UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
STATE BANCORP, INC.
-------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2846511
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
699 HILLSIDE AVENUE, NEW HYDE PARK, NEW YORK 11040
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(Address of principal executive offices) (Zip Code)
(516) 437-1000
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of August 7, 2002, there were 8,103,546 shares of registrant's Common
Stock outstanding.
STATE BANCORP, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001
(Unaudited) 1.
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 2002 and 2001 (Unaudited) 2.
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 (Unaudited) 3.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the Six Months Ended June 30, 2002 and 2001 (Unaudited) 4.
Notes to Unaudited Consolidated Financial Statements 5.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9.
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20.
Item 2. Changes in Securities - None N/A
Item 3. Defaults upon Senior Securities - None N/A
Item 4. Submission of Matters to a Vote of Security Holders 21.
Item 5. Other Information - None N/A
Item 6. Exhibits and Reports on Form 8-K 21.
SIGNATURES 22.
- -----------------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------------------
- -----------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED)
- -----------------------------------------------------------------------------
- ---------------------------------------------------
ASSETS: 2002 2001
- --------------------------------------------------- --------------- --------------
CASH AND DUE FROM BANKS $31,986,019 $25,310,091
FEDERAL FUNDS SOLD - 2,800,000
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - 110,000,000
--------------- --------------
TOTAL CASH AND CASH EQUIVALENTS 31,986,019 138,110,091
SECURITIES:
HELD TO MATURITY (ESTIMATED FAIR VALUE -
$149,131 IN 2002 AND $203,770 IN 2001) 144,800 196,200
AVAILABLE FOR SALE - AT ESTIMATED FAIR VALUE 488,717,175 275,213,366
--------------- --------------
TOTAL SECURITIES 488,861,975 275,409,566
LOANS - NET OF ALLOWANCE FOR PROBABLE LOAN LOSSES
($9,894,079 IN 2002 AND $9,255,414 IN 2001) 574,916,484 542,342,284
BANK PREMISES AND EQUIPMENT - NET 7,609,207 6,420,476
NET RECEIVABLE - SECURITIES SALES 85,017,858 -
OTHER ASSETS 18,193,375 23,488,580
--------------- --------------
- ---------------------------------------------------
TOTAL ASSETS $1,206,584,918 $985,770,997
- --------------------------------------------------- =============== ==============
- ---------------------------------------------------
LIABILITIES:
- ---------------------------------------------------
DEPOSITS:
DEMAND $190,584,997 $181,439,730
SAVINGS 385,399,792 326,984,662
TIME 368,371,746 376,285,070
--------------- --------------
TOTAL DEPOSITS 944,356,535 884,709,462
FEDERAL FUNDS PURCHASED 3,700,000 -
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 96,276,000 -
OTHER BORROWINGS 71,519,157 19,099,591
ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 7,218,373 5,673,515
--------------- --------------
- ---------------------------------------------------
TOTAL LIABILITIES 1,123,070,065 909,482,568
- --------------------------------------------------- --------------- --------------
- ---------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
- ---------------------------------------------------
- ---------------------------------------------------
STOCKHOLDERS' EQUITY:
- ---------------------------------------------------
PREFERRED STOCK, $.01 PAR VALUE, AUTHORIZED
250,000 SHARES - -
COMMON STOCK, $5.00 PAR VALUE, AUTHORIZED
20,000,000 SHARES; ISSUED 8,698,652 SHARES IN 2002
AND 8,645,825 SHARES IN 2001; OUTSTANDING 8,142,703
SHARES IN 2002 AND 8,122,187 SHARES IN 2001 43,493,260 41,170,595
SURPLUS 44,991,118 39,202,494
RETAINED EARNINGS 1,956,792 5,588,315
TREASURY STOCK (541,477 SHARES IN 2002
AND 476,700 SHARES IN 2001) (8,178,552) (7,071,149)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAXES 1,361,434 (2,427,503)
UNEARNED COMPENSATION (109,199) (174,323)
--------------- --------------
- ---------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 83,514,853 76,288,429
- --------------------------------------------------- --------------- --------------
- ---------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,206,584,918 $985,770,997
- --------------------------------------------------- =============== ==============
See accompanying notes to unaudited consolidated financial statements.
(1)
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------
- --------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------
-------------------------------- ----------------------------
THREE MONTHS SIX MONTHS
-------------------------------- ----------------------------
2002 2001 2002 2001
- -------------------------------------------------------- --------------- --------------- ------------ -------------
INTEREST INCOME:
- --------------------------------------------------------
LOANS $10,846,301 $12,439,084 $21,436,578 $24,819,907
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL 77,032 598,223 398,287 1,820,274
SECURITIES HELD TO MATURITY AND
SECURITIES AVAILABLE FOR SALE:
STATES AND POLITICAL SUBDIVISIONS 917,517 1,302,545 1,714,931 2,542,490
MORTGAGE-BACKED SECURITIES 3,243,328 398,422 5,982,284 587,642
GOVERNMENT AGENCY SECURITIES 1,733,713 3,258,090 2,638,556 7,292,585
OTHER SECURITIES 287,242 109,913 427,916 260,938
--------------- --------------- ------------ -------------
TOTAL INTEREST INCOME 17,105,133 18,106,277 32,598,552 37,323,836
--------------- --------------- ------------ -------------
- --------------------------------------------------------
INTEREST EXPENSE:
- --------------------------------------------------------
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE 1,386,309 3,257,486 2,810,694 8,149,345
OTHER DEPOSITS AND TEMPORARY BORROWINGS 2,710,146 3,877,942 4,704,170 8,082,578
--------------- --------------- ------------ -------------
TOTAL INTEREST EXPENSE 4,096,455 7,135,428 7,514,864 16,231,923
--------------- --------------- ------------ -------------
NET INTEREST INCOME 13,008,678 10,970,849 25,083,688 21,091,913
PROVISION FOR PROBABLE LOAN LOSSES 963,000 767,000 1,922,000 1,540,000
--------------- --------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 12,045,678 10,203,849 23,161,688 19,551,913
--------------- --------------- ------------ -------------
- --------------------------------------------------------
NONINTEREST INCOME:
- --------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 356,951 407,810 738,340 837,160
NET SECURITY GAINS (LOSSES) 1,454,055 (49,554) 1,420,510 (59,220)
OTHER OPERATING INCOME 369,238 254,025 652,776 488,930
--------------- --------------- ------------ -------------
TOTAL NONINTEREST INCOME 2,180,244 612,281 2,811,626 1,266,870
--------------- --------------- ------------ -------------
INCOME BEFORE OPERATING EXPENSES 14,225,922 10,816,130 25,973,314 20,818,783
--------------- --------------- ------------ -------------
- --------------------------------------------------------
OPERATING EXPENSES:
- --------------------------------------------------------
SALARIES AND OTHER EMPLOYEE BENEFITS 4,979,184 4,313,248 9,903,670 8,367,491
OCCUPANCY 790,962 664,926 1,543,281 1,189,288
EQUIPMENT 333,463 274,486 661,731 534,699
LEGAL FEES 1,097,120 91,572 1,912,354 183,144
MARKETING AND ADVERTISING 458,543 363,593 838,306 684,561
OTHER OPERATING EXPENSES 1,885,290 1,532,959 3,591,951 2,853,116
--------------- --------------- ------------ -------------
TOTAL OPERATING EXPENSES 9,544,562 7,240,784 18,451,293 13,812,299
--------------- --------------- ------------ -------------
INCOME BEFORE INCOME TAXES 4,681,360 3,575,346 7,522,021 7,006,484
PROVISION FOR INCOME TAXES 1,264,913 683,453 1,927,184 1,342,210
- -------------------------------------------------------- --------------- --------------- ------------ -------------
NET INCOME $3,416,447 $2,891,893 $5,594,837 $5,664,274
- -------------------------------------------------------- --------------- --------------- ------------ -------------
- --------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $0.42 $0.35 $0.69 $0.68
------ ------ ----- -----
- --------------------------------------------------------
- --------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $0.41 $0.35 $0.68 $0.68
------ ------ ----- -----
- --------------------------------------------------------
- --------------------------------------------------------
AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,147,130 8,245,823 8,137,137 8,273,813
- -------------------------------------------------------- --------------- --------------- ------------ ------------
See accompanying notes to unaudited consolidated financial statements.
(2)
- ------------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
- -------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- -------------------------------------------------------------------
- ------------------------------------------------------ ---------------- -------------
OPERATING ACTIVITIES: 2002 2001
- ------------------------------------------------------ ---------------- -------------
NET INCOME $5,594,837 $5,664,274
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR PROBABLE LOAN LOSSES 1,922,000 1,540,000
DEPRECIATION AND AMORTIZATION OF BANK PREMISES AND EQUIPMENT 579,094 508,954
AMORTIZATION OF INTANGIBLES 18,068 18,068
AMORTIZATION (ACCRETION) OF NET PREMIUM (DISCOUNT) ON SECURITIES 1,259,966 (1,931,914)
AMORTIZATION OF UNEARNED COMPENSATION 111,432 111,660
NET SECURITY (GAINS) LOSSES (1,420,510) 59,220
DECREASE IN OTHER ASSETS, NET 3,141,563 432,612
INCREASE (DECREASE) IN ACCRUED EXPENSES, TAXES
AND OTHER LIABILITIES 1,542,443 (2,323,480)
----------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,748,893 4,079,394
----------------- ------------
- ------------------------------------------------------
INVESTING ACTIVITIES:
- ------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 51,400 51,400
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 155,221,137 107,876,574
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 61,384,360 162,792,520
PURCHASES OF SECURITIES AVAILABLE FOR SALE (509,042,108) (190,325,220)
INCREASE IN LOANS - NET (34,496,200) (56,137,369)
PURCHASES OF BANK PREMISES AND EQUIPMENT - NET (1,767,825) (1,182,653)
----------------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (328,649,236) 23,075,252
----------------- ------------
- ------------------------------------------------------
FINANCING ACTIVITIES:
- ------------------------------------------------------
INCREASE IN DEMAND AND SAVINGS DEPOSITS 67,560,397 27,651,185
DECREASE IN TIME DEPOSITS (7,913,324) (99,457,657)
INCREASE IN FEDERAL FUNDS PURCHASED 3,700,000 300,000
INCREASE IN SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE 96,276,000 375,000
INCREASE IN OTHER BORROWINGS 52,419,566 10,506,500
CASH DIVIDENDS PAID (2,166,916) (1,951,371)
PROCEEDS FROM SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN 864,173 426,881
PROCEEDS FROM STOCK OPTIONS EXERCISED 143,778 279,901
PROCEEDS FROM SHARES ISSUED UNDER DIRECTORS' STOCK PLAN - 2,355
PURCHASES OF TREASURY STOCK (1,107,403) (2,169,592)
----------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 209,776,271 (64,036,798)
----------------- ------------
- -----------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (106,124,072) (36,882,152)
- -----------------------------------------------------
- -----------------------------------------------------
CASH AND CASH EQUIVALENTS - JANUARY 1 138,110,091 90,848,865
- -----------------------------------------------------
----------------- ------------
- -----------------------------------------------------
CASH AND CASH EQUIVALENTS - JUNE 30 $31,986,019 $53,966,713
- -----------------------------------------------------
----------------- ------------
- -----------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------
INTEREST PAID $7,563,591 $17,347,093
INCOME TAXES PAID $1,111,200 $1,790,000
ADJUSTMENT TO UNREALIZED NET GAIN ON SECURITIES
AVAILABLE FOR SALE $5,924,512 $1,710,173
DIVIDENDS DECLARED BUT NOT PAID AS OF QUARTER END $1,086,810 $1,045,759
TRANSFER FROM LOANS TO OREO - $3,525,634
See accompanying notes to unaudited consolidated financial statements.
(3)
- ---------------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------
- --------------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMPRE- UNEARNED COMPRE-
COMMON RETAINED TREASURY HENSIVE COMPEN- HENSIVE
STOCK SURPLUS EARNINGS STOCK (LOSS) INCOME SATION TOTAL INCOME (LOSS)
--------- --------- -------- --------- ------------- ------ ------ -----------
BALANCE, JANUARY 1, 2002 $41,170,595 $39,202,494 $5,588,315 ($7,071,149) ($2,427,503) ($174,323) $76,288,429
COMPREHENSIVE INCOME:
NET INCOME 5,594,837 5,594,837 $5,594,837
-----------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED HOLDING GAINS ARISING
DURING THE PERIOD 4,725,903
RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME (936,966)
-----------
TOTAL OTHER COMPREHENSIVE INCOME 3,788,937 3,788,937 3,788,937
-----------
TOTAL COMPREHENSIVE INCOME $9,383,774
-----------
CASH DIVIDEND
($0.27 PER SHARE) (2,169,330) (2,169,330)
5% STOCK DIVIDEND (389,246 SHARES
AT MARKET VALUE) 1,946,230 5,110,800 (7,057,030) -
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (56,419 SHARES
AT 95% OF MARKET VALUE) 282,095 582,078 864,173
STOCK OPTIONS EXERCISED 94,340 49,438 143,778
TREASURY STOCK PURCHASED (1,107,403) (1,107,403)
AMORTIZATION OF UNEARNED
COMPENSATION 46,308 65,124 111,432
----------- ----------- ----------- ----------- ------------- ------------ -----------
- -----------------------------
BALANCE, JUNE 30, 2002 $43,493,260 $44,991,118 $1,956,792 ($8,178,552) $1,361,434 ($109,199) $83,514,853
- -----------------------------
----------- ----------- ----------- ----------- ------------- ------------ -----------
BALANCE, JANUARY 1, 2001 $38,724,480 $34,518,406 $4,779,837 ($2,422,428) ($2,972,336) ($321,222) $72,306,737
COMPREHENSIVE INCOME:
NET INCOME 5,664,274 5,664,274 $5,664,274
-----------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED HOLDING GAINS ARISING
DURING THE PERIOD 1,161,391
RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME (60,911)
-----------
TOTAL OTHER COMPREHENSIVE INCOME 1,100,480 1,100,480 1,100,480
-----------
TOTAL COMPREHENSIVE INCOME $6,764,754
-----------
CASH DIVIDEND
($0.24 PER SHARE) (2,020,315) (2,020,315)
5% STOCK DIVIDEND (375,416 SHARES
AT MARKET VALUE) 1,877,080 3,938,114 (5,815,194) -
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (32,633 SHARES
AT 95% OF MARKET VALUE) 163,165 263,716 426,881
STOCK OPTIONS EXERCISED 220,940 58,961 279,901
STOCK ISSUED UNDER
DIRECTORS' PLAN 785 1,570 2,355
TREASURY STOCK PURCHASED (2,169,592) (2,169,592)
AMORTIZATION OF UNEARNED
COMPENSATION 36,971 74,689 111,660
----------- ----------- ----------- ----------- ------------- ------------ -----------
- --------------------------------
BALANCE, JUNE 30, 2001 $40,986,450 $38,817,738 $2,608,602 ($4,592,020) $(1,871,856) ($246,533) $75,702,381
- -------------------------------- ----------- ----------- ----------- ----------- ------------- ------------ -----------
See accompanying notes to unaudited consolidated financial statements.
(4)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
In the opinion of the management of State Bancorp, Inc. (the "Company"), the
preceding unaudited consolidated financial statements contain all adjustments,
consisting of normal accruals, necessary for a fair presentation of its
consolidated financial condition as of June 30, 2002 and December 31, 2001, its
consolidated earnings for the three and six months ended June 30, 2002 and 2001,
and cash flows and changes in stockholders' equity and comprehensive income
(loss) for the six months ended June 30, 2002 and 2001. The results of
operations for the three and six months ended June 30, 2002 are not necessarily
indicative of the results of operations to be expected for the remainder of the
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's 2001 annual report on Form 10-K.
Certain amounts have been reclassified to conform with the current year's
presentation.
STOCKHOLDERS' EQUITY
The Company has 250,000 shares of preferred stock authorized. No shares were
issued as of June 30, 2002.
Stock held in treasury by the Company is accounted for using the cost method,
which treats stock held in treasury as a reduction to total stockholders'
equity. During the quarter, the Company repurchased 30,093 common shares at an
average price of $17.78.
In connection with the rights offering in July 1996, the Bank's Employee Stock
Option Plan (the "ESOP") borrowed $1,200,000 from the Company to purchase
159,030 (adjusted for stock dividends and splits) of the Company's shares. As
such, the Company recognizes a deduction from stockholders' equity to reflect
the unearned compensation for the shares. The unearned ESOP shares, pledged as
collateral for the ESOP loan, are held in a suspense account and legally
released for allocation among the participants as principal and interest on the
loan is repaid annually. Shares are committed to be released monthly from the
suspense account, and the Company recognizes compensation expense equal to the
current market price of the common shares. As of June 30, 2002, 144,558 shares
have been released from the suspense account and are considered outstanding for
earnings per share computations.
EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted average number
of shares outstanding. Diluted earnings per share is computed based on the
weighted average number of shares outstanding, increased by the number of common
shares that are assumed to have been purchased with the proceeds from the
exercise of stock options (treasury stock method). These purchases were assumed
to have been made at the average market price of the common stock. The average
market price is based on the average closing price for the common stock.
Retroactive recognition has been given for stock dividends and splits.
(5)
For the Six Months Ended June 30, 2002 2001
- --------------------------------------- ---- ----
Net income $5,594,837 $5,664,274
Average dilutive stock options outstanding 592,205 496,432
Average exercise price per share $12.78 $11.98
Average market price - diluted basis $16.57 $15.13
Average common shares outstanding 8,137,137 8,273,813
Increase in shares due to exercise of options - diluted basis 135,617 103,336
------- ------
Adjusted common shares outstanding - diluted 8,272,754 8,377,149
--------- ---------
Net income per share-basic $0.69 $0.68
----- -----
Net income per share-diluted $0.68 $0.68
----- -----
UNREALIZED NET GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Securities available for sale are stated at estimated fair value, and unrealized
gains and losses are excluded from earnings and reported as a separate component
of stockholders' equity until realized. Securities held to maturity are stated
at amortized cost. Management designates each security, at the time of purchase,
as either available for sale or held to maturity depending upon investment
objectives, liquidity needs and intent.
LOANS
As a result of the Company's evaluation of impaired loans, an allowance for
probable loan losses of approximately $2,968,000 and $4,143,000 was established
for $7,007,558 and $8,084,568 of the total impaired loans at June 30, 2002 and
December 31, 2001, respectively. The total average impaired loan balance was
$6,547,583 for the quarter ended June 30, 2002 and $8,378,960 for the year ended
December 31, 2001. Total impaired loans amounted to $7,007,558 and $8,084,568 at
June 30, 2002 and December 31, 2001, respectively. At June 30, 2002, the
aggregate amount of impaired collateral-dependent loans, measured based on the
fair value of the underlying collateral, and of impaired loans measured using
the present value of expected future cash flows discounted at each loan's
effective interest rate, was $3,531,087 and $3,476,471, respectively. Interest
income recognized for impaired, nonaccrual and restructured loans was $7,903 for
the three months ended June 30, 2002. No interest income was recognized for such
loans for the same period in 2001. Total interest income recognized for such
loans was $7,903 and $1,202 for the six months ended June 30, 2002 and 2001,
respectively.
Activity in the allowance for probable loan losses for the six months ended June
30, 2002 and 2001 is as follows:
(6)
2002 2001
---- ----
Balance, January 1, $9,255,414 $9,207,243
Adjustments (1) - 542,312
Provision charged to income 1,922,000 1,540,000
Charge-offs, net of recoveries of $153,100 in 2002 and $81,982 in 2001 (1,283,335) (1,476,982)
----------- ----------
Balance, June 30, $9,894,079 $9,812,573
========== ==========
(1) Opening balance of allowance for probable loan losses of acquired leasing
company.
LEGAL PROCEEDINGS
The Bank is involved in a number of legal proceedings related to Island Mortgage
Network, Inc. and certain related entities, which held deposit accounts at the
Bank during portions of 1999 and 2000. The Bank is defending these lawsuits
vigorously, and management believes that the Bank has substantial defenses, both
substantive and procedural, to the claims that have been threatened or asserted
to date. However, the ultimate outcome of litigation cannot be predicted with
certainty. For a fuller description of the foregoing, see Part II, Item 1.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology
and Documentation Issues." SAB No. 102 expresses the SEC staff's views on the
development, documentation, and application of a systematic methodology for
determining the allowance for probable loan losses in accordance with accounting
principles generally accepted in the United States of America. Also in July
2001, the federal banking agencies issued guidance on this topic through the
Federal Financial Institutions Examination Council interagency guidance, "Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation
for Banks and Savings Institutions." In management's opinion, the Company's
methodology and documentation of the allowance for probable loan losses meets
the guidance issued.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued by
the FASB. This statement requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This statement, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," and by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," was effective for all fiscal
quarters of fiscal years beginning after June 15, 2000, and was not to be
applied retroactively to financial statements of prior periods. The adoption of
this statement as of January 1, 2001 did not have a significant impact on the
Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." The most
significant changes made by SFAS No. 141 are: 1) requiring that the purchase
method of accounting be used for all business combinations
(7)
initiated after June 30, 2001; and 2) establishing specific criteria for the
recognition of intangible assets separately from goodwill. The Company adopted
SFAS No. 141 as of July 1, 2001, and the impact of such adoption did not have a
material effect on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 primarily addresses the accounting for acquired goodwill
and intangible assets (i.e., the post-acquisition accounting). The provisions of
SFAS No. 142 are effective for fiscal years beginning after December 15, 2001.
The most significant changes made by SFAS No. 142 are: 1) goodwill and
indefinite-lived intangible assets are no longer amortized; 2) goodwill and
indefinite-lived intangible assets are tested for impairment at least annually;
and 3) the amortization period of intangible assets with finite lives is no
longer limited to forty years. The Company adopted SFAS No. 142 effective
January 1, 2002. The principal effect of SFAS No. 142 was ceasing the
amortization of goodwill, which amounted to approximately $100,000 annually
after taxes for the year ended December 31, 2001. The goodwill, which relates to
the acquisition of a leasing subsidiary, Studebaker-Worthington Leasing Corp.,
in February 2001, equals approximately $2.4 million. In accordance with SFAS No.
142, the Company completed the transitional goodwill impairment test in the
second quarter, and no evidence of impairment was identified.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Company adopted SFAS No. 144 as of January
1, 2002, and the impact of such adoption did not have a material impact on the
Company's financial position or results of operations.
(8)
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview - The Company, a one-bank holding company, was formed on June 24, 1986.
The Company operates as the parent for its wholly owned subsidiary, State Bank
of Long Island and subsidiaries (the "Bank"), a New York State-chartered
commercial bank founded in 1966. The income of the Company is derived through
the operations of the Bank and its subsidiaries, SB Portfolio Management Corp.,
SB Financial Services Corp., New Hyde Park Leasing Corporation,
Studebaker-Worthington Leasing Corp. ("SWLC") and SB ORE Corp.
Material Changes in Financial Condition - Total assets of the Company were $1.2
billion at June 30, 2002. When compared to December 31, 2001, total assets
increased by $220.8 million or 22.4%. Increases in the investment and loan
portfolios of $213.5 million and $33.2 million, respectively, were the primary
contributors to the asset growth. Somewhat offsetting these increases was a
reduction in lower-yielding securities purchased under agreements to resell
("SPUARs") of $110.0 million. The increase in investment securities resulted
from a balance sheet restructuring utilizing medium-term
(average life) mortgage-backed securities. Government Agency and non- New York
State municipal securities were sold during the second half of 2001 and were
replaced by premium mortgage-backed paper to take advantage of its price
stability, cash flow reinvestment opportunity and lower extension risk in a
rising rate environment. During the second quarter of 2002, sales of Government
Agency and mortgage-backed securities were undertaken as a result of the decline
in interest rates. Management expects to reinvest the proceeds of these sales in
fixed income instruments at various maturity structures during the second half
of this year. The growth in the loan portfolio was primarily attributable to an
increase in commercial mortgages of $29.3 million, most of which related to
loans scheduled to mature within three years, coupled with increases in home
equity lines of credit and consumer installment loans. Management anticipates
continued expansion of the loan and lease portfolios during the remainder of
2002 at a pace somewhat slower than that experienced during the first half of
the year.
At June 30, 2002, total deposits increased $59.6 million to $944.4 million when
compared to December 31, 2001, helping to fund the Company's asset growth. This
rise was largely attributable to increases in the core deposit categories of
demand, NOW and savings accounts of $9.1 million, $53.7 million and $23.9
million, respectively. Partially offsetting these increases were decreases in
money fund accounts and time deposits of $19.2 million and $7.9 million,
respectively. Management expects that low-cost core deposit balances (demand,
NOW, savings and money fund accounts) will continue to grow throughout 2002 as a
result of the Company's expanded branch network, including the newest locations
in Port Washington and the April 2002 opening of its third Queens County branch
in Long Island City. The Company now has fifteen branches located throughout the
tri-county area of Queens, Nassau and Suffolk. Core deposits represented
approximately 61.0% of total deposits at June 30, 2002 versus 57.5 % at year-end
2001. Short-term borrowed funds also helped to fuel the Company's asset growth.
Increases of $96.3 million and $3.7 million in securities sold under agreements
to repurchase ("SSUARs") and Federal Funds purchased, respectively, were coupled
with an increase of $52.4 million in other short-term borrowings, primarily
Federal Home Loan Bank overnight funding.
Average assets for the second quarter of 2002 were up by $189.3 million or 19.0%
to $1.2 billion from the comparable 2001 period. Sources of asset expansion
included a $35.3 million or 6.4% increase in
(9)
average loans, primarily commercial mortgages, coupled with growth in
mortgage-backed securities. This growth was partially offset by a decline in
average money market instruments of $41.2 million. Average mortgage-backed
securities increased by $250.9 million while Government Agency paper and
municipal securities declined on average by $45.5 million and $20.0 million,
respectively, due to sales activity during both the second half of 2001 and the
first half of 2002. Funding the second quarter asset growth was a $120.4 million
increase in average deposits, mainly demand deposits and other low-cost core
funding. Average core deposits increased by $117.6 million or 25.4% during the
second quarter of 2002 as compared to the same period in 2001. Partially
offsetting the growth in core balances was a slight decline in high-cost CDs
over $100 thousand. Average borrowed funds increased by $67.6 million during the
second quarter of 2002 when compared to last year due primarily to an increase
in SSUARs. The net result of these activities was a 13 basis point decrease in
the second quarter net interest margin to 4.80%. Management anticipates that any
further reduction in interest rates during the remainder of 2002 will likely
result in moderate compression of the Company's net interest margin. Growth in
loans during the balance of the year coupled with a continued increase in core
deposit balances will serve to mitigate some of the downward pressure on the
Company's net interest margin. The higher level of core deposits combined with
the lower interest rate environment in 2002 resulted in a 154 basis point
decline in the Company's second quarter average cost of funds to 1.44% as
compared to the same period in 2001.
Capital - The Company's capacity to grow its assets and earnings stems, in part,
from the significance of its capital strength. The Company strives to maintain
an optimal level of capital, commensurate with its risk profile, on which an
attractive rate of return to stockholders will be realized over both the short
and long term, while serving the needs of depositors, creditors and regulators.
In determining an optimal capital level, the Company also considers the capital
levels of its peers and the evaluations of its primary regulators. At June 30,
2002, the Company's and the Bank's capital ratios are in excess of those
necessary for classification as a "well capitalized" institution pursuant to the
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA). Total stockholders' equity amounted to $83.5 million at June 30, 2002,
representing increases of 9.5% and 10.3%, respectively, from December 31, and
June 30, 2001. Excluding valuations related to SFAS No. 115 at the same dates,
total stockholders' equity grew at rates of 4.4% and 5.9% from December 31, and
June 30, 2001, respectively. The Company has no plans or commitments for capital
utilization or expenditures that would affect its current capital position or
would impact its future financial performance. Table 2-1 summarizes the
Company's capital ratios as of June 30, 2002 and compares them to current
regulatory guidelines and December 31, and June 30, 2001 actual results.
The Company's stock repurchase program has expended $1.1 million thus far in
2002 to repurchase 64,777 shares at an average cost of $17.10 per share. Since
1998, 541,477 shares of Company stock have been repurchased at an average cost
of $15.10 per share. Under the Board of Directors' existing authorization, an
additional 458,523 shares may be repurchased from time to time as conditions
warrant.
(10)
TABLE 2-1
Tier I Capital/ Total Capital/
Tier I Risk-Weighted Risk-Weighted
Leverage Assets Assets
-------- ------ ------
Regulatory Minimum 3.00%-4.00% 4.00% 8.00%
Ratios as of:
June 30, 2002 6.71% 11.00% 12.26%
December 31, 2001 7.79% 11.81% 13.06%
June 30, 2001 7.51% 11.91% 13.16%
Regulatory Criteria for a
"Well Capitalized" Institution 5.00% 6.00% 10.00%
Liquidity - Liquidity management is a fundamental component of the Company's
business strategy. The objective of liquidity management is to assure the
ability of the Company and its subsidiary to meet their financial obligations.
These obligations include the withdrawal of deposits on demand or at their
contractual maturity, the repayment of borrowings as they mature, the ability to
fund new and existing loan commitments, the ability to meet payments under
various leases, and the capacity to take advantage of business opportunities as
they arise. The Board of Directors' Funds Management Committee and the
management Asset Liability Committee are responsible to ensure a stable source
of funding to meet both the expected and unexpected cash demands of loan and
deposit customers. Liquidity is composed of the maintenance of a strong base of
core customer funds, maturing short-term assets, the ability to sell marketable
securities and access to lines of credit, brokered deposits and the capital
markets. The Company complements its stable base of core deposits, provided by
long-standing customer relationships, with short-term borrowings from
correspondent banks and time deposits from other corporate customers and
municipalities.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby and
documentary letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
financial statements. The Company has not engaged in derivatives activities for
any of the reported periods.
The Bank's exposure to credit loss in the event of nonperformance by third
parties for commitments to extend credit and letters of credit is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or
(11)
other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
required varies, but may include accounts receivable, inventory, equipment, real
estate, and income-producing commercial properties. At June 30, 2002 and 2001,
commitments to originate loans and commitments under unused lines of credit for
which the Bank is obligated amounted to approximately $149,986,000 and
$121,757,000, respectively.
Letters of credit are conditional commitments issued by the Bank guaranteeing
payments of drafts in accordance with the terms of the letter of credit
agreements. Commercial letters of credit are used primarily to facilitate trade
or commerce and are also issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. Collateral may be required to support letters of credit based upon
management's evaluation of the creditworthiness of each customer. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Most letters of credit
expire within one year. Management does not anticipate any material losses as a
result of these transactions. At June 30, 2002 and 2001, the Bank had letters of
credit outstanding of approximately $7,955,000 and $6,685,000, respectively.
The Company is obligated under various leases covering certain equipment,
branches, office space and the land on which its head office is built. The
minimum payments under these leases, certain of which contain escalation
clauses, are as follows: in 2002, $1,032,790; in 2003, $2,024,426; in 2004,
$2,031,936; in 2005, $1,936,629; in 2006, $1,515,921; and the remainder to 2011,
$7,241,528.
Liquidity at the Company is measured and monitored daily, thereby allowing
management to better understand and react to emerging balance sheet trends.
After assessing actual and projected cash flow needs, management seeks to obtain
funding at the most economical cost to the Company. Throughout the second
quarter of 2002, the Company's liquidity position remained stable and well
within acceptable industry standards. During the second quarter of 2002, higher
levels of core deposits coupled with calls on Government Agency securities and
paydowns on mortgage-backed securities provided a source of readily available
funds to meet general liquidity needs. In addition, at June 30, 2002, the
Company had access to approximately $84 million in Federal Home Loan Bank lines
of credit for overnight or term borrowings with maturities of up to thirty
years. At June 30, 2002, the Company also had $16.5 million in formal and $15.0
million in informal lines of credit extended by correspondent banks to be
utilized, if needed, for short-term funding purposes.
Material Changes in Results of Operations - Net income for the six months ended
June 30, 2002 was $5.6 million, a 1.2% decline as compared to the same 2001
period. The reduction in earnings in 2002 resulted from growth in operating
expenses (up $4.6 million), a higher provision for probable loan losses (up $382
thousand) and a higher effective income tax rate. Partially offsetting these
negative factors was an 18.9% increase in net interest income. Basic earnings
per common share were $0.69 in 2002 and $0.68 in 2001, while fully diluted
earnings per share were $0.68 in
(12)
both periods. The Company's returns on average assets and stockholders' equity
were 1.01% and 14.26% in 2002 and 1.13% and 15.07% in 2001, respectively.
Excluding the impact of SFAS No. 115, the Company's returns on average
stockholders' equity were 14.09% and 14.89% during the first half of 2002 and
2001, respectively.
The increase in net interest income, up $4.0 million to $25.1 million, resulted
from an expanded interest-earning asset base, principally loans and
mortgage-backed securities. The Company's average loan portfolio grew by $36.5
million or 6.8% compared to the first six months of 2001, mostly attributable to
increases in commercial mortgages. The new branch locations in both Nassau and
Queens Counties are expected to provide additional opportunity for the Company
to further increase the loan portfolio. The Company, offering superior service
and response time coupled with competitive product pricing, has been able to
steadily improve its market share through conservative underwriting and credit
standards. Products such as the Small Business Line of Credit and the home
equity product, Prime for Life, continue to be well received and are generating
loan volume and creating new cross sell opportunities for the Company's full
range of deposit and credit products. In addition, the Company has full time
staff that concentrates on the marketing and sales efforts of new and existing
retail products, including a full range of lease-financing transactions that are
handled by SWLC.
The Company's investment portfolio increased, on average, by 26.9% in the first
six months of 2002 as compared to 2001. This is primarily due to an increase in
average mortgage-backed securities (up $224.1 million), partially offset by
declines in average callable Government Agency securities (down $102.9 million)
and average municipal issues (down $24.4 million). This re-balancing of the
investment portfolio should provide defensive yield protection as interest rates
are expected to rise in the coming quarters.
Excluding securities transaction income, noninterest income improved $65
thousand, or 4.9%, for the first half of 2002 as compared to 2001. This was due
in large measure to increases in service charges on deposit accounts, annuity
commissions, ATM fees, letter of credit fees and sweep account income, partially
offset by a decrease in return item charges. Excluding non-recurring items,
management expects that other income will improve moderately during the last
half of 2002 when compared to the same period in 2001.
Net securities transactions resulted in gains of $1.4 million for the first half
of 2002 as compared to losses of $59 thousand for the same period last year.
During the second quarter of 2002, sales of Government Agency and
mortgage-backed securities were undertaken as a result of the decline in
interest rates and management expects to reinvest the proceeds of these sales in
fixed income instruments at various maturity structures during the second half
of this year.
The 33.6% growth in total operating expenses during the first six months of 2002
as compared to 2001 was due to increases in several categories. The most
significant increases pertained to salaries and other employee benefits (up $1.5
million), occupancy costs (up $354 thousand), legal fees (up $1.7 million) and
other expenses (up $739 thousand). Equipment and marketing and advertising
expenses also increased during the first six months of the year, but by lesser
amounts than for the
(13)
previously noted categories. The increases in salaries and benefits, occupancy,
equipment and marketing and advertising expenses were due principally to growth
in both staff and facilities. This growth primarily resulted from the
acquisition of SWLC during the first quarter of 2001, the Company's expanded
branch network and the additional occupancy requirements in the Jericho Plaza
location for support personnel. The growth in legal fees expense was due to the
cost of ongoing litigation related to Island Mortgage Network ("IMN") and its
affiliates, as previously discussed in detail in the Company's 2001 and 2002 SEC
filings and as discussed in Part II, Item 1 herein. The Company expects to incur
additional costs related to this litigation during the remainder of 2002.
Excluding IMN-related legal fees, total operating expenses increased at a
year-over-year rate of 21.6%. The 25.9% increase in other operating expenses
resulted primarily from increases in loan collection expenses,
telecommunications costs, computer service fees, insurance expenses, messenger
and delivery fees and branch opening costs. The increase in marketing and
advertising expenses in 2002 was due principally to promotions related to the
Company's new branch locations and a corporate sponsorship of the recent U.S.
Open golf event held on Long Island.
The foregoing expense factors resulted in an operating efficiency ratio (total
operating expenses as a percentage of fully taxable equivalent net interest and
noninterest revenue, excluding securities transactions) of 67.1% for the first
half of 2002 as compared to 57.9% in 2001. Excluding costs related to
litigations and SWLC, total operating expenses increased by 15.4% in 2002 and
would have produced an efficiency ratio of 59.9%. The Company's other primary
measure of expense control, the ratio of total operating expenses to average
total assets, also increased during the first six months of 2002 to 3.32% from a
level of 2.76% in 2001.
Income tax expense rose by $585 thousand for the first six months of 2002 as
compared to 2001, resulting in an increase in the Company's effective tax rate
to 25.6% from 19.2% a year ago. This rise is largely due to a reduction in
tax-exempt income coupled with a higher effective New York State tax rate in
2002.
Net income for the three months ended June 30, 2002 grew by 18.1% when compared
to the comparable 2001 period. This was largely attributable to an improvement
in net interest income (up 18.6%), a $1.5 million increase in net security gains
and higher other noninterest income (up 9.7%). Partially offsetting the
foregoing positive factors was a higher level of operating expenses (up 31.8%),
a $196 thousand increase in the provision for probable loan losses and a higher
effective income tax rate. Basic earnings per common share were $0.42 and $0.35
in the second quarter of 2002 and 2001, respectively, while fully diluted
earnings per share were $0.41 and $0.35 in the second quarter of 2002 and 2001,
respectively. The Company's returns on average assets and stockholders' equity
were 1.16% and 17.19% for the second quarter of 2002 and 1.16% and 15.16% for
the second quarter of 2001, respectively. Excluding the impact of SFAS No. 115,
the Company's returns on average stockholders' equity were 16.95% and 15.04%
during the second quarter of 2002 and 2001, respectively.
The reasons supporting the second quarter earnings performance are, for the most
part, the same as those discussed in the six-month analysis. Growth in average
interest-earning assets, primarily loans
(14)
($35.3 million) and mortgage-backed securities (up $250.9 million), largely
accounted for the growth in net interest income. Net security gains of $1.5
million were recorded in the second quarter of 2002 compared to net security
losses of $50 thousand for the same period in 2001. Other income improved
primarily as the result of higher annuity commissions and increases in letter of
credit, ATM and sweep account fees.
Total operating expenses grew by $2.3 million in the second quarter of 2002 as
compared to the second quarter of 2001. The most significant increases pertained
to salaries and other employee benefits (up $666 thousand) and legal fees (up
$1.0 million). The increase in salaries and benefits was due principally to
growth in staff as a result of the Company's expanded branch network. The growth
in legal fees expense was largely due to the cost of ongoing litigation related
to IMN and its affiliates, as previously discussed in detail in the Company's
2001 and 2002 SEC filings and as discussed in Part II, Item 1 herein. The
Company expects to incur additional costs related to this litigation during the
remainder of 2002. The foregoing expense factors resulted in an operating
efficiency ratio of 66.9% for the second quarter of 2002 versus 58.5% in 2001.
Excluding IMN-related legal fees, total operating expenses increased at a rate
of 18.6% in the second quarter of 2002 as compared to the same period in 2001.
Income tax expense rose $581 thousand during the second quarter of 2002 as
compared to 2001, resulting in an increase in the Company's effective tax rate
to 27.0% from 19.1% a year ago. This rise is largely due to a reduction in
tax-exempt income coupled with a higher effective New York State tax rate in
2002.
Asset Quality - Nonperforming assets (defined by the Company as nonaccrual loans
and other real estate owned) totaled $8.2 million at June 30, 2002, a $726
thousand or 8.1% decrease from December 31, 2001 and a $4.3 million or 34.5%
reduction from the comparable 2001 date. As of June 30, 2002, restructured,
accruing loans declined by $167 thousand (58.8%) versus year-end 2001. Although
classified as nonperforming for reporting purposes, restructured loans continue
to accrue and pay interest in accordance with their modified terms. Loans 90
days or more past due and still accruing interest declined by $275 thousand or
67.9% when compared to year-end 2001 and $3.5 million or 96.5% versus June 30,
2001.
In management's opinion, the most critical accounting policy impacting the
Company's financial statements is the evaluation of the allowance for probable
loan losses. Management carefully monitors the credit quality of the loan
portfolio and makes estimates about the amount of credit losses that have been
incurred at each financial statement date. Management evaluates the fair value
of collateral supporting the impaired loans using independent appraisals and
other measures of fair value. This process involves subjective judgments and
assumptions and is subject to change based on factors that may be outside the
control of the Company.
The allowance for probable loan losses amounted to $9.9 million or 1.7% of total
loans at June 30, 2002 versus $9.8 million and 1.8%, respectively, at the
comparable 2001 date. The allowance for probable loan losses as a percentage of
nonaccrual loans, restructured and accruing loans and loans 90 days or more past
due and still accruing, improved to 117% at June 30, 2002 from 96% at
(15)
December 31, 2001 and 80% one year ago, with the decline in nonperforming assets
resulting in the improved coverage ratios. As disclosed in prior filings, the
balance in nonaccrual loans and other real estate owned associated with one
relationship's related credits totaled $456 thousand at June 30, 2002, $1.2
million at December 31, 2001 and $4.8 million at June 30, 2001. The original
credit was partially written down during the years of 1999, 2000 and 2001, and
was transferred to nonaccrual status when the collection of interest became
doubtful. The Bank transferred a portion of the previously described related
credit from nonaccrual loans to other real estate owned during the second
quarter of 2001. This property was subsequently sold during the fourth quarter
of 2001.
The Company's loan portfolio is concentrated in commercial and industrial loans
and commercial mortgages, the majority of which are fully secured by collateral
with market values in excess of the carrying value of the underlying loans. The
provision for probable loan losses for the first half of 2002 and 2001 was $1.9
million and $1.5 million, respectively. Net loan charge-offs during the same
periods were $1.3 million and $1.5 million, respectively. The provision for
probable loan losses is continually evaluated relative to portfolio risk and
regulatory guidelines considering all economic factors that affect the loan loss
reserve, such as fluctuations in the Long Island real estate market and interest
rates, economic slowdowns in industries and other uncertainties. It will
continue to be closely reviewed during the second half of 2002. Due to the
uncertain nature of the current economy, management anticipates further loan
charge-offs during the remainder of 2002. A further review of the Company's
nonperforming assets may be found in Table 2-2 following this analysis.
Cautionary Statement - This report contains forward-looking statements within
the meaning of and pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The words "expects," "believes,"
"anticipates" and other similar expressions are intended to identify
forward-looking statements. A forward-looking statement encompasses any
estimate, prediction, opinion or statement of belief. Such forward-looking
statements in this report include, among other things, identifications of
trends, loan growth, comments on the adequacy of the allowance for probable loan
losses, effects of asset sensitivity and interest changes, and information
concerning market risk referenced in Item 3 of Part I. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The results may ultimately vary from the forward-looking
statements made. The Company undertakes no obligation to publish revised
statements to reflect the occurrence of unanticipated events or circumstances
after the date hereof.
(16)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
TABLE 2 - 2
- ---------------------
- ----------------------------------------------------------------------------
STATE BANCORP, INC.
ANALYSIS OF NONPERFORMING ASSETS AND THE ALLOWANCE FOR PROBABLE LOAN LOSSES
JUNE 30, 2002 VERSUS DECEMBER 31, 2001 AND JUNE 30, 2001
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------
NONPERFORMING ASSETS BY TYPE: PERIOD ENDED:
- -----------------------------
-----------------------------------------------------
6/30/02 12/31/01 6/30/01
-------------- ------------ -------------
NONACCRUAL LOANS $8,194 (1) $8,920 (1) $8,297 (1)
OTHER REAL ESTATE OWNED - - 4,208 (1)
-------------- ------------ -------------
TOTAL NONPERFORMING ASSETS $8,194 $8,920 $12,505
-------------- ------------ -------------
RESTRUCTURED, ACCRUING LOANS $117 $284 $298
LOANS 90 DAYS OR MORE PAST DUE
AND STILL ACCRUING $130 $405 $3,672
GROSS LOANS OUTSTANDING $584,811 $551,598 $548,670
TOTAL STOCKHOLDERS' EQUITY $83,515 $76,288 $75,702
ANALYSIS OF THE ALLOWANCE FOR QUARTER ENDED:
-----------------------------------------------------
PROBABLE LOAN LOSSES: 6/30/02 12/31/01 6/30/01
- -----------------------
-------------- ------------ -------------
BEGINNING BALANCE $9,239 $9,096 $9,868
PROVISION 963 1,170 767
NET CHARGE-OFFS (308) (1,011) (822)
-------------- ------------ -------------
ENDING BALANCE $9,894 $9,255 $9,813
-------------- ------------ -------------
KEY RATIOS AT PERIOD-END:
ALLOWANCE AS A % OF TOTAL LOANS 1.7% 1.7% 1.8%
NONACCRUAL LOANS AS A % OF TOTAL LOANS 1.4% 1.6% 1.5%
NONPERFORMING ASSETS (2) AS A % OF TOTAL
LOANS AND OTHER REAL ESTATE OWNED 1.4% 1.6% 2.3%
ALLOWANCE FOR PROBABLE LOAN LOSSES AS
A % OF NONACCRUAL LOANS 120.7% 103.8% 118.3%
ALLOWANCE FOR PROBABLE LOAN LOSSES AS A %
OF NONACCRUAL LOANS, RESTRUCTURED,
ACCRUING LOANS AND LOANS 90 DAYS OR
MORE PAST DUE AND STILL ACCRUING 117.2% 96.3% 80.0%
(1) INCLUDES RELATED CREDITS TOTALING $456 THOUSAND AT JUNE 30, 2002, $1.2
MILLION AT DECEMBER 31, 2001 AND $4.8 MILLION AT JUNE 30, 2001.
(2) EXCLUDES RESTRUCTURED, ACCRUING LOANS AND LOANS 90 DAYS OR MORE PAST DUE
AND STILL ACCRUING INTEREST.
CERTAIN PRIOR PERIOD AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT
YEAR'S PRESENTATION.
(17)
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
December 31, 2001 in our Annual Report on Form 10-K. There have been no material
changes in our market risk at June 30, 2002 compared to December 31, 2001. The
following is an update of the discussion provided therein:
Our largest component of market risk continues to be interest rate risk,
virtually all at the Bank level. The degree by which interest income may vary
due to changes in interest rates is measured through interest rate sensitivity
management. A static gap report (see Table 3-1), measured at a single point in
time, measures the difference between assets and liabilities that reprice in a
future given time period. The assumptions used in the table are the same as
those used for the December 31, 2001 analysis. The Company's gap ratio (the
percentage of assets repricing against liabilities) at June 30, 2002 was 86.7%.
The Company's liability sensitive position, meaning that more liabilities
reprice on a cumulative basis than assets, indicates that net interest income
should increase in declining rate scenarios and decrease in rising rate
scenarios. However, because rate movements are rarely parallel, a static gap
report can only be considered a rough measurement of the impact a rate movement
could have on interest income.
The Company is still not subject to foreign currency exchange or commodity price
risk. At June 30, 2002, the Company owned no trading assets, nor did it use
hedging transactions such as interest rate swaps. There has been no material
change in the composition of assets or deposit liabilities from December 31,
2001. The Company continues to monitor the impact of interest rate volatility
upon net interest income and net portfolio value in the same manner as at
December 31, 2001. The Board of Directors has not amended the approved limits of
acceptable variances.
(18)
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK (CONTINUED)
======================================================================
JUNE 30, 2002
- ----------------
TABLE 3-1 LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------- ======================================================================
============================================================================
SENSITIVITY TIME HORIZON
($ IN THOUSANDS) Noninterest-
- ------------------------------
INTEREST - SENSITIVE ASSETS : 1) 0 - 6 Months 6-12 Months 1 - 5 Years Over 5 Years Sensitive Total
- ------------------------------ ------------ ----------- ----------- ------------ ------------ ---------
Loans (net of unearned income) 2) $296,458 $18,477 $199,088 $62,594 $8,194 $584,811
Interest-Bearing Deposits 1,069 1,069
Securities Held to Maturity 145 145
Securities Available for Sale 3) 45,495 117,296 188,143 130,498 5,118 486,550
------------ ---------- ----------- ------------ ------------ ---------
Total Interest-Earning Assets 343,022 135,773 387,376 193,092 13,312 1,072,575
Unrealized Net Gain on Securities
Available for Sale 2,167 2,167
Noninterest-Bearing Cash and Due
from Banks 30,917 30,917
Net Receivable - Securities Sales 85,018 85,018
All Other Assets 7) 6,984 2,887 144 92 5,801 15,908
------------ ---------- ----------- ------------ ------------ ---------
Total Assets $468,108 $138,660 $387,520 $193,184 $19,113 $1,206,585
------------ ---------- ----------- ------------ ------------ ---------
- -----------------------------------
INTEREST - SENSITIVE LIABILITIES : 1)
- -----------------------------------
Savings Accounts 4) $13,719 $10,117 $80,939 $60,705 $165,480
Money Fund and NOW Accounts 5) 28,143 17,146 137,171 37,460 219,920
Time Deposits 6) 256,088 57,153 54,720 411 368,372
------------ ---------- ----------- ------------ ------------ ---------
Total Interest-Bearing Deposits 297,950 84,416 272,830 98,576 - 753,772
Securities Sold Under Agreements
to Repurchase, Federal Funds
Purchased and Other Borrowings 168,876 1,275 1,344 171,495
------------ ---------- ----------- ------------ ------------ ---------
Total Interest-Bearing Liabilities 466,826 85,691 274,174 98,576 - 925,267
All Other Liabilities, Equity and
Demand Deposits 7) 16,488 8,572 62,596 110,147 83,515 281,318
------------ ---------- ----------- ------------ ------------ ---------
Total Liabilities and Equity $483,314 $94,263 $336,770 $208,723 $83,515 $1,206,585
------------ ---------- ----------- ------------ ------------ ---------
Cumulative Interest-Sensitivity Gap 8) ($123,804) ($73,722) $39,480 $133,996 $147,308
Cumulative Interest-Sensitivity Ratio 9) 73.5 % 86.7 % 104.8 % 114.5 % 115.9 %
Cumulative Interest-Sensitivity Gap
As a % of Total Assets (10.3)% (6.1)% 3.3 % 11.1 % 12.2 %
(1) Allocations to specific interest-sensitivity periods are based on the
earlier of the repricing or maturity date.
(2) Nonaccrual loans are shown in the noninterest-sensitive category.
(3) Estimated principal reductions have been assumed for mortgage-backed
securities based upon their current constant prepayment rates.
(4) Savings deposits, excluding short-term municipal deposits, are assumed to
decline at a rate of 12.5% per year over an eight-year period based upon the
nature of their historically stable core deposit relationships. Short-term
municipal deposits are included in the 0 - 6 months category.
(5) Money fund and NOW accounts of individuals, partnerships and corporations
are assumed to decline at a rate of 10% per year over a ten-year period
based upon the nature of their historically stable core deposit
relationships. Money fund and NOW accounts of municipalities are assumed to
decline at a rate of 20% per year over a five-year period, except for short-
term municipal deposits that are included in the 0 - 6 months category.
(6) Reflected as maturing in each instrument's period of contractual maturity.
(7) Other assets and liabilities are shown according to their contractual
payment schedule or a reasonable estimate thereof. Demand deposits,
excluding short-term municipal deposits, are assumed to decline at a rate of
8.3% per year over a twelve-year period based upon the nature of their
historically stable core deposit relationships. Short-term municipal
deposits are included in the 0 - 6 months category.
(8) Total interest-earning assets minus total interest-bearing liabilities.
(9) Total interest-earning assets as a percentage of total interest-bearing
liabilities.
(19)
PART II
ITEM 1 - LEGAL PROCEEDINGS
As previously reported, the Bank has been named (along with other defendants) in
lawsuits related to the activities of Island Mortgage Network, Inc. and certain
related companies ("IMN"). The seven such cases pending against the Bank as of
August 12, 2002 are as follows:
Blanton, et al. v. IMN Financial Corp., et al., Adv. Proc.
------------------------------------------------
No. 01-8096, Bankruptcy Court for the Eastern District of New York.
Moritz, et al. v. National Settlement Services Corp., et al.,
----------------------------------------------------------------
Civil Action No. 3 :00 CV 426 MU, Western District of North Carolina.
Duboff, et al. v. Island Mortgage Network, Inc., et al., Index
-------------------------------------------------------
No. 10738/00, Supreme Court of the State of New York.
First American Title Insurance Co. v. State Bank of Long Island,
---------------------------------------------------------------
Index No. 13438/01, Supreme Court of the State of New York.
Broward Title Co. v. Alan Jacobs, et al., Adv. Proc. No. 01-8181,
-----------------------------------------
Bankruptcy Court for the Eastern District of New York.
Household Commercial Financial Services, Inc., et al. v. Action
-------------------------------------------------------------------
Abstract, Inc., et al., Adv. Proc. No. 02-8167,
- -----------------------
Bankruptcy Court for the Eastern District of New York.
Alan M. Jacobs, as Chapter 11 Trustee v. State Bank of Long Island,
-------------------------------------------------------------------
Adv. Proc. No. 02-8157, Bankruptcy Court for the Eastern District of New York.
The adversary proceeding in which Household Commercial Financial Services, Inc.
is a plaintiff (along with Matrix Capital Bank and HSA Residential Mortgage
Services of Texas) was commenced recently. The allegations are similar in nature
to those previously made in the litigation brought against the Bank by Imperial
Warehouse Finance, Inc. (which the Bank recently settled). A copy of the new
complaint is attached as an exhibit hereto.
In the adversary proceeding recently initiated by the Trustee for IMN, the
Trustee is seeking to recover certain monies on the theory that an alleged June,
2000 transfer of monies by IMN to State Bank is avoidable as a preferential
transfer and as a fraudulent conveyance. A copy of the complaint is attached as
an exhibit hereto.
The Bank is defending these lawsuits vigorously, and management believes that
the Bank has substantial defenses to the claims that have been asserted.
However, the ultimate outcome of these lawsuits cannot be predicted with
certainty. It also remains possible that other parties may pursue additional
claims against the Bank related to the Bank's dealings with IMN and its
affiliates. The Bank's legal fees and expenses will be significant, and those
costs, in addition to any costs associated with settling the IMN-related
litigations or satisfying any adverse judgments, could have a material adverse
effect on the Bank's results of operations or financial position. The Bank is
continuing to explore the extent to which insurance coverage may be available to
defray some of the costs associated with the IMN-related litigations, and the
Bank is also, in certain of the litigations, pursuing
(20)
cross-claims against co-defendants and claims against various non-parties.
The Company and the Bank are subject to other legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability, if any, with respect to such matters will not
materially affect future operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the shareholders of the Company, held on April 23,
2002, the following directors were elected:
Nominee Term For Withheld
- ------- ---- --- --------
Thomas F. Goldrick, Jr. 3 years 6,291,175 137,341
John F. Picciano 3 years 6,354,788 73,728
Suzanne H. Rueck 3 years 6,356,491 72,025
Jeffrey S. Wilks 3 years 6,335,193 93,323
The following directors continue to serve on the Board:
J. Robert Blumenthal, Carl R. Bruno, Thomas E. Christman, Arthur Dulik, Jr.,
Gary Holman, Richard W. Merzbacher, Joseph F. Munson, Daniel T. Rowe
There were no broker non-votes on this matter.
In addition, at the annual meeting of the shareholders of the Company, a Stock
Option Plan (2002) was considered and voted upon. The holders of 4,631,932
shares voted for the resolution, the holders of 360,999 shares voted against the
resolution, and the holders of 57,214 shares abstained. There were 1,378,371
broker non-votes on this proposal.
The proxy statement for this meeting was filed with the Securities and Exchange
Commission.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Complaint in Household Commercial Financial Services, Inc., et al. v.
Action Abstract, Inc., et al.
99.2 Complaint in Alan M. Jacobs, as Chapter 11 Trustee v. State Bank of Long
Island.
99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(21)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE BANCORP, INC.
8/14/02 s/Daniel T. Rowe
- -------- -------------------------
Date Daniel T. Rowe, President
8/14/02 s/Brian K. Finneran
- -------- ----------------------------
Date Brian K. Finneran, Secretary
(Principal Financial Officer)
(22)