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, 2004
[ ] 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
(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 4, 2004, there were 8,600,459 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, 2004 and December 31, 2003 (Unaudited) 1.
Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003 2.
(Unaudited)
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited) 3.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Three Months Ended 4.
March 31, 2004 and 2003 (Unaudited)
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 20.
Item 4. Controls and Procedures 23.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23.
Item 2. Changes in Securities and Use of Proceeds 24.
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 24.
SIGNATURES 26.
- --------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- --------------------------------------------------
- --------------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
2004 2003
------------------ ------------------
- --------------------------------------------------------------
ASSETS:
- --------------------------------------------------------------
CASH AND DUE FROM BANKS $44,821,893 $56,762,269
FEDERAL FUNDS SOLD 3,000,000 -
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 5,000,000 91,000,000
------------------ ------------------
TOTAL CASH AND CASH EQUIVALENTS 52,821,893 147,762,269
SECURITIES HELD TO MATURITY (ESTIMATED FAIR VALUE -
$40,099,440 IN 2004 AND $55,231,959 IN 2003) 40,014,000 55,065,400
SECURITIES AVAILABLE FOR SALE - AT ESTIMATED FAIR VALUE 587,270,347 511,964,686
------------------ ------------------
TOTAL SECURITIES 627,284,347 567,030,086
LOANS (NET OF ALLOWANCE FOR PROBABLE LOAN LOSSES
OF $11,233,286 IN 2004 AND $10,732,078 IN 2003) 699,479,126 700,484,056
BANK PREMISES AND EQUIPMENT - NET 6,852,717 7,083,848
BANK OWNED LIFE INSURANCE 25,133,019 -
OTHER ASSETS 19,721,134 18,640,104
------------------ ------------------
- --------------------------------------------------------------
TOTAL ASSETS $1,431,292,236 $1,441,000,363
- -------------------------------------------------------------- ================== ==================
- --------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------
DEPOSITS:
DEMAND $282,457,901 $265,691,712
SAVINGS 594,525,481 688,717,586
TIME 270,508,715 261,877,605
------------------ ------------------
TOTAL DEPOSITS 1,147,492,097 1,216,286,903
FEDERAL FUNDS PURCHASED - 10,000,000
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 100,505,000 31,601,147
OTHER BORROWINGS 37,460,713 50,714,149
JUNIOR SUBORDINATED DEBENTURES 20,000,000 20,000,000
NET PAYABLE - SECURITIES PURCHASES 18,317,888 8,612,652
ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 9,489,044 9,073,990
------------------ ------------------
- --------------------------------------------------------------
TOTAL LIABILITIES 1,333,264,742 1,346,288,841
- -------------------------------------------------------------- ------------------ ------------------
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 9,439,652 SHARES IN 2004
AND 9,377,955 SHARES IN 2003; OUTSTANDING 8,576,323
SHARES IN 2004 AND 8,540,097 SHARES IN 2003 47,198,260 46,889,775
SURPLUS 54,122,582 53,544,877
RETAINED EARNINGS 7,881,278 5,189,907
TREASURY STOCK (863,329 SHARES IN 2004
AND 837,858 SHARES IN 2003) (14,111,369) (13,481,356)
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF TAXES 2,936,743 2,568,319
------------------ ------------------
- --------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 98,027,494 94,711,522
- -------------------------------------------------------------- ------------------ ------------------
- --------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,431,292,236 $1,441,000,363
- -------------------------------------------------------------- ================== ==================
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, 2004 AND 2003 (UNAUDITED)
- --------------------------------------------------------------------------------------------------
---------------------------------
THREE MONTHS
---------------------------------
--------------- ---------------
2004 2003
- --------------------------------------------------------- --------------- ---------------
INTEREST INCOME:
- ---------------------------------------------------------
LOANS $11,630,095 $10,936,220
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL 179,926 185,234
SECURITIES HELD TO MATURITY AND
SECURITIES AVAILABLE FOR SALE:
STATES AND POLITICAL SUBDIVISIONS 577,790 881,645
MORTGAGE-BACKED SECURITIES 2,056,009 2,410,768
GOVERNMENT AGENCY SECURITIES 1,207,660 2,262,599
OTHER SECURITIES 449,675 344,436
--------------- ---------------
TOTAL INTEREST INCOME 16,101,155 17,020,902
--------------- ---------------
- ---------------------------------------------------------
INTEREST EXPENSE:
- ---------------------------------------------------------
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE 528,151 871,731
OTHER DEPOSITS AND TEMPORARY BORROWINGS 2,096,038 2,390,781
JUNIOR SUBORDINATED DEBENTURES 247,031 141,633
--------------- ---------------
TOTAL INTEREST EXPENSE 2,871,220 3,404,145
--------------- ---------------
NET INTEREST INCOME 13,229,935 13,616,757
PROVISION FOR PROBABLE LOAN LOSSES 1,077,000 983,751
--------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 12,152,935 12,633,006
--------------- ---------------
- ---------------------------------------------------------
NONINTEREST INCOME:
- ---------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 559,100 390,926
NET SECURITY GAINS 2,621,571 1,996,078
OTHER OPERATING INCOME 522,575 318,461
--------------- ---------------
TOTAL NONINTEREST INCOME 3,703,246 2,705,465
--------------- ---------------
INCOME BEFORE OPERATING EXPENSES 15,856,181 15,338,471
--------------- ---------------
- ---------------------------------------------------------
OPERATING EXPENSES:
- ---------------------------------------------------------
SALARIES AND OTHER EMPLOYEE BENEFITS 5,980,866 5,560,010
OCCUPANCY 985,762 932,682
EQUIPMENT 368,954 388,527
LEGAL 845,852 2,332,900
MARKETING AND ADVERTISING 306,202 331,355
OTHER OPERATING EXPENSES 1,798,301 1,911,550
--------------- ---------------
TOTAL OPERATING EXPENSES 10,285,937 11,457,024
--------------- ---------------
INCOME BEFORE INCOME TAXES 5,570,244 3,881,447
PROVISION FOR INCOME TAXES 1,675,218 1,103,567
- --------------------------------------------------------- --------------- ---------------
NET INCOME $3,895,026 $2,777,880
- --------------------------------------------------------- =============== ===============
- ---------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $0.45 $0.33
------ ------
- ---------------------------------------------------------
- ---------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $0.44 $0.32
------ ------
- ---------------------------------------------------------
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, 2004 AND 2003 (UNAUDITED)
- ----------------------------------------------------------------------------------------
- --------------------------------------------------------------------- --------------------- --------------------
OPERATING ACTIVITIES: 2004 2003
- --------------------------------------------------------------------- --------------------- --------------------
NET INCOME $3,895,026 $2,777,880
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR PROBABLE LOAN LOSSES 1,077,000 983,751
DEPRECIATION AND AMORTIZATION OF BANK PREMISES AND EQUIPMENT 377,749 402,060
AMORTIZATION OF INTANGIBLES 9,034 9,034
AMORTIZATION OF NET PREMIUM ON SECURITIES 1,724,489 2,046,738
AMORTIZATION OF UNEARNED COMPENSATION - 49,508
NET SECURITY GAINS (2,621,571) (1,996,078)
(INCREASE) DECREASE IN OTHER ASSETS, NET (621,799) 5,849,853
INCREASE (DECREASE) IN ACCRUED EXPENSES, TAXES
AND OTHER LIABILITIES 407,470 (719,457)
--------------------- --------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,247,398 9,403,289
--------------------- --------------------
- ---------------------------------------------------------------------
INVESTING ACTIVITIES:
- ---------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 15,051,400 26,680,886
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 63,295,381 253,311,952
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 56,284,192 65,571,345
PURCHASES OF SECURITIES AVAILABLE FOR SALE (184,382,757) (383,905,152)
(INCREASE) DECREASE IN LOANS - NET (72,070) 2,572,630
PURCHASES OF BANK PREMISES AND EQUIPMENT - NET (146,618) (253,331)
INCREASE IN BANK OWNED LIFE INSURANCE (25,133,019) -
--------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (75,103,491) (36,021,670)
--------------------- --------------------
- ---------------------------------------------------------------------
FINANCING ACTIVITIES:
- ---------------------------------------------------------------------
(DECREASE) INCREASE IN DEMAND AND SAVINGS DEPOSITS (77,425,916) 121,702,271
INCREASE (DECREASE) IN TIME DEPOSITS 8,631,110 (117,723,775)
(DECREASE) INCREASE IN FEDERAL FUNDS PURCHASED (10,000,000) 5,200,000
INCREASE (DECREASE) IN SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE 68,903,853 (27,573,000)
DECREASE IN OTHER BORROWINGS (13,253,436) (615,919)
CASH DIVIDENDS PAID (1,196,071) (1,113,946)
PROCEEDS FROM SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN 556,318 641,424
PROCEEDS FROM STOCK OPTIONS EXERCISED 329,872 156,022
PURCHASES OF TREASURY STOCK (630,013) (222,285)
--------------------- --------------------
NET CASH USED IN FINANCING ACTIVITIES (24,084,283) (19,549,208)
--------------------- --------------------
- ---------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (94,940,376) (46,167,589)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - JANUARY 1 147,762,269 98,586,855
- ---------------------------------------------------------------------
- --------------------------------------------------------------------- --------------------- --------------------
CASH AND CASH EQUIVALENTS - MARCH 31 $52,821,893 $52,419,266
- --------------------------------------------------------------------- ===================== ====================
- ---------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------
INTEREST PAID $2,706,462 $3,566,730
INCOME TAXES PAID $44,334 $1,267,824
ADJUSTMENT TO UNREALIZED NET GAIN OR LOSS ON SECURITIES
AVAILABLE FOR SALE ($99,841) ($2,289,355)
DIVIDENDS DECLARED BUT NOT PAID AS OF QUARTER END $1,203,655 $1,122,821
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, 2004 AND 2003 (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, 2004 $46,889,775 $53,544,877 $5,189,907 ($13,481,356) $2,568,319 $ - $94,711,522
COMPREHENSIVE INCOME:
NET INCOME 3,895,026 3,895,026 $3,895,026
-----------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED HOLDING GAINS ARISING
DURING THE PERIOD 1,433,953
RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME (1,704,907)
CASH FLOW HEDGES 639,378
-----------
TOTAL OTHER COMPREHENSIVE INCOME 368,424 368,424 368,424
-----------
TOTAL COMPREHENSIVE INCOME $4,263,450
===========
CASH DIVIDEND
($0.14 PER SHARE) (1,203,655) (1,203,655)
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (24,251 SHARES
AT 95% OF MARKET VALUE) 121,255 435,063 556,318
STOCK OPTIONS EXERCISED 187,230 142,642 329,872
TREASURY STOCK PURCHASED (630,013) (630,013)
----------- ----------- ---------- ------------- ------------ --------- ----------
- -----------------------------------
BALANCE, MARCH 31, 2004 $47,198,260 $54,122,582 $7,881,278 ($14,111,369) $2,936,743 $ - $98,027,494
- -----------------------------------
=========== =========== ========== ============= ============ ========= ==========
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
($0.13 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
- -----------------------------------
=========== =========== ========== ============= ============ ========= ==========
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, 2004 and December 31, 2003, its
consolidated statements of income for the three months ended March 31, 2004 and
2003, its consolidated statements of cash flows for the three months ended March
31, 2004 and 2003 and its consolidated statements of stockholders' equity and
comprehensive income (loss) for the three months ended March 31, 2004 and 2003.
The results of operations for the three months ended March 31, 2004 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 2003 annual
report on Form 10-K. Certain amounts have been reclassified to conform to the
current year's presentation.
Accounting for 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 the
disclosure requirements of SFAS No. 148 as of December 31, 2002.
The estimated fair value of options granted during 2004 and 2003 was $5.95 and
$4.40 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.
(5)
For the Three Months Ended March 31, 2004 2003
- ------------------------------------ ---- ----
Net income, as reported $3,895,026 $2,777,880
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (95,383) (71,527)
---------- ----------
Pro forma net income $3,799,643 $2,706,353
========== ==========
Earnings per share:
Basic - as reported $0.45 $0.33
Basic - pro forma $0.44 $0.32
Diluted - as reported $0.44 $0.32
Diluted - pro forma $0.43 $0.32
The fair value of options granted under the Company's incentive stock option
plans during 2004 and 2003 were estimated on the date of grant using the
Black-Scholes Single Option Pricing Model with the following weighted-average
assumptions used:
2004 2003
---- ----
Dividend yield 2.5% 3.1%
Expected volatility 25.5% 28.4%
Risk-free interest rate 3.55% 3.38%
Expected life of options 7.3 years 7.4 years
Accounting for Derivative Financial Instruments
- -----------------------------------------------
The Company uses interest rate swap agreements to manage its exposure to
fluctuations in interest rates on a portion of its variable rate commercial loan
portfolio. The agreements qualify as cash flow hedges. Gains and losses in the
fair value of a cash flow hedge are recorded to other comprehensive income for
the effective portion of the hedge and reclassified to earnings at a time when a
forecasted transaction affects earnings. Amounts to be received under the swap
agreement are recognized as an addition to interest income in the Company's
consolidated statements of income during the period in which they accrue. The
Company does not hold any derivative financial instruments for trading purposes.
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
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 generally effective
for contracts entered into or modified after June 30, 2003, and should be
applied prospectively. Implementation issues that had been effective for fiscal
quarters that began prior to June 15, 2003 are to be applied in accordance with
their respective effective dates. The Company's adoption of SFAS No. 149 as of
July 1, 2003, did not have a material impact on the Company's financial
statements.
At March 31, 2004, the Company is party to two swap agreements with terms
expiring in September 2007 that hedge a portion of the interest rate variability
in its portfolio of prime rate loans. The agreements effectively require the
Company to pay prime interest rate and receive a fixed rate of 6.01% from the
(6)
counterparty on $50 million of loan assets. The fair value of the swap
agreements was $1,112,379, inclusive of accrued interest of $47,458, at March
31, 2004. For the three months ended March 31, 2004, the Company recognized
interest income of $254,042 under the agreements. The Company did not engage in
derivatives activity during the first quarter of 2003.
Accounting for Bank Owned Life Insurance
- ----------------------------------------
In February 2004, the Company purchased $25 million in Bank Owned Life
Insurance. The Company is the beneficiary of this policy that insures the lives
of certain officers of its bank subsidiary. The Company has recognized the
amount that could be realized under the insurance policy as an asset in the
consolidated balance sheets.
Recent Accounting Developments
- ------------------------------
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" which was revised in December 2003 by the issuance of FIN No. 46(R).
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. FIN No.
46(R) is effective for the Company for financial statements issued after
December 15, 2003. The Company has participated in the issue of trust preferred
securities through trusts established for such purpose. Effective December 31,
2003, the Company adopted this statement requiring the Company to deconsolidate
the trust preferred security trusts. Such adoption did not have a material
impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the balance sheet. The
effective date of SFAS No. 150 has been indefinitely deferred by the FASB when
certain criteria are met. Although the Company's trust preferred securities meet
such criteria, the trust preferred securities have been deconsolidated under the
provision of FIN No. 46(R) and reclassified as borrowed funds as of December 31,
2003.
In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a consensus
regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and requires
certain disclosures for equity investments accounted for under the cost method.
Disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments that were required under an earlier EITF 03-1
consensus remain in effect. The EITF 03-1 guidance for determining
other-than-temporary impairment is
(7)
effective for the Company's quarter ending September 30, 2004 and the
disclosures for the cost method investments are effective for the Company's
fiscal year ending December 31, 2004. The determination of whether a decline in
market value is other-than-temporary is necessarily a matter of subjective
judgment. The timing and amount of any realized losses reported in the Company's
financial statements could vary if conclusions other than those made by
management were to determine whether an other-than-temporary impairment exists.
At March 31, 2004 compared to December 31, 2003, there have been no material
changes in the Company's investments' unrealized losses and the length of time
that individual securities have been in a continuous unrealized loss position.
2. STOCKHOLDERS' EQUITY
- -- --------------------
The Company has 250,000 shares of preferred stock authorized. No shares were
issued as of March 31, 2004.
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 25,471 common shares at an
average price of $24.73 per share.
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.
For the Three Months Ended March 31, 2004 2003
- ------------------------------------ ---- ----
Net income $3,895,026 $2,777,880
Average dilutive stock options outstanding 843,132 656,917
Average exercise price per share $15.60 $12.87
Average market price - diluted basis $24.71 $17.64
Average common shares outstanding 8,582,723 8,409,072
Increase in shares due to exercise of options - diluted basis 310,751 177,533
------- -------
Adjusted common shares outstanding - diluted 8,893,474 8,586,605
--------- ---------
Net income per share - basic $0.45 $0.33
----- -----
Net income per share - diluted $0.44 $0.32
----- -----
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 net of tax as
accumulated other comprehensive income (loss) 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.
(8)
5. LOANS
- -- -----
The recorded investment in loans that are considered to be impaired, for the
quarter ended March 31, 2004 and for the year ended December 31, 2003, is
summarized below.
---------------------------- --------------------------
For the Quarter Ended For the Year Ended
March 31, 2004 December 31, 2003
---------------------------- --------------------------
Amount measured using the present value of expected future
cash flows, discounted at each loan's effective interest rate $425,807 $433,088
Impaired collateral-dependent loans 6,329,743 7,747,117
--------- ---------
Total amount evaluated as impaired $6,755,550 $8,180,205
========== ==========
Average impaired loan balance $7,073,710 $7,814,272
As a result of the Company's evaluation of impaired loans, an allowance for
probable loan losses of approximately $2,106,000 and $2,755,000 was established
for $4,416,166 and $7,267,664 of the total impaired loans at March 31, 2004 and
December 31, 2003, respectively. No specific allowance was required for the
remaining balance of impaired loans at March 31, 2004 and December 31, 2003.
Interest income of $20,134 was recognized on impaired loans for the three months
ended March 31, 2004. No interest income was recognized on such loans for the
three months ended March 31, 2003.
Activity in the allowance for probable loan losses for the three months ended
March 31, 2004 and 2003 is as follows:
2004 2003
---- ----
Balance, January 1 $10,732,078 $10,045,516
Provision charged to income 1,077,000 983,751
Charge-offs, net of recoveries of $36,056 in 2004 and $17,543 in 2003 (575,792) (803,839)
--------- ---------
Balance, March 31 $11,233,286 $10,225,428
=========== ===========
6. 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.
7. INCOME TAX MATTERS
- -- ------------------
The Company's New York state income tax returns are under examination for the
years ended December 31, 1999, 2000 and 2001. At this time, management cannot
determine the effects, if any, that the results of this examination will have on
the Company's consolidated 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 and II,
entities formed in 2002 and 2003, respectively, 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.
Recent Accounting Developments - 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" which was revised in December 2003 by the issuance of FIN No. 46(R).
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. FIN No.
46(R) is effective for the Company for financial statements issued after
December 15, 2003. The Company has participated in the issue of trust preferred
securities through trusts established for such purpose. Effective December 31,
2003, the Company adopted this statement requiring the Company to deconsolidate
the trust preferred security trusts. Such adoption did not have a material
impact on the Company's financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("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 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 generally effective for contracts entered into or
modified after June 30, 2003, and should be applied prospectively.
Implementation issues that had been effective for fiscal quarters that began
prior to June 15, 2003 are to be applied in accordance with their respective
effective dates. The Company's adoption of SFAS No. 149 as of July 1, 2003, did
not have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the balance sheet. The
effective date of SFAS No. 150 has been indefinitely deferred by the FASB when
certain criteria are met. Although the Company's trust preferred securities meet
such criteria, the trust preferred securities have been deconsolidated under the
provision of FIN No. 46(R) and reclassified as borrowed funds as of December 31,
2003.
(10)
In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a consensus
regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and requires
certain disclosures for equity investments accounted for under the cost method.
Disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments that were required under an earlier EITF 03-1
consensus remain in effect. The EITF 03-1 guidance for determining
other-than-temporary impairment is effective for the Company's quarter ending
September 30, 2004 and the disclosures for the cost method investments are
effective for the Company's fiscal year ending December 31, 2004. The
determination of whether a decline in market value is other-than-temporary is
necessarily a matter of subjective judgment. The timing and amount of any
realized losses reported in the Company's financial statements could vary if
conclusions other than those made by management were to determine whether an
other-than-temporary impairment exists. At March 31, 2004 compared to December
31, 2003, there have been no material changes in the Company's investments'
unrealized losses and the length of time that individual securities have been in
a continuous unrealized loss position.
Critical Accounting Policies, Judgments And Estimates - The discussion and
analysis of the financial condition and results of operations of the Company are
based on the Consolidated Financial Statements, which are prepared in conformity
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses. Management evaluates those estimates and assumptions on
an ongoing basis, including those related to the allowance for probable loan
losses and income taxes. Management bases its estimates on historical experience
and various other factors and assumptions that are believed to be reasonable
under the circumstances. These form the bases for making judgments on the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from those estimates under different
assumptions or conditions.
Allowance for Probable Loan Losses - 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, makes estimates about the amount of credit
losses that have been incurred at each financial statement date and, on a
quarterly basis, charges off the amounts of those loans deemed uncollectible.
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.
Management of the Company recognizes that, despite its best efforts to minimize
risk through a rigorous credit review process, losses will occur. In times of
economic slowdown, either regional or national, the risk inherent in the
Company's loan portfolio will increase. The timing and amount of loan losses
that occur are dependent upon several factors, most notably qualitative and
quantitative factors about both the micro and macro economic conditions as
reflected in the loan portfolio and the economy as a whole. Factors considered
in this evaluation include, but are not limited to, estimated losses from loan
and other credit arrangements, general economic conditions, changes in credit
concentrations or pledged collateral, historical loan loss experience and trends
in portfolio volume, maturity, composition, delinquencies and nonaccruals. The
allowance for probable loan losses is available to absorb charge-offs from any
loan category, while additions are made through the provision for probable loan
losses, which is a charge to operating earnings. The adequacy of the provision
and the resulting allowance for probable loan losses is determined by
management's continuing review of the loan portfolio, including identification
and review of individual problem situations that may affect a borrower's ability
to repay, delinquency and nonperforming loan data, collateral values, regulatory
examination results and changes in the size and character of the loan portfolio.
Thus, an increase in the size of the loan portfolio or in any of its components
could necessitate an increase in the allowance even though credit quality and
problem loan totals may be improving.
(11)
Accounting for Income Taxes - The Company accounts for income taxes in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management exercises significant
judgment in the evaluation of the amount and timing of the recognition of the
resulting tax assets and liabilities and the judgments and estimates required
for the evaluation are periodically updated based upon changes in business
factors and the tax laws.
The Company's New York state income tax returns are under examination for the
years ended December 31, 1999, 2000 and 2001. At this time, management cannot
determine the effects, if any, that the results of this examination will have on
the Company's consolidated financial statements.
Material Changes in Financial Condition - Total assets of the Company were $1.4
billion at March 31, 2004. When compared to December 31, 2003, total assets
decreased by $10 million or 1%. The decrease was primarily attributable to
declines in overnight securities purchased under agreements to resell and cash
balances due from correspondent banks of $86 million and $12 million,
respectively. These declines were partially offset by increases in Federal funds
sold and the investment portfolio and the purchase of Bank Owned Life Insurance
of $3 million, $60 million and $25 million, respectively. The growth in the
investment portfolio resulted primarily from increases in U.S. Government Agency
and mortgage-backed securities of $43 million and $17 million, respectively.
At March 31, 2004, total deposits were $1.1 billion, a decrease of $69 million
or 6% when compared to December 31, 2003. This decline was largely attributable
to a decrease in savings deposits of $94 million, as lower Super NOW and regular
savings deposits balances of $90 million and $38 million, respectively, were
offset by an increase in money fund deposits of $34 million. Partially
offsetting the decrease in savings deposits were increases in demand and time
deposits of $17 million and $8 million, respectively. Core deposit balances,
consisting of demand, savings, money fund and Super NOW deposits, represented
approximately 76% of total deposits at March 31, 2004 compared to 78% at
year-end 2003. Core deposit balances provide low-cost funding that allows the
Company to reduce its funding from short-term institutional sources. Short-term
borrowed funds, primarily securities sold under agreements to repurchase, have
been utilized for funding purposes. At March 31, 2004, total short-term
borrowings were $138 million, an increase of $46 million from December 31, 2003.
Average interest-earning assets for the first quarter of 2004 were up by $72
million or 6% to $1.4 billion from the comparable 2003 period. Sources of asset
expansion included a $94 million or 15% increase in average loans, primarily
commercial loans and commercial mortgages, and an increase in average money
market instruments of $20 million. This growth was partially offset by a $42
million or 7% decrease in average investment securities, with U.S. Government
Agency securities declining $62 million and mortgage-backed securities
increasing $20 million.
Funding the first quarter growth in interest-earning assets were $38 million
average increases in both total deposits and short-term borrowed funds. Average
core deposits increased $138 million or 17% during the first quarter of 2004 as
compared to the same period in 2003. Partially offsetting the growth in average
core balances was a decline in average time deposits of $100 million or 26%,
including a decrease of $69 million or 29% in CDs over $100 thousand. The
increase in average short-term borrowed funds during the first quarter of 2004
as compared to the same period last year was primarily attributable to a $30
million higher Federal Home Loan Bank of New York ("FHLB") funding level,
coupled with an $8 million increase in securities sold under agreements to
repurchase.
These activities resulted in a first quarter net interest margin on a
tax-equivalent basis of 4.02%, down from 4.47% one year ago. The increased level
of core deposits has allowed the Company to reduce its dependence on higher-cost
funding which, combined with the continued low interest rate environment,
resulted in a 22 basis
(12)
points decline in the Company's first quarter average cost of funds to 0.85% as
compared to the same period in 2003.
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,
2004, 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 $98 million at March 31, 2004,
representing increases of $3 million and $10 million, respectively, from
December 31 and March 31, 2003. Total stockholders' equity grew at rates of 4%
and 11% from December 31 and March 31, 2003, 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, 2004 and
compares them to current regulatory guidelines and December 31 and March 31,
2003 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, 2004 7.85% 12.33% 13.56%
December 31, 2003 8.08% 12.26% 13.46%
March 31, 2003 6.72% 11.56% 12.81%
Regulatory Criteria for a
"Well-Capitalized" Institution 5.00% 6.00% 10.00%
The Company's stock repurchase program expended $630 thousand during the first
quarter of 2004 to repurchase 25,471 shares at an average cost of $24.73 per
share. Since 1998, a total of 863,329 shares of Company stock have been
repurchased at an average cost of $16.35 per share. Under the Board of
Directors' existing authorization, an additional 136,671 shares may be
repurchased from time to time as conditions warrant.
During the fourth quarter of 2003, the Company enhanced its Tier I capital
position through the issuance of an additional $10 million in trust preferred
securities through a pooled offering structure. The trust preferred securities,
which currently qualify as Tier I capital for regulatory capital purposes, were
issued by a newly established subsidiary, State Bancorp Capital Trust II. The
securities 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 4.02%. The Company now has
a total of $20 million in trust preferred securities outstanding. During the
first quarter of 2004, the weighted average rate on all trust preferred
securities was 4.31%.
Liquidity and Off-Balance Sheet Arrangements - Liquidity management is a
fundamental component of the
(13)
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 Management's Asset/Liability Committee are responsible for ensuring 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 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, 2004 and 2003, commitments to originate
loans and commitments under unused lines of credit for which the Bank is
obligated amounted to approximately $236 million and $225 million, 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, 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,
2004 and 2003, the Bank had letters of credit outstanding of approximately $15
million and $8 million, respectively. At March 31, 2004, the uncollateralized
portion was approximately $3 million.
The Bank's use of derivative financial instruments, i.e. interest rate swaps, is
exposed to credit risk. This credit exposure relates to possible losses that
would be recognized if the counterparties fail to perform their obligations
under the contracts. To mitigate this credit exposure, the Bank deals only with
counterparties of good credit standing and requires the exchange of collateral
over a certain credit threshold. At March 31, 2004, the Bank is party to two
interest rate swap agreements to manage its exposure to fluctuations in interest
rates on $50 million of variable rate commercial loans. The Bank did not engage
in derivatives activities during the first quarter of 2003.
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 2004, $1.7 million; in 2005, $2.2 million; in 2006,
$1.8 million; in 2007, $1.7 million; in 2008, $1.7 million; and the remainder to
2012, $4.6 million.
(14)
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 2004, the Company's liquidity position remained stable and well within
acceptable industry standards. During the first quarter of 2004, the level of
core deposits, calls of U.S. Government Agency securities and paydowns on
mortgage-backed securities provided a source of readily available funds to meet
general liquidity needs. In addition, at March 31, 2004, the Company had access
to approximately $99 million in Federal Home Loan Bank lines of credit for
overnight or term borrowings with maturities of up to thirty years. At March 31,
2004, the Company also had approximately $10 million in formal and $32 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, 2004.
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 $13,748 $1,741 $4,048 $3,381 $4,578
Securities sold under agreements to
repurchase 100,505 100,505 - - -
Federal Home Loan Bank of New York
overnight and term borrowings 37,000 37,000 - - -
Obligations under equipment lease financing 461 308 153 - -
Junior subordinated debentures 20,000 - - - 20,000
------ - - - ------
$171,714 $139,554 $4,201 $3,381 $24,578
======== ======== ====== ====== =======
Material Changes in Results of Operations for the Three Months Ended March 31,
2004 versus 2003 - Net income for the three months ended March 31, 2004 was $3.9
million, an increase of $1.1 million or 40.2%, when compared to the same 2003
period. Improvements in noninterest income to $3.7 million and operating
expenses (down 10.2%) were offset by lower net interest income (down 2.8%), a
slightly higher provision for probable loan losses and an increase in the
effective income tax rate. Basic earnings per common share were $0.45 in 2004
and $0.33 in 2003, while diluted earnings per share were $0.44 and $0.32,
respectively. The Company's returns on average assets and stockholders' equity
were 1.09% and 16.12% in 2004 and 0.82% and 12.48% in 2003, respectively.
As shown in Table 2-2 following this discussion, net interest income decreased
by 2.8% to $13.2 million as the result of a 45 basis points decline in the
Company's net interest margin on a tax-equivalent basis to 4.02% in
(15)
2004. Mitigating the margin contraction somewhat was an increase in average
interest-earning assets of $72 million or 6%, primarily loans (up $94 million).
The expansion of the loan portfolio during 2004 was due to growth in all loan
categories, most notably commercial loans and commercial mortgages, that
resulted in a 15% increase in average total loans outstanding. The newer branch
locations in both Nassau and Queens Counties are expected to provide continued
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 and an online banking
service, 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 decreased 7%, on average, during the first
three months of 2004 as compared to 2003. This is primarily due to average U.S.
Government Agency securities declining $62 million as average mortgage-backed
securities increased $20 million.
Funding the growth in average interest-earning assets during the first quarter
of 2004 as compared to the same 2003 period were higher levels of average
deposits and borrowings. The increase in deposits resulted from growth in
low-cost core balances that provided funding at an average cost of 50 basis
points during the first quarter of 2004 and has enabled the Company to reduce
its funding from short-term institutional sources. The increase in average
borrowings was largely attributable to higher FHLB funding levels and the
issuance of additional trust preferred securities during the fourth quarter of
2003.
Noninterest income improved $1.0 million, or 36.9%, for the first three months
of 2004 as compared to 2003. This was due in large measure to a $625 thousand
increase in net security gains, as well as increases in service charges on
deposit accounts and other operating income of 43.0% and 64.1%, respectively.
Sales of long-term municipal notes, undertaken as a result of the continued low
interest rate environment, coupled with a gain realized from a tender offer on a
corporate note owned by the Company, produced the security gains. Management
continually monitors the fixed income markets to take advantage of any
opportunities that may arise due to movement in interest rates or other
short-term anomalies in the marketplace. Other operating income increased
largely as the result of income from Bank Owned Life Insurance purchased during
the first quarter of 2004 and higher letter of credit fees.
The 10.2% improvement in total operating expenses during the first three months
of 2004 as compared to 2003 was primarily due to reductions in legal expenses
and other operating expenses, partially offset by an increase in salaries and
employee benefits. Legal expense decreased $1.5 million during 2004 mainly as
the result of lower expenses related to the ongoing litigations related to
Island Mortgage Network and its affiliates ("IMN") as previously discussed in
detail in the Company's 2001, 2002 and 2003 Securities and Exchange Commission
filings and as discussed in detail in Part II, Item 1 herein. The Company
recorded additional expenses during the first quarter of 2003 to settle one of
the IMN cases pending at that time. The Company expects to incur additional
costs related to these litigations during 2004 which are not quantifiable at
this time. Other operating expenses decreased 5.9% during 2004 to $1.8 million.
This decrease was largely the result of reductions in loan collection expenses,
telecommunications costs and travel and entertainment expenses. The increase of
$421 thousand in salaries and benefits costs resulted primarily from normal
salary adjustments, growth in staff and higher medical and retirement plan
expenses.
The above factors resulted in an improved operating efficiency ratio (total
operating expenses as a percentage of fully taxable equivalent net interest and
noninterest revenue, excluding securities transactions) of 70.3% for the
(16)
first three months of 2004 as compared to 77.2% in 2003. The Company's other
primary measure of expense control, the ratio of total operating expenses to
average total assets, also improved during the first three months of 2004 to
2.87% from a level of 3.36% in 2003.
Income tax expense rose by $572 thousand for the first three months of 2004 as
compared to 2003, resulting in an increase in the Company's effective tax rate
to 30.1% from 28.4% a year ago.
Asset Quality - Nonperforming assets (defined by the Company as nonaccrual loans
and other real estate owned) totaled $10 million at March 31, 2004, a $1 million
decrease from December 31, 2003 and a $3 million increase from March 31, 2003.
The increase in nonperforming assets at March 31, 2004 as compared to the same
period in 2003 is primarily the result of the addition of a $3 million
commercial credit to other real estate owned during the third quarter of 2003.
Management of the Company expects to dispose of this property during 2004 with
no material impact on the Company's financial statements. At March 31, 2004 and
December 31, 2003, there were no restructured accruing loans. This compares to a
balance of $41 thousand at March 31, 2003. 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 totaled $96 thousand at March 31, 2004,
reflecting decreases of $53 thousand and $18 thousand when compared to year-end
2003 and March 31, 2003, respectively.
The allowance for probable loan losses amounted to $11 million or 1.6% of total
loans at March 31, 2004 versus $10 million and 1.7%, respectively, at the
comparable 2003 date. The allowance for probable loan losses as a percentage of
nonaccrual loans, restructured accruing loans and loans 90 days or more past due
and still accruing, increased to 157% at March 31, 2004 from 122% at December
31, 2003 and from 150% 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 2004 and 2003
was $1.1 million and $1.0 million, respectively. Net loan charge-offs during the
same periods were approximately $576 thousand and $804 thousand, 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 remainder of
2004. Due to the uncertain nature of the current economy, management anticipates
further loan charge-offs during the rest of 2004. 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/corporate. The Company undertakes no obligation to publish
revised events or circumstances after the date hereof.
(17)
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, 2004 AND 2003
---------------------------------------------------------------------------------------
($ IN THOUSANDS)
2004 2003
------------------------------------------ ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------ ------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage-backed securities $ 288,523 $ 2,056 2.82 % $ 268,401 $ 2,411 3.59 %
Municipal securities 85,115 578 2.69 81,339 882 4.34
Government Agency and other securities 187,643 1,651 3.48 254,093 2,605 4.10
-------- ------ ----- -------- ------ ----
Total securities 561,281 4,285 3.02 603,833 5,898 3.91
-------- ------ ----- -------- ------ ----
Federal funds sold 1,000 2 0.79 2,779 7 1.01
Securities purchased under agreements to
resell 75,935 178 0.93 59,405 178 1.20
Interest-bearing deposits 6,415 6 0.38 780 2 1.04
Loans 710,078 11,630 6.48 615,773 10,936 7.10
-------- ------- ----- -------- ------- ----
Total interest-earning assets 1,354,709 16,101 4.70 1,282,570 17,021 5.31
---------- ------- ----- ---------- ------- ----
Non-interest-earning assets 84,537 99,548
------- ------
Total Assets $1,439,246 $ 1,382,118
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $ 672,240 $ 1,160 0.69 % $ 582,930 $ 1,152 0.80 %
Time deposits 279,285 1,202 1.70 379,552 1,892 1.99
-------- ------ ----- -------- ------ ----
Total savings and time deposits 951,525 2,362 0.99 962,482 3,044 1.27
-------- ------ ----- -------- ------ ----
Federal funds purchased 8,902 25 1.11 7,671 27 1.41
Securities sold under agreements to
repurchase 15,717 44 1.11 6,742 24 1.42
Other borrowed funds 61,151 193 1.25 33,215 167 2.01
Junior subordinated debentures 20,000 247 4.89 10,000 142 5.68
------- ---- ----- ------- ---- ----
Total interest-bearing liabilities 1,057,295 2,871 1.08 1,020,110 3,404 1.34
---------- ------ ----- ---------- ------ ----
Demand deposits 268,053 219,255
Other liabilities 16,718 52,502
------- ------
Total liabilities 1,342,066 1,291,867
Stockholders' equity 97,180 90,251
------- ------
Total Liabilities and
Stockholders' Equity $1,439,246 $ 1,382,118
=========== ===========
Net interest income/rate spread 13,230 3.62 % 13,617 3.97 %
----- -----
Add tax-equivalent basis adjustment 326 518
---- ---
Net interest margin - tax-equivalent basis $ 13,556 4.02 % $ 14,135 4.47 %
========= ===== ========= =====
(18)
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, 2004 VERSUS DECEMBER 31, 2003 AND MARCH 31, 2003
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS BY TYPE:
PERIOD ENDED:
----------------------------------------------------------
3/31/2004 12/31/2003 3/31/2003
---------------- ---------------- ------------
Nonaccrual Loans $7,064 $8,666 $6,668
Other Real Estate Owned 2,662 2,697 -
---------------- ---------------- ------------
Total Nonperforming Assets $9,726 $11,363 $6,668
---------------- ---------------- ------------
Restructured Accruing Loans - - $41
Loans 90 Days or More Past Due
and Still Accruing $96 $149 $114
Gross Loans Outstanding $710,712 $711,216 $617,007
Total Stockholders' Equity $98,027 $94,712 $88,096
ANALYSIS OF THE ALLOWANCE FOR
PROBABLE LOAN LOSSES:
QUARTER ENDED:
----------------------------------------------------------
3/31/2004 12/31/2003 3/31/2003
---------------- ---------------- ------------
Beginning Balance $10,732 $10,597 $10,046
Provision 1,077 984 983
Net Charge-Offs (576) (849) (804)
---------------- ---------------- ------------
Ending Balance $11,233 $10,732 $10,225
---------------- ---------------- ------------
KEY RATIOS:
PERIOD ENDED:
----------------------------------------------------------
3/31/2004 12/31/2003 3/31/2003
---------------- ---------------- ------------
Allowance as a % of Total Loans 1.6% 1.5% 1.7%
Nonaccrual Loans as a % of Total Loans 1.0% 1.2% 1.1%
Nonperforming Assets (1) as a % of Total
Loans and Other Real Estate Owned 1.4% 1.6% 1.1%
Allowance for Probable Loan Losses as
a % of Nonaccrual Loans 159.0% 123.8% 153.3%
Allowance for Probable Loan Losses as a %
of Nonaccrual Loans, Restructured
Accruing Loans and Loans 90 Days or
More Past Due and Still Accruing 156.9% 121.7% 149.9%
(1) Excludes restructured accruing loans and loans 90 days or more past due and
still accruing interest.
(19)
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
December 31, 2003 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, 2004 compared to
December 31, 2003. The following is an update of the discussion provided
therein.
Asset/Liability Management and Market Risk - The process by which financial
institutions manage interest-earning assets and funding sources under different
interest rate environments is called asset/liability management. The primary
goal of asset/liability management is to increase net interest income within an
acceptable range of overall risk tolerance. Management must ensure that
liquidity, capital, interest rate and market risk are prudently managed.
Asset/liability and interest rate risk management are governed by policies
reviewed and approved annually by the Company's Board of Directors. The Board
has delegated responsibility for asset/liability and interest rate risk
management to Management's Asset/Liability Committee ("ALCO"). The ALCO meets
quarterly and sets strategic directives that guide the day to day
asset/liability management activities of the Company as well as reviewing and
approving all major funding, capital and market risk management programs. The
ALCO, in conjunction with a noted industry consultant, also focuses on current
market conditions, balance sheet management strategies, deposit and loan pricing
issues and interest rate risk measurement and mitigation.
Interest Rate Risk - Interest rate risk is the potential adverse change 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. Reviewing repricing characteristics of interest-earning assets and
interest-bearing liabilities identifies risk. The Company's Funds Management
Committee sets forth policy guidelines that limit the level of interest rate
risk within specified tolerance ranges. Management must determine the
appropriate level of risk, under policy guidelines, 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 and
options risk, and is measured using financial modeling techniques including
interest rate ramp and shock simulations to measure the impact of changes in
interest rates on earnings for periods 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.
Asset and liability management strategies may also involve the use of
off-balance sheet instruments such as interest rate swaps to hedge interest rate
risk. During 2003 the Company executed $50 million of interest rate swaps to
hedge a portion of the interest rate variability in its portfolio of prime rate
loans.
Management performs simulation analysis to assess the Company's asset/liability
position on a dynamic repricing basis using software developed by an industry
noted vendor. Simulation modeling applies alternative interest rate scenarios
and periodic forecasts of future business activity to estimate the related
impact on net interest income. The use of simulation modeling assists management
in its continuing efforts to achieve earnings stability in a variety of interest
rate environments.
The Company's asset/liability and interest rate risk management policy limits
interest rate risk exposure to -12% and -15% of the base case net income for net
earnings at risk at the 12 month and 24 month time horizons, respectively. Net
earnings at risk is the potential adverse change in net income arising from up
to +/- 200 basis point change in interest rates ramped over a 12 month period,
and measured over a 24 month time horizon.
Management also monitors equity value at risk as a percentage of market value of
portfolio equity ("MVPE"). The Company's MVPE is the difference between the
market value of its interest-sensitive assets and the market value of its
interest-sensitive liabilities. MVPE at risk is the potential adverse change in
the present value
(20)
(market value) of total equity arising from an immediate hypothetical shock in
interest rates. Management uses scenario analysis on a static basis to assess
its equity value at risk by modeling MVPE under various interest rate shock
scenarios.
When modeling MVPE at risk, management recognizes the high degree of
subjectivity when projecting long-term cash flows and reinvestment rates, and
therefore uses MPVE at risk as a relative indicator of interest rate risk.
Simulation and scenario techniques in asset/liability modeling are influenced by
a number of estimates and assumptions with regard to embedded options,
prepayment behaviors, pricing strategies and cash flows. Such assumptions and
estimates are inherently uncertain and, as a consequence, simulation and
scenario output will neither precisely estimate the level of, or the changes in,
net interest income and MVPE, respectively.
To mitigate the impact of changes in interest rates, as a general rule, the
balance sheet should be structured so that repricing opportunities exist for
both assets and liabilities in approximately equivalent amounts at basically the
same time intervals.
In managing interest rate risk, 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.
When monitoring its interest-sensitivity gap position, management recognizes
that these static measurements do not reflect the results of any projected
activity and are best utilized as early indicators of potential interest rate
exposures.
The accompanying Table 3-1 sets forth the amounts of assets and liabilities
outstanding as of March 31, 2004 which, based upon certain assumptions, are
expected to reprice or mature in each of the time frames shown. Except as
stated, the amount of assets and liabilities shown to reprice or mature within a
particular time frame was determined in accordance with the earlier of the term
to repricing or the contractual terms of the asset or liability.
An asset-sensitive gap indicates an excess of interest-sensitive assets over
interest-sensitive liabilities, whereas a liability-sensitive gap indicates the
opposite. At March 31, 2004, the Company had a one-year cumulative
asset-sensitivity gap of $215 million. In a rising rate environment, an
asset-sensitive gap position generally indicates that increases in income from
interest-bearing assets will outpace increases in expense associated with
funding those assets. In addition, the Company's net interest margin and net
income would improve under this scenario. Conversely, in a declining interest
rate environment, the Company's cost of funds would decline more slowly than the
yield on its rate-sensitive assets and would likely result in a contraction of
net interest income.
Interest rate risk can be reduced by various strategies, including the
administration of liability costs and the investment of asset maturities and
cash flows in such a way as to insulate net interest income from the effects of
changes in interest rates. As previously mentioned, a static gap position is
best utilized as a tool for early detection of potential interest rate exposure.
Management monitors the Company's cumulative one-year gap with a view that
rate-sensitive assets and liabilities are approximately equal in that time
frame. Due to the nature of the Company's business, primarily the seasonality of
its municipal funding function, an exactly matched one-year gap is unlikely to
occur. Rather, as previously discussed, management relies on net interest income
simulation analysis to manage the Company's asset/liability position on a
dynamic repricing basis.
(21)
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK (CONTINUED)
-------------------------------------------------------------------
MARCH 31, 2004
- ----------------
TABLE 3-1 LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------- -------------------------------------------------------------------
--------------------------------------------------------------------------------------------
SENSITIVITY TIME HORIZON
($ 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) $404,157 $28,592 $198,574 $72,325 $7,064 $710,712
Securities Purchased Under
Agreements to Resell,
Federal Funds Sold and
Interest-Bearing Deposits 12,043 12,043
Securities Held to Maturity 40,000 14 40,014
Securities Available for Sale 3) 141,200 96,790 199,607 142,218 3,909 583,724
------------ ------------- ------------ ------------ ------------ ----------
Total Interest-Earning Assets 597,400 125,396 398,181 214,543 10,973 1,346,493
Unrealized Net Gain on Securities
Available for Sale 3,546 3,546
Noninterest-Bearing Cash and Due
from Banks 40,779 40,779
All Other Assets 7) 6,274 8,294 18,995 29 6,882 40,474
------------ ------------- ------------ ------------ ------------ ----------
Total Assets $647,999 $133,690 $417,176 $214,572 $17,855 $1,431,292
------------ ------------- ------------ ------------ ------------ ----------
- ----------------------------------
INTEREST - SENSITIVE LIABILITIES : 1)
- ----------------------------------
Savings Accounts 4) $13,711 $13,711 $109,685 $82,263 $219,370
Money Fund and NOW Accounts 5) 43,339 31,912 255,446 44,458 375,155
Time Deposits 6) 224,358 22,759 22,698 694 270,509
------------ ------------- ------------ ------------ ------------ ----------
Total Interest-Bearing Deposits 281,408 68,382 387,829 127,415 - 865,034
Federal Funds Purchased, Securities
Sold Under Agreements to
Repurchase and Other Borrowings 137,706 107 153 137,966
Junior Subordinated Debentures 20,000 20,000
------------ ------------- ------------ ------------ ------------ ----------
Total Interest-Bearing Liabilities 439,114 68,489 387,982 127,415 - 1,023,000
Net Payable - Securities Purchases 18,318 18,318
All Other Liabilities, Equity
and Demand Deposits 7) 19,065 16,061 102,881 153,940 98,027 389,974
------------ ------------- ------------ ------------ ------------ ----------
Total Liabilities and Equity $476,497 $84,550 $490,863 $281,355 $98,027 $1,431,292
------------ ------------- ------------ ------------ ------------ ----------
Cumulative Interest-Sensitivity Gap 8) $158,286 $215,193 $225,392 $312,520 $323,493
Cumulative Interest-Sensitivity Ratio 9) 136.0 % 142.4 % 125.2 % 130.5 % 131.6 %
Cumulative Interest-Sensitivity Gap
As a % of Total Assets 11.1 % 15.0 % 15.7 % 21.8 % 22.6 %
(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. Securities
containing embedded options are reflected in the sensitivity time horizon
category that best reflects the anticipated repricing impact of the embedded
option as of the report date.
(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.
(22)
ITEM 4. - CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Principal Financial Officer, the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Principal Financial Officer have concluded that these
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and regulations and are operating in an effective manner. No
change in the Company's internal control over financial reporting (as defined in
Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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, 2004
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, and Moritz, et al. v.
National Settlement Services Corp., et al., Civil Action No. 3:00 CV 426 MU,
Western District of North Carolina. While technically these cases remain
pending, the Bank has executed binding settlement agreements with the plaintiffs
in both cases, and finalization of those settlements is contingent only upon the
fulfillment of certain conditions precedent by the plaintiffs, which has not yet
occurred but is expected to occur. The cost of settling these litigations is not
material.
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 Trustee
and the Bank have submitted for the Court's approval a stipulation settling this
case and releasing all claims held by each of the parties against the others.
The net economic effect of the settlement, if approved, will not be material to
the Bank. The hearing with respect to the settlement is presently scheduled for
May 26, 2004.
Broward Title Co. v. Alan Jacobs, et al., Adv. Proc. No. 01-8181, Bankruptcy
Court for the Eastern District of New York. In July, 2002, Broward's claims
against the Bank and the Duboff defendants were severed from its claims against
the remaining defendants. Since that time, Broward has been actively pursuing
its case against the remaining defendants and has not made any attempts to
prosecute its case against State Bank, although it may do so at a later date.
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. The parties are currently completing the expert discovery phase of
litigation, and summary judgment motions are presently due to be filed by May
14, 2004.
The Bank is defending the active 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 later 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
(23)
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.
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
and will not have a material impact on the Company's financial statements.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
The following table discloses the Company's repurchases of its common stock made
during the quarter.
(c) Total number of
shares purchased as (d) Maximum number of
part of publicly shares that may yet be
(a) Total number of (b) Average price announced plans or purchased under the
Period shares purchased paid per share programs plans or programs
- ------ ------------------- ----------------- ------------------- ----------------------
January 1 - 31, 2004 - - - 162,142
February 1 - 29, 2004 2,300 $25.25 2,300 159,842
March 1 - 31, 2004 23,171 24.68 23,171 136,671
------ ----- ------ -------
Total 25,471 $24.73 25,471 136,671
------ ------ ------ -------
On February 24, 1998, the Company's Board of Directors authorized a stock
repurchase program enabling the Company to buy back up to 50,000 shares of its
common stock. Subsequently, on November 24, 1998, February 29, 2000 and June 26,
2001, the Company's Board of Directors authorized increases in the Company's
stock repurchase program under which the Company was then able to buy back up to
a cumulative total of 200,000, 500,000 and 1,000,000 shares of its common stock,
respectively. The repurchases may be made from time to time as market conditions
permit, at prevailing prices on the open market. The program may be discontinued
at any time.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
31 Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(24)
(b) Reports on Form 8-K:
--------------------
On January 22, 2004, the Company issued the earnings release for the
period ended December 31, 2003.
(25)
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.
5/10/04 s/Daniel T. Rowe
- -------- -------------------------
Date Daniel T. Rowe, President
5/10/04 s/Brian K. Finneran
- -------- --------------------------------------
Date Brian K. Finneran, Secretary/Treasurer
(Principal Financial Officer)
(26)