UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2003
[ ] 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- -----
As of May 7, 2003, there were 8,065,695 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 - March 31, 2003 and December 31, 2002
(Unaudited) 1.
Consolidated Statements of Income for the Three Months Ended
March 31, 2003 and 2002 (Unaudited) 2.
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2003 and 2002 (Unaudited) 3.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss)for the Three Months Ended March 31, 2003 and 2002 (Unaudited) 4.
Notes to Unaudited Consolidated Financial Statements 5.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10.
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19.
Item 4. Controls and Procedures 21.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21.
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 - None N/A
Item 5. Other Information - None N/A
Item 6. Exhibits and Reports on Form 8-K 22.
SIGNATURES 23.
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT 24.
- -------------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -------------------------------------
- -------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002 (UNAUDITED)
- -------------------------------------------------------
- ----------------------------------------------
ASSETS: 2003 2002
- ---------------------------------------------- ---------------- -----------------
CASH AND DUE FROM BANKS $42,419,266 $50,586,855
FEDERAL FUNDS SOLD 10,000,000 -
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - 48,000,000
----------------- -----------------
TOTAL CASH AND CASH EQUIVALENTS 52,419,266 98,586,855
SECURITIES HELD TO MATURITY (ESTIMATED FAIR VALUE -
$82,412 IN 2003 AND $26,713,300 IN 2002) 79,400 26,711,314
SECURITIES AVAILABLE FOR SALE - AT ESTIMATED FAIR VALUE 689,396,411 582,899,187
----------------- -----------------
TOTAL SECURITIES 689,475,811 609,610,501
LOANS (NET OF ALLOWANCE FOR PROBABLE LOAN LOSSES
OF $10,225,428 IN 2003 AND $10,045,516 IN 2002) 606,781,976 610,338,357
BANK PREMISES AND EQUIPMENT - NET 7,731,038 7,879,767
NET RECEIVABLE - SECURITIES SALES 7,225,041 14,173,044
OTHER ASSETS 16,257,819 21,693,660
----------------- -----------------
- -----------------------------------------------------------
TOTAL ASSETS $1,379,890,951 $1,362,282,184
- ----------------------------------------------------------- ================= =================
- -----------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------
DEPOSITS:
DEMAND $237,148,673 $215,876,137
SAVINGS 599,197,053 498,767,318
TIME 314,659,278 432,383,053
----------------- -----------------
TOTAL DEPOSITS 1,151,005,004 1,147,026,508
FEDERAL FUNDS PURCHASED 10,000,000 4,800,000
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 22,410,000 49,983,000
OTHER BORROWINGS 52,049,725 52,665,644
NET PAYABLE - SECURITIES PURCHASES 38,925,353 2,009,000
ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 7,404,819 8,115,401
----------------- -----------------
- -----------------------------------------------------------
TOTAL LIABILITIES 1,281,794,901 1,264,599,553
- ----------------------------------------------------------- ----------------- -----------------
GUARANTEED PREFERRED BENEFICIAL INTEREST
IN SUBORDINATED DEBT 10,000,000 10,000,000
COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------------------------
STOCKHOLDERS' EQUITY:
- -----------------------------------------------------------
PREFERRED STOCK, $.01 PAR VALUE, AUTHORIZED
250,000 SHARES; 0 SHARES ISSUED - -
COMMON STOCK, $5.00 PAR VALUE, AUTHORIZED
20,000,000 SHARES; ISSUED 8,822,121 SHARES IN 2003
AND 8,763,679 SHARES IN 2002; OUTSTANDING 8,025,998
SHARES IN 2003 AND 7,979,862 SHARES IN 2002 44,110,605 43,818,395
SURPLUS 46,243,110 45,714,829
RETAINED EARNINGS 7,074,576 5,419,517
TREASURY STOCK (796,123 SHARES IN 2003
AND 783,817 SHARES IN 2002) (12,666,401) (12,444,116)
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF TAXES 3,351,792 5,218,101
UNEARNED COMPENSATION (17,632) (44,095)
----------------- -----------------
- -----------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 88,096,050 87,682,631
- ----------------------------------------------------------- ----------------- -----------------
- -----------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,379,890,951 $1,362,282,184
- ----------------------------------------------------------- ================= =================
See accompanying notes to unaudited consolidated financial statements.
(1)
- -------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------
- --------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
- ---------------------------------------------------------------------------
-------------------------
THREE MONTHS
-------------------------
----------- ------------
2003 2002
- ------------------------------------------- ----------- ------------
INTEREST INCOME:
- -------------------------------------------
LOANS $10,936,220 $10,590,277
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL 185,234 321,255
SECURITIES HELD TO MATURITY AND
SECURITIES AVAILABLE FOR SALE:
STATES AND POLITICAL SUBDIVISIONS 881,645 797,414
MORTGAGE-BACKED SECURITIES 2,410,768 2,738,956
GOVERNMENT AGENCY SECURITIES 2,262,599 904,843
OTHER SECURITIES 344,436 140,674
----------- ------------
TOTAL INTEREST INCOME 17,020,902 15,493,419
----------- ------------
- -------------------------------------------
INTEREST EXPENSE:
- -------------------------------------------
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR
MORE 871,731 1,424,385
OTHER DEPOSITS AND TEMPORARY BORROWINGS 2,390,781 1,994,024
GUARANTEED PREFERRED BENEFICIAL INTEREST
IN SUBORDINATED DEBT 141,633 -
----------- ------------
TOTAL INTEREST EXPENSE 3,404,145 3,418,409
----------- ------------
NET INTEREST INCOME 13,616,757 12,075,010
PROVISION FOR PROBABLE LOAN LOSSES 983,751 959,000
----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 12,633,006 11,116,010
----------- ------------
- -------------------------------------------
OTHER INCOME:
- -------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 390,926 381,389
NET SECURITY GAINS (LOSSES) 1,996,078 (33,545)
OTHER OPERATING INCOME 318,461 283,538
----------- ------------
TOTAL OTHER INCOME 2,705,465 631,382
----------- ------------
INCOME BEFORE OPERATING EXPENSES 15,338,471 11,747,392
----------- ------------
- -------------------------------------------
OPERATING EXPENSES:
- -------------------------------------------
SALARIES AND OTHER EMPLOYEE BENEFITS 5,560,010 4,924,486
OCCUPANCY 932,682 752,319
EQUIPMENT 388,527 328,268
LEGAL 2,332,900 815,234
MARKETING AND ADVERTISING 331,355 379,763
OTHER OPERATING EXPENSES 1,911,550 1,706,661
----------- ------------
TOTAL OPERATING EXPENSES 11,457,024 8,906,731
----------- ------------
INCOME BEFORE INCOME TAXES 3,881,447 2,840,661
PROVISION FOR INCOME TAXES 1,103,567 662,271
- ------------------------------------------- ----------- ------------
NET INCOME $2,777,880 $2,178,390
- ------------------------------------------- ----------- ------------
- ------------------------------------------
BASIC EARNINGS PER COMMON SHARE $0.35 $0.27
------ ------
- ------------------------------------------
- ------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $0.34 $0.26
------ ------
- ------------------------------------------
- -------------------------------------------
AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,008,640 8,127,034
- ------------------------------------------- ----------- ------------
See accompanying notes to unaudited consolidated financial statements.
(2)
- ---------------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------
- -----------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
- -----------------------------------------------------------------
- --------------------------------------------- -------------- -------------
OPERATING ACTIVITIES: 2003 2002
- --------------------------------------------- -------------- -------------
NET INCOME $2,777,880 $2,178,390
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR PROBABLE LOAN LOSSES 983,751 959,000
DEPRECIATION AND AMORTIZATION OF BANK PREMISES AND EQUIPMENT 402,060 286,443
AMORTIZATION OF INTANGIBLES 9,034 9,034
AMORTIZATION OF NET PREMIUM ON SECURITIES 2,046,738 200,302
AMORTIZATION OF UNEARNED COMPENSATION 49,508 54,937
NET SECURITY (GAINS) LOSSES (1,996,078) 33,545
DECREASE IN OTHER ASSETS, NET 5,849,853 3,890,356
DECREASE IN ACCRUED EXPENSES, TAXES
AND OTHER LIABILITIES (719,457) (1,296,928)
---------------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,403,289 6,315,079
---------------------- -------------------
- -----------------------------------------------------------------------
INVESTING ACTIVITIES:
- -----------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 26,680,886 51,400
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 253,311,952 57,826,184
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 65,571,345 22,606,200
PURCHASES OF SECURITIES AVAILABLE FOR SALE (383,905,152) (295,954,025)
DECREASE (INCREASE) IN LOANS - NET 2,572,630 (22,155,494)
PURCHASES OF BANK PREMISES AND EQUIPMENT - NET (253,331) (839,135)
---------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (36,021,670) (238,464,870)
---------------------- -------------------
- -----------------------------------------------------------------------
FINANCING ACTIVITIES:
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN DEMAND AND SAVINGS DEPOSITS 121,702,271 (30,521,995)
DECREASE IN TIME DEPOSITS (117,723,775) (12,905,628)
INCREASE IN FEDERAL FUNDS PURCHASED 5,200,000 -
(DECREASE) INCREASE IN SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE (27,573,000) 158,365,250
(DECREASE) INCREASE IN OTHER BORROWINGS (615,919) 11,604,802
CASH DIVIDENDS PAID (1,113,946) (1,084,395)
PROCEEDS FROM SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN 641,424 360,671
PROCEEDS FROM STOCK OPTIONS EXERCISED 156,022 53,689
PURCHASES OF TREASURY STOCK (222,285) (572,338)
---------------------- -------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (19,549,208) 125,300,056
---------------------- -------------------
- -----------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (46,167,589) (106,849,735)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - JANUARY 1 98,586,855 138,110,091
- -----------------------------------------------------------------------
- ----------------------------------------------------------------------- ---------------------- -------------------
CASH AND CASH EQUIVALENTS - MARCH 31 $52,419,266 $31,260,356
- ----------------------------------------------------------------------- ---------------------- -------------------
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------
INTEREST PAID $3,566,730 $3,362,140
INCOME TAXES PAID $1,267,824 $16,500
ADJUSTMENT TO UNREALIZED NET GAIN OR LOSS ON SECURITIES
AVAILABLE FOR SALE ($2,289,355) ($2,402,399)
DIVIDENDS DECLARED BUT NOT PAID AS OF QUARTER END $1,122,821 $1,082,521
See accompanying notes to unaudited consolidated financial statements.
(3)
- -----------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------
- ------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
- ------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL COMPRE-
COMPRE- UNEARNED STOCK- HENSIVE
COMMON RETAINED TREASURY HENSIVE COMPEN- HOLDERS' INCOME
STOCK SURPLUS EARNINGS STOCK INCOME (LOSS) SATION EQUITY (LOSS)
----- ------- -------- ----- ------------ ------ ----- ------
BALANCE, JANUARY 1, 2003 $43,818,395 $45,714,829 $5,419,517 ($12,444,116) $5,218,101 ($44,095) $87,682,631
COMPREHENSIVE INCOME:
NET INCOME 2,777,880 2,777,880 $2,777,880
-----------
OTHER COMPREHENSIVE LOSS,
NET OF TAX:
UNREALIZED HOLDING LOSSES ARISING
DURING THE PERIOD (549,283)
RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME (1,317,026)
-----------
TOTAL OTHER COMPREHENSIVE LOSS (1,866,309) (1,866,309)(1,866,309)
-----------
TOTAL COMPREHENSIVE INCOME $911,571
-----------
CASH DIVIDEND
($0.14 PER SHARE) (1,122,821) (1,122,821)
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (38,072 SHARES
AT 95% OF MARKET VALUE) 190,360 451,064 641,424
STOCK OPTIONS EXERCISED 101,850 54,172 156,022
TREASURY STOCK PURCHASED (222,285) (222,285)
AMORTIZATION OF UNEARNED
COMPENSATION 23,045 26,463 49,508
------------ ------------- ---------- ----------- ------------ ----------- ----------
- --------------------------------
BALANCE, MARCH 31, 2003 $44,110,605 $46,243,110 $7,074,576 ($12,666,401) $3,351,792 ($17,632) $88,096,050
- --------------------------------
------------- -------- ---------- ----------- ------------ ----------- ----------
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 2,178,390 2,178,390 $2,178,390
-----------
OTHER COMPREHENSIVE LOSS,
NET OF TAX:
UNREALIZED HOLDING LOSSES ARISING
DURING THE PERIOD (1,479,939)
RECLASSIFICATION ADJUSTMENT
FOR LOSSES INCLUDED IN NET INCOME 19,919
-----------
TOTAL OTHER COMPREHENSIVE LOSS (1,460,020) (1,460,020)(1,460,020)
-----------
TOTAL COMPREHENSIVE INCOME $718,370
-----------
CASH DIVIDEND
($0.13 PER SHARE) (1,082,521) (1,082,521)
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (24,891 SHARES
AT 95% OF MARKET VALUE) 124,455 236,216 360,671
STOCK OPTIONS EXERCISED 33,355 20,334 53,689
TREASURY STOCK PURCHASED (572,338) (572,338)
AMORTIZATION OF UNEARNED
COMPENSATION 20,745 34,192 54,937
------------ --------- ---------- ----------- ------------ ----------- ----------
- -------------------------------
BALANCE, MARCH 31, 2002 $41,328,405 $39,479,789 $6,684,184 ($7,643,487) ($3,887,523)($140,131) $75,821,237
- ------------------------------- ------------ --------- ---------- ----------- ------------ ----------- ----------
See accompanying notes to unaudited consolidated financial statements.
(4)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
1. 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 balance sheets as of March 31, 2003 and December 31, 2002, its
consolidated statements of income for the three months ended March 31, 2003 and
2002, its consolidated statements of cash flows for the three months ended March
31, 2003 and 2002 and its consolidated statements of stockholders' equity and
comprehensive income (loss) for the three months ended March 31, 2003 and 2002.
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year. For further information, please refer to the consolidated
financial statements and footnotes thereto included in the Company's 2002 annual
report on Form 10-K. Certain amounts have been reclassified to conform to the
current year's presentation.
2. STOCKHOLDERS' EQUITY
The Company has 250,000 shares of preferred stock authorized. No shares were
issued as of March 31, 2003.
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 12,306 common shares at an
average price of $18.06 per share.
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 March 31, 2003, 156,692 shares
have been released from the suspense account and are considered outstanding for
earnings per share computations.
3. 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 Three Months Ended March 31, 2003 2002
- ------------------------------------ ---- ----
Net income $2,777,880 $2,178,390
Average dilutive stock options outstanding 625,635 472,905
Average exercise price per share $13.52 $16.15
Average market price - diluted basis $18.52 $15.91
Average common shares outstanding 8,008,640 8,127,034
Increase in shares due to exercise of options - diluted basis 169,079 129,302
------- -------
Adjusted common shares outstanding - diluted 8,177,719 8,256,336
--------- ---------
Net income per share - basic $0.35 $0.27
----- -----
Net income per share - diluted $0.34 $0.26
----- -----
4. 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.
5. LOANS
As a result of the Company's evaluation of impaired loans, an allowance for
probable loan losses of approximately $1,746,000 and $2,027,000 was established
for $5,023,751 and $4,954,194 of the total impaired loans at March 31, 2003 and
December 31, 2002, respectively. The total average impaired loan balance was
$4,975,892 for the quarter ended March 31, 2003 and $6,486,261 for the year
ended December 31, 2002. Total impaired loans amounted to $5,023,751 and
$4,954,194 at March 31, 2003 and December 31, 2002, respectively. At March 31,
2003, 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 $2,697,784 and $2,325,967,
respectively. No interest income was recognized on impaired loans for the three
months ended March 31, 2003 and 2002.
Activity in the allowance for probable loan losses for the three months ended
March 31, 2003 and 2002 is as follows:
2003 2002
---- ----
Balance, January 1, $10,045,516 $9,255,414
Provision charged to income 983,751 959,000
Charge-offs, net of recoveries of $17,543 in 2003 and $72,096 in 2002 (803,839) (975,003)
--------- ---------
Balance, March 31, $10,225,428 $9,239,411
=========== ==========
(6)
6. STOCK OPTIONS
The Company accounts for stock-based compensation using the intrinsic value
method which recognizes as expense the difference between the market value of
the stock and the exercise price at grant date. The Company discloses the pro
forma effects of accounting for stock-based compensation using the fair value
method.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This statement is effective for financial statements
for fiscal years ending after December 15, 2002. The Company adopted SFAS No.
148 as of December 31, 2002, and the impact of such adoption did not have a
material impact on the Company's financial statements.
The estimated fair value of options granted during 2003 and 2002 was $4.40 and
$3.10 per share, respectively. The Company applies Accounting Principles Board
Opinion ("APB") No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its incentive stock
option plans. Had compensation cost for the Company's four plans been determined
at the fair value on the grant dates for awards under those plans, consistent
with the method in SFAS No. 123, "Accounting for Stock-based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
For the Three Months Ended March 31, 2003 2002
- ------------------------------------ ---- ----
Net income, as reported $2,777,880 $2,178,390
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (99,940) (77,349)
-------- --------
Pro forma net income $2,677,940 $2,101,041
========== ==========
Earnings per share:
Basic - as reported $0.35 $0.27
Basic - pro forma $0.33 $0.26
Diluted - as reported $0.34 $0.26
Diluted - pro forma $0.33 $0.25
The fair value of options granted under the Company's incentive stock option
plans during 2003 and 2002 were estimated on the date of grant using the
Black-Scholes Single Option Pricing Model with the following weighted-average
assumptions used:
(7)
2003 2002
---- ----
Dividend yield 3.1% 3.4%
Expected volatility 28.4% 17.7%
Risk-free interest rate 3.38% 4.77%
Expected life of options 7.4 years 7.3 years
7. 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.
8. RECENT ACCOUNTING DEVELOPMENTS
On October 1, 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain
Financial Institutions," which allows financial institutions meeting certain
criteria to reclassify their unidentifiable intangible asset balances to
goodwill and retroactively cease amortization beginning as of January 1, 2002.
The adoption of this statement did not have a material effect on the Company's
financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness
of Others," which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company's adoption of this
Interpretation as of December 31, 2002, did not have a material impact on the
Company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company is not a party to any variable interest entities
covered by the Interpretation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
(8)
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," resulting in more consistent reporting of contracts as
either derivatives or hybrid instruments. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and should be applied
prospectively. Implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 should continue to be applied in
accordance with their respective effective dates. The Company is currently
assessing the impacts of this statement on its financial statements.
(9)
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 subsidiaries, State Bank
of Long Island and subsidiaries (the "Bank"), a New York State-chartered
commercial bank founded in 1966, and State Bancorp Capital Trust I (the
"Trust"), an entity formed in 2002 to issue Trust Preferred securities. 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 and its subsidiary P.W.B. Realty, L.L.C.,
Studebaker-Worthington Leasing Corp. ("SWLC") and SB ORE Corp.
Material Changes in Financial Condition - Total assets of the Company were $1.4
billion at March 31, 2003. When compared to December 31, 2002, total assets
increased by $17.6 million or 1.3%. An increase in the investment portfolio of
$79.9 million was the primary contributor to the asset growth and was funded
largely by growth in core deposits. Partially offsetting this increase was a
reduction in lower-yielding securities purchased under agreements to resell of
$48.0 million. The increase in investment securities resulted from a leverage
strategy utilizing medium-term (average life) mortgage-backed securities and
callable Government Agency issues.
At March 31, 2003, total deposits increased $4.0 million to $1.2 billion when
compared to December 31, 2002, helping to fund the Company's asset growth. This
rise was largely attributable to increases in the core deposit categories of
demand, NOW, savings and money fund accounts of $21.3 million, $14.9 million,
$81.4 million and $4.1 million, respectively. Largely offsetting these increases
was a decrease in time deposits of $117.7 million. Management expects that
low-cost core deposit balances (demand, NOW, savings and money fund accounts)
will continue to grow as a result of the Company's expanded branch network,
including the newest locations in Port Washington and Long Island City. The
Company now has fifteen branches located throughout the tri-county area of
Nassau, Suffolk and Queens. Core deposits represented approximately 72.7% of
total deposits at March 31, 2003 versus 62.3 % at year-end 2002. The increase in
core deposit balances has allowed the Company to reduce its dependence on
short-term borrowed funds. Securities sold under agreements to repurchase
declined $27.6 million, partially offset by a $5.2 million increase in Federal
Funds purchased.
Average interest-earning assets for the first quarter of 2003 were up by $275.4
million or 27.3% to $1.3 billion from the comparable 2002 period. Sources of
asset expansion included a $233.2 million or 62.9% increase in average
investment securities, coupled with a $55.4 million or 9.9% increase in average
loans, primarily commercial mortgages. This growth was partially offset by a
decline in average money market instruments of $13.2 million. Average U.S.
Government Agency securities and average mortgage-backed securities increased by
$147.4 million and $59.0 million, respectively. Funding the first quarter asset
growth was a $248.7 million increase in average deposits, mainly demand deposits
and other low-cost core funding. Average core deposits increased by $267.5
million or 50.0% during the first quarter of 2003 as compared to the same period
in 2002. Partially offsetting the growth in average core balances was a decline
in average total time deposits of $18.8 million or 4.7%, with a decrease of
$59.2 million or 19.8% in CDs over $100 thousand. Average borrowed funds
increased by $9.4 million during the first quarter of 2003 when compared to the
same period last year primarily as a result of a $16.3 million increase in
Federal Home Loan Bank overnight funding. These activities resulted in a first
quarter net interest margin on a tax-equivalent basis of 4.47%, down from 5.06%
one year ago. Management anticipates a flat to slightly lower net interest
margin during the remainder of 2003 as low-cost core deposit balances and loan
volumes are each projected to increase while short-term interest rates are
expected to stabilize at current levels. Pricing pressure in the loan portfolio
is expected to offset any improvement in funding costs that will result from
continued core deposit expansion. The higher level of core deposits allowed the
Company to
(10)
reduce its dependence on higher-cost funding which, combined with the lower
interest rate environment, resulted in a 30 basis point decline in the Company's
first quarter average cost of funds to 1.07% as compared to the same period in
2002.
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 March 31,
2003, 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 $88.1 million at March 31,
2003, representing increases of $413 thousand and $12.3 million, respectively,
from December 31 and March 31, 2002. Excluding valuations related to SFAS No.
115 at the same dates, total stockholders' equity grew at rates of 2.8% and 6.3%
from December 31 and March 31, 2002, 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 March 31, 2003 and compares
them to current regulatory guidelines and December 31 and March 31, 2002 actual
results.
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:
March 31, 2003 6.72% 11.56% 12.81%
December 31, 2002 6.95% 11.36% 12.62%
March 31, 2002 7.30% 11.39% 12.65%
Regulatory Criteria for a "Well
Capitalized" Institution 5.00% 6.00% 10.00%
The Company's stock repurchase program expended $222 thousand during the first
quarter of 2003 to repurchase 12,306 shares at an average cost of $18.06 per
share. Since 1998, 796,123 shares of Company stock have been repurchased at an
average cost of $15.91 per share. Under the Board of Directors' existing
authorization, an additional 203,877 shares may be repurchased from time to time
as conditions warrant.
During the fourth quarter of 2002, the Company raised $10 million from its
participation in a pooled trust preferred securities offering. The trust
preferred securities, which qualify as Tier I capital for regulatory capital
purposes, were issued by the Trust, bear an interest rate tied to three-month
LIBOR and are redeemable by the Company in whole or in part after five years or
earlier under certain circumstances. The initial rate on the securities was
5.27%. During the first quarter of 2003, the weighted average rate on the trust
preferred securities was 4.99%.
(11)
Liquidity and Off-Balance Sheet Arrangements - 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
subsidiaries 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 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 March 31, 2003 and 2002, commitments to originate
loans and commitments under unused lines of credit for which the Bank is
obligated amounted to approximately $224,751,000 and $166,967,000, 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 March 31, 2003 and 2002, the Bank had letters
of credit outstanding of approximately $8,374,000 and $7,367,000, 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
(12)
clauses, are as follows: in 2003, $1,687,778; in 2004, $2,244,990;
in 2005, $2,148,553; in 2006, $1,720,469; in 2007, $1,605,535; and the
remainder to 2012, $6,093,846.
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 first quarter
of 2003, the Company's liquidity position remained stable and well within
acceptable industry standards. During the first quarter of 2003, higher levels
of core deposits coupled with calls on Government Agency securities and
pay-downs on mortgage-backed securities provided a source of readily available
funds to meet general liquidity needs. In addition, at March 31, 2003, 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 March 31, 2003, the Company also had $16.5 million in formal and $30.0
million in informal lines of credit extended by correspondent banks to be
utilized, if needed, for short-term funding purposes.
Tabular Disclosure of Contractual Obligations - Shown below are the amounts of
payments due under specified contractual obligations, aggregated by category of
contractual obligation, for specified time periods. All information is as of
March 31, 2003.
Payments due by period (in thousands)
-------------------------------------
Contractual obligations Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
- ----------------------- ----- ---------------- ----------- ----------- -----------------
Leases covering various Bank equipment,
branches, office space and land $15,501 $1,688 $4,393 $3,326 $6,094
Federal funds purchased 10,000 10,000 - - -
Securities sold under agreements to
repurchase 22,410 22,410 - - -
Federal Home Loan Bank of New York
overnight funding 50,000 50,000 - - -
Obligations under equipment lease financing 2,050 1,530 520 - -
Guaranteed preferred beneficial interest in
subordinated debt 10,000 - - - 10,000
Total $109,961 $85,628 $4,913 $3,326 $16,094
- ----- -------- ------- ------ ------ -------
(13)
Material Changes in Results of Operations for the Three Months Ended March 31,
2003 versus 2002 - Net income for the three months ended March 31, 2003 was $2.8
million, an increase of $599 thousand or 27.5%, when compared to the same 2002
period. Improvements in net interest income (up 12.8%) to $13.6 million and
noninterest income (up 6.7% excluding the impact of securities sales) were
offset by growth in operating expenses (up 28.6%), a higher provision for
probable loan losses and an increase in the effective income tax rate. Basic
earnings per common share were $0.35 in 2003 and $0.27 in 2002, while fully
diluted earnings per share were $0.34 and $0.26, respectively. The Company's
returns on average assets and stockholders' equity were 0.82% and 12.48% in 2003
and 0.84% and 11.26% in 2002, respectively. Excluding the impact of unrealized
gains and losses on securities available for sale, reported net of tax as
accumulated other comprehensive income (loss) as a separate component of
stockholders' equity, the Company's returns on average stockholders' equity were
13.31% and 11.14% during the first three months of 2003 and 2002, respectively.
As shown in Table 2-2 following this discussion, the increase in net interest
income, up $1.5 million to $13.6 million, resulted from an expanded
interest-earning asset base, principally loans and mortgage-backed securities.
The Company's average loan portfolio grew by $55.4 million or 9.9% compared to
the first three months of 2002, primarily attributable to an increase in
commercial mortgages. The newer 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 and
responsive personal customer service 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, as well as the web-based
commercial cash management system, 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 62.9% in the first
three months of 2003 as compared to 2002. This is primarily due to increases in
average U.S. Government Agency securities and average mortgage-backed securities
of $147.4 million and $59.0 million, respectively. This re-balancing of the
investment portfolio should provide defensive yield protection if interest rates
rise in the coming months.
Excluding securities transaction income, noninterest income improved $44
thousand, or 6.7%, for the first three months of 2003 as compared to 2002. This
was due in large measure to increases in service charges on deposit accounts,
return item charges and mutual fund sales in 2003. Excluding non-recurring
items, management expects that other income will improve somewhat during the
remainder of 2003 when compared to the same period in 2002.
Net securities transactions resulted in gains of $2.0 million for the first
three months of 2003 as compared to losses of $34 thousand for the same period
last year. During the first quarter of 2003, sales of 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 remainder of this year. Management will
continue to closely monitor the fixed income markets during the rest of 2003 for
opportunities that may arise due to movements in interest rates or short-term
anomalies in the marketplace.
The 28.6% growth in total operating expenses during the first three months of
2003 as compared to 2002 was due to increases in several categories. The most
significant increases pertained to salaries and other employee benefits (up $636
thousand), occupancy costs (up $180 thousand), legal expenses (up $1.5 million)
and other expenses (up $205 thousand). The increase in salaries and benefits
costs resulted largely from the opening of two new
(14)
branches in the first half of 2002, while the growth in occupancy expense was
due to both the expanded branch network and the additional occupancy
requirements for the Company's support areas. The growth in legal expenses was
due primarily to the ongoing litigations related to Island Mortgage Network
("IMN") and its affiliates, as previously discussed in detail in the Company's
2001 and 2002 Securities and Exchange Commission ("SEC") filings and as
discussed in Part II, Item 1 herein. The Company expects to incur additional
costs, not quantifiable at this time, related to the IMN litigations during the
remainder of 2003. Excluding IMN-related legal expenses, total operating
expenses increased at a year-over-year rate of 12.9%. The 12.0% increase in
other operating expenses resulted primarily from increases in loan collection
expenses, telecommunications costs and audit and examination costs.
The above 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 77.2% for the first
three months of 2003 as compared to 67.4% in 2002. Excluding costs related to
the IMN litigations, the Company's operating efficiency ratio would have been
62.0% and 61.7% for the first three months of 2003 and 2002, respectively. The
Company's other primary measure of expense control, the ratio of total operating
expenses to average total assets, improved slightly during the first three
months of 2003 to 3.36% from a level of 3.43% in 2002.
Income tax expense rose by $441 thousand for the first three months of 2003 as
compared to 2002, resulting in an increase in the Company's effective tax rate
to 28.4% from 23.3% 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.
Asset Quality - Nonperforming assets (defined by the Company as nonaccrual loans
and other real estate owned) totaled $6.7 million at March 31, 2003, a $351
thousand increase from December 31, 2002 and an $839 thousand reduction from the
comparable 2002 date. As of March 31, 2003, restructured accruing loans declined
by $66 thousand (61.7%) versus year-end 2002. 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 $15 thousand or 11.6%
when compared to year-end 2002 and $100 thousand or 46.7% versus March 31, 2002.
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 $10.2 million or 1.7% of
total loans at March 31, 2003 versus $9.2 million and 1.6%, respectively, at the
comparable 2002 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, declined slightly to 150% at March 31, 2003 from 153% at
December 31, 2002 but improved from 118% one year ago.
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 three months of 2003 and 2002
was $983 thousand and $959 thousand, respectively. Net loan charge-offs during
the same periods were approximately $804 thousand and $975 thousand,
respectively. The provision for probable loan losses is continually evaluated
(15)
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
remainder of 2003. Due to the uncertain nature of the current economy,
management anticipates further loan charge-offs during the rest of 2003. A
further review of the Company's nonperforming assets may be found in Table 2-3
following this analysis.
Forward-Looking Statements and Risk Factors - This report contains
forward-looking statements, including 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. The words "expects,"
"believes," "anticipates" and other similar expressions are intended to identify
forward-looking statements. The forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results or earnings to differ
materially from such forward-looking statements include, but are not limited to,
the following: (1) general economic conditions, (2) competitive pressure among
financial services companies, (3) changes in interest rates, (4) deposit flows,
(5) loan demand, (6) changes in legislation or regulation, (7) changes in
accounting principles, policies and guidelines, (8) litigation liabilities,
including costs, expenses, settlements and judgments and (9) other economic,
competitive, governmental, regulatory and technological factors affecting State
Bancorp, Inc.'s operations, pricing, products and services. Investors are
encouraged to access the Company's periodic reports filed with the SEC for
financial and business information regarding the Company at
www.statebankofli.com/relations. The Company undertakes no obligation to publish
revised 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 NET INTEREST INCOME ANALYSIS
- -----------
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
---------------------------------------------------------------------------------------
($ IN THOUSANDS)
2003 2002
------------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------- ------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage-backed securities $ 268,401 $ 2,411 3.59 % $ 209,389 $ 2,739 5.23 %
Municipal securities 81,339 882 4.34 76,516 797 4.17
Government Agency and other securities 254,093 2,605 4.10 84,738 1,041 4.91
-------- ------ ----- ------- ------ ----
Total securities 603,833 5,898 3.91 370,643 4,577 4.94
-------- ------ ----- -------- ------ ----
Federal funds sold 2,779 7 1.01 2,025 8 1.58
Securities purchased under agreements to
resell 59,405 178 1.20 72,700 313 1.72
Interest-bearing deposits 780 2 1.04 1,456 5 1.39
Loans 615,773 10,936 7.10 560,308 10,590 7.56
-------- ------- ----- -------- ------- ----
Total interest-earning assets 1,282,570 17,021 5.31 1,007,132 15,493 6.15
---------- ------- ----- ---------- ------- ----
Non-interest-earning assets 99,548 47,328
------- ------
Total Assets $1,382,118 $ 1,054,460
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $ 582,930 $ 1,152 0.80 % $ 356,215 $ 803 0.91 %
Time deposits 379,552 1,892 1.99 398,353 2,310 2.32
-------- ------ ----- -------- ------ ----
Total savings and time deposits 962,482 3,044 1.27 754,568 3,113 1.66
-------- ------ ----- -------- ------ ----
Federal funds purchased 7,671 27 1.41 1,663 8 1.92
Securities sold under agreements to
repurchase 6,742 24 1.42 15,149 73 1.93
Other borrowed funds 33,215 167 2.01 21,383 224 4.19
Guaranteed preferred beneficial interest
in subordinated debt 10,000 142 5.68 - - -
------- ---- ----- -- -- --
Total interest-bearing liabilities 1,020,110 3,404 1.34 792,763 3,418 1.73
---------- ------ ----- -------- ------ ----
Demand deposits 219,255 178,492
Other liabilities 52,502 4,731
------- -----
Total liabilities 1,291,867 975,986
Stockholders' equity 90,251 78,474
------- ------
Total Liabilities and
Stockholders' Equity $1,382,118 $ 1,054,460
=========== ===========
Net interest income/rate spread 13,617 3.97 % 12,075 4.42 %
----- -----
Add tax-equivalent basis adjustment 518 479
---- ---
Net interest margin - tax-equivalent basis $ 14,135 4.47 % $ 12,554 5.06 %
========= ===== ========= =====
(17)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
TABLE 2 - 3
- ---------------------
- --------------------------------------------------------------------------------
STATE BANCORP, INC.
ANALYSIS OF NONPERFORMING ASSETS AND THE ALLOWANCE FOR PROBABLE LOAN LOSSES
MARCH 31, 2003 VERSUS DECEMBER 31, 2002 AND MARCH 31, 2002
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS BY TYPE: PERIOD ENDED:
- -----------------------------
---------------------------------------------
3/31/03 12/31/02 3/31/02
------------ ----------- -----------
NONACCRUAL LOANS $6,668 $6,317 $7,507
OTHER REAL ESTATE OWNED - - -
-------------- ------------ -------------
TOTAL NONPERFORMING ASSETS $6,668 $6,317 $7,507
-------------- ------------ -------------
RESTRUCTURED ACCRUING LOANS $41 $107 $132
LOANS 90 DAYS OR MORE PAST DUE
AND STILL ACCRUING $114 $129 $214
GROSS LOANS OUTSTANDING $617,007 $620,384 $572,778
TOTAL STOCKHOLDERS' EQUITY $88,096 $87,683 $75,821
ANALYSIS OF THE ALLOWANCE FOR
PROBABLE LOAN LOSSES: QUARTER ENDED:
- -----------------------
---------------------------------------------------
3/31/2003 12/31/2002 3/31/2002
-------------- ------------ -------------
BEGINNING BALANCE $10,046 $10,152 $9,255
PROVISION 983 822 959
NET CHARGE-OFFS (804) (928) (975)
-------------- ------------ -------------
ENDING BALANCE $10,225 $10,046 $9,239
-------------- ------------ -------------
KEY RATIOS AT PERIOD-END:
ALLOWANCE AS A % OF TOTAL LOANS 1.7% 1.6% 1.6%
NONACCRUAL LOANS AS A % OF TOTAL LOANS 1.1% 1.0% 1.3%
NONPERFORMING ASSETS (1) AS A % OF TOTAL
LOANS AND OTHER REAL ESTATE OWNED 1.1% 1.0% 1.3%
ALLOWANCE FOR PROBABLE LOAN LOSSES AS
A % OF NONACCRUAL LOANS 153.3% 159.0% 123.1%
ALLOWANCE FOR PROBABLE LOAN LOSSES AS A %
OF NONACCRUAL LOANS, RESTRUCTURED
ACCRUING LOANS AND LOANS 90 DAYS OR
MORE PAST DUE AND STILL ACCRUING 149.9% 153.3% 117.6%
(1) EXCLUDES RESTRUCTURED ACCRUING LOANS AND LOANS 90 DAYS OR MORE PAST
DUE AND STILL ACCRUING INTEREST.
(18)
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
December 31, 2002 in the Company's Annual Report on Form 10-K. There have been
no material changes in the Company's market risk at March 31, 2003 compared to
December 31, 2002. The following is an update of the discussion provided
therein.
The Company's largest component of market risk continues to be interest rate
risk, virtually all at the Bank level. Interest rate risk is the risk to
earnings or capital arising from movements in interest rates. This risk can be
quantified by measuring the change in net interest margin relative to changes in
market rates. The Company's Funds Management Committee sets forth guidelines
that limit the level of interest rate risk within specified tolerance ranges.
Management must determine the appropriate level of risk which will enable the
Company to achieve its performance objectives within the confines imposed by its
business objectives and the external environment within which it operates.
Interest rate risk arises from repricing risk, basis risk, yield curve risk or
options risk and is measured using financial modeling techniques, including
quarterly interest rate shock simulations, to measure the impact of changes in
interest rates on earnings for periods of up to two years. These simulations are
used to determine whether corrective action may be warranted or required in
order to adjust the overall interest rate risk profile of the Company.
Simulation results, utilizing the Sendero asset/liability model, are influenced
by a number of estimates and assumptions that are inherently uncertain and, as a
consequence, results will neither precisely estimate net interest income nor
precisely measure the impact of higher or lower interest rates on net interest
income.
To mitigate the impact of changes in interest rates, the balance sheet must be
structured so that repricing opportunities exist for both assets and liabilities
in approximately equivalent amounts at basically the same time intervals.
Imbalances in these repricing opportunities at any point in time constitute an
interest-sensitivity gap, which is the difference between interest-sensitive
assets and interest-sensitive liabilities. These static measurements are best
utilized as early indicators of potential interest rate exposures. The primary
objectives of the Company's asset/liability management are to continually
evaluate the interest rate risk inherent in the Company's balance sheet; to
determine the level and direction of risk appropriate given the Bank's strategic
focus, operating environment, liquidity requirements and performance objectives;
and to manage this risk in a prudent manner consistent with approved policy.
A static gap report (see Table 3-1), a snapshot at a single point in time,
measures the difference between assets and liabilities repricing in selected
future time periods. The assumptions used in the report are the same as those
used for the December 31, 2002 analysis. The Company's one-year cumulative gap
ratio at March 31, 2003 was 131.4%. The Company's asset-sensitive position,
meaning that more assets reprice on a cumulative basis than liabilities,
indicates that net interest income should decrease in declining rate scenarios
and increase in rising rate scenarios. However, a static gap report should only
be considered a rough measurement of the impact any rate movement could have on
interest income.
The Company is still not subject to foreign currency exchange or commodity price
risk. At March 31, 2003, the Company owned no trading assets, nor did it use
hedging transactions such as interest rate swaps. There have been no material
changes in the composition of assets or deposit liabilities from December 31,
2002. 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, 2002. The Board of Directors has not amended the approved limits of
acceptable variances.
(19)
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK (CONTINUED)
======================================================================
MARCH 31, 2003
- ----------------
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) $320,631 $29,539 $194,779 $65,390 $6,668 $617,007
Federal Funds Sold and
Interest-Bearing Deposits 10,528 10,528
Securities Held to Maturity 51 28 79
Securities Available for Sale 3) 157,723 109,571 258,625 153,649 3,909 683,477
-------------- ------------- ------------- ------------ ------------ -------------
Total Interest-Earning Assets 488,882 139,161 453,432 219,039 10,577 1,311,091
Unrealized Net Gain on Securities
Available for Sale 5,920 5,920
Noninterest-Bearing Cash and Due from Banks 41,891 41,891
Net Receivable - Securities Sales 7,225 7,225
All Other Assets 7) 7,283 2,119 145 65 4,152 13,764
-------------- ------------- ------------- ------------ ------------ -------------
Total Assets $551,201 $141,280 $453,577 $219,104 $14,729 $1,379,891
-------------- ------------- ------------- ------------ ------------ -------------
- ----------------------------------
INTEREST-SENSITIVE LIABILITIES : 1)
- ----------------------------------
Savings Accounts 4) $28,319 $17,319 $138,553 $103,915 $288,106
Money Fund and NOW Accounts 5) 50,945 24,645 197,297 38,204 311,091
Time Deposits 6) 241,114 21,531 51,348 666 314,659
-------------- ------------- ------------- ------------ ------------ -------------
Total Interest-Bearing Deposits 320,378 63,495 387,198 142,785 - 913,856
Securities Sold Under Agreements to
Repurchase, Federal Funds Purchased
and Other Borrowings 83,326 614 520 84,460
Guaranteed Preferred Beneficial Interest
in Subordinated Debt 10,000 10,000
-------------- ------------- ------------- ------------ ------------ -------------
Total Interest-Bearing Liabilities 413,704 64,109 387,718 142,785 - 1,008,316
Net Payable - Securities Purchases 38,925 38,925
All Other Liabilities, Equity
and Demand Deposits 7) 22,541 11,958 84,166 125,889 88,096 332,650
-------------- ------------- ------------- ------------ ------------ -------------
Total Liabilities and Equity $475,170 $76,067 $471,884 $268,674 $88,096 $1,379,891
-------------- ------------- ------------- ------------ ------------ -------------
Cumulative Interest-Sensitivity Gap 8) $75,178 $150,230 $215,944 $292,198 $302,775
Cumulative Interest-Sensitivity Ratio 9) 118.2 % 131.4 % 124.9 % 129.0 % 130.0 %
Cumulative Interest-Sensitivity Gap
As a % of Total Assets 5.4 % 10.9 % 15.6 % 21.2 % 21.9 %
(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 16.7% per year over a six-year period and
5.9% per year over a seventeen-year period, respectively, 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 9.1% per
year over an eleven-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.
(20)
ITEM 4. - CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Principal Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) within 90 days of the filing date of this quarterly report, and,
based on their evaluation, the Chief Executive Officer and Principal Financial
Officer have concluded that these disclosure controls and procedures are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
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 cases pending against the Bank as of May 7, 2003
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.
First American Title Insurance Co.,et al. 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 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.
(21)
In addition to the litigations noted above, 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 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(22)
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.
5/15/03 s/Daniel T. Rowe
- -------- -------------------------
Date Daniel T. Rowe, President
5/15/03 s/Brian K. Finneran
- -------- ----------------------------
Date Brian K. Finneran, Secretary/Treasurer
(Principal Financial Officer)
(23)
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Thomas F. Goldrick, Jr., Chairman and Chief Executive Officer of the Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of State Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
5/15/03 s/Thomas F. Goldrick, Jr.
- -------- ----------------------------------
Date Thomas F. Goldrick, Jr.,
Chairman and Chief Executive Officer
(24)
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Brian K. Finneran, Secretary/Treasurer and Principal Financial Officer of
the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of State Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
5/15/03 s/Brian K. Finneran
- -------- ----------------------------------
Date Brian K. Finneran, Secretary/Treasurer
(Principal Financial Officer)
(25)