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”) and Ad Con, Inc. The condensed consolidated financial
statements also include the Bank’s wholly-owned subsidiaries, Dutch Hill Realty
Corp., U.S.B. Financial Services, Inc., and USB Delaware Inc., including its
majority-owned subsidiary, TPNZ Preferred Funding Corporation (“TPNZ”). All
significant intercompany accounts and transactions are eliminated in
consolidation.
The
Company also has four subsidiary trusts, Union State Capital Trust I, Union
State Statutory Trust II, USB Statutory Trust III (through June 26, 2007, as
described in Note 10 of these notes to condensed consolidated financial
statements), and Union State Statutory Trust IV (collectively, the “Trusts”),
that are not consolidated with the Company for financial reporting purposes
in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”). The Trusts were established by the Company in 1997, 2001,
2002, and 2004, respectively, for the purpose of issuing corporation-obligated
mandatory redeemable capital securities (“Capital Securities”) and acquiring
junior subordinated debt from the Company. See Note 10 to the Company’s
Consolidated Financial Statements included in the Company’s 2006 Annual Report
to Stockholders for a further discussion of the Capital Securities and the
junior subordinated debt issued by the Company. The Company owns 100 percent
of
the voting securities of each of the Trusts. The Company has fully and
unconditionally guaranteed the Capital Securities along with all obligations
of
the Trusts under the trust agreements relating to the Capital Securities. The
Company’s ability to make interest payments on the subordinated debt is
primarily dependent on the receipt of dividends from the Bank. See Note 9 of
these notes to condensed consolidated financial statements for a discussion
of
the limits on the Bank’s ability to pay dividends to the Company.
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments (comprised of only normal and
recurring adjustments) necessary to present fairly the financial position of
the
Company as of September 30, 2007, the Company’s operations for the three and
nine months ended September 30, 2007 and 2006, and the Company’s cash flows and
changes in stockholders’ equity for the nine months ended September 30, 2007 and
2006. For purposes of presenting the condensed consolidated statements of cash
flows, cash and cash equivalents include cash and due from banks, as well as
federal funds sold. Certain reclassifications have been made to prior year
accounts to conform to the current year’s presentations.
The
condensed consolidated financial statements have been prepared in accordance
with GAAP and predominant practices used within the banking industry. A summary
of the Company's significant accounting policies is set forth in Note 3 to
the
Consolidated Financial Statements included in the Company's 2006 Annual Report
to Stockholders. In preparing such financial statements, management is required
to make estimates and assumptions that affect the reported amounts of actual
and
contingent assets and liabilities as of the dates of the condensed consolidated
statements of condition and the revenues and expenses for the periods reported.
Actual results could differ significantly from those estimates.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These
condensed consolidated financial statements should be read in conjunction with
the Company’s Consolidated Financial Statements for the year ended December 31,
2006 and related notes included in the Company’s 2006 Annual Report to
Stockholders and Form 10-K.
3.
|
Accounting
Pronouncements
|
Accounting
for Uncertainty in Income Tax Positions:
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109” (“FIN No. 48”). FIN No. 48 prescribes a recognition threshold
and measurement attribute, as well as clear criteria for subsequently
recognizing, derecognizing and measuring income tax positions, for financial
statement purposes. FIN No. 48 establishes a “more-likely-than-not” recognition
threshold that must be met before an income tax benefit can be recognized in
the
consolidated financial statements. To meet this threshold, a company must
determine that, upon examination by the taxing authority, the income tax
position is more likely than not to be sustained based on the technical merits
of the position. Once the recognition threshold has been met, a company is
required to recognize the largest amount of income tax benefit that is greater
than 50 percent likely of being realized upon ultimate settlement with the
taxing authority.
The
Company adopted FIN No. 48 on January 1, 2007. Upon adoption of FIN No. 48
by
the Company, the total amount of unrecognized income tax benefit was $0.5
million, of which the total amount, if recognized, that would favorably affect
the effective income tax rate was $0.2 million. Unrecognized income tax benefits
of $0.3 million are related to interest that would be incurred as a result
of
the Internal Revenue Service (“IRS”) and New York State Tax Department (“NYS Tax
Department”) disallowing the income tax benefit during the year in which the
benefits were recognized by the Company. Accrued interest on uncertain income
tax positions and related penalties, when applicable, are recognized in the
provision for income taxes. The Company’s adoption of FIN No. 48 did not have a
material impact on the Company’s condensed consolidated financial
statements.
The
Company’s tax years for 2003, 2004, 2005, and 2006 can be subject to examination
by the IRS according to a three year statute of limitations. The Company is
currently under examination by the NYS Tax Department for the tax years 2003,
2004, and 2005. The Company can also be subject to examination by the NYS Tax
Department for tax year 2006.
The
Company’s uncertain income tax positions may change over the subsequent 12-month
period as a result of completing the current NYS Tax Department examination
for
tax years 2003, 2004, and 2005. Upon adoption of FIN No. 48, unrecognized income
tax benefits related to these tax years was $0.3 million.
Pending
Accounting Pronouncement - Fair Value Measurements:
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. A fair value
measurement should be determined based on the assumptions that market
participants would use in pricing an asset or liability. SFAS No. 157 applies
only to fair value measurements already required or permitted by other
accounting standards and does not impose requirements for additional fair value
measurements. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. Management is currently evaluating the impact that the adoption
of
SFAS No. 157 will have on the Company’s consolidated financial statements.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pending
Accounting Pronouncement - Fair Value Option for Financial Assets and Financial
Liabilities:
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment to FASB
Statement No. 115” (“SFAS No. 159”), which permits companies to choose to
measure eligible items at fair value at specified election dates. The objective
is to improve financial reporting by providing entities with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective as of the beginning of the first fiscal
year that begins after November 15, 2007. Management is in the process of
evaluating the effects of choosing to measure eligible items at fair value
under
SFAS No. 159.
4.
|
Accounting
for Share-Based
Compensation
|
SFAS
No.
123R, “Share-Based Payment” (“SFAS No. 123R”), requires accounting for
share-based compensation cost using a fair value method in the financial
statements. Compensation cost is recognized, net of estimated forfeitures,
for
the portion of outstanding awards for which the requisite service has not yet
been rendered, based on the grant-date fair value of those awards.
In
2005,
1998 and 1989, the stockholders of the Company approved Director Stock Option
Plans (the “Director Plans”) under which options to purchase an aggregate of
2,041,358 shares (after adjustment for stock splits and dividends) of the
Company’s common stock may be granted to all non-employee members of the
Company’s Board of Directors. There have been options to purchase 292,459 shares
(as adjusted for common stock dividends) granted under the 2005 Director Stock
Option Plan, and there were options to purchase 232,541 shares (as adjusted
for
common stock dividends) remaining to be granted at September 30, 2007. No
further options may be granted under the 1998 and 1989 Director Stock Option
Plans.
Under
the
Tappan Zee Directors’ Stock Option Plan (the “Tappan Zee Directors’ Plan”),
which was assumed by the Company, options to purchase 80,057 shares (as adjusted
for common stock dividends) were authorized for grant to non-employee directors.
There have been options to purchase an aggregate of 66,710 shares (as adjusted
for common stock dividends) granted under this plan. This plan expired at the
end of August 2006, and no further options may be granted under this
plan.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A
summary
of the activity in the Director Plans and related information for the nine
months ended September 30, 2007 is as follows:
|
|
2007
|
|
|
|
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($
in 000’s)
|
|
Vested
outstanding at January 1, 2007
|
|
|
583,884
|
|
$
|
14.74
|
|
|
|
|
Unvested
outstanding at January 1, 2007
|
|
|
97,486
|
|
|
21.88
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
681,370
|
|
|
15.76
|
|
|
|
|
Granted
|
|
|
100,162
|
|
|
20.59
|
|
|
|
|
Exercised
|
|
|
(24,915
|
)
|
|
10.30
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
756,617
|
|
|
16.58
|
|
$
|
5,029
|
|
Exercisable
at September 30, 2007
|
|
|
656,455
|
|
$
|
15.97
|
|
$
|
4,765
|
|
Weighted
average fair value of options granted during the nine months ended
September 30, 2007
|
|
|
|
|
$
|
6.25
|
|
|
|
|
A
summary
of the activity in the Director Plans and Tappan Zee Directors’ Plan and related
information for the nine months ended September 30, 2006 is as
follows:
|
|
2006
|
|
|
|
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($
in 000’s)
|
|
Vested
outstanding at January 1, 2006
|
|
|
558,082
|
|
$
|
13.09
|
|
|
|
|
Unvested
outstanding at January 1, 2006
|
|
|
94,811
|
|
|
20.14
|
|
|
|
|
Outstanding
at January 1, 2006
|
|
|
652,893
|
|
|
14.11
|
|
|
|
|
Granted
|
|
|
97,486
|
|
|
21.88
|
|
|
|
|
Exercised
|
|
|
(69,009
|
)
|
|
8.79
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
681,370
|
|
|
15.76
|
|
$
|
4,290
|
|
Exercisable
at September 30, 2006
|
|
|
583,884
|
|
$
|
14.74
|
|
$
|
4,273
|
|
Weighted
average fair value of options granted during the nine months ended
September 30, 2006
|
|
|
|
|
$
|
7.38
|
|
|
|
|
Under
the
1993 and 1984 Incentive Stock Option Plans and the 2005, 2001, and 1997 Employee
Stock Option Plans (collectively, the “Employee Stock Option Plans”), both
incentive and non-qualified options to purchase an aggregate of 8,288,717 shares
(after adjustment for stock splits and stock dividends) of the Company’s common
stock were authorized to be granted to key employees of the Company and its
subsidiaries. There have been options to purchase 1,038,447 shares (as adjusted
for common stock dividends) granted under the 2005 Employee Stock Option Plan,
and there were options to purchase 851,553 shares (as adjusted for common stock
dividends) remaining to be granted at September 30, 2007. No further options
may
be granted under the 1993 and 1984 Incentive Stock Option Plans and the 2001
and
1997 Employee Stock Option Plans.
Under
the
Tappan Zee Stock Option Plan, which was assumed by the Company, options to
purchase 186,798 shares (as adjusted for common stock dividends) were authorized
for grant to employees. There have been options to purchase 133,430 shares
(as
adjusted for common stock dividends) granted under this plan. This plan expired
at the end of August 2006, and no further options may be granted under this
plan.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A
summary
of the activity in the Employee Stock Option Plans and related information
for
the nine months ended September 30, 2007 is as follows:
|
|
2007
|
|
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($
in 000’s)
|
|
Vested
outstanding at January 1, 2007
|
|
|
1,990,693
|
|
$
|
14.96
|
|
|
|
|
Unvested
outstanding at January 1, 2007
|
|
|
596,539
|
|
|
23.16
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
2,587,232
|
|
|
16.85
|
|
|
|
|
Granted
|
|
|
321,669
|
|
|
21.96
|
|
|
|
|
Cancelled
|
|
|
(3,205
|
)
|
|
21.87
|
|
|
|
|
Exercised
|
|
|
(95,474
|
)
|
|
15.29
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
2,810,222
|
|
|
17.48
|
|
$
|
16,524
|
|
Exercisable
at September 30, 2007
|
|
|
2,000,376
|
|
$
|
15.31
|
|
$
|
15,843
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
|
|
|
|
|
during
the nine months ended September 30, 2007
|
|
|
|
|
$
|
6.55
|
|
|
|
|
A
summary
of the activity in the Employee Stock Option Plans and Tappan Zee Stock Option
Plan and related information for the nine months ended September 30, 2006 is
as
follows:
|
|
2006
|
|
|
|
Options
|
|
Weighted-Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($
in 000’s)
|
|
Vested
outstanding at January 1, 2006
|
|
|
2,651,175
|
|
$
|
14.16
|
|
|
|
|
Unvested
outstanding at January 1, 2006
|
|
|
1,560
|
|
|
22.26
|
|
|
|
|
Outstanding
at January 1, 2006
|
|
|
2,652,735
|
|
|
14.16
|
|
|
|
|
Granted
|
|
|
321,586
|
|
|
21.96
|
|
|
|
|
Cancelled
|
|
|
(200
|
)
|
|
21.93
|
|
|
|
|
Exercised
|
|
|
(147,177
|
)
|
|
10.77
|
|
|
|
|
Expired
|
|
|
(69,858
|
)
|
|
22.34
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
2,757,086
|
|
|
15.04
|
|
$
|
19,345
|
|
Exercisable
at September 30, 2006
|
|
|
2,439,267
|
|
$
|
14.14
|
|
$
|
19,313
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
|
|
|
|
|
during
the nine months ended September 30, 2006
|
|
|
|
|
$
|
6.92
|
|
|
|
|
For
the
three months ended September 30, 2007 and 2006, share-based compensation expense
under SFAS No. 123R was $0.7 million and $0.4 million, resulting in a decrease
in net income of $0.4 million and $0.2 million, a decrease in basic earnings
per
common share of $0.02 and $0.01, and a decrease in diluted earnings per common
share of $0.02 and $0.01, respectively. The income tax benefit related to the
share-based compensation cost for both the three months ended September 30,
2007
and 2006 was $0.2 million. For the three months ended September 30, 2007 and
2006, $1.3 million and $0.4 million was received from the exercise of stock
options, and $0.2 million and $0.1 million was realized as income tax benefits,
respectively.
For
the
nine months ended September 30, 2007 and 2006, share-based compensation expense
under SFAS No. 123R was $1.9 million and $0.9 million, resulting in a decrease
in net income of $1.2 million and $0.6 million, a decrease in basic earnings
per
common share of $0.06 and $0.03, and a decrease in diluted earnings per common
share of $0.05 and $0.02, respectively. The income tax benefit related to the
share-based compensation cost for the nine months ended September 30, 2007
and
2006 was $0.6 million and $0.3 million, respectively. For the nine months ended
September 30, 2007 and 2006, $1.7 million and $2.0 million was received from
the
exercise of stock options, and $0.3 million and $0.8 million was realized as
income tax benefits, respectively.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As
of
September 30, 2007, there was $4.8 million of total unrecognized compensation
cost related to non-vested share-based compensation awards granted under the
stock option plans. The cost will be recognized over thirty-one months or a
lesser period based upon the vesting of these share-based compensation awards.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model and is recognized over the options’ vesting
period.
The
following weighted average assumptions were used for the Director Plans and
Employee Stock Option Plans for the nine months ended September 30, 2007 and
2006:
|
|
Three
months ended
|
|
Nine
months ended
|
|
Director
Plan Assumptions:
|
|
September
30,
2007
|
|
September
30,
2006
|
|
September
30,
2007
|
|
September
30,
2006
|
|
Expected
stock price volatility
|
|
|
29.89
|
%
|
|
31.31
|
%
|
|
30.59
|
%
|
|
32.22
|
%
|
Risk-free
interest rate
|
|
|
4.85
|
|
|
5.07
|
|
|
4.96
|
|
|
4.56
|
|
Expected
dividend yield
|
|
|
2.85
|
|
|
2.43
|
|
|
2.64
|
|
|
2.51
|
|
Expected
annual forfeitures
|
|
|
1.99
|
|
|
1.70
|
|
|
1.85
|
|
|
1.70
|
|
Expected
life (in years)
|
|
|
7.92
|
|
|
7.81
|
|
|
7.87
|
|
|
7.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Plan Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
stock price volatility
|
|
|
29.92
|
%
|
|
30.52
|
%
|
|
29.92
|
%
|
|
30.54
|
%
|
Risk-free
interest rate
|
|
|
4.78
|
|
|
5.03
|
|
|
4.78
|
|
|
5.03
|
|
Expected
dividend yield
|
|
|
2.58
|
|
|
2.43
|
|
|
2.58
|
|
|
2.43
|
|
Expected
annual forfeitures
|
|
|
1.31
|
|
|
1.29
|
|
|
1.31
|
|
|
1.29
|
|
Expected
life (in years)
|
|
|
7.42
|
|
|
6.86
|
|
|
7.42
|
|
|
6.87
|
|
The
gross
carrying amounts of intangible assets acquired in connection with branch and
bank acquisitions and a favorable lease were $9.0 million at both September
30,
2007 and December 31, 2006, and accumulated amortization on such intangible
assets was $7.3 million and $6.4 million at September 30, 2007 and December
31,
2006, respectively. Intangible assets of $8.4 million are amortized using the
straight line method and $0.6 million of an intangible asset is amortized based
on a deposit market study performed at the time of acquisition. The intangible
amortization expense was $0.3 million and $0.8 million for both the three and
nine months ended September 30, 2007 and 2006, respectively. The annual
amortization expense for the remaining life of all intangibles will vary
throughout the amortization periods.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6.
|
Earnings
Per Common Share
(“EPS”)
|
The
computation of basic and diluted earnings per common share for the three and
nine months ended September 30, 2007 and 2006 is as follows:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
5,802
|
|
$
|
8,145
|
|
$
|
19,057
|
|
$
|
23,485
|
|
Less:
preferred dividends
|
|
|
―
|
|
|
―
|
|
|
10
|
|
|
10
|
|
Net
income for basic and diluted
earnings
per common share - net income
available
to common stockholders
|
|
$
|
5,802
|
|
$
|
8,145
|
|
$
|
19,047
|
|
$
|
23,475
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
common
share - weighted average shares
|
|
|
22,006,642
|
|
|
21,751,565
|
|
|
21,934,259
|
|
|
21,746,909
|
|
Effects
of dilutive securities -
director
and employee stock options
|
|
|
545,092
|
|
|
889,975
|
|
|
508,501
|
|
|
961,122
|
|
Denominator
for diluted earnings per
common
share - adjusted weighted
average
shares
|
|
|
22,551,734
|
|
|
22,641,540
|
|
|
22,442,760
|
|
|
22,708,031
|
|
Basic
earnings per common share
|
|
$
|
0.26
|
|
$
|
0.37
|
|
$
|
0.87
|
|
$
|
1.08
|
|
Diluted
earnings per common share
|
|
|
0.26
|
|
|
0.36
|
|
|
0.85
|
|
|
1.03
|
|
In
accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities,” the Company’s investment policies include a determination of
the appropriate classification of securities at the time of purchase. Securities
that may be sold as part of the Company’s asset/liability or liquidity
management, or in response to or in anticipation of changes in interest rates
and resulting prepayment risk, or for similar factors, are classified as
available for sale. Securities that the Company has the ability and positive
intent to hold to maturity are classified as held to maturity and carried at
amortized cost. Realized gains and losses on the sales of all securities,
determined by using the specific identification method, are reported in
earnings. Securities available for sale are shown in the condensed consolidated
statements of financial condition at estimated fair value and the resulting
net
unrealized gains and losses, net of tax, are shown in accumulated other
comprehensive income (loss).
The
decision to sell securities available for sale is based on management’s
assessment of changes in economic or financial market conditions, interest
rate
risk, and the Company’s financial position and liquidity. Estimated fair values
for securities are based on quoted market prices, where available. If quoted
market prices are not available, estimated fair values are based on quoted
market prices of similar instruments. Securities in an unrealized loss position
are periodically evaluated for other-than-temporary impairment. Management
considers the effect of interest rates, credit ratings and other factors on
the
valuation of such securities, as well as the Company’s intent and ability to
hold such securities until a forecasted recovery or maturity occurs. The Company
does not acquire a significant amount of securities for the purpose of engaging
in trading activities.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company had gross realized gains on securities transactions of $4,000 and
$426,000 during the three months ended September 30, 2007 and 2006,
respectively. The Company had gross realized gains on securities transactions
of
$6,000 and $431,000 during the nine months ended September 30, 2007 and 2006,
respectively. The Company did not have realized losses on securities
transactions during the three and nine months ended September 30, 2007 and
2006,
respectively.
A
summary
of the amortized cost, estimated fair values, and related gross unrealized
gains
and losses on securities at September 30, 2007 and December 31, 2006 is as
follows:
|
|
(000’s)
|
|
September
30, 2007
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
72,931
|
|
$
|
―
|
|
$
|
948
|
|
$
|
71,983
|
|
Mortgage-backed
securities
|
|
|
426,337
|
|
|
2,060
|
|
|
4,954
|
|
|
423,443
|
|
Obligations
of states and political subdivisions
|
|
|
226
|
|
|
10
|
|
|
―
|
|
|
236
|
|
Corporate
securities
|
|
|
111
|
|
|
33
|
|
|
―
|
|
|
144
|
|
Total
securities available for sale
|
|
$
|
499,605
|
|
$
|
2,103
|
|
$
|
5,902
|
|
$
|
495,806
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
615,398
|
|
$
|
121
|
|
$
|
5,509
|
|
$
|
610,010
|
|
Obligations
of states and political subdivisions
|
|
|
97,613
|
|
|
1,694
|
|
|
284
|
|
|
99,023
|
|
Total
securities held to maturity
|
|
$
|
713,011
|
|
$
|
1,815
|
|
$
|
5,793
|
|
$
|
709,033
|
|
|
|
(000’s)
|
|
December
31, 2006
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
72,927
|
|
$
|
—
|
|
$
|
1,027
|
|
$
|
71,900
|
|
Mortgage-backed
securities
|
|
|
361,904
|
|
|
2,027
|
|
|
4,932
|
|
|
358,999
|
|
Obligations
of states and political subdivisions
|
|
|
230
|
|
|
12
|
|
|
―
|
|
|
242
|
|
Corporate
securities
|
|
|
109
|
|
|
44
|
|
|
―
|
|
|
153
|
|
Total
securities available for sale
|
|
$
|
435,170
|
|
$
|
2,083
|
|
$
|
5,959
|
|
$
|
431,294
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
639,846
|
|
$
|
178
|
|
$
|
6,033
|
|
$
|
633,991
|
|
Obligations
of states and political subdivisions
|
|
|
112,102
|
|
|
1,800
|
|
|
386
|
|
|
113,516
|
|
Total
securities held to maturity
|
|
$
|
751,948
|
|
$
|
1,978
|
|
$
|
6,419
|
|
$
|
747,507
|
|
|
Available
for sale and held to maturity qualified obligations of states and
political subdivisions are not subject to Federal income tax.
|
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
A
summary of gross unrealized losses on securities that are not
other-than-temporarily impaired, which have been in a continuous
unrealized loss position for less than 12 months and for 12 months
or
longer as of September 30, 2007 and December 31, 2006, is as
follows:
|
Securities
in an Unrealized Loss Position that are not Other-Than-Temporarily
Impaired
|
|
(000’s)
|
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
September
30, 2007
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
U.S.
government agencies
|
|
$
|
169,484
|
|
$
|
67
|
|
$
|
381,513
|
|
$
|
6,390
|
|
$
|
550,997
|
|
$
|
6,457
|
|
Mortgage-backed
securities
|
|
|
109,467
|
|
|
149
|
|
|
130,496
|
|
|
4,805
|
|
|
239,963
|
|
|
4,954
|
|
Obligations
of states and
political
subdivisions
|
|
|
28,509
|
|
|
75
|
|
|
9,792
|
|
|
209
|
|
|
38,301
|
|
|
284
|
|
Corporate
securities
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total
temporarily impaired
securities
|
|
$
|
307,461
|
|
$
|
291
|
|
$
|
521,801
|
|
$
|
11,404
|
|
$
|
829,262
|
|
$
|
11,695
|
|
|
|
(000’s)
|
|
December
31, 2006
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
U.S.
government agencies
|
|
$
|
120,536
|
|
$
|
511
|
|
$
|
406,325
|
|
$
|
6,549
|
|
$
|
526,861
|
|
$
|
7,060
|
|
Mortgage-backed
securities
|
|
|
6,550
|
|
|
22
|
|
|
145,583
|
|
|
4,910
|
|
|
152,133
|
|
|
4,932
|
|
Obligations
of states and
political
subdivisions
|
|
|
41,195
|
|
|
148
|
|
|
8,914
|
|
|
238
|
|
|
50,109
|
|
|
386
|
|
Total
temporarily impaired
securities
|
|
$
|
168,281
|
|
$
|
681
|
|
$
|
560,822
|
|
$
|
11,697
|
|
$
|
729,103
|
|
$
|
12,378
|
|
The
Company’s U.S. government agency and mortgage-backed securities that are in an
unrealized loss position at September 30, 2007 and December 31, 2006 are credit
rated AAA or Aaa by nationally recognized statistical rating organizations.
Substantially all obligations of states and political subdivisions are credit
rated AAA or Aaa due to insurance, which guarantees the obligations against
default, by private insurance companies. At September 30, 2007 and December
31,
2006, approximately $3.1 million and $14.4 million, respectively, of issuances
were not rated, substantially all of which were bond or tax anticipation notes
from local municipalities.
At
September 30, 2007, the number of securities in an unrealized loss position
included 20 U.S. government agencies, 35 mortgage-backed securities, and 80
obligations of states and political subdivisions. At December 31, 2006, the
number of securities in an unrealized loss position included 17 U.S. government
agencies, 29 mortgage-backed securities, and 107 obligations of states and
political subdivisions. The temporary impairment on securities of less than
12
months and 12 months or more at September 30, 2007 and December 31, 2006 is
due
to the higher interest rate environment, as compared to the periods in which
the
securities were initially purchased. The higher interest rates resulted in
a
decline in the market value of the securities. The temporary impairment will
fluctuate as the interest rate environment changes. In a rising interest rate
environment, the temporary impairment will increase, while a decrease in the
temporary impairment will occur in a declining interest rate environment.
Management does not consider the impairment of the securities to be other than
temporary due to the high credit quality or insurance provided by private
insurance companies, and the intent and ability of the Company to hold such
securities until a forecasted recovery or maturity occurs.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nonaccrual
loans were $9.7 million and $9.8 million at September 30, 2007 and December
31,
2006, respectively. Restructured loans were $0.1 million at both September
30,
2007 and December 31, 2006. At September 30, 2007 and December 31, 2006, the
recorded investment in loans that are considered to be impaired approximated
$7.7 million and $9.2 million, respectively. Such loans were also in nonaccrual
status at September 30, 2007 and December 31, 2006, respectively. The average
recorded investment in impaired loans for the nine months ended September 30,
2007 and 2006 and for the year ended December 31, 2006 was $8.4 million, $14.7
million, and $14.1 million, respectively. There was no interest income
recognized by the Company on impaired loans for the three and nine months ended
September 30, 2007, and $0.2 million and $0.5 million of interest income on
impaired loans was recognized for the three and nine months ended September
30,
2006, respectively.
As
applicable, each impaired loan has a related allowance for loan losses in
accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan
- an amendment of FASB Statements No. 5 and 15.” As of September 30, 2007,
impaired and nonaccrual loans primarily consisted of one customer relationship.
The loans related to this customer relationship, aggregating $7.4 million of
commercial loans as of September 30, 2007, involve problems with sources of
repayment from operating cash flows. No specific allowance for loan loss was
allocated to the impaired loans related to this customer relationship due to
the
market value of the real estate collateral. The impaired loans mentioned above
are also supported by personal guarantees.
Substantially
all of the nonaccruing and restructured loans are collateralized by real estate.
At September 30, 2007, the Company had and continues to have no commitments
to
lend additional funds to any customers with nonaccrual or restructured loan
balances, with the exception of a commitment to lend an additional $0.1 million
with respect to a commercial loan included in the $7.4 million commercial loan
relationship described above. At September 30, 2007, accruing loans denoted
as
potential problem loans, which may result in the loans being placed on
nonaccrual status in the near future, were not significant. Accruing loans
that
are contractually past due 90 days or more at September 30, 2007 were not
significant.
9.
|
Borrowings
and Stockholders’
Equity
|
The
Company utilizes short-term and long-term borrowings primarily to meet funding
requirements for its asset growth, balance sheet leverage, and to manage its
interest rate risk.
Short-term
borrowings include securities sold under agreements to repurchase, federal
funds
purchased, and short-term Federal Home Loan Bank of New York (“FHLB”) advances.
Short-term securities sold under agreements to repurchase have original
maturities between one and 365 days. The Bank has borrowing availability under
master security sale and repurchase agreements through four primary investment
firms, the FHLB, and to a lesser extent, its customers. At September 30, 2007
and December 31, 2006, the Bank had no short-term repurchase agreements
outstanding with the FHLB or primary investment firms.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At
September 30, 2007 and December 31, 2006, the Bank had short-term repurchase
agreements with customers of $7.4 million and $0.9 million at a weighted average
interest rate of 3.97 percent and 3.83 percent, respectively. These short-term
customer borrowings were collateralized by securities with an aggregate carrying
value of $7.8 million and an estimated fair value of $7.6 million at September
30, 2007 and an aggregate carrying value and estimated fair value of $0.7
million at December 31, 2006.
Federal
funds purchased represent overnight funds. The Bank has federal funds purchase
lines available with six financial institutions for a total of $90.0 million.
At
September 30, 2007 and December 31, 2006, the Bank had no federal funds
purchased balances outstanding.
Short-term
FHLB advances are borrowings with original maturities between one and 365 days.
There were no short-term FHLB advances outstanding at September 30, 2007 and
December 31, 2006.
Additional
information with respect to short-term borrowings as of and for the nine months
ended September 30, 2007 and 2006 is presented in the following
table:
|
|
(000’s
except percentages)
|
|
Short-Term
Borrowings
|
|
2007
|
|
2006
|
|
Balance
at September 30
|
|
$
|
7,412
|
|
$
|
863
|
|
Average
balance outstanding
|
|
$
|
2,685
|
|
$
|
46,901
|
|
Weighted-average
interest rate:
|
|
|
|
|
|
|
|
As
of September 30
|
|
|
3.97
|
%
|
|
3.88
|
%
|
Paid
during period
|
|
|
3.95
|
%
|
|
4.72
|
%
|
The
Bank
had long-term borrowings, which have original maturities of over one year,
of
$586.0 million and $605.5 million in securities sold under agreements to
repurchase at September 30, 2007 and December 31, 2006, respectively. These
borrowings have an original term of ten years at interest rates between 2.83
percent and 6.08 percent at September 30, 2007, and between 1.99 percent and
6.08 percent at December 31, 2006 that are callable on certain dates after
an
initial noncall period at the option of the counterparty to the repurchase
agreements. The long-term borrowings in securities sold under agreements to
repurchase may not be repaid in full prior to maturity without penalty. As
of
September 30, 2007, long-term repurchase agreements with the FHLB were
collateralized by securities with an aggregate carrying value of $605.0 million
and an estimated fair value of $602.9 million. As of December 31, 2006,
long-term repurchase agreements with the FHLB were collateralized by securities
with an aggregate carrying value of $653.8 million and an estimated fair value
of $650.8 million.
At
September 30, 2007 and December 31, 2006, long-term FHLB advances totaled $126.8
million and $101.8 million at interest rates between 4.04 percent and 5.99
percent and between 4.05 percent and 5.99 percent, respectively. At September
30, 2007, borrowings totaling $1.8 million consisted of amortizing advances
having scheduled payments. Other borrowings totaling $125.0 million have an
original term of ten years that are callable on certain dates after an initial
noncall period at the option of the counterparty to the advance. Advances at
December 31, 2006 included $1.8 million of amortizing advances having scheduled
periodic payments and $100.0 million that are callable on certain dates after
an
initial noncall period at the option of the issuer. The long-term FHLB advances
may not be repaid in full prior to maturity without penalty. At September 30,
2007 and December 31, 2006, these borrowings were collateralized by a pledge
to
the FHLB of a security interest in certain residential mortgage-related assets
having an aggregate book value of $156.3 million and $125.6 million,
respectively.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At
September 30, 2007 a $28.0 million FHLB letter of credit was used as collateral
for a New York State governmental deposit. The FHLB letter of credit was
collateralized by a pledge to the FHLB of residential mortgage loans at
September 30, 2007 having an aggregate book value of $34.5 million. At December
31, 2006, a $20.0 million FHLB letter of credit was used as collateral for
a New
York State government deposit and collateralized by a pledge to the FHLB of
residential mortgage loans having an aggregate book value of $24.7
million.
A
summary
of long-term, fixed-rate borrowings distributed based upon remaining contractual
payment date and expected option call date at September 30, 2007, with
comparative totals for December 31, 2006, is as follows:
|
|
(000’s
except percentages)
|
|
Long-Term
Borrowings
|
|
Within
1
Year
|
|
After
1
But
Within
5
Years
|
|
After
5
Years
|
|
2007
Total
|
|
2006
Total
|
|
Contractual
Payment Date:
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term borrowing
|
|
$
|
50,021
|
|
$
|
120,096
|
|
$
|
542,677
|
|
$
|
712,794
|
|
$
|
707,309
|
|
Weighted
average interest rate
|
|
|
5.63
|
%
|
|
5.71
|
%
|
|
4.13
|
%
|
|
4.50
|
%
|
|
4.46
|
%
|
Expected
Call Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term borrowing
|
|
$
|
131,021
|
|
$
|
145,096
|
|
$
|
436,677
|
|
$
|
712,794
|
|
$
|
707,309
|
|
Weighted
average interest rate
|
|
|
4.01
|
%
|
|
5.30
|
%
|
|
4.38
|
%
|
|
4.50
|
%
|
|
4.46
|
%
|
At
September 30, 2007 and December 31, 2006, the Bank held 348,726 and 345,227
shares, respectively, of capital stock of the FHLB with a carrying value of
$34.9 million and $34.5 million, respectively, which is required in order to
borrow under the short- and long-term advances and securities sold under
agreements to repurchase programs from the FHLB. The FHLB generally limits
borrowings to an aggregate of 50 percent of total assets 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 in any year 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. In addition, the Bank may not declare
and pay dividends more often than quarterly, and no dividends may be declared
or
paid if there is any impairment of the Bank’s capital stock. At September 30,
2007, the Bank could pay dividends of $36.9 million to the Company without
having to obtain prior regulatory approval.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For
the
nine months ended September 30, 2006, the Company purchased 179,900 shares
of
its common stock at an aggregate cost of $3.9 million under its 2005 repurchase
plan, which expired December 31, 2006. As of September 30, 2007, the Company’s
Board of Directors has not authorized a new repurchase plan. For the nine months
ended September 30, 2007, there was no common stock acquired in connection
with
stock option exercises compared to 8,922 shares of common stock acquired for
the
nine months ended September 30, 2006.
10.
|
Corporation-Obligated
Mandatory Redeemable Capital Securities of Subsidiary
Trusts
|
At
September 30, 2007, the Company had outstanding $51.5 million of junior
subordinated debt in connection with the issuance of $51.5 million of Capital
Securities. Capital Securities are generally permitted to be included in Tier
I
regulatory capital in an amount not in excess of 25 percent of Tier I Capital,
with the remainder included in Total Capital. At September 30, 2007, Tier I
Capital totaled $291.1 million, which included $50.0 million of Capital
Securities.
On
June
26, 2007, the Capital Securities of USB Statutory Trust III were redeemed at
a
redemption price equal to the $1,000 liquidation amount of each security, plus
all accrued and unpaid interest per security to, but not including, the
redemption date. The redemption of the Capital Securities was made in connection
with the concurrent redemption by the Company of all of its $10.3 million
Floating Rate Junior Subordinated Deferrable Interest Debentures (the
“Debentures”) due June 26, 2032, which were held exclusively by USB Statutory
Trust III, on June 26, 2007 at a redemption price equal to the principal
outstanding amount of the Debentures, plus interest accrued and unpaid on the
Debentures to, but not including, the redemption date.
11.
|
Commitments
and Contingencies
|
In
the
normal course of business, various commitments to extend credit are made that
are not reflected in the accompanying condensed consolidated financial
statements. At September 30, 2007, the Company had approximately $476.4 million
in formal credit lines outstanding, $54.2 million in loan commitments
outstanding, which are loans primarily collateralized by real estate, $31.4
million of standby letters of credit outstanding, and $46.2 million of credit
card lines outstanding. Such amounts represent the maximum risk of loss on
these
commitments.
Standby
letters of credit are issued to guarantee financial performance or obligations
of the Bank’s customers. Generally, standby letters of credit are either
partially or fully collateralized by cash, real estate, or other assets. In
most
cases, personal guarantees are obtained. Standby letters of credit are
considered in the Bank’s evaluation of its reserve for unfunded loan
commitments.
Effective
May 19, 1999, the Company adopted the Retirement Plan for Non-Employee Directors
of U.S.B. Holding Co., Inc. and Certain Affiliates (the “Director Retirement
Plan”), which is described in Note 17 to the Company’s Consolidated Financial
Statements included in the 2006 Annual Report to Stockholders. At September
30,
2007 and December 31, 2006, the Company had a recorded liability of $604,000
and
$580,000, respectively, to provide for the present value of payments expected
to
be made under the Director Retirement Plan. The discount rate used to compute
the present value obligation is 5.25 percent for both periods.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company adopted SFAS No. 158, “Employers Accounting for Deferred Pension and
Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88, 106,
and 132(R)” (“SFAS No. 158”) as of December 31, 2006. The adoption of SFAS No.
158 required the Company to record the unamortized prior service cost, which
is
being amortized over the average remaining service period of the current
non-employee directors, as a component of accumulated other comprehensive income
(loss). Benefit cost for the Director Retirement Plan for the three months
ended
September 30, 2007 and 2006 was approximately $22,000 and $31,000, of which
$8,000 and $7,000 represents current service cost and $14,000 and $24,000
represents prior service cost, respectively. Benefit cost for the Director
Retirement Plan for the nine months ended September 30, 2007 and 2006 was
approximately $66,000 and $94,000, of which $24,000 and $21,000 represents
current service cost and $42,000 and $73,000 represents amortization of prior
service cost, respectively.
On
July
25, 2007, the Company and the Bank entered into amended and restated employment
agreements with each of Thomas E. Hales and Raymond J. Crotty (collectively,
the
“Employment Agreements”) in order to renew the terms to five years for Mr. Hales
and three years for Mr. Crotty. In addition, the Employment Agreements were
amended to comply with section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”), and regulations or other guidance of the Internal Revenue
Service published thereunder (collectively, “Section 409A”). Among other
requirements, Section 409A requires restrictions on payment timing to specified
individuals under certain types of compensation agreements.
On
July
25, 2007, the Bank entered into a letter agreement with Mr. Thomas Buonaiuto
which provides change of control benefit protections to Mr. Buonaiuto in certain
circumstances.
On
July
25, 2007, the Company adopted the U.S.B. Holding Co., Inc. Amended and Restated
Severance Plan (the “Severance Plan”), which will provide severance protections
to eligible full time employees of both the Company and Bank following a change
in control (as defined in the Severance Plan) of the Company.
Other
commitments are also described in Note 16 to the Company’s Consolidated
Financial Statements included in the Company’s 2006 Annual Report to
Stockholders.
The
Company is party to various legal proceedings arising in the ordinary course
of
business. Because litigation is inherently unpredictable, particularly in cases
where claimants seek substantial or indeterminate damages or where
investigations and proceedings are in the early phases, the Company cannot
predict with certainty the loss or range of loss related to such matters, how
such matters will be resolved, when they will ultimately be resolved, or what
the eventual settlement, fine, penalty, or other relief might be, if any.
Consequently, the Company cannot estimate losses or ranges of losses for matters
where there is only a reasonable possibility that a loss may have been incurred.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with counsel, that
the
resolution of such matters will not have a material adverse effect on the
financial statements of the Company, taken as a whole; such resolution may,
however, have a material effect on the operating results or cash flows in any
future period, depending on the level of income for such period.
U.S.B.
HOLDING CO., INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company provides reserves in accordance with SFAS No. 5, “Accounting for
Contingencies,” as required. The ultimate resolution of any legal proceedings
may differ from the amounts reserved, if any. As of September 30, 2007, reserves
were not required in accordance with SFAS No. 5.
The
Company has one reportable segment, “Community Banking.” All of the Company’s
activities are interrelated, and each activity is dependent and assessed based
on how each of the activities of the Company supports the others. For example,
commercial lending is dependent upon the ability of the Bank to fund itself
with
deposits and other borrowings and to manage interest rate and credit risk.
This
situation is also similar for consumer and residential mortgage lending.
Accordingly, all significant operating decisions are based upon analysis of
the
Company as one operating segment or unit.
The
Company operates only in the U.S. domestic market, specifically the lower Hudson
Valley, which includes the counties of Rockland, Westchester, Orange, Putnam
and
Dutchess, New York, as well as New York City and Long Island, New York, and
Southern Connecticut and the surrounding area. For the nine months ended
September 30, 2007 and 2006, there is no customer that accounted for more than
ten percent of the Company’s revenue.
13.
|
Merger
Agreement with KeyCorp
|
The
Company has entered into an Amended and Restated Agreement and Plan of Merger
dated as of October 22, 2007 among KeyCorp, KYCA LLC, and U.S.B. Holding Co.,
Inc. (the “Agreement”), pursuant to which the Company will merge into KYCA LLC,
a Delaware limited liability company and a direct wholly-owned subsidiary of
KeyCorp, in exchange for cash and stock, and the Bank will merge into KeyBank
National Association (the “Merger”). Under the terms of the Agreement,
stockholders of the Company will be entitled to receive 0.455 shares of KeyCorp
common stock and $8.925 in cash for each share of Company common stock that
they
own. Consummation of the Merger is subject to a number of customary conditions,
including, but not limited to, the approval of the Agreement by the Company’s
stockholders and the receipt of all required bank regulatory approvals.
On
November 2, 2007, the Merger was approved by the Federal Reserve Board. A
special meeting of stockholders of the Company has been set for November 28,
2007 for stockholders of record on October 22, 2007 to vote on the Merger.
For
both the three and nine months ended September 30, 2007, the Company incurred
$2.3 million of acquisition costs related to the Merger. The acquisition costs
primarily consisted of investment banker and legal fees.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
|
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains a number of “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements may be identified by the use of such words as
“believe,” “expect,” “anticipate,” “intend,” “should,” “ “would,” “could,”
“may,” “planned,” “estimated,” “potential,” “outlook,” “predict,” “project” and
similar terms and phrases, including references to
assumptions.
Forward-looking
statements are based on various assumptions and analyses made by the Company
in
light of management's experience and its perception of historical trends,
current conditions and expected future developments, as well as other factors
the Company believes are appropriate under the circumstances. These statements
are not guarantees of future performance and are subject to risks, uncertainties
and other factors (many of which are beyond the Company’s control) that could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. These factors include, without
limitation, the following: the timing and occurrence or non-occurrence of events
may be subject to circumstances beyond the Company’s control; there may be
increases in competitive pressure among financial institutions or from
non-financial institutions; changes in the interest rate environment may reduce
interest margins or affect the value of the Company’s investments; changes in
deposit flows, loan demand or real estate values may adversely affect the
Company’s business; changes in accounting principles, policies or guidelines may
cause the Company’s financial condition to be perceived differently; general
economic conditions, either nationally or locally in some or all of the areas
in
which the Company does business, or conditions in the securities markets or the
banking industry may be less favorable than the Company currently anticipates;
legislative or regulatory changes may adversely affect the Company’s business;
applicable technological changes may be more difficult or expensive than the
Company anticipates; success or consummation of new business initiatives may
be
more difficult or expensive than the Company anticipates; or litigation or
matters before regulatory agencies, whether currently existing or commencing
in
the future, may delay the occurrence or non-occurrence of events longer than
the
Company anticipates.
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. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed
on
these statements.
MERGER
AGREEMENT WITH KEYCORP
The
Company has entered into an Amended and Restated Agreement and Plan of Merger
dated October 22, 2007 among KeyCorp, KYCA LLC, and U.S.B. Holding Co., Inc.
(the “Agreement”), pursuant to which the Company will merge into KYCA LLC, a
Delaware limited liability company and a direct wholly-owned subsidiary of
KeyCorp, in exchange for cash and stock, and the Bank will merge into KeyBank
National Association (the “Merger). Under the terms of the Agreement,
stockholders of the Company will be entitled to receive 0.455 shares of KeyCorp
common stock and $8.925 in cash for each share of Company common stock that
they
own. Consummation of the Merger is subject to a number of customary conditions,
including, but not limited to, the approval of the Agreement by the Company’s
stockholders and the receipt of all required bank regulatory approvals.
On
November 2, 2007, the Merger was approved by the Federal Reserve Board. A
special meeting of stockholders of the Company has been set for November 28,
2007 for stockholders of record on October 22, 2007 to vote on the Merger.
For
both the three and nine months ended September 30, 2007, the Company incurred
$2.3 million of acquisition costs related to the Merger. The acquisition costs
primarily consisted of investment banker and legal fees.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW
The
Company’s primary business is obtaining deposits through its retail branch
system, and commercial and municipal relationships, and lending to both a retail
and commercial customer base. A substantial amount of loans are collateralized
by real estate, including construction projects. The Bank’s residential mortgage
portfolio does not contain sub-prime loans and, therefore, has not been affected
by the sub-prime loan market. The Company also acquires triple-A credit rated
securities and obligations of local municipalities to invest deposits in excess
of loan production and borrows on a wholesale basis to leverage capital and
manage interest rate risk. The credit quality of the Company’s securities
portfolio has not been affected by the sub-prime loan market. The Company
operates through its 30 full service branches (31 full service branches as
of
September 30, 2007 before the closing of the Bank’s Chestnut Ridge office
located in Rockland County, New York) and its four loan centers in Rockland,
Westchester, and Orange counties, and New York City in New York and Stamford,
Connecticut.
The
Company’s primary source of revenue is net interest income, which is the
difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. The Company also derives income from
non-interest income sources such as service charges on deposit accounts, gains
on sales of securities and other forms of income. Net interest income and
non-interest income support the Company’s operating expenses and provision for
credit losses.
As
the
Company’s primary source of income is net interest income, the interest rate
environment has a significant effect on revenue. The market for and credit
quality of loans is impacted by interest rates, as well as the local economy.
Deposits are also sensitive to interest rates, local economic conditions, and
the attractiveness of alternative investments, such as stocks, bonds, mutual
funds, and annuities.
The
Company’s core revenue, net interest income, has been adversely affected during
the nine months ended September 30, 2007 by a decrease in the net interest
margin as a result of a reduction in interest rate spreads between interest
earning assets and interest bearing liabilities compared to the 2006 period
and
pricing pressures from increased competition for loans and deposits. Ongoing
pricing pressures on deposits and loans in the Company’s marketplace could
continue to negatively affect net interest income by causing the net interest
margin to compress further.
Also
significant to the Company’s net income and earnings per common share is the
ability to generate quality interest earning assets in the form of loans and
securities at reasonable interest rate spreads to maintain or increase net
interest income. Increasing the Company’s interest earning assets is challenging
as a result of intense competition for loans, and difficulty in obtaining
acceptable yields and structures on security investments, while managing
interest rate risk. In addition, loan prepayments, particularly on commercial
mortgage loans, also impact the Company’s ability to increase interest earning
assets.
Critical
Accounting Policies
The
Company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The
Company’s significant accounting policies are more fully described in Note 3 to
the Company’s Consolidated Financial Statements included in the Company’s 2006
Annual Report to Stockholders. Certain accounting policies require management
to
make estimates and assumptions that affect the reported amounts of actual and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. On
an
on-going basis, management evaluates its estimates and assumptions, and the
effects of revisions are reflected in the financial statements in the period
in
which they are determined to be necessary.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
critical policies given the Company’s current business strategy and
asset/liability structure are accounting for non-performing loans, the allowance
for loan losses, the reserve for unfunded loan commitments and standby letters
of credit, the provision for credit losses, the classification of securities
as
either held to maturity or available for sale, the evaluation of other than
temporary impairment of securities, and the evaluation of the valuation reserves
for net deferred tax assets. These accounting policies are those that most
frequently require management to make estimates and judgments and, therefore,
are critical to understanding the Company’s results of operations. The Company’s
critical accounting policies are described in greater detail under the heading
“Critical Accounting Policies” in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in the Company’s 2006
Annual Report to Stockholders. 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 included in the Company’s 2006 Annual Report to
Stockholders.
COMPARISON
OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2007 AND DECEMBER 31,
2006
At
September 30, 2007, the Company had total assets of $3,070.9 million, an
increase of $147.6 million from December 31, 2006. The increase in total assets
was primarily due to increases in cash and due from banks, federal funds sold,
and the securities portfolio. The increase in cash and due from banks and
federal funds sold was primarily due to receipt of seasonal tax deposits from
local municipalities.
The
securities portfolio, including investments in FHLB stock, totaled $1,243.7
million and $1,217.8 million at September 30, 2007 and December 31, 2006,
respectively, an increase of $25.9 million during the nine months ended
September 30, 2007. The securities portfolio consisted of securities held to
maturity at amortized cost of $713.0 million and $751.9 million, securities
available for sale at estimated fair value totaling $495.8 million and $431.3
million, and FHLB stock of $34.9 million and $34.5 million at September 30,
2007
and December 31, 2006, respectively.
Securities
are selected to provide safety of principal and liquidity, produce income on
excess funds during structural changes in the composition of deposits and during
cyclical and seasonal changes in loan demand, and to leverage capital. The
amount of securities purchased and maintained in the investment portfolio is
dependent on the level of deposit growth in excess of loan growth, the ability
to leverage capital, while maintaining adequate capital ratios and managing
interest rate risk, and the ability of the Bank to borrow wholesale funds.
In
order to manage liquidity and control interest rate risk, the Company’s
investment strategy focuses on a combination of securities that have short-term
maturities, adjustable-rate securities or those whose cash flow patterns result
in a lower degree of interest rate risk, and investments in fixed rate
securities with longer-term maturities and call options by the issuer to
increase yield.
Generally,
most securities may be used to collateralize borrowings and public deposits.
As
a result, the investment portfolio is an integral part of the Company’s funding
strategy. The Company will continue to seek opportunities in utilizing the
investment portfolio to invest excess cash flow and leverage capital, while
managing interest rate risk. The weighted average life of the investment
portfolio at September 30, 2007 and December 31, 2006 was 6.48 years and 7.87
years, respectively.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
During
the nine months ended September 30, 2007, U.S. government agency securities
decreased $24.4 million due primarily to redemptions of $25.0 million, partially
offset by an increase of $0.5 million in amortization of the loss on transfer
of
available for sale securities to held to maturity and an increase of $0.1
million in estimated fair value of available for sale securities. U.S.
government agency securities of $687.3 million as of September 30, 2007
consisted of fixed-rate securities with longer-term maturities and call options
by the issuer to increase yield. Mortgage-backed securities increased by $64.4
million primarily due to purchases of $105.9 million and an increase of $0.1
million in discount accretion, partially offset by principal paydowns of $41.6
million. The Bank’s investment in obligations of states and political
subdivisions, or municipal securities, decreased by $14.5 million. This was
primarily due to maturities and redemptions of $31.9 million, partially offset
by purchases of $17.4 million. Municipal securities are considered core
investments having favorable tax equivalent yields and diversified maturities.
These obligations are principally of New York State political subdivisions
and
substantially all are classified as held to maturity. Purchases of municipal
securities are dependent upon their availability in the marketplace and the
comparative tax equivalent yields of such securities compared to other
securities of similar credit risk and maturity.
The
Company invests in medium-term corporate debt securities and bank and other
equity securities. The Company had outstanding balances in corporate securities
of $0.1 million and $0.2 million at September 30, 2007 and December 31, 2006,
respectively, consisting of bank and other equity securities.
Loans
represent the largest and highest yielding earning assets of the Company. The
Company continues to originate a significant portion of loans collateralized
by
real estate within the markets in which it primarily conducts business. Loan
volume is dependent on the Bank’s ability to originate loans in the competitive
markets in which it operates. Critical factors include the credit worthiness
of
borrowers, the economy of the Bank’s markets, and the level of interest rates.
Also impacting net loan growth is the level of loan prepayments and competition
from other financial institutions.
At
September 30, 2007, total loans, net were $1,547.6 million, a net decrease
of
$29.8 million or 1.9 percent compared to December 31, 2006. A summary of the
decrease in total loans, net at September 30, 2007 compared to December 31,
2006
is as follows:
|
|
|
|
(000’s)
|
|
|
|
|
|
September
30,
2007
|
|
December
31,
2006
|
|
Increase/
(Decrease)
|
|
Time
and demand loans
|
|
$
|
135,372
|
|
$
|
140,416
|
|
$
|
(5,044
|
)
|
Installment
loans
|
|
|
25,415
|
|
|
28,621
|
|
|
(3,206
|
)
|
Credit
Card
|
|
|
7,581
|
|
|
7,444
|
|
|
137
|
|
Real
Estate
|
|
|
|
|
|
|
|
|
|
|
-
Commercial
|
|
|
556,543
|
|
|
572,622
|
|
|
(16,079
|
)
|
-
Residential
|
|
|
290,553
|
|
|
293,370
|
|
|
(2,817
|
)
|
-
Construction and real estate secured
|
|
|
461,260
|
|
|
465,463
|
|
|
(4,203
|
)
|
-
Home equity
|
|
|
83,316
|
|
|
82,452
|
|
|
864
|
|
Other
|
|
|
4,413
|
|
|
5,280
|
|
|
(867
|
)
|
Gross
loans
|
|
|
1,564,453
|
|
|
1,595,668
|
|
|
(31,215
|
)
|
Deferred
net loan commitment fees
|
|
|
(1,262
|
)
|
|
(2,248
|
)
|
|
986
|
|
Total
loans
|
|
|
1,563,191
|
|
|
1,593,420
|
|
|
(30,229
|
)
|
Allowance
for loan losses
|
|
|
(15,622
|
)
|
|
(16,034
|
)
|
|
412
|
|
Total
loans, net
|
|
$
|
1,547,569
|
|
$
|
1,577,386
|
|
$
|
(29,817
|
)
|
In
the
normal course of business, various commitments to extend credit are made that
are not reflected in the accompanying condensed consolidated financial
statements. The Company had approximately $476.4 million in formal credit lines
outstanding, $54.2 million in loan commitments outstanding, which are loans
primarily collateralized by real estate, $31.4 million of standby letters of
credit outstanding, and $46.2 million of credit card lines outstanding. Such
amounts represent the maximum risk of loss on these commitments. 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, increasing deposits and borrowings, and receiving proceeds from
loan
and security repayments.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
Company's allowance for loan losses decreased $0.4 million to $15.6 million
at
September 30, 2007 from $16.0 million at December 31, 2006. The decrease
in the
allowance for loan losses was due to charge-offs of $1.2 million of
nonperforming loans, as well as improved factors applied to other loan
classifications. The allowance represents 1.00 percent and 1.01 percent of
total
loans outstanding at September 30, 2007 and December 31, 2006,
respectively.
The
allowance for loan losses and reserve for unfunded loan commitments and standby
letters of credit reflect a provision of $0.7 million and net charge-offs of
$1.2 million recorded for the nine months ended September 30, 2007. The reserve
for unfunded loan commitments and standby letters of credit of $1.0 million
at
September 30, 2007 and $1.1 million at December 31, 2006 is included in other
liabilities. At September 30, 2007, accruing loans denoted as potential problem
loans, which may result in the loans being placed on nonaccrual status in the
near future, were not significant.
As
with
any financial institution, poor economic conditions and high inflation, interest
rates or unemployment may lead to increased losses in the loan portfolio.
Conversely, improvements in economic conditions tend to reduce the amounts
charged against the allowance. Management has established various controls,
in
addition to Board approved underwriting standards, in order to limit future
losses, such as (1) a “watch list” of possible problem and classified loans, (2)
various loan policies concerning loan administration (loan file documentation,
disclosures, approvals, etc.), and (3) a loan review staff employed by the
Company to determine compliance with established controls, and to review the
quality and identify anticipated collectibility issues of the portfolio.
Management determines which loans are uncollectible and makes additional
provisions, as necessary, to state the allowance and the reserve at the
appropriate levels.
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 and evaluation of past due loans, non-performing
loans, impaired loans and potential problem loans, assessments of the expected
effects of the current economic environment, applicable industry, geographic,
and customer concentrations within the loan portfolio, and a review of
historical loss experience. Management takes a prudent and cautious position
in
evaluating various business and economic uncertainties in relation to the
Company’s loan portfolio. In management’s judgment, the allowance and reserve
are considered adequate to absorb losses inherent in the credit portfolio.
The
collectibility of the loan portfolio of the Company is subject to changes in
the
real estate market in which the Company operates.
The
provisions for credit losses established for the nine months ended September
30,
2007 and 2006, and the related allowance and reserve, reflect net charge-offs
incurred and risks with respect to real estate, time and demand, installment,
credit card, and other loans, as well as the effect of the real estate market
and general economic conditions of the New York Metropolitan area on the loan
portfolio. Management believes the allowance and the reserve at September 30,
2007 appropriately reflect the risk elements inherent in the total credit
portfolio at that time. There is no assurance that the Company will not be
required to make future adjustments to the allowance or the reserve in response
to changing economic conditions or regulatory examinations.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
Company’s fundamental source of funds supporting interest earning assets
continues to be deposits, consisting of demand deposits (non-interest bearing),
NOW, money market, savings, and various forms of time deposits. Retail deposits
are obtained primarily by mass marketing efforts and are fee and interest rate
sensitive. Commercial deposits are generally obtained through direct marketing
and business relationship development efforts, as well as a result of lending
relationships. The maintenance of a strong deposit base is key to the
development of lending opportunities and creates long-term customer
relationships, which enhance the ability to cross sell services. Depositors
include individuals, small and large businesses, and governmental entities.
To
meet the requirements of a diverse customer base, a full range of deposit
instruments is offered, which has allowed the Company to maintain the deposit
base despite intense competition from other banking institutions and non-bank
financial service providers.
Total
deposits increased $139.5 million, or 7.4 percent, for the nine months ended
September 30, 2007 to $2,035.9 million. The total deposit increase resulted
from
net increases in retail and commercial deposits of $20.1 million and municipal
deposits of $173.4 million, partially offset by a decrease in brokered deposits
of $54.0 million.
A
summary
of the increase in total deposits at September 30, 2007 compared to December
31,
2006 is as follows:
|
|
September
30,
2007
|
|
December
31,
2006
|
|
Increase/
(Decrease)
|
|
Non-interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
Individuals,
partnerships, and corporations
|
|
$
|
258,678
|
|
$
|
269,468
|
|
$
|
(10,790
|
)
|
Certified
and official checks
|
|
|
19,256
|
|
|
14,753
|
|
|
4,503
|
|
States
and political subdivisions
|
|
|
98,890
|
|
|
10,661
|
|
|
88,229
|
|
Total
non-interest bearing deposits
|
|
|
376,824
|
|
|
294,882
|
|
|
81,942
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
|
98,683
|
|
|
110,386
|
|
|
(11,703
|
)
|
Money
market accounts
|
|
|
181,102
|
|
|
139,052
|
|
|
42,050
|
|
Savings
deposits
|
|
|
371,185
|
|
|
370,034
|
|
|
1,151
|
|
States
and political subdivisions - NOW, money market,
and
savings deposits
|
|
|
184,863
|
|
|
81,827
|
|
|
103,036
|
|
Time
deposits of individuals, partnerships, corporations
under
$100,000
|
|
|
374,163
|
|
|
378,631
|
|
|
(4,468
|
)
|
Time
deposits of individuals, partnerships, corporations
over
$100,000
|
|
|
209,543
|
|
|
214,039
|
|
|
(4,496
|
)
|
Brokered
time deposits
|
|
|
―
|
|
|
54,000
|
|
|
(54,000
|
)
|
States
and political subdivisions - time deposits
|
|
|
143,799
|
|
|
161,660
|
|
|
(17,861
|
)
|
IRAs
and Keoghs
|
|
|
95,730
|
|
|
91,858
|
|
|
3,872
|
|
Total
interest bearing deposits
|
|
|
1,659,068
|
|
|
1,601,487
|
|
|
57,581
|
|
Total
deposits
|
|
$
|
2,035,892
|
|
$
|
1,896,369
|
|
$
|
139,523
|
|
The
increase in municipal deposits was primarily due to temporary seasonal tax
deposits received during the end of the 2007 third quarter. The increase in
retail and commercial deposits at September 30, 2007 was primarily due to the
Bank offering competitively priced tiered money market deposits. The decrease
in
brokered deposits was a result of maturities during the first six months of
2007. The brokered deposits were not renewed as a result of alternative sources
of funding (i.e., wholesale borrowings and municipal deposits) being more
competitively priced.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
As
the
amounts of deposits change and earning assets increase or decrease, the Bank
will manage its funding with short-term borrowings. Short-term borrowings
provide management with the ability to react to changes in levels of earning
assets. As of September 30, 2007, the Bank did not have any FHLB short-term
borrowings as a result of an increase in municipal deposits. Management will
continue to evaluate the interest rate environment in order to determine the
most effective combination of borrowings and deposits.
Stockholders'
equity increased to $236.9 million at September 30, 2007 from the December
31,
2006 balance of $223.4 million, an increase of 6.0 percent. The increase
primarily resulted from: $19.1 million of net income for the nine months ended
September 30, 2007; $2.0 million of stock options exercised and related tax
benefit; $1.9 million of compensation cost related to stock options; and $0.4
million in accumulated other comprehensive income; partially offset by cash
dividends paid of $9.9 million.
The
Company's leverage ratio at September 30, 2007 was 9.65 percent, compared to
9.75 percent at December 31, 2006. The decrease in the Company’s leverage
capital ratio is due primarily to the redemption of USB Statutory Trust III
Capital Securities, partially offset by an increase in stockholders’ equity,
excluding accumulated other comprehensive loss, for the nine months ended
September 30, 2007. The Company's Tier I and total capital ratios under
applicable risk-based capital guidelines were 16.02 percent and 16.93 percent
at
September 30, 2007, and 15.43 percent and 16.34 percent at December 31, 2006,
respectively. In addition, the Bank exceeded all current regulatory capital
requirements and was in the “well-capitalized” category at September 30, 2007
and December 31, 2006.
COMPARISON
OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2007
AND 2006
Earnings
Net
income for the three months ended September 30, 2007 was $5.8 million compared
to $8.1 million for the three months ended September 30, 2006, a decrease of
$2.3 million, or 28.8 percent. Dilut
ed
earnings per common share for the quarter ended September 30, 2007 was $0.26
compared to $0.36 for the prior year period, a decrease of 27.8 percent. The
Company’s third quarter 2007 net income result
ed
in a
9.97 percent return on average common stockholders’ equity and a 0.77 percent
return on average total assets, as compared to 15.27 percent and 1.13 percent,
respectively, for the 2006 third quarter.
Net
income for the nine months ended September 30, 2007 was $19.1 million compared
to $23.5 million for the nine months ended September 30, 2006, a decrease of
$4.4 million, or 18.9 percent. Diluted earnings per common share for the quarter
ended September 30, 2007 was $0.85 compared to $1.03 for the prior year period,
a decrease of 17.5 percent. The Company’s nine months ended September 30, 2007
net income resulted in a 11.08 percent return on average common stockholders’
equity and a 0.85 percent return on average total assets, as compared to 14.94
percent and 1.11 percent, respectively, for the 2006 period.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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
the most significant component of the Company’s consolidated earnings. Net
interest income is positively impacted by a combination of increases in interest
earning assets over interest bearing liabilities and an increase in the net
interest spread between interest earning assets and interest bearing
liabilities. Net interest income is adversely impacted by a combination of
decreases in interest earning assets over interest bearing liabilities and
a
decrease in the net interest spread between interest earning assets and interest
bearing liabilities. For the three months ended September 30, 2007, net interest
income decreased $0.7 million, or 3.0 percent, to $22.5 million compared to
$23.2 million for the three months ended September 30, 2006. For the nine months
ended September 30, 2007, net interest income decreased $2.7 million, or 3.9
percent, to $66.7 million compared to $69.4 million for the nine months ended
September 30, 2006.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
A
summary
of the average balances and interest yield/rates for the three months ended
September 30, 2007 compared to the three months ended September 30, 2006 is
as
follows:
|
|
(000’s,
except
percentages)
For
the three months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
INTEREST
EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
50,400
|
|
$
|
659
|
|
|
5.12
|
%
|
$
|
30,029
|
|
$
|
396
|
|
|
5.16
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
|
703,969
|
|
|
9,839
|
|
|
5.59
|
|
|
712,931
|
|
|
9,943
|
|
|
5.58
|
|
Mortgage-backed
securities
|
|
|
434,083
|
|
|
6,093
|
|
|
5.61
|
|
|
410,217
|
|
|
5,780
|
|
|
5.64
|
|
Obligations
of states and political subdivisions
|
|
|
103,634
|
|
|
1,659
|
|
|
6.40
|
|
|
98,589
|
|
|
1,595
|
|
|
6.47
|
|
Corporate
securities, FHLB stock, and other securities
|
|
|
37,514
|
|
|
695
|
|
|
7.41
|
|
|
36,930
|
|
|
538
|
|
|
5.83
|
|
Loans,
net
|
|
|
1,577,360
|
|
|
29,213
|
|
|
7.33
|
|
|
1,493,654
|
|
|
27,976
|
|
|
7.47
|
|
Total
interest earning assets
|
|
|
2,906,960
|
|
|
48,158
|
|
|
6.52
|
%
|
|
2,782,350
|
|
|
46,228
|
|
|
6.61
|
%
|
INTEREST
BEARING LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
185,466
|
|
$
|
781
|
|
|
1.67
|
%
|
$
|
166,551
|
|
$
|
497
|
|
|
1.20
|
%
|
Money
market
|
|
|
208,295
|
|
|
1,772
|
|
|
3.38
|
|
|
177,596
|
|
|
1,209
|
|
|
2.73
|
|
Savings
|
|
|
397,062
|
|
|
2,598
|
|
|
2.60
|
|
|
405,041
|
|
|
2,367
|
|
|
2.34
|
|
Time
|
|
|
855,257
|
|
|
10,351
|
|
|
4.79
|
|
|
799,036
|
|
|
8,743
|
|
|
4.33
|
|
Total
interest bearing deposits
|
|
|
1,646,080
|
|
|
15,502
|
|
|
3.70
|
|
|
1,548,224
|
|
|
12,816
|
|
|
3.27
|
|
Federal
funds purchased, securities sold under agreements to repurchase
and FHLB
advances
|
|
|
734,441
|
|
|
8,406
|
|
|
4.48
|
|
|
717,994
|
|
|
8,223
|
|
|
4.53
|
|
Subordinated
debt issued in connection with corporation - obligated
mandatory
redeemable capital securities of subsidiary trusts
|
|
|
51,548
|
|
|
1,195
|
|
|
9.27
|
|
|
61,858
|
|
|
1,436
|
|
|
9.29
|
|
Total
interest bearing liabilities
|
|
|
2,432,069
|
|
|
25,103
|
|
|
4.05
|
%
|
|
2,328,076
|
|
|
22,475
|
|
|
3.82
|
%
|
NET
INTEREST INCOME
|
|
|
|
|
$
|
23,055
|
|
|
|
|
|
|
|
$
|
23,753
|
|
|
|
|
NET
YIELD ON INTEREST EARNING ASSETS (NET INTEREST
MARGIN)
|
|
|
|
|
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
3.41
|
%
|
The
data
contained herein has been adjusted to a tax equivalent basis, based on the
Federal statutory tax rate of 35 percent. The effect of the tax equivalent
adjustment to interest income on total interest earning assets was $0.6 million
for the three months ended September 30, 2007 and 2006. The estimated fair
value
adjustment on the available for sale securities is included in non-interest
earning assets. Non accruing loans are included in average balances of loans,
net. The net amortization of loan commitment fees, net of certain direct loan
origination costs of $0.5 million and $0.6 million for the three months ended
September 30, 2007 and 2006, respectively, are included in interest income
on
loans, net.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
A
summary
of the average balances and interest yield/rates for the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006 is
as
follows:
|
|
(000’s,
except percentages)
For
the nine months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
INTEREST
EARNING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
59,299
|
|
$
|
2,324
|
|
|
5.17
|
%
|
$
|
27,472
|
|
$
|
1,018
|
|
|
4.89
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
|
709,911
|
|
|
29,720
|
|
|
5.58
|
|
|
712,283
|
|
|
29,822
|
|
|
5.58
|
|
Mortgage-backed
securities
|
|
|
396,570
|
|
|
16,644
|
|
|
5.60
|
|
|
357,793
|
|
|
14,549
|
|
|
5.42
|
|
Obligations
of states
and
political subdivisions
|
|
|
109,809
|
|
|
5,267
|
|
|
6.40
|
|
|
104,147
|
|
|
5,001
|
|
|
6.40
|
|
Corporate
securities, FHLB
stock,
and other securities
|
|
|
37,024
|
|
|
2,026
|
|
|
4.10
|
|
|
35,454
|
|
|
1,401
|
|
|
5.28
|
|
Loans,
net
|
|
|
1,596,831
|
|
|
88,154
|
|
|
7.31
|
|
|
1,486,081
|
|
|
81,023
|
|
|
7.22
|
|
Total
interest earning assets
|
|
|
2,909,444
|
|
|
144,135
|
|
|
6.59
|
%
|
|
2,723,230
|
|
|
132,814
|
|
|
6.49
|
%
|
INTEREST
BEARING LIABILITIES
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
194,182
|
|
$
|
2,670
|
|
|
1.84
|
%
|
$
|
184,803
|
|
$
|
1,790
|
|
|
1.29
|
%
|
Money
market
|
|
|
189,218
|
|
|
4,630
|
|
|
3.27
|
|
|
156,816
|
|
|
2,598
|
|
|
2.22
|
|
Savings
|
|
|
399,299
|
|
|
7,710
|
|
|
2.58
|
|
|
420,733
|
|
|
6,668
|
|
|
2.12
|
|
Time
|
|
|
887,291
|
|
|
31,888
|
|
|
4.79
|
|
|
775,008
|
|
|
23,126
|
|
|
3.98
|
|
Total
interest bearing deposits
|
|
|
1,669,990
|
|
|
46,898
|
|
|
3.75
|
|
|
1,537,360
|
|
|
34,182
|
|
|
2.97
|
|
Federal
funds purchased,
securities
sold under
agreements
to repurchase
and
FHLB advances
|
|
|
718,884
|
|
|
24,420
|
|
|
4.48
|
|
|
685,705
|
|
|
23,223
|
|
|
4.47
|
|
Subordinated
debt issued in
connection
with
corporation
- obligated
mandatory
redeemable capital
securities
of subsidiary trusts
|
|
|
58,195
|
|
|
4,283
|
|
|
9.81
|
|
|
61,858
|
|
|
4,145
|
|
|
8.93
|
|
Total
interest bearing liabilities
|
|
|
2,447,069
|
|
|
75,601
|
|
|
4.10
|
%
|
|
2,284,923
|
|
|
61,550
|
|
|
3.58
|
%
|
NET
INTEREST INCOME
|
|
|
|
|
$
|
68,534
|
|
|
|
|
|
|
|
$
|
71,264
|
|
|
|
|
NET
YIELD ON INTEREST EARNING ASSETS (NET INTEREST
MARGIN)
|
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
3.49
|
%
|
The
data
contained herein has been adjusted to a tax equivalent basis, based on the
Federal statutory tax rate of 35 percent. The effect of the tax equivalent
adjustment to interest income on total interest earning assets was $1.8 million
and $1.9 million for the nine months ended September 30, 2007 and 2006,
respectively. The estimated fair value adjustment on the available for sale
securities is included in non-interest earning assets. Non accruing loans are
included in average balances of loans, net. The net amortization of loan
commitment fees, net of certain direct loan origination costs of $1.5 million
and $1.6 million for the nine months ended September 30, 2007 and 2006,
respectively, are included in interest income on loans, net.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
|
The
following table sets forth the dollar amount of changes in interest income,
interest expense, and net interest income between the three and nine months
ended September 30, 2007 and 2006 on a tax equivalent basis:
|
|
For
the three months ended
September
30, 2007 compared to 2006
|
|
For
the nine months ended
September
30, 2007 compared to 2006
|
|
|
|
Increase
(Decrease) due to change in
|
|
Increase
(Decrease) due to change in
|
|
|
|
Average
Volume
|
|
Average
Rate
|
|
Total
Increase
(Decrease)
|
|
Average
Volume
|
|
Average
Rate
|
|
Total
Increase
(Decrease)
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
284
|
|
$
|
(21
|
)
|
$
|
263
|
|
$
|
1,245
|
|
$
|
61
|
|
$
|
1,306
|
|
Securities
|
|
|
293
|
|
|
137
|
|
|
430
|
|
|
1,855
|
|
|
1,029
|
|
|
2,884
|
|
Loans,
net
|
|
|
4,061
|
|
|
(2,824
|
)
|
|
1,237
|
|
|
6,109
|
|
|
1,022
|
|
|
7,131
|
|
Total
interest earning assets
|
|
|
4,638
|
|
|
(2,708
|
)
|
|
1,930
|
|
|
9,209
|
|
|
2,112
|
|
|
11,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
872
|
|
|
1,814
|
|
|
2,686
|
|
|
3,144
|
|
|
9,572
|
|
|
12,716
|
|
Federal
funds purchased, securities
sold
under agreements to repurchase
and
FHLB advances
|
|
|
608
|
|
|
(425
|
)
|
|
183
|
|
|
1,144
|
|
|
53
|
|
|
1,197
|
|
Subordinated
debt issued in connection
with
corporation - obligated
mandatory
redeemable capital
securities
of subsidiary trusts
|
|
|
(238
|
)
|
|
(3
|
)
|
|
(241
|
)
|
|
(357
|
)
|
|
495
|
|
|
138
|
|
Total
interest bearing liabilities
|
|
|
1,242
|
|
|
1,386
|
|
|
2,628
|
|
|
3,931
|
|
|
10,120
|
|
|
14,051
|
|
Decrease
in interest differential
|
|
$
|
3,396
|
|
$
|
(4,094
|
)
|
$
|
(698
|
)
|
$
|
5,278
|
|
$
|
(8,008
|
)
|
$
|
(2,730
|
)
|
The
decrease in net interest income for the three and nine months ended September
30, 2007 resulted primarily from decreases in the net interest spread and margin
on a tax equivalent basis. The decreases in the net interest margin on a tax
equivalent basis were primarily due to the rates on interest bearing liabilities
increasing more rapidly than the yields on interest earning assets due to
competitive pressures on loan and deposit pricing. The decrease was partially
offset by increases in average volume on interest earning assets. As of
September 30, 2007, the Company’s balance sheet is in a liability interest rate
sensitive position.
The
net
interest margin may continue to be negatively affected if interest rate spreads
between interest earning assets and interest bearing liabilities continue to
narrow. Also, pricing pressures on deposits and loans in the Company’s
marketplace could continue to negatively effect net interest income by causing
the net interest margin to compress further.
Management
uses its strong capital position to prudently leverage the balance sheet by
purchasing government securities funded by borrowings. Although the leverage
strategy results in narrower net interest spreads, the strategy increases net
interest income without significant credit risk or increase in operating
expenses. Management will continue to evaluate and manage the effect of the
changing interest rate environment on the Company’s present and future
operations, while continuing to competitively price its products and services
throughout the markets it serves.
Provision
for Credit Losses
The
decrease in the provision for credit losses of $48,000 for the three months
ended September 30, 2007 compared to the 2006 period was primarily due to a
reversal of the reserve for unfunded loan commitments in other liabilities.
The
provision for credit losses for the nine months ended September 30, 2007
decreased to $693,000 compared to $1,344,000 for 2006 primarily due to the
elimination of a specific reserve that was required for one non-performing
real
estate construction loan outstanding during 2006. The ratio of allowance for
loan losses to total loans at September 30, 2007, December 31, 2006, and
September 30, 2006 was 1.00 percent, 1.01 percent, and 1.03 percent,
respectively. The ratio of non-performing assets to total assets at September
30, 2007 was 0.31 percent compared to 0.34 percent and 0.12 percent at December
31, 2006 and September 30, 2006, respectively. During the three and nine months
ended September 30, 2007, net charge-offs totaled $0.8 million and $1.2 million
compared to $0.1 million and $0.4 million for the 2006 period, respectively.
Net
charge-offs during the nine months ended September 30, 2007 primarily consisted
of $0.4 million related to one non-performing real estate construction loan
(charged-off during the 2007 first quarter) and $0.6 million related to one
non-performing business loan (charged-off during the 2007 second
quarter).
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
|
Nonaccrual
loans were $9.7 million and $3.7 million at September 30, 2007 and 2006,
respectively, compared to $9.8 million at December 31, 2006. Total nonaccrual
loans at September 30, 2007 primarily consisted of one customer relationship
with commercial loans aggregating $7.4 million. The loans involve problems
with
sources of repayment from operating cash flows. The loans are also supported
by
personal guarantees. No specific allowance for loan loss was allocated
to these
impaired loans due to the market value of the real estate collateral.
Restructured loans were $0.1 million at September 30, 2007, December 31,
2006,
and September 30, 2006.
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 foregone revenue, the Company must increase the level
of its provision for credit losses and incur collection and other costs
associated with the management and disposition of foreclosed properties. A
substantial portion (89.0 percent at September 30, 2007) of total loans of
the
Company is collateralized by real estate, primarily located in the New York
Metropolitan area. Accordingly, the collectibility of the loan portfolio of
the
Company is subject to changes in the real estate market in which the Company
operates.
Non-Interest
Income
Non-interest
income decreased for the three months ended September 30, 2007 to $1.8 million
and for the nine months ended September 30, 2007 to $5.3 million compared to
$2.1 million and $5.7 million for the 2006 periods, respectively. The decrease
for both the September 30, 2007 three and nine month periods compared to the
2006 periods was primarily due to gains on securities transactions from the
sale
of $47.0 million of collateralized mortgage obligations in the 2006 third
quarter, partially offset by an increase in prepayment loan fees in the 2007
periods.
Non-Interest
Expenses
Non-interest
expenses increased $2.7 million, or 20.3 percent, and $4.5 million, or 11.5
percent, to $15.8 million and $43.3 million for the three and nine months ended
September 30, 2007, respectively. The increase in non-interest expenses for
the
three months ended September 30, 2007 was primarily due to increases in salaries
and employee benefits expense and acquisition costs. The increase in
non-interest expenses for the nine months ended September 30, 2007 was primarily
due to increases in salaries and employee benefits, occupancy and equipment
expense, professional fees, and acquisition costs.
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
|
Salaries
and employee benefits expense, the largest component of non-interest expense,
increased by $515,000, or 6.2 percent, and $1,787,000, or 7.3 percent,
to $8.9
million and $26.4 million, during the three and nine months ended September
30,
2007 compared to the 2006 periods, respectively. The increases for the
three and
nine months ended September 30, 2007 were primarily due to an increase
in stock
option expense, payroll expense, medical benefit costs, and a lower level
of
deferred salaries and employee benefits expense related to loan originations
with commitment fees. The increase was partially offset by lower levels
of
incentive compensation expense.
Changes
in non-interest expense for the three and nine months ended September 30, 2007
compared to the three and nine months ended September 30, 2006 were also
primarily due to the following:
·
|
Decrease
of $4,000 (0.2 percent) and an increase of $208,000 (3.5 percent)
in
occupancy and equipment expense. The increase for the nine month
period
primarily reflects higher utility cost expense and property taxes
from the
opening of branch locations and maintenance contracts on new
equipment
purchased.
|
·
|
Decreases
of $161,000 (24.2 percent) and $195,000 (10.0 percent) in advertising
and
business development expense. The decreases primarily reflect
decreases in
sponsorship events and lower radio and television advertising
costs.
|
|
Increases
of $12,000 (3.2 percent) and $159,000 (13.8 percent) in professional
fees.
The increases were primarily due to higher legal fees related to
a
previous non-performing real estate construction loan held by the
Bank’s
wholly-owned subsidiary, Dutch Hill Realty Corp., as well as higher
audit
and legal fees for Securities and Exchange Commission
compliance.
|
|
Increase
of $2.3 million in acquisition costs for both periods. The increase
was
primarily due to investment banker and legal fees related to the
Company’s
pending merger with KeyCorp.
|
|
Decrease
of $50,000 (5.6 percent) and an increase of $109,000 (3.9 percent)
in
other expense. The decrease for the three month period is primarily
due to
reductions in travel and training expense and the charitable contribution
made by the Bank to the U.S.B. Foundation. The increase for the nine
month
period was primarily due to higher credit card related expenses and
outside printing costs and a lower level of deferred expenses related
to
loan originating, partially offset by lower expenses for courier
runs to
Bank locations.
|
U.S.B.
HOLDING CO., INC.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Income
Taxes
The
effective income tax rate for the three and nine months ended September 30,
2007
was 32.2 percent and 31.8 percent compared to 32.8 percent and 32.6 percent
for
the 2006 periods, respectively. The effective income tax rate for both the
2007
and 2006 periods reflects nontaxable income from municipal bonds.
As
a
result of a reduction in taxable income for New York State tax purposes, the
Company has established a valuation allowance that reduces the New York State
net deferred tax asset to the amount management believes will more likely than
not be realized. At September 30, 2007, December 31, 2006, and September 30,
2006, the valuation allowance was $4.8 million, $3.7 million, and $3.6 million,
respectively. As of September 30, 2007, the New York State deferred tax asset,
net of state deferred tax liabilities, is fully reserved by the valuation
allowance.
The
Company adopted FIN No. 48 on January 1, 2007. For more information on the
Company’s unrecognized income tax benefits identified under FIN No. 48, see Note
3 to the condensed consolidated financial statements.
U.S.B.
HOLDING CO., INC.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market
risk is the potential for economic losses to be incurred on market risk
sensitive instruments as a result of adverse changes in market indices such
as
interest rates, foreign currency exchange rates, and commodity prices.
Quantitative and qualitative disclosures about market risk at December 31,
2006
were reported in the Company’s 2006 Annual Report to Stockholders. There were no
material changes in the Company’s market risk exposures at September 30, 2007
compared to December 31, 2006. Interest rate risk continues to be the Company’s
primary market risk exposure since substantially all Company transactions are
denominated in U.S. dollars with no direct foreign currency exchange or changes
in commodity price exposures. Substantially all market risk sensitive
instruments continue to be held to maturity or available for sale with no
significant financial instruments entered into or acquired for trading purposes.
The Company does not use derivative financial instruments such as interest
rate
swaps and caps and has not been party to any derivative financial instruments
during the nine months ended September 30, 2007.
The
Company continues to use two methods to evaluate its sensitivity 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, 2007 as compared
to
December 31, 2006. The Company’s “Static Gap” at September 30, 2007 was a
negative cumulative gap of $339.0 million in the one-year time frame compared
to
a negative cumulative gap of $391.8 million at December 31, 2006. If interest
rates were to gradually increase 200 basis points or decrease 200 basis points
from current rates, the percentage change in estimated net interest income
for
the subsequent twelve month measurement period would continue to be within
the
Company’s policy limit of not changing by more than 5.0 percent.
U.S.B.
HOLDING CO., INC.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
The
Company has evaluated the design and operation of its disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and forms of
the Securities and Exchange Commission. This evaluation was made under the
supervision and with the participation of management, including the Company’s
Chief Executive Officer and Chief Financial Officer, as of September 30, 2007.
The Chief Executive Officer and Chief Financial Officer have each concluded,
based on their review, that as of September 30, 2007, the Company’s disclosure
controls and procedures, as defined by Exchange Act Rules 13a-15(e) and
15d-15(e), were 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 and that such information
is
accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure. There was no change in the Company’s
internal control over financial reporting that occurred during the fiscal
quarter ended September 30, 2007 that has materially affected or is reasonably
likely to materially affect the Company’s internal control over financial
reporting.