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: SEPTEMBER 30, 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 November 4, 2004, there were 9,047,761 shares of registrant's Common
Stock outstanding.
STATE BANCORP, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2004 and December 31, 2003 (Unaudited) 1.
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003 2.
(Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (Unaudited) 3.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Nine Months Ended 4.
September 30, 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 13.
Item 3. Quantitative and Qualitative Disclosure About Market Risk 29.
Item 4. Controls and Procedures 32.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32.
Item 2. Changes in Securities and Use of Proceeds 33.
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 33.
SIGNATURES 34.
PART I
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (UNAUDITED)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-------------------- ---------------------
ASSETS:
- -------
CASH AND DUE FROM BANKS $49,381,973 $56,762,269
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - 91,000,000
-------------------- ---------------------
TOTAL CASH AND CASH EQUIVALENTS 49,381,973 147,762,269
SECURITIES HELD TO MATURITY (ESTIMATED FAIR VALUE -
$24,981,500 IN 2004 AND $55,231,959 IN 2003) 25,006,729 55,065,400
SECURITIES AVAILABLE FOR SALE - AT ESTIMATED FAIR VALUE 619,534,443 511,964,686
-------------------- ---------------------
TOTAL SECURITIES 644,541,172 567,030,086
LOANS (NET OF ALLOWANCE FOR PROBABLE LOAN LOSSES
OF $11,831,087 IN 2004 AND $10,732,078 IN 2003) 742,405,976 700,484,056
BANK PREMISES AND EQUIPMENT - NET 6,512,522 7,083,848
BANK OWNED LIFE INSURANCE 25,626,035 -
OTHER ASSETS 21,826,476 18,640,104
-------------------- ---------------------
TOTAL ASSETS $1,490,294,154 $1,441,000,363
==================== =====================
LIABILITIES:
- ------------
DEPOSITS:
DEMAND $291,416,239 $265,691,712
SAVINGS 580,490,893 688,717,586
TIME 266,843,674 261,877,605
-------------------- ---------------------
TOTAL DEPOSITS 1,138,750,806 1,216,286,903
FEDERAL FUNDS PURCHASED 10,000,000 10,000,000
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 88,680,000 31,601,147
OTHER BORROWINGS 112,330,243 50,714,149
JUNIOR SUBORDINATED DEBENTURES 20,620,000 20,000,000
PAYABLE - SECURITIES PURCHASES 10,000,000 8,612,652
ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 11,079,494 9,073,990
-------------------- ---------------------
TOTAL LIABILITIES 1,391,460,543 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 9,939,075 SHARES IN 2004
AND 9,846,853 SHARES IN 2003; OUTSTANDING 9,017,066
SHARES IN 2004 AND 8,967,102 SHARES IN 2003 49,695,375 46,889,775
SURPLUS 62,417,245 53,544,877
RETAINED EARNINGS 2,626,501 5,189,907
TREASURY STOCK (922,009 SHARES IN 2004 AND 837,858 SHARES IN 2003) (15,375,138) (13,481,356)
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES (530,372) 2,568,319
-------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 98,833,611 94,711,522
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,490,294,154 $1,441,000,363
==================== =====================
See accompanying notes to unaudited consolidated financial statements.
1
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
THREE MONTHS NINE MONTHS
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
INTEREST INCOME:
- ----------------
LOANS $12,548,148 $11,168,508 $35,961,578 $33,016,544
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL 1,806 57,299 249,647 381,683
SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE:
STATES AND POLITICAL SUBDIVISIONS 779,465 668,218 1,997,118 2,347,038
MORTGAGE-BACKED SECURITIES 2,511,663 1,859,422 7,188,597 6,225,287
GOVERNMENT AGENCY SECURITIES 1,815,788 1,245,441 4,689,889 5,815,217
OTHER SECURITIES 441,304 382,459 1,370,276 1,111,752
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 18,098,174 15,381,347 51,457,105 48,897,521
------------- ------------- ------------- -------------
INTEREST EXPENSE:
- -----------------
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE 729,790 490,778 1,838,957 2,009,372
OTHER DEPOSITS AND TEMPORARY BORROWINGS 2,319,443 1,726,926 6,373,451 6,627,366
JUNIOR SUBORDINATED DEBENTURES 269,058 135,639 764,480 414,539
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 3,318,291 2,353,343 8,976,888 9,051,277
------------- ------------- ------------- -------------
NET INTEREST INCOME 14,779,883 13,028,004 42,480,217 39,846,244
PROVISION FOR PROBABLE LOAN LOSSES 1,152,000 983,751 3,315,000 2,951,253
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 13,627,883 12,044,253 39,165,217 36,894,991
------------- ------------- ------------- -------------
NONINTEREST INCOME:
- -------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 577,261 401,475 1,749,841 1,158,545
NET SECURITY GAINS 275,298 2,281,855 2,865,738 5,863,405
BANK OWNED LIFE INSURANCE POLICY EARNINGS 232,122 - 626,035 -
OTHER OPERATING INCOME 431,711 412,177 1,283,094 1,273,048
------------- ------------- ------------- -------------
TOTAL NONINTEREST INCOME 1,516,392 3,095,507 6,524,708 8,294,998
------------- ------------- ------------- -------------
INCOME BEFORE OPERATING EXPENSES 15,144,275 15,139,760 45,689,925 45,189,989
------------- ------------- ------------- -------------
OPERATING EXPENSES:
- -------------------
SALARIES AND OTHER EMPLOYEE BENEFITS 6,144,457 5,574,126 17,897,777 16,693,754
OCCUPANCY 997,635 964,189 2,962,064 2,860,573
EQUIPMENT 368,913 418,875 1,101,849 1,211,071
LEGAL 845,788 830,283 2,609,001 3,982,833
MARKETING AND ADVERTISING 495,281 349,806 1,149,985 958,557
CREDIT AND COLLECTION 155,319 315,982 600,524 1,012,247
OTHER OPERATING EXPENSES 1,418,580 1,648,692 4,368,558 4,673,558
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 10,425,973 10,101,953 30,689,758 31,392,593
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 4,718,302 5,037,807 15,000,167 13,797,396
PROVISION FOR INCOME TAXES 1,344,977 1,614,031 4,366,926 4,195,228
------------- ------------- ------------- -------------
NET INCOME $3,373,325 $3,423,776 $10,633,241 $9,602,168
- ---------- ============= ============= ============= =============
BASIC EARNINGS PER COMMON SHARE $0.37 $0.38 $1.18 $1.08
DILUTED EARNINGS PER COMMON SHARE $0.36 $0.38 $1.14 $1.06
CASH DIVIDENDS PAID PER COMMON SHARE $0.14 $0.13 $0.41 $0.38
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 9,020,368 8,926,183 9,014,235 8,877,684
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 9,297,873 9,195,310 9,313,868 9,098,792
See accompanying notes to unaudited consolidated financial statements.
2
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2004 2003
-------------- ---------------
OPERATING ACTIVITIES:
- ---------------------
NET INCOME $10,633,241 $9,602,168
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR PROBABLE LOAN LOSSES 3,315,000 2,951,253
DEPRECIATION AND AMORTIZATION OF BANK PREMISES AND EQUIPMENT 1,142,673 1,239,469
AMORTIZATION OF INTANGIBLES 27,103 27,103
AMORTIZATION OF NET PREMIUM ON SECURITIES 4,506,047 6,010,916
AMORTIZATION OF UNEARNED COMPENSATION - 82,601
NET SECURITY GAINS (2,865,738) (5,863,405)
BANK OWNED LIFE INSURANCE POLICY EARNINGS (626,035) -
(INCREASE) DECREASE IN OTHER ASSETS (1,205,024) 8,801,099
INCREASE IN ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 1,848,515 816,722
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,775,782 23,667,926
-------------- ---------------
INVESTING ACTIVITIES:
- ---------------------
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 85,046,524 26,680,886
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 178,331,081 701,757,205
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 197,497,589 292,274,281
PURCHASES OF SECURITIES HELD TO MATURITY (54,987,500) (70,000,000)
PURCHASES OF SECURITIES AVAILABLE FOR SALE (488,138,883) (886,287,333)
INCREASE IN LOANS - NET (45,236,920) (64,287,899)
PURCHASES OF BANK PREMISES AND EQUIPMENT - NET (571,347) (648,951)
INCREASE IN BANK OWNED LIFE INSURANCE (25,000,000) -
-------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (153,059,456) (511,811)
-------------- ---------------
FINANCING ACTIVITIES:
- ---------------------
(DECREASE) INCREASE IN DEMAND AND SAVINGS DEPOSITS (82,502,166) 92,779,009
INCREASE (DECREASE) IN TIME DEPOSITS 4,966,069 (171,613,765)
INCREASE IN FEDERAL FUNDS PURCHASED - 18,200,000
INCREASE (DECREASE) IN SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 57,078,853 (24,168,000)
INCREASE (DECREASE) IN OTHER BORROWINGS 61,616,094 (1,513,883)
CASH DIVIDENDS PAID (3,697,030) (3,373,459)
PROCEEDS FROM SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN 1,791,168 2,267,846
PROCEEDS FROM STOCK OPTIONS EXERCISED 513,811 328,347
PROCEEDS FROM STOCK ISSUED UNDER DIRECTORS' STOCK PLAN 30,361 17,226
PURCHASES OF TREASURY STOCK (1,893,782) (745,562)
-------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 37,903,378 (87,822,241)
-------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (98,380,296) (64,666,126)
CASH AND CASH EQUIVALENTS - JANUARY 1 147,762,269 98,586,855
-------------- ---------------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $49,381,973 $33,920,729
============== ===============
SUPPLEMENTAL DATA:
- ------------------
INTEREST PAID $8,564,256 $9,361,538
INCOME TAXES PAID $4,032,126 $3,828,273
ADJUSTMENT TO UNREALIZED NET GAIN OR LOSS ON SECURITIES
AVAILABLE FOR SALE ($4,487,142) ($7,467,179)
DIVIDENDS DECLARED BUT NOT PAID AS OF QUARTER END $1,353,061 $1,191,815
TRANSFER FROM LOANS TO OTHER REAL ESTATE OWNED - $2,650,000
See accompanying notes to unaudited consolidated financial statements.
3
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
NET INCOME - - 10,633,241 - - - 10,633,241 $10,633,241
------------
UNREALIZED HOLDING LOSSES
ARISING DURING THE PERIOD - - - - - - (1,200,587)
RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME - - - - - - (1,861,635)
CASH FLOW HEDGES - - - - - - (36,469)
------------
TOTAL OTHER
COMPREHENSIVE LOSS - - - - (3,098,691) - (3,098,691) (3,098,691)
------------
TOTAL COMPREHENSIVE
INCOME - - - - - - $7,534,550
============
CASH DIVIDEND
($0.43 PER SHARE) - - (3,854,019) - - - (3,854,019)
5% STOCK DIVIDEND (427,776
SHARES AT MARKET VALUE) 2,138,880 7,203,748 (9,342,628) - - - -
SHARES ISSUED UNDER THE
DIVIDEND REINVESTMENT
PLAN (79,249 SHARES AT
95% OF MARKET VALUE) 396,245 1,394,923 - - - - 1,791,168
STOCK OPTIONS EXERCISED 264,215 249,596 - - - - 513,811
STOCK ISSUED UNDER
DIRECTORS' STOCK PLAN 6,260 24,101 - - - - 30,361
TREASURY STOCK PURCHASED - - - (1,893,782) - - (1,893,782)
---------------------------------------------------------------------------------------------
BALANCE,SEPTEMBER 30, 2004 $49,695,375 $62,417,245 $2,626,501 ($15,375,138) ($530,372) $ - $98,833,611
=============================================================================================
BALANCE, JANUARY 1, 2003 $43,818,395 $45,714,829 $5,419,517 ($12,444,116) $5,218,101 ($44,095) $87,682,631
NET INCOME - - 9,602,168 - - - 9,602,168 $9,602,168
------------
UNREALIZED HOLDING LOSSES
ARISING DURING THE PERIOD - - - - - - (969,044)
RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME - - - - - - (3,744,928)
CASH FLOW HEDGES - - - - - - 414,917
------------
TOTAL OTHER
COMPREHENSIVE LOSS - - - - (4,299,055) - (4,299,055) (4,299,055)
------------
TOTAL COMPREHENSIVE
INCOME - - - - - - $5,303,113
============
CASH DIVIDEND
($0.39 PER SHARE) - - (3,451,326) - - - (3,451,326)
5% STOCK DIVIDEND (401,978
SHARES AT MARKET VALUE) 2,009,890 5,587,495 (7,597,385) - - - -
SHARES ISSUED UNDER THE
DIVIDEND REINVESTMENT
PLAN (130,036 SHARES AT
95% OF MARKET VALUE) 650,180 1,617,666 - - - - 2,267,846
STOCK OPTIONS EXERCISED 210,580 117,767 - - - - 328,347
STOCK ISSUED UNDER
DIRECTORS' STOCK PLAN 4,785 12,441 - - - - 17,226
TREASURY STOCK PURCHASED - - - (745,562) - - (745,562)
AMORTIZATION OF UNEARNED
COMPENSATION - 38,506 - - - 44,095 82,601
---------------------------------------------------------------------------------------------
BALANCE,SEPTEMBER 30, 2003 $46,693,830 $53,088,704 $3,972,974 ($13,189,678) $919,046 $ - $91,484,876
=============================================================================================
See accompanying notes to unaudited consolidated financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------------------
State Bancorp, Inc. (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. These Trust Preferred securities are classified as junior
subordinated debentures in the financial statements. The income of the Company
is derived through the operations of the Bank and its subsidiaries, SB Portfolio
Management Corp. ("SB Portfolio"), SB Financial Services Corp. ("SB Financial"),
New Hyde Park Leasing Corporation ("NHPL") and its subsidiary P.W.B. Realty,
L.L.C. ("PWB"), Studebaker-Worthington Leasing Corp. ("SWLC") and SB ORE Corp.
In the opinion of the management of 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 September 30, 2004 and December 31, 2003, its consolidated statements of
income for the three and nine months ended September 30, 2004 and 2003, its
consolidated statements of cash flows for the nine months ended September 30,
2004 and 2003 and its consolidated statements of stockholders' equity and
comprehensive income (loss) for the nine months ended September 30, 2004 and
2003, in accordance with generally accepted accounting principles in the United
States of America. The results of operations for the three and nine months ended
September 30, 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 Nine Months Ended September 30, 2004 2003
- --------------------------------------- ---- ----
Net income, as reported $10,633,241 $9,602,168
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (290,076) (208,644)
----------- ----------
Pro forma net income $10,343,165 $9,393,524
=========== ==========
Earnings per share:
Basic - as reported $1.18 $1.08
Basic - pro forma $1.15 $1.06
Diluted - as reported $1.14 $1.06
Diluted - pro forma $1.11 $1.03
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 September 30, 2004 and December 31, 2003, the Company was 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
6
the counterparty on $50 million of loan assets. The fair value of the swap
agreements was ($30,658) and $350,107, inclusive of accrued interest of $30,083
and $47,458, at September 30, 2004 and December 31, 2003, respectively, and is
contained within other assets in the consolidated balance sheets. For the nine
months ended September 30, 2004 and 2003, the Company recognized interest income
of $715,264 and $61,417, respectively, under the agreements.
Accounting for Bank Owned Life Insurance
- ----------------------------------------
In February 2004, the Company purchased $25 million in Bank Owned Life Insurance
as a mechanism for funding current and future employee benefit costs. The
Company is the beneficiary of this policy that insures the lives of certain
officers of its subsidiaries. The Company has recognized the cash surrender
value under the insurance policy as an asset in the consolidated balance sheets.
Changes in the cash surrender value are recorded in other operating income.
Recent Accounting Developments
- ------------------------------
In January 2003, the FASB issued FASB Interpretation ("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, classified as junior
subordinated debentures in the financial statements, 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 was
effective for other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. However, the guidance contained in
paragraphs 10-20 of this Issue has been delayed by FASB Staff Position ("FSP")
EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," posted September 30, 2004. The delay of the effective date for
paragraphs 10-20 will be superseded concurrent with the final issuance of
proposed FSP EITF Issue 03-1-a, "Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The proposed FSP would
provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment. The disclosures continue to be effective for
the Company's financial statements for fiscal years ending after December 15,
2003, for investments accounted for under SFAS No. 115.
7
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
management's conclusions were to change as to whether an other-than-temporary
impairment exists. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. In analyzing an
issuer's financial condition, the Company's management considers whether the
securities are issued by the U.S. Government or its agencies, whether downgrades
by bond rating agencies have occurred and industry analysts' reports. The
Company's management currently conducts impairment evaluations at least on a
quarterly basis and has concluded that, at September 30, 2004, there were no
other-than-temporary impairments of the Company's investment securities.
Information pertaining to securities with gross unrealized losses at September
30, 2004, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:
Less than 12 Months 12 Months or Longer Total
---------------------------------------------------------------------------------------
Gross Gross Gross
Unrealized Estimated Unrealized Estimated Unrealized Estimated
Losses Fair Value Losses Fair Value Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Government Agency securities ($25,229) $24,967,500 $ - $ - ($25,229) $24,967,500
- ---------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Obligations of states and political
subdivisions (732,987) 139,138,751 - - (732,987) 139,138,751
Government Agency securities (174,869) 50,050,415 - - (174,869) 50,050,415
Corporate securities (222,891) 27,215,000 (246,215) 4,975,000 (469,106) 32,190,000
Mortgage-backed securities and
collateralized mortgage obligations (1,317,046) 143,886,450 (204,959) 13,134,119 (1,522,005) 157,020,569
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ($2,447,793) $360,290,616 ($451,174) $18,109,119 ($2,898,967) $378,399,735
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities ($2,473,022) $385,258,116 ($451,174) $18,109,119 ($2,924,196) $403,367,235
=================================================================================================================================
The securities that have been in a continuous loss position for 12 months or
longer in the table above may be categorized as either: (1) Adjustable rate
mortgage-backed securities totaling $11,777,831, (2) Fixed rate mortgage-backed
securities totaling $1,356,288 or (3) Callable fixed income securities with a
fixed stated coupon totaling $4,975,000.
The market value, and therefore the loss position, for each type of bond
responds differently to market conditions. In management's opinion, those market
conditions are temporary in nature and provide the basis for the Company's
belief that the declines are temporary. The adjustable rate securities have
coupons that reset at some pre-determined point to the then current market
rates. When the coupon is reset to current market rates, the security's market
value also resets, reflecting a current market value and therefore, in all
likelihood, removing any loss conditions.
Fixed rate mortgage-backed securities not only respond to changes in interest
rates, but changes in the amount of cash flow as determined by prepayments. When
interest rates fall, mortgage holders are induced to refinance their
8
existing loans at a lower rate, causing prepayments to occur. This increase in
cash flow effectively reduces the yield on the security and the market will tend
to value those securities lower. However, as prepayments abate as a result of a
number of factors including higher interest rates and burnout, the reduced cash
flow on a fixed rate mortgage-backed security effectively raises the yield on
the bond and the market will value higher.
The market value for callable fixed rate securities changes inversely with
changes in interest rates. When interest rates are falling, the market value of
callable fixed rate securities will appreciate to call date, whereas in a rising
interest rate environment, the market value of callable fixed rate securities
will depreciate to maturity date. The market value of callable fixed rate
securities is also affected with the passage of time. The closer a callable
fixed rate security approaches its maturity date, the closer the market value of
the security approaches par value.
The securities that have been in a continuous loss position for 12 months or
longer in the prior table were purchased in an environment of historically low
interest rates and the Company expects the likelihood of an increase in interest
rates to be greater than the likelihood of a decline in interest rates. Higher
interest rates will cause the adjustable mortgage rate securities to reset their
coupons at higher levels and therefore, their market value will increase to
reflect the higher coupon. The Company anticipates a reduction in prepayments on
the fixed rate mortgage-backed security. The reduced cash flow would increase
the yield and the market value should reflect the higher yield. The market value
of callable fixed rate securities will increase in either a falling interest
rate environment or with the passage of time as the security approaches its
maturity date. It is important to note that every category of security mentioned
above will mature at a specified date and at par value. Any temporary changes in
market value due to market rates will have no impact on the security's ultimate
value at maturity.
Management of the Company believes the securities are providing an attractive
level of interest income and, as the Bank has access to various alternate
liquidity sources, the ability to hold these securities until maturity exists.
The Bank has no intention now, or in the foreseeable future, of liquidating
these securities; however, they remain classified as "available for sale" and
could be sold, regardless of their market value, should business conditions
warrant such sale.
2. STOCKHOLDERS' EQUITY
- ------------------------
The Company has 250,000 shares of preferred stock authorized. No shares were
issued as of September 30, 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 16,944 common shares at an
average price of $21.95 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.
9
For the Nine Months Ended September 30, 2004 2003
- --------------------------------------- ---- ----
Net income $10,633,241 $9,602,168
Average dilutive stock options outstanding 732,449 803,824
Average exercise price per share $11.34 $13.10
Average market price $22.71 $18.07
Weighted average common shares outstanding 9,014,235 8,877,684
Increase in shares due to exercise of options - diluted basis 299,633 221,108
------- -------
Adjusted common shares outstanding - diluted 9,313,868 9,098,792
========= =========
Net income per share - basic $1.18 $1.08
===== =====
Net income per share - diluted $1.14 $1.06
===== =====
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.
5. LOANS
- ---------
The recorded investment in loans that are considered to be impaired, for the
quarter ended September 30, 2004 and for the year ended December 31, 2003, is
summarized below.
For the Quarter Ended For the Year Ended
September 30, 2004 December 31, 2003
--------------------- ------------------
Amount measured using the present value of expected future
cash flows, discounted at each loan's effective interest rate $410,582 $433,088
Impaired collateral-dependent loans 4,304,192 7,747,117
--------- ---------
Total amount evaluated as impaired $4,714,774 $8,180,205
========== ==========
Average impaired loan balance $4,739,779 $7,814,272
========== ==========
As a result of the Company's evaluation of impaired loans, an allowance for
probable loan losses of approximately $1,985,000 and $2,755,000 was established
for $4,029,051 and $7,267,664 of the total impaired loans at September 30, 2004
and December 31, 2003, respectively. No specific allowance was required for the
remaining balance of impaired loans at September 30, 2004 and December 31, 2003.
Interest income of $71,665 and $43,547 was recognized on impaired loans for the
nine months ended September 30, 2004 and 2003, respectively, while interest
income of $42,900 was recognized on impaired loans for the three months ended
September 30, 2004. No interest income was recognized on such loans for the
three months ended September 30, 2003.
10
Activity in the allowance for probable loan losses for the nine months ended
September 30, 2004 and 2003 is as follows:
2004 2003
---- ----
Balance, January 1 $10,732,078 $10,045,516
Provision charged to income 3,315,000 2,951,253
Charge-offs, net of recoveries of $98,008 in 2004 and $174,236 in 2003 (2,215,991) (2,399,970)
----------- -----------
Balance, September 30 $11,831,087 $10,596,799
=========== ===========
6. LEGAL PROCEEDINGS
- ---------------------
The Bank is involved in a number of legal proceedings related to Island Mortgage
Network, Inc. and certain related entities ("IMN"), 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 to the claims that have been asserted. However, the ultimate outcome of
these lawsuits cannot be predicted with certainty, and therefore, no liability
has been recognized in the consolidated balance sheets at September 30, 2004 or
December 31, 2003.
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 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.
For a more complete description of these matters, please refer to Part II, Item
1 of this Form 10-Q document.
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
estimate the likelihood that the examination will change the tax liability for
the years under examination. As such, no liability has been recognized in the
consolidated balance sheets at September 30, 2004 or December 31, 2003.
8. REGULATORY CAPITAL
- ----------------------
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under the
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and the Bank's classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to
11
maintain minimum amounts and ratios of total capital and Tier I capital, as
defined in the regulations, to risk-weighted assets and of Tier I capital to
average assets. Management believes, as of September 30, 2004, that the Company
and the Bank meet all capital adequacy requirements to which they are subject.
As of September 30, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank's
category. The Company's and the Bank's capital amounts (in thousands) and ratios
are as follows:
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
As of September 30, 2004:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company $116,781 7.85% $59,506 4.00% N/A N/A
The Bank $115,779 7.79% $59,450 4.00% $74,313 5.00%
Tier I Capital to Risk-Weighted Assets:
The Company $116,781 12.34% $37,854 4.00% N/A N/A
The Bank $115,779 12.25% $37,805 4.00% $56,708 6.00%
Total Capital to Risk-Weighted Assets:
The Company $128,611 13.59% $75,709 8.00% N/A N/A
The Bank $127,593 13.50% $75,611 8.00% $94,513 10.00%
- ----------------------------------------------------------------------------------------------------------------------------
As of September 30, 2003:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company $97,947 7.69% $50,948 4.00% N/A N/A
The Bank $96,113 7.54% $50,988 4.00% $63,735 5.00%
Tier I Capital to Risk-Weighted Assets:
The Company $97,947 11.62% $33,717 4.00% N/A N/A
The Bank $96,113 11.41% $33,694 4.00% $50,541 6.00%
Total Capital to Risk-Weighted Assets:
The Company $108,484 12.87% $67,434 8.00% N/A N/A
The Bank $106,643 12.66% $67,389 8.00% $84,236 10.00%
- ----------------------------------------------------------------------------------------------------------------------------
12
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview - State Bancorp, Inc. (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. These Trust Preferred securities are classified as junior
subordinated debentures in the financial statements. The income of the Company
is derived through the operations of the Bank and its subsidiaries, SB Portfolio
Management Corp. ("SB Portfolio"), SB Financial Services Corp. ("SB Financial"),
New Hyde Park Leasing Corporation ("NHPL") and its subsidiary P.W.B. Realty,
L.L.C. ("PWB"), Studebaker-Worthington Leasing Corp. ("SWLC") and SB ORE Corp.
Financial performance of State Bancorp, Inc. Over/
(dollars in thousands, except per share data) (under)
As of or for the nine months ended September 30, 2004 2003 2003
- ----------------------------------------------------------------------------------------------
Revenue (1) $49,005 $48,141 2 %
Operating expenses 30,690 31,393 (2)
Provision for probable loan losses 3,315 2,951 12
Net income 10,633 9,602 11
Net income per share - diluted (2) 1.14 1.06 8
Dividend payout ratio 36.2% 35.9% 30 bp
Return on average total stockholders' equity 14.76% 14.17% 59
- ----------------------------------------------------------------------------------------------
Tier I leverage ratio 7.85% 7.69% 16 bp
Tier I capital ratio 12.34% 11.62% 72
Total capital ratio 13.59% 12.87% 72
- ----------------------------------------------------------------------------------------------
bp - denotes basis points; 100 bp equals 1%.
(1) Represents net interest income plus total noninterest income.
(2) Retroactive recognition has been given for stock dividends.
As of September 30, 2004, the Company, on a consolidated basis, had total assets
of approximately $1.5 billion, total deposits of approximately $1.1 billion and
stockholders' equity of approximately $98.8 million. Unless the context
otherwise requires, references herein to the Company include the Company and its
subsidiaries on a consolidated basis.
The Bank provides a full range of banking services to customers located
primarily in Nassau, Suffolk and Queens Counties. The Bank serves its customer
base through fifteen full-service branches in those counties and a lending
center in Jericho. The Bank's deposit products include checking, savings, time,
money market and IRA accounts. The Bank offers secured and unsecured commercial
and consumer loans. Additional credit services offered include commercial
mortgage loans, construction mortgage loans, letters of credit, equipment
leasing, other commercial installment loans and lines of credit, home equity
lines of credit, residential mortgage loans and auto and other personal loans.
In addition, the Bank provides safe deposit services, merchant credit card
services, access to annuity products and mutual funds and a consumer debit card
with membership in a national ATM network. Through an alliance with U.S. Trust
Company, the Bank also offers its customers access to financial planning and
wealth management services. Thirteen of the Bank's branches have ATMs. The Bank
also offers its customers on-line banking, bill payment and cash management
services. The Bank's strategy of establishing and maintaining long-term customer
relationships has contributed to the Bank's relatively stable core deposit base.
The Bank considers its business to be highly competitive in its market areas.
The Bank vies with local, regional and national depository financial
institutions and other businesses with respect to its lending services and/or in
attracting deposits, including commercial banks, savings banks, insurance
companies, credit unions, money market funds and affiliates of consumer goods
manufacturers. Although the Bank is considerably smaller in size than many of
these
13
institutions operating in its market areas, it has demonstrated the ability to
compete profitably with them.
The Bank's leasing activity has been primarily conducted by its wholly owned
subsidiaries, NHPL, formed in 1979 to lease commercial equipment and SWLC,
acquired in 2001 with a thirty year history of nationwide equipment leasing
specializing in small-ticket leases for computers and office equipment.
The Bank has organized various operating subsidiaries. NHPL owns 51% of PWB,
which was formed in 2002 to own the Bank's branch premises located in Port
Washington, New York. The Bank owns 100% of SB ORE Corp., formed in 1994 to hold
foreclosed property. In 1998, the Bank established SB Portfolio and SB
Financial, two wholly owned Delaware-based subsidiaries. SB Portfolio holds and
manages a portfolio of fixed income investments while SB Financial provides
balance sheet management services such as interest rate risk modeling and
asset/liability management reporting along with general advisory services to the
Company and its subsidiaries.
Neither the Company nor any of its direct or indirect subsidiaries is dependent
upon a single customer or very few customers. No material amount of deposits is
obtained from a single depositor. The Bank does not rely on foreign sources of
funds or income and the Bank does not have any foreign commitments, with the
exception of letters of credit issued on behalf of several of its customers. The
Bank's nature and conduct of business have remained substantially unchanged
since year-end 2003.
The Company expects that compliance with provisions regulating environmental
controls will have no effect upon the capital, expenditures, earnings or
competitive position of the Company. The Company operates in the banking
industry and management considers the Company to be aggregated in one reportable
operating segment. The Bank has not experienced any material seasonal
fluctuations in its business. The Company has not had material expenditures for
research and development. The Company employed 330 full-time and part-time
officers and employees as of September 30, 2004.
The Company's Internet address is www.statebankofli.com. The Company makes
available on its Internet website its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments thereto as soon
as reasonably practicable after the Company files such material with, or
furnishes such material to, the Securities and Exchange Commission, as
applicable.
Recent Accounting Developments - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation ("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
14
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.
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 was
effective for other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. However, the guidance contained in
paragraphs 10-20 of this Issue has been delayed by FASB Staff Position ("FSP")
EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," posted September 30, 2004. The delay of the effective date for
paragraphs 10-20 will be superseded concurrent with the final issuance of
proposed FSP EITF Issue 03-1-a, "Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The proposed FSP would
provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment. The disclosures continue to be effective for
the Company's financial statements for fiscal years ending after December 15,
2003, for investments accounted for under SFAS No. 115. For all other
investments within the scope of this Issue, the disclosures continue to be
effective for fiscal years ending after June 15, 2004. The additional
disclosures for cost method investments continue to be effective for fiscal
years ending after June 15, 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
management's conclusions were to change as to whether an other-than-temporary
impairment exists. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. In analyzing an
issuer's financial condition, the Company's management considers whether the
securities are issued by the U.S. Government or its agencies, whether downgrades
by bond rating agencies have occurred and industry analysts' reports. The
Company's management currently conducts impairment evaluations at least on a
quarterly basis and has concluded that, at September 30, 2004, there were no
other-than-temporary impairments of the Company's investment securities.
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.
15
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 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.
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
LOAN PORTFOLIO AND THE ALLOWANCE
FOR PROBABLE LOAN LOSSES
For the Period Ended Loans(net of unearned income) Allowance as a %
(in thousands) of total loans
- --------------------------------------------------------------------------------
12/31/00 $496,992 1.85%
12/31/01 $551,598 1.68%
12/31/02 $620,384 1.62%
12/31/03 $711,216 1.51%
9/30/04 $754,237 1.57%
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.
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.
16
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
estimate the likelihood that the examination will change the tax liability for
the years under examination. As such, no liability has been recognized in the
consolidated balance sheets at September 30, 2004 or December 31, 2003.
Material Changes in Financial Condition - Total assets of the Company were $1.5
billion at September 30, 2004. When compared to December 31, 2003, total assets
increased by $49 million or 3%. The increase was primarily attributable to
growth in both the investment and loan portfolios and the purchase of Bank Owned
Life Insurance of $77 million, $42 million and $26 million, respectively. These
were partially offset by declines in overnight securities purchased under
agreements to resell and cash and due from banks of $91 million and $7 million,
respectively. The growth in the investment portfolio resulted primarily from an
increase in short-term tax-exempt municipal securities, while the primary factor
contributing to the growth in the loan portfolio was the increase in commercial
mortgage loans.
At September 30, 2004, total deposits were $1.1 billion, a decrease of $78
million or 6% when compared to December 31, 2003. This decline was largely
attributable to a decrease in savings deposits of $108 million, as Super NOW and
money fund deposits decreased $132 million and $22 million, respectively,
partially offset by a $46 million increase in regular savings deposits.
Partially offsetting the net decrease in savings deposits were increases in
demand deposits and time deposits of $25 million and $5 million, respectively.
Core deposit balances, consisting of demand, savings, money fund and Super NOW
deposits, represented approximately 77% of total deposits at September 30, 2004
compared to 78% at year-end 2003. Core deposit balances provide low-cost funding
that allows the Company to reduce its dependence on higher-cost time deposits.
Short-term borrowed funds, primarily securities sold under agreements to
repurchase and Federal Home Loan Bank of New York ("FHLB") advances, have been
utilized for funding purposes. At September 30, 2004, total short-term
borrowings were $211 million, an increase of $119 million from December 31,
2003.
Average interest-earning assets for the third quarter of 2004 were up by $196
million or 16% to $1.4 billion from the comparable 2003 period. This was largely
the result of an $80 million or 12% increase in average loans, primarily
commercial loans and commercial mortgages, coupled with a $135 million or 26%
increase in average investment securities, with U.S. Government Agency
securities and short-term tax-exempt municipal securities rising $88 million and
$59 million, respectively. Partially offsetting these increases was a decline in
average money market instruments.
Funding the third quarter growth in average interest-earning assets were
increases in both average core deposits and average borrowed funds. Average core
deposits increased $95 million or 12% during the third quarter of 2004 as
compared to the same period in 2003, reflecting the 17% increase in average
demand deposits. The increase in average short-term borrowed funds during the
third quarter of 2004 as compared to the same period in the prior year was
primarily attributable to an $82 million higher FHLB funding level, coupled with
a $59 million increase in securities sold under agreements to repurchase.
These activities resulted in a third quarter net interest margin on a
tax-equivalent basis of 4.25%, down from 4.38% one year ago. This decline was
the result of a 17 basis point increase in the Company's cost of funds to a
weighted average rate of 0.94%, somewhat offset by a 4 basis point increase in
the Company's fully taxable equivalent ("FTE") yield on interest-earning assets
to 5.19%.
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 September
30, 2004, the Company's and
17
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).
During 2004, the Company's capital has expanded by the amount of its net income
earned and common stock issued net of cash dividends paid to stockholders and
shares repurchased. Internal capital generation, defined as earnings less cash
dividends paid on common stock, is the primary catalyst supporting the Company's
future growth of assets and stockholder value. Total stockholders' equity
amounted to $99 million at September 30, 2004, representing a $4 million (4%)
increase and a $7 million (8%) increase, respectively, from December 31 and
September 30, 2003. 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 September 30, 2004 and compares them to current
regulatory guidelines and December 31 and September 30, 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:
September 30, 2004 7.85% 12.34% 13.59%
December 31, 2003 8.08% 12.26% 13.46%
September 30, 2003 7.69% 11.62% 12.87%
Regulatory Criteria for a
"Well-Capitalized" Institution 5.00% 6.00% 10.00%
Management strives to provide stockholders with a competitive return on their
investment in the Company. During the second quarter of 2004, the Company's
Board of Directors (the "Board") declared a 5% stock dividend, the 35th
consecutive year that it has paid a stock dividend. In addition, for the first
nine months of 2004, the Board declared cash dividends on the Company's common
stock amounting to $0.43 per share (as adjusted for the 5% stock dividend),
increasing its quarterly cash dividend by 7% to $0.15 per share ($0.14 per share
as adjusted for the 5% stock dividend) beginning in the second quarter.
18
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
CASH DIVIDENDS PAID AND DIVIDEND PAYOUT RATIOS
For the Period Ended Dividends paid Payout ratio
- --------------------------------------------------------------------------------
12/31/00 $3,777,938 35.28%
12/31/01 $4,197,162 38.79%
12/31/02 $4,414,379 39.06%
12/31/03 $4,647,399 38.68%
9/30/04 $3,854,020 36.25%
The Company's stock repurchase program expended $372 thousand during the third
quarter of 2004 to repurchase 16,944 shares at an average cost of $21.95 per
share. Since 1998, a total of 922,009 shares of Company stock have been
repurchased at an average cost of $16.68 per share. Under the Board's existing
authorization, an additional 577,991 shares may be repurchased from time to time
as conditions warrant. This action will only occur if management believes that
the purchase will be at prices that are accretive to earnings per share.
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
third quarter of 2004, the weighted average rate on all trust preferred
securities was 4.69%.
Liquidity and Off-Balance Sheet Arrangements - Liquidity management is a
fundamental component of the Company's business strategy. The objective of
liquidity management is to assure the ability of the Company and its
subsidiaries to meet their financial obligations. These obligations include the
withdrawal of deposits on demand or at their contractual maturity, the repayment
of borrowings as they mature, the ability to fund new and existing loan
commitments, the ability to meet payments under various leases and the capacity
to take advantage of business opportunities as they arise. The Board's Funds
Management Committee and management's Asset/Liability Committee ("ALCO") 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
19
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 September 30, 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 $213 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. At September 30,
2004 and 2003, the Bank had letters of credit outstanding of approximately $18
million and $13 million, respectively. At September 30, 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 September 30, 2004 and 2003, the Bank was
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 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, $625 thousand; in 2005, $2.4 million; in 2006,
$1.9 million; in 2007, $1.8 million; in 2008, $1.7 million; and the remainder to
2012, $4.7 million.
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 third quarter
of 2004, the Company's liquidity position remained stable and well within
acceptable industry standards. During the third 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 September 30, 2004, the Company had
access to approximately $125 million in FHLB lines of credit for overnight or
term borrowings with maturities of up to thirty years. At September 30, 2004,
the Company also had approximately $10 million in formal and $47 million in
informal lines of credit extended by correspondent banks to be utilized, if
needed, for short-term funding purposes. Approximately $112 million and $10
million were drawn under the Company's lines of credit with FHLB and
correspondent banks, respectively, at September 30, 2004.
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
September 30, 2004.
20
Payments due by period (in thousands)
--------------------------------------------------------------------------------------
Less than More than
Contractual obligations Total 1 year 1 - 3 years 3 - 5 years 5 years
- --------------------------------------------- ------------- ----------------- ----------------- ----------------- ------------------
Leases covering various Bank equipment,
branches, office space and land $13,022 $625 $4,230 $3,487 $4,680
Federal funds purchased 10,000 10,000 - - -
Securities sold under agreements to
repurchase 88,680 88,680 - - -
Federal Home Loan Bank of New York
overnight and term borrowings 112,000 112,000 - - -
Obligations under equipment lease financing 330 191 139 - -
Junior subordinated debentures 20,620 - - - 20,620
------------- ----------------- ----------------- ----------------- ------------------
$244,652 $211,496 $4,369 $3,487 $25,300
============= ================= ================= ================= ==================
Material Changes in Results of Operations for the Nine Months Ended September
30, 2004 versus 2003 - Net income for the nine months ended September 30, 2004
was $10.6 million, an increase of $1.0 million or 10.7%, when compared to the
same 2003 period. An improvement in net interest income (up $2.6 million),
higher deposit service charges and other operating income and a 2.2% reduction
in total operating expenses were offset by lower net security gains (down $3.0
million before taxes), a $364 thousand higher provision for probable loan losses
and an increase in the provision for income taxes. Diluted earnings per common
share were $1.14 in 2004 and $1.06 in 2003. The Company's returns on average
assets and stockholders' equity were 0.97% and 14.76% in 2004 and 0.95% and
14.17% in 2003, respectively.
As shown in Table 2-2 (A) following this discussion, net interest income
increased by 6.6% to $42.5 million as the result of an 8% or $107 million
increase in average interest-earning assets, primarily loans and investment
securities. Growth in commercial mortgages, commercial loans and leases resulted
in an $85 million or 13% increase in average loans outstanding during 2004. The
newer branch locations in both Nassau and Queens Counties continue to provide
opportunities 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 increased by $27 million or
5%, on average, during the first nine months of 2004 as compared to 2003
primarily due to growth in short-term tax-exempt municipal securities.
Funding the growth in average interest-earning assets during the first nine
months of 2004, as compared to the same
21
2003 period, were higher levels of average core deposits and borrowings. The
lower-cost core deposit balances, comprised of demand, savings, money fund and
Super NOW accounts, increased $87 million or 10% during 2004 and provided
funding at an average cost of 51 basis points. This has enabled the Company to
reduce its dependence on higher-cost time deposits. The increase in average
borrowings was largely attributable to higher FHLB funding levels and an
increase in securities sold under agreements to repurchase of $63 million and
$30 million, respectively.
These activities resulted in a net interest margin on a tax-equivalent basis of
4.16%, down from 4.28% one year ago. This decline was the result of a 20 basis
points decrease in the Company's FTE yield on interest-earning assets to 5.02%,
somewhat offset by an 8 basis points decrease in the Company's cost of funds to
a weighted average rate of 0.86%. These decreases reflect the protracted low
interest rate environment.
Total noninterest income declined $1.8 million or 21.3% for the first nine
months of 2004 as compared to 2003. This was due in large measure to a $3.0
million decrease in net security gains, offset by increases in service charges
on deposit accounts and other operating income of 51.0% and 50.0%, respectively.
Sales of long-term municipal notes, undertaken as a result of the relatively 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 realized in
2004. 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 fee generation for letters of credit,
merchant services, wire transfers and foreign exchange.
Revenue of State Bancorp, Inc. Over/
(dollars in thousands) (under)
For the nine months ended September 30, 2004 2003 2003
- ------------------------------------------------------------------------------------------
Net interest income $42,480 $39,846 7 %
Service charges on deposit accounts 1,750 1,159 51
Net security gains 2,866 5,863 (51)
Bank Owned Life Insurance policy earnings 626 - -
Other operating income 1,283 1,273 1
- ------------------------------------------------------------------------------------------
Total revenue $49,005 $48,141 2 %
- ------------------------------------------------------------------------------------------
The 2.2% improvement in total operating expenses during the first nine months of
2004 as compared to 2003 was primarily due to reductions in legal expenses and
other operating expenses, partially offset by increases in salaries and employee
benefits and marketing and advertising expenses. Legal expenses decreased $1.4
million during 2004 mainly as the result of lower expenses associated with
ongoing litigation related to Island Mortgage Network and its affiliates ("IMN")
as previously discussed in detail in the Company's Securities and Exchange
Commission filings and as discussed in detail in Part II, Item 1 herein. The
Company will continue to incur costs related to the IMN litigation during the
fourth quarter of 2004. Other operating expenses decreased 12.6% during 2004 to
$5.0 million. This decrease was largely the result of reductions in loan
collection expenses, telecommunications costs and expenses related to meetings
and seminars. The increase of $1.2 million in salaries and benefits costs
resulted primarily from normal salary adjustments, growth in staff and higher
medical and retirement plan expenses, while marketing and advertising expenses
increased $192 thousand due to costs associated with SWLC business development
efforts and various new Bank product promotions.
22
Operating expenses of State Bancorp, Inc. Over/
(dollars in thousands) (under)
For the nine months ended September 30, 2004 2003 2003
- ----------------------------------------------------------------------------------------
Salaries and other employee benefits $17,898 $16,694 7 %
Occupancy 2,962 2,861 4
Equipment 1,102 1,211 (9)
Legal 2,609 3,983 (34)
Marketing and advertising 1,150 958 20
Credit and collection 601 1,012 (41)
Other operating expenses 4,368 4,674 (7)
- ----------------------------------------------------------------------------------------
Total operating expenses $30,690 $31,393 (2)%
- ----------------------------------------------------------------------------------------
The Company's primary measure of expense control, the ratio of total operating
expenses to average total assets, improved during the first nine months of 2004
to 2.79% from a level of 3.10% in 2003.
Income tax expense rose by $172 thousand for the first nine months of 2004 as
compared to 2003. However, the Company's effective tax rate declined to 29.1%
from 30.4% a year ago.
Material Changes in Results of Operations for the Three Months Ended September
30, 2004 versus 2003 - Net income for the three months ended September 30, 2004
was $3.4 million, a decrease of $50 thousand or 1.5%, when compared to the same
2003 period. Improvements in net interest income to $14.8 million, higher
deposit service charges and other operating income and a decrease in the
effective income tax rate were offset by lower net security gains (down $2.0
million before taxes), a $168 thousand higher provision for probable loan losses
and an increase in total operating expenses of $324 thousand. Diluted earnings
per common share were $0.36 in 2004 and $0.38 in 2003. The Company's returns on
average assets and stockholders' equity were 0.90% and 13.87% in 2004 and 1.06%
and 15.08% in 2003, respectively.
The reasons supporting the third quarter earnings performance are, for the most
part, similar to those already discussed in the nine-month analysis. As shown in
Table 2-2 (B) following this narrative, the increase of $1.8 million in net
interest income resulted from a 16% growth in average interest-earning assets,
primarily investments, commercial loans and commercial mortgages, funded through
an expanded core deposit base and a higher level of borrowed funds.
Total noninterest income declined $1.6 million for the third quarter of 2004 as
compared to 2003. This was due in large measure to a $2.0 million decrease in
net security gains, partially offset by increases in collection of service
charges on deposit accounts and other operating income of $176 thousand and $252
thousand, respectively.
The 3.2% growth in total operating expenses during the third quarter of 2004 as
compared to 2003 was primarily due to increases in salaries and employee
benefits (up $570 thousand) and marketing and advertising expenses (up $145
thousand), partially offset by a decrease in other operating expenses of $391
thousand.
The Company's primary measure of expense control, the ratio of total operating
expenses to average total assets, improved during the third quarter of 2004 to
2.79% from a level of 3.14% in 2003.
Income tax expense decreased $269 thousand for the third quarter of 2004 as
compared to 2003, resulting in a decline in the Company's effective tax rate to
28.5% from 32.0% a year ago.
Asset Quality - Nonperforming assets (defined by the Company as nonaccrual loans
and other real estate owned) totaled $9 million at September 30, 2004, a $2
million decrease from December 31, 2003 and a $1 million decrease from September
30, 2003. The reduction in nonperforming assets at September 30, 2004 was
primarily the result of aggressive workout, collection and charge-off efforts
during 2004. The Company held one commercial property as
23
other real estate owned totaling $3 million at September 30, 2004, December 31,
2003 and September 30, 2003. Management of the Company anticipates that this
property will be sold with no material impact on the Company's financial
statements. At September 30, 2004, December 31, 2003 and September 30, 2003,
there were no restructured accruing loans. Loans 90 days or more past due and
still accruing interest totaled $357 thousand at September 30, 2004, reflecting
an increase of $208 thousand when compared to year-end 2003 but a decrease of
$29 thousand when compared to September 30, 2003.
The allowance for probable loan losses amounted to $12 million or 1.6% of total
loans at September 30, 2004 versus $11 million and 1.6%, respectively, at the
comparable 2003 date. The allowance for probable loan losses as a percentage of
nonaccrual loans and loans 90 days or more past due and still accruing,
increased to 173% at September 30, 2004 from 122% at December 31, 2003 and from
129% one year ago.
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
TOTAL NONPERFORMING ASSETS AND THE ALLOWANCE
FOR PROBABLE LOAN LOSSES
For the Period Ended Total nonperforming assets Allowance as a % of
(in thousands) total nonperforming assets
- -------------------- -------------------------- --------------------------
12/31/00 $11,066 83.20%
12/31/01 $8,920 103.76%
12/31/02 $6,317 159.03%
12/31/03 $11,363 94.45%
9/30/04 $9,188 128.77%
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 nine months of 2004 and 2003
was $3.3 million and $3.0 million, respectively. Net loan charge-offs during the
same periods were approximately $2.2 million and $2.4 million, respectively. The
provision for probable loan losses is continually evaluated relative to
portfolio risk and regulatory guidelines considering all economic factors that
affect the loan loss reserve, such as fluctuations in the Long Island real
estate market and interest rates, economic slowdowns in industries and other
uncertainties. It will continue to be closely reviewed during the remainder of
2004. Due to the uncertain nature of the factors cited above, 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
24
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.
25
TABLE 2 - 2 (A)
NET INTEREST INCOME ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN THOUSANDS)
2004 2003
----------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------- ---------------------------------
ASSETS:
- -------
Interest-earning assets:
Mortgage-backed securities $279,599 $7,189 3.38 % $276,419 $6,225 2.97 %
Municipal securities 103,505 1,997 2.53 76,973 2,347 4.02
Government Agency and other securities 227,619 6,028 3.48 229,835 6,918 3.97
----------------------------------- ---------------------------------
Total securities 610,723 15,214 3.27 583,227 15,490 3.50
----------------------------------- ---------------------------------
Federal funds sold 439 3 0.90 2,939 21 0.94
Securities purchased under agreements to
resell 35,106 247 0.92 41,408 360 1.15
Interest-bearing deposits 5,044 32 0.85 1,764 9 0.68
Loans 723,859 35,961 6.53 638,776 33,017 6.82
----------------------------------- ---------------------------------
Total interest-earning assets 1,375,171 51,457 4.92 1,268,114 48,897 5.08
----------------------------------- ---------------------------------
Non-interest-earning assets 94,552 84,494
------------ ------------
Total Assets $1,469,723 $1,352,608
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Interest-bearing liabilities:
Savings deposits $647,861 $3,540 0.73 % $606,441 $3,421 0.75 %
Time deposits 261,157 3,191 1.61 319,760 4,571 1.89
----------------------------------- ---------------------------------
Total savings and time deposits 909,018 6,731 0.98 926,201 7,992 1.14
----------------------------------- ---------------------------------
Federal funds purchased 7,634 72 1.24 6,821 72 1.39
Securities sold under agreements to
repurchase 45,237 452 1.31 15,047 152 1.33
Other borrowed funds 90,991 958 1.38 29,268 420 1.89
Junior subordinated debentures 20,620 764 4.87 10,000 415 5.47
----------------------------------- ---------------------------------
Total interest-bearing liabilities 1,073,500 8,977 1.11 987,337 9,051 1.22
----------------------------------- ---------------------------------
Demand deposits 282,635 237,522
Other liabilities 17,367 37,178
------------ ------------
Total liabilities 1,373,502 1,262,037
Stockholders' equity 96,221 90,571
------------ ------------
Total Liabilities and
Stockholders' Equity $1,469,723 $1,352,608
============ ============
Net interest income/rate spread 42,480 3.81 % 39,846 3.87 %
----------- -----------
Add tax-equivalent basis adjustment 1,059 1,323
------------ ----------
Net interest margin - tax-equivalent basis $43,539 4.16 % $41,169 4.28 %
======================= =====================
26
TABLE 2 - 2 (B)
NET INTEREST INCOME ANALYSIS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN THOUSANDS)
2004 2003
---------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------------------------- ---------------------------------
ASSETS:
- -------
Interest-earning assets:
Mortgage-backed securities $266,439 $2,512 3.69 % $276,350 $1,859 2.63 %
Municipal securities 133,538 779 2.28 74,417 668 3.51
Government Agency and other securities 248,797 2,241 3.52 162,604 1,627 3.92
---------------------------------- ---------------------------------
Total securities 648,774 5,532 3.34 513,371 4,154 3.17
---------------------------------- ---------------------------------
Federal funds sold 196 1 2.00 3,286 7 0.83
Securities purchased under agreements to
resell 446 1 0.88 20,685 50 0.95
Interest-bearing deposits 5,122 16 1.24 999 1 0.40
Loans 739,269 12,548 6.64 659,741 11,169 6.62
---------------------------------- ---------------------------------
Total interest-earning assets 1,393,807 18,098 5.08 1,198,082 15,381 5.02
---------------------------------- ---------------------------------
Non-interest-earning assets 93,762 79,700
------------ ------------
Total Assets $1,487,569 $1,277,782
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Interest-bearing liabilities:
Savings deposits $623,006 $1,297 0.83 % $571,594 $836 0.58 %
Time deposits 256,543 1,040 1.59 278,210 1,234 1.74
---------------------------------- ---------------------------------
Total savings and time deposits 879,549 2,337 1.05 849,804 2,070 0.96
---------------------------------- ---------------------------------
Federal funds purchased 4,373 18 1.61 5,785 18 1.22
Securities sold under agreements to
repurchase 70,281 268 1.49 10,889 34 1.22
Other borrowed funds 102,354 426 1.63 21,641 95 1.72
Junior subordinated debentures 20,620 269 5.10 10,000 136 5.32
---------------------------------- ---------------------------------
Total interest-bearing liabilities 1,077,177 3,318 1.21 898,119 2,353 1.03
---------------------------------- ---------------------------------
Demand deposits 300,737 257,310
Other liabilities 12,905 32,294
------------ ------------
Total liabilities 1,390,819 1,187,723
Stockholders' equity 96,750 90,059
------------ ------------
Total Liabilities and
Stockholders' Equity $1,487,569 $1,277,782
============ ============
Net interest income/rate spread 14,780 3.87 % 13,028 3.99 %
------------ -----------
Add tax-equivalent basis adjustment 373 385
---------- ----------
Net interest margin - tax-equivalent basis $15,153 4.25 % $13,413 4.38 %
====================== =====================
27
TABLE 2 - 3
ANALYSIS OF NONPERFORMING ASSETS
AND THE ALLOWANCE FOR PROBABLE LOAN LOSSES
SEPTEMBER 30, 2004 VERSUS DECEMBER 31, 2003 AND SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS)
NONPERFORMING ASSETS BY TYPE: PERIOD ENDED:
- ----------------------------- --------------------------------------------------
9/30/2004 12/31/2003 9/30/2003
---------- ----------- ----------
Nonaccrual Loans $6,474 $8,666 $7,817
Other Real Estate Owned 2,714 2,697 2,650
---------- ----------- ----------
Total Nonperforming Assets $9,188 $11,363 $10,467
========== =========== ==========
Loans 90 Days or More Past Due
and Still Accruing $357 $149 $386
Gross Loans Outstanding $754,237 $711,216 $679,622
Total Stockholders' Equity $98,834 $94,712 $91,485
ANALYSIS OF THE ALLOWANCE FOR
PROBABLE LOAN LOSSES: QUARTER ENDED:
- --------------------- --------------------------------------------------
9/30/2004 12/31/2003 9/30/2003
---------- ----------- ----------
Beginning Balance $11,042 $10,597 $10,395
Provision 1,152 984 984
Net Charge-Offs (363) (849) (782)
---------- ----------- ----------
Ending Balance $11,831 $10,732 $10,597
========== =========== ==========
KEY RATIOS: PERIOD ENDED:
- ------------ --------------------------------------------------
9/30/2004 12/31/2003 9/30/2003
---------- ----------- ----------
Allowance as a % of Total Loans 1.6% 1.5% 1.6%
Nonaccrual Loans as a % of Total Loans 0.9% 1.2% 1.2%
Nonperforming Assets (1) as a % of Total
Loans and Other Real Estate Owned 1.2% 1.6% 1.5%
Allowance for Probable Loan Losses as
a % of Nonaccrual Loans 182.7% 123.8% 135.6%
Allowance for Probable Loan Losses as a %
of Nonaccrual Loans and Loans 90 days or
More Past Due and Still Accruing 173.2% 121.7% 129.2%
(1) Excludes loans 90 days or more past due and still accruing interest.
28
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 September 30, 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 Board. The Board has delegated
responsibility for asset/liability and interest rate risk management to
management's 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 various
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 a noted
industry 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 (market value) of
29
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 September 30, 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 September 30, 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.
30
TABLE 3 - 1
LIQUIDITY AND INTEREST RATE SENSITIVITY
SEPTEMBER 30, 2004
(DOLLARS IN THOUSANDS)
Sensitivity Time Horizon (1)
-------------------------------------------------------------------------------
0 - 6 6 - 12 1 - 5 Over Noninterest-
Months Months Years 5 Years Sensitive Total
-------------------------------------------------------------------------------
INTEREST - SENSITIVE ASSETS:
- ----------------------------
Loans (net of unearned income) (2) $412,027 $35,338 $214,463 $85,935 $6,474 $754,237
Interest-Bearing Deposits 9,179 - - - - 9,179
Securities Held to Maturity 14 10,000 14,993 - - 25,007
Securities Available for Sale (3) 110,774 169,759 214,803 118,770 6,268 620,374
-------------------------------------------------------------------------------
Total Interest-Earning Assets 531,994 215,097 444,259 204,705 12,742 1,408,797
Unrealized Net Loss on Securities Available for Sale (840) - - - - (840)
Noninterest-Bearing Cash and Due from Banks 40,203 - - - - 40,203
All Other Assets (7) 7,170 8,808 19,364 11 6,781 42,134
-------------------------------------------------------------------------------
Total Assets 578,527 223,905 463,623 204,716 19,523 1,490,294
-------------------------------------------------------------------------------
INTEREST - SENSITIVE LIABILITIES:
- ---------------------------------
Savings Accounts (4) 18,964 18,964 151,708 113,781 - 303,417
Money Fund and NOW Accounts (5) 23,405 23,405 187,386 42,878 - 277,074
Time Deposits (6) 192,627 30,168 43,412 637 - 266,844
-------------------------------------------------------------------------------
Total Interest-Bearing Deposits 234,996 72,537 382,506 157,296 - 847,335
Federal Funds Purchased, Securities Sold Under
Agreements to Repurchase and Other Borrowings 210,794 78 138 - - 211,010
Junior Subordinated Debentures 20,620 - - - - 20,620
-------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 466,410 72,615 382,644 157,296 - 1,078,965
Payable - Securities Purchases 10,000 - - - - 10,000
All Other Liabilities, Equity and Demand Deposits (7) 22,886 15,601 105,731 158,277 98,834 401,329
-------------------------------------------------------------------------------
Total Liabilities and Equity 499,296 88,216 488,375 315,573 98,834 1,490,294
-------------------------------------------------------------------------------
Cumulative Interest-Sensitivity Gap (8) $79,231 $214,920 $190,168 $79,311 $ -
=================================================================
Cumulative Interest-Sensitivity Ratio (9) 115.9 % 136.6 % 117.7 % 105.7 % 100.0 %
Cumulative Interest-Sensitivity Gap as a %
of Total Assets 5.3 % 14.4 % 12.8 % 5.3 % - %
(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 allocated to the interest-sensitivity period
that best reflects the anticipated repricing impact of the embedded option.
(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 assets minus total liabilities and equity.
(9) Total assets as a percentage of total liabilities and equity.
31
TEM 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 November 5,
2004 are as follows:
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 this case
remains pending, the Bank has executed a binding settlement agreement with the
plaintiff, and finalization of this settlement is contingent only upon the
formal dismissal of the litigation by the Court. The cost of settling this
litigation is not material.
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 the 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 have completed fact and expert discovery and filed summary
judgment motions; the plaintiffs' motion has become moot, and thus only the
Bank's summary judgment motion remains. Oral argument on the Bank's motion was
held on October 12, 2004. The Court requested further briefing, which is
expected to be completed in early November, at which time the Bank's motion for
summary judgment will be marked submitted.
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 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,
32
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.
Total number of shares Maximum number of
purchased as part of shares that may yet be
publicly announced purchased under the
Total number of Average price paid plans plans
Period shares purchased per share or programs or programs
- ----------------------------------- ---------------------- --------------------- ------------------------- -------------------------
July 1 - 31, 2004 302 $20.00 302 594,633
August 1 - 31, 2004 10,700 21.53 10,700 583,933
September 1 - 30, 2004 5,942 22.81 5,942 577,991
- ----------------------------------- ---------------------- --------------------- ------------------------- -------------------------
Total 16,944 $21.95 16,944 577,991
- ----------------------------------- ---------------------- --------------------- ------------------------- -------------------------
On February 24, 1998, the Board 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, June 26, 2001 and April 27, 2004, the
Board 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, 1,000,000 and 1,500,000 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 or in privately negotiated transactions.
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
(b) Reports on Form 8-K:
On July 20, 2004, the Company issued the earnings release for the
period ended June 30, 2004.
At a meeting held on September 27, 2004, the Board unanimously voted
to increase the number of directors from ten members to thirteen
members and unanimously elected the following persons to serve
until the next annual meeting of shareholders: K. Thomas Liaw,
Gerard J. McKeon and Andrew J. Simons. The Board did not
immediately appoint the new directors to serve on any committees,
but may do so in the future. The new directors were also elected
to the Board of Directors of the Bank.
33
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.
11/9/04 s/Daniel T. Rowe
- -------- -------------------------
Date Daniel T. Rowe, President
11/9/04 s/Brian K. Finneran
- -------- --------------------------------------
Date Brian K. Finneran, Secretary/Treasurer
(Principal Financial Officer)
34