOCKHOLDERS' EQUITY
-----------------------------------
The Company utilizes borrowings primarily to meet the funding
requirements for its asset growth and to manage its interest rate risk.
Borrowings include securities sold under agreements to repurchase,
federal funds purchased, and Federal Home Loan Bank of New York ("FHLB")
advances.
Short-term securities sold under agreements to repurchase generally
mature between one and 365 days. The Bank may borrow up to $175.0
million from two primary investment firms under master security sale and
repurchase agreements. There were no outstanding borrowings under these
agreements at September 30, 2002. In addition, the Bank has the ability
to borrow from the FHLB under similar master security sale and
repurchase agreements and, to a lesser extent, its customers. At
September 30, 2002 and December 31, 2001, the Bank had short-term
repurchase agreements outstanding of $2.0 million at an interest rate of
1.62 percent and $1.3 million at a weighted average interest rate of
1.68 percent, respectively. At September 30, 2002 and December 31, 2001,
these borrowings were collateralized by securities with an aggregate
carrying value and estimated fair value of $2.0 million and $1.3
million, respectively.
14
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
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, 2002 and December 31, 2001, the
Bank had no federal funds purchased balances outstanding.
Short-term FHLB advances are borrowings with original maturities between
one and 365 days. At September 30, 2002 and December 31, 2001, the Bank
had no such short-term FHLB advances outstanding.
Additional information with respect to short-term borrowings as of and
for the nine months ended September 30, 2002 and 2001 is presented in
the table below.
SHORT-TERM BORROWINGS 2002 2001
------------------------------------------------------------------------
(000's except percentages)
Balance at September 30 $ 2,005 $ 266
Average balance outstanding $ 1,501 $ 3,389
Weighted-average interest rate
As of September 30 1.62% 3.47%
Paid during period 1.64% 5.36%
========================================================================
The Bank had long-term borrowings, which have original maturities of
over one year, of $342.0 million and $302.0 million in securities sold
under agreements to repurchase at September 30, 2002 and December 31,
2001, respectively. At September 30, 2002 and December 31, 2001, these
borrowings have an original term of between five and ten years at
interest rates between 3.53 percent and 6.08 percent, and 4.33 percent
and 6.08 percent, respectively, that are callable on certain dates after
an initial noncall period at the option of the counterparty to the
repurchase agreements. As of September 30, 2002 and December 31, 2001,
these borrowings are collateralized by securities with an aggregate
carrying value of $350.8 million and $306.3 million and an estimated
fair value of $352.0 million and $305.7 million, respectively.
At September 30, 2002 and December 31, 2001, long-term FHLB advances
totaled $111.8 million and $114.3 million, respectively, at interest
rates of between 3.49 percent to 6.72 percent. At September 30, 2002,
borrowings totaling $11.8 million are amortizing advances having
scheduled payments and $30.0 million are payable only at maturity. Other
borrowings totaling $70.0 million have an original term of ten years
that are callable on certain dates after an initial noncall period at
the option of the counterparty to the advance. These borrowings may not
be repaid in full prior to maturity without penalty. At September 30,
2002 and December 31, 2001, 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 $133.9 million and $138.2
million, respectively.
15
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
A summary of long-term, fixed-rate borrowings distributed based upon
remaining contractual payment date and expected option call date at
September 30, 2002, with comparative totals for December 31, 2001, is as
follows:
AFTER 1
WITHIN BUT WITHIN AFTER 2002 2001
LONG-TERM BORROWINGS 1 YEAR 5 YEARS 5 YEARS TOTAL TOTAL
- -----------------------------------------------------------------------------------------------------
Contractual Payment/Expected (000's, except percentages)
Call Date:
Total long-term borrowing $3,372 $56,592 $393,794 $453,758 $416,291
Weighted-average interest rate 5.71% 4.48% 4.98% 4.92% 5.05%
=====================================================================================================
At September 30, 2002 and December 31, 2001, the Bank held 227,023
shares and 208,146 shares of capital stock of the FHLB with a carrying
value of $22.7 million and $20.8 million, respectively, which is
required in order to borrow under the short- and long-term advance and
securities sold under agreements to repurchase programs from the FHLB.
The FHLB generally limits borrowings up to an aggregate of 30 percent of
total assets, excluding securities sold under agreements to repurchase,
upon the prerequisite purchase of additional shares of FHLB stock. Any
advances made from the FHLB are required to be collateralized by the
FHLB stock 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, 2002, the Bank could pay dividends of $39.8 million to the
Company without having to obtain prior regulatory approval.
On May 23, 2002, the Company's stockholders approved an amendment to the
certificate of Incorporation (the "Amendment") to increase the number of
authorized shares of preferred stock, with no par value, from 100,000 to
10,000,000. The Amendment was filed with the State of Delaware and
became effective on July 25, 2002. The increase in the authorized shares
of preferred stock will benefit the Company by improving its flexibility
in responding to future business needs and opportunities. The additional
authorized shares will be available for issuance from time to time in
connection with raising capital that would qualify as Tier I or total
capital for regulatory purposes to support growth of the Company and
common stock repurchase programs, provide capital for possible
acquisitions and for other corporate purposes.
On December 18, 2001, the Company's Board of Directors authorized the
repurchase of up to 330,000 common shares (adjusted for the ten percent
common stock dividend), or approximately 1.8%, 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
16
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
and private transactions throughout 2002 as, in the opinion of
management, market conditions may warrant. During the nine month period
ended September 30, 2002, the purchases of 61,700 common shares were
made under the authorized repurchase plan at an average price of $15.44.
Common shares repurchased will be held as treasury stock and will be
available for general corporate purposes.
11. 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, 2002, formal credit
lines, and commercial and residential loan commitments, which are
primarily loans collateralized by real estate, approximated $386.6
million, $62.2 million and $20.1 million, respectively. Outstanding
standby letters of credit totaled $43.6 million. Such commitment amounts
represent the maximum risk of loss on these commitments.
Other commitments are described in Note 16 to the consolidated financial
statements of the Company for the year ended December 31, 2001, which is
included in the Company's 2001 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, none of
which, in the opinion of management, based on advise from legal counsel,
will have a material adverse effect on the Company's consolidated
financial position or results of operations.
12. 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 in
the lower Hudson Valley area, 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, 2002 and 2001,
there is no customer that accounted for more than ten percent of the
Company's revenue.
13. BRANCH ACQUISITION AND PLANNED DE NOVO BRANCHES
-----------------------------------------------
On June 18, 2002, the Bank signed a definitive agreement to acquire the
Yonkers branch of Fourth Federal Savings Bank ("Fourth Federal"). The
Bank completed the acquisition on
17
U.S.B. HOLDING CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
October 31, 2002 at which time the branch became the Bank's second
branch in Yonkers. The branch had approximately $15.3 million in
deposits, which were assumed by the Bank. The Bank paid a premium of
approximately $0.9 million for such deposits. The premium represents a
core deposit intangible, which will be amortized over an estimated life
of eight years. Deposits assumed excluded brokered deposits, loan hold
bank accounts, overdrawn accounts, dormant accounts, other wholesale
deposits and affiliated deposits owned by related entities of Fourth
Federal.
The Bank is in the process of establishing de novo branch locations in
Eastchester (Westchester County) and Goshen (Orange County), New York.
The Goshen branch is anticipated to be open in the fourth quarter of
2002, while the Eastchester branch is planned for the first quarter
2003.
14. SUBSEQUENT EVENT
----------------
On October 25, 2002, the Company sold available for sale investment
securities totaling approximately $100.0 million. The sale, which is
scheduled to settle in November 2002, resulted in realized gains of
approximately $3.2 million before income taxes and approximately $1.9
million after income taxes.
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, 2002. The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements relating to subsequent
periods increasingly are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: competitive
pressures on loan and deposit product pricing; other actions of competitors;
changes in economic conditions, including changes in interest rates and the
shape of the U.S. Treasury yield curve and the credit quality of borrowers;
wartime events or terrorist activity; the extent and timing of actions of the
Federal Reserve Board; customer deposit disintermediation; changes in customers'
acceptance of the Company's products and services; increase in Federal and state
income taxes and/or the Company's effective income tax rate; and the extent and
timing of legislative and regulatory actions and reform.
The Company's forward-looking statements are only as of the date on which such
statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's accounting policies are disclosed in Note 3 to the consolidated
financial statements included in the Company's 2001 Annual Report to
Stockholders. The more critical policies given the Company's current business
strategy and asset/liability structure are accounting for non-performing loans,
the allowance for loan losses and provision for credit losses, and the
classification of securities as either held to maturity or available for sale.
In addition to Note 3 to the 2001 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 2001 Annual Report to
Stockholders.
FINANCIAL CONDITION
- -------------------
At September 30, 2002, the Company had total assets of $2,383.4 million, an
increase of $343.3 million or 16.8 percent from December 31, 2001.
The securities portfolio, including investments in Federal Home Loan Bank of New
York ("FHLB") stock, totaled $886.1 million and $773.7 million at September 30,
2002 and December 31, 2001, respectively, an increase of $112.4 million during
the nine months ended
19
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
September 30, 2002. The securities portfolio consists of securities held to
maturity at amortized cost of $340.4 million and $298.9 million, securities
available for sale at estimated fair value totaling $523.0 million and $454.0
million, and FHLB stock of $22.7 million and $20.8 million at September 30, 2002
and December 31, 2001, respectively. Proceeds from sales and redemption of the
securities not otherwise reinvested in securities are used to fund the loan
portfolio, invested in Federal funds sold pending evaluation of alternative
investments, or used to repay liabilities.
During the nine months ended September 30, 2002, U.S. government agency
securities increased $57.3 million due primarily to purchases totaling $239.8
million, partially offset by sales and redemptions of $181.9 million in callable
bonds, and a net decrease in the estimated fair value of available for sale
securities of $0.6 million. Mortgage-backed securities increased by $50.5
million primarily due to purchases totaling $199.6 million and an increase in
the estimated fair value of available for sale securities of $2.1 million,
partially offset by principal paydowns of $139.3 million, sales of $10.7
million, and net premium amortizations of $1.2 million. The Bank's investment in
obligations of states and political subdivisions, or municipal securities,
increased by $2.2 million primarily due to purchases of $9.0 million that were
partially offset by maturities of $6.8 million during the nine month period
ended September 30, 2002. Municipal securities are considered core investments
having favorable tax equivalent yields and diversified maturities. Purchases of
municipal securities are dependent upon their availability in the marketplace
and the comparative tax equivalent yields of such securities compared to other
securities of similar credit risk and maturity.
The Company also invests in medium-term corporate debt securities and other debt
securities that are rated investment grade by nationally recognized credit
rating organizations at the time of purchase and equity securities. The Company
had outstanding balances in corporate securities of $15.5 million and $14.9
million consisting of Federal Home Loan Mortgage Corp. ("FHLMC") preferred stock
of $15.4 million and $14.8 million at September 30, 2002 and December 31, 2002,
respectively, and other equity securities of $0.1 million for both periods. The
preferred stock is issued by the FHLMC and has a favorable tax equivalent yield.
The total investment in FHLB stock was $22.7 million and $20.8 million at
September 30, 2002 and December 31, 2001, respectively.
The Company continues to exercise its conservative approach to investing by
purchasing high credit quality investments, and controlling interest rate risk
by purchasing both fixed and floating rate securities through the averaging of
investments in medium-term maturities.
At September 30, 2002, loans outstanding were $1,294.0 million, a net increase
of $123.1 million or 10.5 percent compared to $1,170.9 million at December 31,
2001. The increase in outstanding loan balances reflects increases of: $61.7
million in land, acquisition and construction loans; $41.3 million in commercial
mortgages; $14.8 million in residential mortgages; $7.9 million in time secured
loans; $4.1 million in home equity loans; $0.1 million in commercial installment
loans, and $0.6 million in other loans. The increase was partially offset by
decreases of $3.7 million in time unsecured loans; $2.4 million in personal
installment loans;
20
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
$0.7 million in credit card loans; and $0.6 million in other loans. The Company
had approximately $386.6 million in formal credit lines, $82.3 million in loan
commitments outstanding, which are loans primarily collateralized by real
estate, and $43.6 million in standby letters of credit outstanding as of
September 30, 2002. 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 $0.9 million or 7.4 percent to
$13.3 million at September 30, 2002, from $12.4 million at December 31, 2001.
The allowance for loan losses represents 1.03 percent and 1.06 percent of gross
loans outstanding at September 30, 2002 and December 31, 2001, respectively. The
September 30, 2002 allowance reflects a provision for credit losses of $3.2
million and net charge-offs of $2.1 million recorded for the nine months ended
September 30, 2002.
Management believes the allowance for loan losses at September 30, 2002 is
appropriate based on its evaluation of the risk elements and resulting estimated
losses inherent in the total loan portfolio at that time. The Company may be
required to make future adjustments to the allowance in response to changing
economic conditions or regulatory examinations.
Total deposits increased $225.1 million for the nine month period ended
September 30, 2002 to $1,651.1 million from $1,426.0 million at December 31,
2001. The total deposit increase resulted from net increases in municipal
deposits of $116.2 million and $108.9 in retail and commercial deposits. As of
September 30, 2002, seasonal NOW and demand municipal tax deposits increased
$76.8 million and $74.9 million, respectively, as compared to December 31, 2001.
Municipal money market deposits also increased $2.7 million, compared to
December 31, 2001, due to increased activity with municipal relationships. The
increase in municipal deposits was partially offset by decreases in municipal
time deposits over $100,000 and savings deposits of $36.8 million and $1.4
million, respectively, compared to year end 2001. Municipal time deposits
greater than $100,000 are obtained on a bidding basis with maturities of 30 to
180 days and are used in conjunction with liquidity management. As a result of
the low interest rate environment, the Bank replaced many of these time deposits
with longer-term FHLB borrowings. Management will continue to evaluate the
interest rate environment in order to determine the most effective combination
of borrowings and deposits.
The increase in retail and commercial deposits was due to increases in demand
deposits, time deposits over and under $100,000, NOW, money markets accounts,
and IRA/Keogh retail deposits, which was partially offset by a decrease in
retail and commercial savings deposits. Retail and commercial demand deposits
increased $41.6 million, as compared to December 31, 2001, due to increased
marketing of competitive checking account products. Retail and commercial time
deposits over and under $100,000 increased $39.2 million and $24.0 million,
respectively, compared to year end 2001 due to the Bank offering competitive
longer-term rates in the low interest rate environment. NOW and money market
retail and commercial deposits increased $7.6 million and $2.9 million,
respectively, compared to December 31, 2001, as the
21
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
Bank continued to direct its efforts to attract lower cost core deposits.
IRA/Keogh retail deposits increased $6.6 million compared to year end 2001 due
to greater emphasis on these products and allocation of specialized personnel to
administer and sell long-term retirement products. These increases were
partially offset by a $13.0 million decrease in retail and commercial savings
deposits compared to December 31, 2001 as customers sought higher interest
bearing deposit accounts.
Stockholders' equity increased to $149.8 million at September 30, 2002 from the
December 31, 2001 balance of $135.2 million, an increase of 10.8 percent. The
increase primarily results from: $18.6 million of net income for the nine month
period ended September 30, 2002; $2.0 million of stock options exercised; $1.3
million in other comprehensive income; and $0.2 million of shares committed to
be released under benefit plans; partially offset by cash dividends paid on
common stock of $5.0 million and treasury stock purchase transactions of $2.5
million.
The Company's leverage ratio at September 30, 2002 was 8.50 percent, compared to
8.19 percent at December 31, 2001. The Company's Tier I and Total Capital ratios
under the risk-based capital guidelines were 12.78 percent and 13.95 percent at
September 30, 2002, and 13.03 percent and 14.03 percent at December 31, 2001,
respectively. In addition, the Bank exceeds all current regulatory capital
requirements and was in the "well-capitalized" category at September 30, 2002
and December 31, 2001.
On June 26, 2002, the Company issued $10 million of additional Capital
Securities. The Capital Securities qualify for Tier I (up to certain limits) and
Total Capital for regulatory purposes and also provide additional liquidity (See
Note 3 to the Notes to Condensed Consolidated Financial Statements (Unaudited)).
RESULTS OF OPERATIONS
- ---------------------
EARNINGS
- --------
Net income for the three and nine month periods ended September 30, 2002 was
$6.5 million and $18.6 million compared to $5.2 million and $15.4 million for
the three and nine month periods ended September 30, 2001, an increase of 26.2
percent and 21.0 percent, respectively. Diluted earnings per common share were
$0.34 and $0.98 for the three and nine month periods ended September 30, 2002,
compared to $0.27 and $0.82 for the three and nine month periods ended September
30, 2001, increases of 25.9 percent and 19.5 percent, respectively.
The increase in net income for the three and nine month periods ended September
30, 2002 compared to the prior year reflects increases in net interest income,
non-interest income including, net security gains, and a lower effective income
tax rate. These increases were partially offset by higher non-interest expenses
and provision for credit losses. The increase in diluted earnings per common
share for both the 2002 periods as compared to 2001 reflects the higher net
income, partially offset by higher adjusted weighted average shares.
22
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
A discussion of the factors impacting the changes in the various components of
net income follows.
NET INTEREST INCOME
- -------------------
Net interest income, the difference between interest income and interest
expense, is a significant component of the Company's consolidated earnings. For
the three and nine month periods ended September 30, 2002, net interest income
increased 17.3 percent and 20.4 percent to $18.5 million and $54.3 million from
$15.8 million and $45.1 million for the three and nine month periods ended
September 30, 2001, respectively. Net interest income increased in the current
periods primarily due to increases in the volume of earning assets, as well as
an increase in both the net interest spread and margin, funded by increases in
average interest bearing liabilities, demand accounts and higher levels of
equity.
For the three and nine months ended September 30, 2002, the net interest spread
on a tax equivalent basis (yield on earning assets less cost of funds, including
demand deposits) was 3.62 percent and 3.61 percent, as compared to 3.31 percent
and 3.21 percent for the prior year periods, respectively. The net interest
margin on a tax equivalent basis (net interest income on a tax equivalent basis
divided by average interest earning assets) for the three and nine months ended
September 30, 2002, was 3.70 percent and 3.72 percent, as compared to 3.44
percent and 3.37 percent for the prior periods, respectively.
The increase in the net interest spread and margin reflects the more significant
decrease in cost of funds as compared to the decline in yields on interest
earning assets for the three and nine months ended September 30, 2002 compared
to the prior year periods. The more significant decline in cost of funds during
the 2002 periods reflects management's strategies to lower interest expense,
while extending the maturities of liabilities during the lower interest rate
environment. The net interest margin also benefited from a $34.7 million (12.3
percent) increase and $43.3 million (16.9 percent) increase in average earning
assets over interest bearing liabilities and Capital Securities for the three
and nine months ended September 30, 2002 compared to the 2001 periods.
The decrease in yield on average interest earning assets on a tax equivalent
basis from 7.06 percent and 7.38 percent for the three and nine month periods
ended September 30, 2001 to 6.27 percent and 6.34 percent for the same periods
in 2002 resulted from decreases in yields on average net loans, average gross
securities, and average federal funds sold. The interest yield on average net
loans on a tax equivalent basis decreased from 7.61 percent and 7.97 percent for
the three and nine months ended September 30, 2001 to 6.83 percent and 6.86
percent for the comparable 2002 periods. The interest yield on average gross
securities on a tax equivalent basis decreased to 5.71 percent and 5.80 percent
for the three and nine months ended September 30, 2002 from 6.47 percent and
6.68 percent for the comparable 2001 periods. The interest yield on average
federal funds sold decreased from 3.38 percent and 4.34 percent for the three
and nine months ended September 30, 2001 to 1.67 percent and 1.66 percent for
the comparable 2002 periods.
23
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
The decrease in yields resulting in a reduction of interest income was partially
offset by volume increases of average interest earning assets. For the 2002
third quarter, average interest earning assets increased $177.4 million (9.4
percent) compared to the 2001 period. The increase consisted of increases in
average net loans of $148.8 million, average gross securities of $15.0 million,
and average federal funds sold of $13.6 million for the three months ended
September 30, 2002 compared to the 2001 period. For the nine months ended
September 30, 2002, average interest earning assets increased $169.7 million
(9.2 percent) compared to the 2001 period. The increase primarily consisted of
increase in average net loans of $139.4 million and average gross securities of
$25.9 million for the nine months ended September 30, 2002 compared to the 2001
period, respectively. The increase in average interest earning assets during
both 2002 periods were primarily from net increases in real estate secured land
acquisition and construction loans, commercial mortgages, residential mortgages
and investment securities.
Cost of interest bearing liabilities decreased during the three and nine month
periods ended September 30, 2002, as compared to the same periods in the prior
year. The costs of average deposits, borrowings, and Capital Securities,
including demand deposits, decreased from 3.75 percent and 4.17 percent for the
three and nine months ended September 30, 2001 to 2.65 percent and 2.73 percent
for the 2002 comparable periods. The decrease in yields consisted primarily of a
decrease in yields on interest bearing deposits to 2.19 percent and 2.27 percent
for the three and nine months ended September 30, 2002 from 3.82 percent and
4.40 percent as compared to the 2001 periods, respectively. The decrease in
yields on deposits, borrowings, and Capital Securities was partially offset by a
net increase in the average balances, including demand deposits, of $184.8
million (10.2 percent) and $165.5 million (9.3 percent) for the three and nine
months ended September 20, 2002 compared to the 2001 period.
The Company continues a leverage strategy of purchasing government securities
funded by borrowings. Although the leverage strategy results in tighter net
interest spreads, the strategy increases net interest income while managing
interest rate risk. The Company has also taken advantage of opportunities during
the three and nine months ended September 30, 2002 to realize gains on
available-for-sale securities that management believes would most likely would
have been called or prepaid at par value. Net security gains of $0.3 million and
$1.7 million were realized for the three and nine months ended September 30,
2002 periods as compared to $1.5 million for the 2001 nine month period. There
were no security gains realized during the 2001 third quarter.
The Company has increased its core revenue, net interest income, by prudently
managing interest risk and increasing average earning assets as discussed above.
However, net interest income may be affected by the low interest rate
environment, and maturities and sales of assets and re-investment at lower
rates, which could cause the net interest margin to decrease due to the asset
sensitivity of the Company's balance sheet during the short term period.
Management will continue to evaluate and mitigate the effect of the changing
interest rate environment of the Company's operations, while continuing to
competitively price its products and services throughout the markets it serves.
24
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
PROVISION FOR CREDIT LOSSES
- ---------------------------
The provision for credit losses increased $0.2 million to $0.6 million and $2.3
million to $3.2 million for the three and nine month periods ended September 30,
2002, respectively, compared to the same periods in 2001. The increase in the
provision for the three month 2002 period was primarily attributable to an
increase in loans of $42.9 million for the quarter, as well as the continual
re-evaluation of existing credits within the loan portfolio. During the three
months ended September 30, 2002, net charge-offs totaled $89,000 as compared to
$80,000 for the 2001 period. The increase in the provision for credit losses for
the nine months ended September 30, 2002 was primarily due to a $123.1 million
increase in loans outstanding as of September 30, 2002 compared to year end 2001
and continual re-evaluation of existing credits within the loan portfolio. Net
charge-offs totaled $2.1 million and $0.2 million for the nine months September
30, 2002 and 2001 periods, respectively. The net charge-off increase for the
nine month September 30, 2002 period was primarily due to a $0.6 million
charge-off related to the settlement of the Bennett loan and related litigation,
and the $1.3 million partial charge-off of a real estate construction loan.
Nonaccrual loans were $16.0 million and $19.2 million at September 30, 2002 and
2001 compared to $20.7 million at December 31, 2001. Total nonaccrual loans at
September 30, 2002 primarily consisted of a real estate construction loan that
was reduced from $19.5 million at December 31, 2001 to $15.8 million at
September 30, 2002 due to a $1.3 million partial charge-off and principal
paydowns, partially offset by advances to complete the project.
It is the Company's policy to discontinue the accrual of interest on loans when,
in the opinion of management, a reasonable doubt exists as to the timely
collectibility of the amounts due. Regulatory requirements generally prohibit
the accrual of interest on certain loans when principal or interest is due and
remains unpaid for 90 days or more (with the exception of credit card loans for
which the criteria is 180 days past due). Net income is adversely impacted by
the level of non-performing assets caused by the deterioration of borrowers'
ability to meet scheduled interest and principal payments. In addition to
forgone revenue, the Company must increase the level of provisions for credit
losses, incur collection costs, and other costs associated with the management
and disposition of foreclosed properties.
An evaluation of the quality of the loan portfolio is performed by management on
a quarterly basis as an integral part of the credit administration function,
which includes the identification of past due loans, non-performing loans and
impaired loans, assessments of the expected effects of the current economic
environment and industry, geographic and customer concentrations in the loan
portfolio, and review of the historical loan 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 based on its evaluation of the
risk elements and resulting estimated losses inherent in the credit portfolio.
A substantial portion (88.7 percent at September 30, 2002) 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
25
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
market in which the Company operates. The provisions for credit losses
established in 2002 and 2001 and the related allowance for loan losses reflects
net charge-offs and losses incurred with respect to real estate, time and
demand, installment, credit card and other loans, and the effect of the real
estate market and general economic conditions of the New York Metropolitan area
on the loan portfolio. There is no assurance that the Company will not be
required to make future adjustments to the allowance in response to changing
economic conditions or regulatory examinations.
NON-INTEREST INCOME
- -------------------
Non-interest income increased for the three months ended September 30, 2002 by
$0.4 million to $2.0 million, an increase of 26.8 percent. The increase
primarily reflects net security gains of $0.3 million and an increase in loan
prepayment fees of $0.2 million, partially offset by a decrease in letter of
credit fees of $0.1 million. For the nine month period ended September 30, 2002,
non-interest income increased by $0.7 million to $6.5 million, a 12.8 percent
increase. The increase is primarily due to an increase in loan prepayment fees
($709,000), loans and deposit related fees ($104,000), and net security gains
($170,000), partially offset by a decrease in letter of credit fees ($169,000),
and service charges and fees ($134,000).
NON-INTEREST EXPENSES
- ---------------------
Non-interest expenses increased $1.0 million (11.4 percent) to $10.1 million and
$2.8 million (10.6 percent) to $29.3 million for the three and nine month
periods ended September 30, 2002 from the comparable periods in 2001,
respectively. The primary reason for these increases results from higher levels
of salaries and benefits, professional fees and other expense categories related
to increases in business volume.
Salaries and employee benefits, the largest component of non-interest expense,
increased by $737,000, or 13.8 percent, and $2,046,000, or 13.1 percent, during
the three and nine month periods ended September 30, 2002 compared to the prior
year periods. The increase occurred due to additional personnel employed by the
Company primarily to support deposit and loan growth. In addition, salaries and
employee benefits increased because of additional expenses related to incentive
compensation and bonus plans and payroll taxes. Increases in salaries and
employee benefits expense were partially offset by a decrease in medical
expenses related to the Bank's health care plan and an increase in the deferral
of FASB No. 91 loan allocation expenses for the 2002 periods as compared to
prior year periods.
Significant changes in the other components of non-interest expenses for the
three and nine month periods ended September 30, 2002, respectively, compared to
the prior year periods, were due to the following:
o Increase of $27,000 (1.8 percent) and $40,000 (0.9 percent) in occupancy
and equipment expense. The increase in both periods is primarily due to
an increase in building maintenance and other maintenance contracts,
partially offset by a reduction in utility expense from more competitive
rates and less severe weather.
26
U.S.B. HOLDING CO., INC.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATION (cont'd)
-------------------------------------------
o Increase of $4,000 (0.8 percent) and $85,000 (6.3 percent) in
advertising and business development. The increases reflect the hiring
of a public relations firm in 2002 and more emphasis on marketing and
business development programs to attract retail deposits during a period
of higher net loan growth in 2002 as compared to 2001.
o Increase of $95,000 (37.3 percent) and $198,000 (29.4 percent) in
professional fees. The increases reflect higher Director fees and
consulting fees in 2002, partially offset by a decline in legal fees
related to nonaccrual loans for the nine month period.
o Increase of $39,000 (17.1 percent) and $53,000 (7.2 percent) in
communications expense. The increases for both periods reflects an
increase in costs related to data communication lines.
o Decrease of $26,000 (11.7 percent) and $47,000 (7.3 percent) in
stationery and printing. The decreases primarily reflect a decrease in
printing special purpose letters in 2002 compared to 2001.
o Decrease of $5,000 (7.1 percent) and $6,000 (2.8 percent) in FDIC
insurance. The decreases are related to a reduction in FDIC insurance
rates for 2002, partially offset by an increase in insured deposits.
o Increase of $157,000 (24.0 percent) and $452,000 (22.9 percent) in other
expenses. The increases are primarily due to increases in branch related
expenses, credit card expenses, corporate filing fees, courier fees, and
Internet related expenses.
INCOME TAXES
- ------------
The effective income tax rates for the three and nine month periods ended
September 30, 2002 were 33.7 percent and 34.2 percent, compared to 34.5 percent
and 34.6 percent, respectively, for the prior periods in 2001. The lower
effective income tax rate for both periods, as compared to the Federal Statutory
tax rate, primarily reflects benefits associated with tax exempt obligations of
states and political subdivisions, partially offset by state income taxes, net
of Federal tax benefits.
27
U.S.B. HOLDING CO., INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- ------------------------------------------------------
MARKET RISK
-----------
Quantitative and qualitative disclosures about market risk at December 31, 2001
were reported in the Company's 2001 Annual Report to Stockholders. There have
been no material changes in the Company's market risk exposures at September 30,
2002 compared to December 31, 2001. Interest rate risk continues to be the
Company's primary market risk exposure since all Company transactions are
denominated in U.S. dollars with no direct foreign currency exchange or changes
in commodity price exposures. All market risk sensitive instruments continue to
be held to maturity or available for sale with no financial instruments entered
into for trading purposes. The Company does not use derivative financial
instruments such as interest rate swaps and caps extensively and has not been
party to any derivative financial instruments during the nine months ended
September 30, 2002.
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, 2002 as compared to
December 31, 2001. The Company's "Static Gap" at September 30, 2002 was a
positive cumulative $351.3 million in the one year time frame compared to a
negative cumulative $31.4 million at December 31, 2001. The change in the Static
Gap at September 30, 2002 compared to December 31, 2001, reflects an increase in
maturities and acceleration of call dates for securities due to the lower
interest rate environment, an increase in federal funds sold, and an extension
of maturities of time deposits and borrowings. If interest rates were to
gradually ramp up 200 basis points or down 150 basis points from current rates,
the percentage change in estimated net interest income for the subsequent twelve
month measurement period continues to be within the Company's policy limit of
not declining by more than 5.0 percent.
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 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 principal executive officer
and principal financial officer within the 90-day period prior to the filing of
this Quarterly Report on Form 10-Q. The principal executive officer and
principal financial officer have concluded, based on their review, that the
Company's disclosure controls and procedures, as defined by Exchange Act Rules
13a-14(c) and 15d-14(c), 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 were no significant
changes to the Company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS
Exhibit No. Exhibit
- ----------- -------
(3)(a) Restated Certificate of Incorporation dated July 25, 2002
(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)).
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- --------------------------------------------------
(4)(h) Guarantee Agreement, dated June 26, 2002, by and between
Registrant and State Street Bank and Trust Company of
Connecticut, National Association, as Trustee for the holders
of Capital Securities of USB Statutory Trust III,
(incorporated herein by reference to Registrant's 2002 Second
Quarter Form 10-Q, Exhibit (4) (h)).
(4)(i) Amended and Restated Declaration of Trust of USB Statutory
Trust III, (incorporated herein by reference to Registrant's
2002 Second Quarter Form 10-Q, Exhibit (4) (i)).
(10)(a) Agreement of Employment dated as of November 16, 1998, and
as amended November 8, 2000, between the Company and the Bank
and Thomas E. Hales (incorporated herein by reference to
Registrant's Annual Report on Form 10-Q for the quarter ended
September 30, 2000 ("2000 Third Quarter 10-Q"), Exhibit
(10)(a)).
(10)(b) Agreement of Employment dated as of November 16, 1998, and
as amended November 8, 2000, between the Company and the Bank
and Raymond J. Crotty (incorporated herein by reference to
Registrant's 2000 Third Quarter 10-Q, Exhibit (10)(b)).
(10)(c) Amendment to Employment Agreement as of October 25, 2001
between the Company and the Bank and Raymond J. Crotty
(incorporated herein by reference to Registrant's 2001 Third
Quarter 10-Q, Exhibit (10)(c)).
(10)(d) Agreement of Employment dated as of November 16, 1998, and
as amended November 8, 2000, between the Company and the Bank
and Steven T. Sabatini (incorporated herein by reference to
Registrant's 2000 Third Quarter 10-Q, Exhibit (10)(c)).
(10)(e) Amendment to Employment Agreement as of October 25, 2001
between the Company and the Bank and Steven T. Sabatini
(incorporated herein by reference to Registrant's 2001 Third
Quarter 10-Q, Exhibit (10)(e)).
(10)(f) Registrant's 1993 Incentive Stock Option Plan
(incorporated herein by reference from Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999,
Exhibit (10)(e)).
(10)(g) Registrant's U.S.B. Holding Co., Inc. Employee Stock Ownership
Plan (With Code Section 401(k) Provisions) (incorporated
herein by reference from Registrant's Annual Report on Form
10-K for the year ended December 31, 2001, Exhibit (10)(g )).
(10)(h) Registrant's Dividend Reinvestment and Stock Purchase Plan
(incorporated herein by reference from Registrant's Form S-3
Registration Statement (file No. 33-72788).
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- --------------------------------------------------
(10)(i) Registrant's Director Stock Option Plan (incorporated herein by
reference to Registrant's 1996 10-K, Exhibit (10)(f)).
(10)(j) Registrant's 1998 Director Stock Option Plan (incorporated
herein by reference to Registrant's Form S-8 Registration
Statement, filed June 5, 1998, Exhibit (10)(d)).
(10)(k) Registrant's Key Employees' Supplemental Investment Plan,
as amended July 1, 1997 and September 1, 1998 (incorporated
herein by reference to the Plan's Annual Report on Form 11-K
for the year ended December 31, 1998, Exhibit (10)(j)).
(10)(l) Registrant's Key Employees' Supplemental Diversified Investment Plan
dated September 1, 1998 (incorporated herein by reference to the Plan's
Annual Report on Form 11-K for the year ended December 31, 1998,
Exhibit (10)(k)).
(10)(m) Registrant's 1997 Employee Stock Option Plan (incorporated
herein by reference to Registrant's Proxy Statement filed
April 18, 1997).
(10)(n) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and
Employees ("Employee Stock Option Plan") (incorporated herein by
reference to Exhibit B to Tappan Zee Financial, Inc.'s Proxy Statement
for use in connection with its 1996 Annual Meeting of Shareholders).
(10)(o) Amendment No. 1 to the Employee Stock Option Plan (incorporated herein
by reference to Tappan Zee Financial, Inc.'s Annual Report on Form 10-K
for the fiscal year ended March 31, 1997 ("Tappan Zee 1997 10-K"),
Exhibit 10.1.1).
(10)(p) Amendment No. 2 to the Employee Stock Option Plan (incorporated herein
by reference to Exhibit A to Tappan Zee Financial, Inc.'s Proxy
Statement for use in connection with its 1997 Annual Meeting of
Shareholders ("Tappan Zee 1997 Proxy Statement")).
(10)(q) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors
("Outside Director Option Plan") (incorporated herein by reference to
Exhibit B to the Tappan Zee 1997 Proxy Statement).
(10)(r) Amendment No. 1 to the Outside Director Option Plan (incorporated
herein by reference to the Tappan Zee 1997 10-K, Exhibit 10.2.1).
(10)(s) Amendment No. 2 to the Outside Director Option Plan (incorporated
herein by reference to Exhibit B to the Tappan Zee 1997 Proxy
Statement).
(10)(t) Loan Agreement to the Employee Stock Ownership Plan Trust of Tappan Zee
Financial, Inc. and Certain Affiliates (incorporated herein by
reference to the Tappan Zee Financial, Inc.'s Annual Report on Form
10-K for the fiscal year ended March 31, 1996, Exhibit 10.7).
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (cont'd)
- --------------------------------------------------
(10)(u) Deferred Compensation Plan for Directors of Tarrytowns
Bank, FSB (Incorporated herein by reference to the
Registration Statement on Form S-1 (file No. 33-94128), filed
on June 30, 1995, as amended, Exhibit 10.7).
(10)(v) Forms of Stock Option Agreement by and between Tappan Zee
Financial, Inc. and recipients of stock options granted
pursuant to the Employee Option Plan and the Outside Director
Option Plan (incorporated herein by reference to the Tappan
Zee 1997 10-K, Exhibit 10.16).
(10)(w) Registrant's Retirement Plan for Non-Employee Directors of
U.S.B. Holding Co., Inc. and Certain Affiliates dated
effective as of May 19, 1999 and as amended March 20, 2002
(incorporated herein by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001,
(Exhibit (10)(w)).
(10)(x) U.S.B. Holding Co., Inc. Severance Plan dated January 30, 2002
(incorporated herein by reference from Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001,
Exhibit (10)(y)).
(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) Asset Purchase and Liability Assumptions 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)).
(11) Computation of earnings per share.*
(99.1) 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
No reports on Form 8-K were filed during the quarter ended September 30,
2002.
33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on November 12, 2002.
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)
34
CERTIFICATION
I, Thomas E. Hales, Chairman, President and Chief Executive Officer, certify
that:
1. I have reviewed this Quarterly Report on Form 10-Q of U.S.B. Holding Co.,
Inc. (the "Company").
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ Thomas E. Hales
----------------- ----------------------------------
Thomas E. Hales
Chairman of the Board, President &
Chief Executive Officer
35
CERTIFICATION
I, Steven T. Sabatini, Senior Executive Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of U.S.B. Holding Co.,
Inc. (the "Company").
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 /s/ Steven T. Sabatini
----------------- ---------------------------------
Steven T. Sabatini
Senior Executive Vice President &
Chief Financial Officer
36